Hobbies and Games Inc.

has had taxable income the last three years, but is breaking even this year. Sondra, the sole shareholder, has a $25,000 basis in her stock. After consulting with a local CPA, the corporation does the following:

a. Sets up an Employee Stock Ownership Plan (ESOP).

b. Contributes $40,000 to the ESOP, borrowed for the occasion from a local bank.

c. Deducts the $40,000 as a contribution to a qualified plan, thus creating a net operating loss of $40,000.

d. Permits the ESOP to purchase 49 percent of Sondra’s stock; she reports a long-term capital gain of $27,750.

(See IRS Letter Rulings 8147187 and 8222026.)

Can all these transactions be executed under the rules applicable to employee stock ownership plans?