Can a S-Corp. buy back stock from the ESOP?

Yes

Maybe Not! Generally, an ESOP can sell Company stock back to its S-Corp sponsor if the transaction meets the prohibited transaction exemption available under Section 408(e) of ERISA. However, the flush language at the end of Section 4975(d) of the Code, read together with new Section 4975(f)(6) of the Code, make clear that if 50% or more of the stock of the S-Corp is owned by a "shareholder-employee" within the meaning of Section 4975(f)(6) of the Code, the sale of Company stock to the S-Corp by the ESOP is NOT exempt under Section 4975(d).

If there are 100 shares of an S Corp. and the ESOP owns 85 of those 100 shares, do you count all 100 shares to determine who is a 2% owner, or do you only count the remaining 15 shares in that determination? If a shareholder owns 1 share of stock, is he a 1% owner or a 6.67% owner? Or do you look at the percentage of the ESOP that the employee owns and add that to his 1 share? Any help would be greatly appreciated!!

The 2 percent is determined based on the 100 shares outstanding.
Section 1372(B) of the Code, which defines "2 percent shareholder," says you look to the Section 318 attribution rules . Section 318 of the Code does not include any provision which would imply that you ignore the shares owned by an ESOP. (Contrast this with the excluded stock rule under Section 1563© for controlled group purposes.)

Does anyone know of any developments concerning whether S corp ESOPs will be able to use distributions to service debt? Specifically, can distributions relating to the allocated shares be used? I have seen this issue mentioned in articles a couple of times, and talked with various ESOP attorneys and received conflicting opinions.

One attorney mentioned that at the ABA Section of Taxation meeting, commentators stated they were aware of at least one PLR which had been submitted on this issue, and that their informal discussions with the IRS personnel responsible for responding to the PLR request were leaning toward prohibiting the use of distributions (from allocated shares )to service debt. Anyone else facing this issue or have any additional insight?

Robert(Bob) Lees,
Would like to revive your thread regarding an S-Corp. buying back its stock from its ESOP. The 1997 Tax Act provided a technical correction to allow the sale of employer securities by "shareholder-ees" or a S-Corp. owned equal or greater than 50% by such "shareholder-ees" to its ESOP via a prohibited transaction exemption, previously only available to C corporations. See IRC 4975(f)(6)(B)(iii). Is it true that the reverse (sale from a S-Corp ESOP back to the S-Corp.) is not exempted? Was this intentional? Thanks!