Changing demographics, impending changes in taxation, and challenging economic conditions have made ESOPs a creative strategy to ensure organization survival and success. This publication defines issues that must be fully considered before installing an ESOP, and highlights the common attributes of successful installations. Use this book to chart a course through succession issues and transition ownership issues with a minimum impact to financial results.  The book offers you practical strategies to deal with current economic realities and taxation challenges, including the following:  Increasing tax rates in the near future will make ESOPs a tax efficient option for business owners.  In recessionary times ESOPs control the succession process versus letting probate and inheritance taxes jeopardize the survival of their organization.  Financing for almost any business transaction is difficult; ESOPs are very seller finance friendly.  ESOPs represent an effective exit vehicle for Baby Boomer owners.

Table of Contents:
Introduction ix Chapter 1: Employee Stock Ownership Plan History and Background Overview of Employee Ownership and Employee Stock Ownership Plans 1 Underlying Philosophy of ESOPs 1 Legislative History  2 Employee Retirement Income Security Act of 1974  3 Revenue Act of 1978  3 The Chrysler Loan Guarantee Act of 1979  3 The Economic Recovery Tax Act of 1981  3 Deficit Reduction Act of 1984  4 Tax Reform Act of 1986  4 Small Business Job Protection Act of 1996  4 Taxpayer Relief Act of 1997 4 The Economic Growth and Tax Relief Reconciliation Act of 2001 5 Jobs and Growth Tax Relief Reconciliation Act of 2003  5 Impact on ESOPs  5 ESOPs Today 6 Summary  7 Chapter 2: Significant Events and Organizations Regulations and Government Agencies  9 Employee Retirement Income Security Act of 1974  9 IRS  11 Securities and Exchange Commission  13 DOL  14 General ERISA Fiduciary Considerations  16 Proposed DOL Regulations Specifi c to ESOP Valuations 19 Major Exceptions to ERISA for the Benefi t of ESOPs  20 ESOP and ERISA Litigation  21 Summary  22 Industry Organizations and Standards  22 The AICPA  22 The ESOP Association  26 National Center for Employee Ownership (NCEO)  28 Ohio Employee Ownership Center  30 Appendix 2A—IRS Form 5309, Application for Determination of Employee Stock Ownership Plan  31 Chapter 3: Employee Stock Ownership Plan Transaction Mechanics Traditional Uses of an ESOP  35 Provide Liquidity and Diversifi cation for Shareholders  36 Provide a Means of Capital Formation  36 Finance Corporate Acquisitions  36 An Incentive to Increase Employee Productivity and Retain Personnel  36 Provide a Succession Plan  37 Provide Liquidity in Divorce Situations  37 Provide Negotiating Leverage for Any Proposed Transaction  37 Summary  38 Alternatives to an ESOP  38 Sell or Transition the Business to Family Members  38 Sell to Management or Key Employees  38 Sell or Merge With a Third Party—Financial Buyer  38 Sell or Merge With a Third Party—Strategic or Investment Buyer  39 Sell Stock Through an Initial Public Offering  39 Liquidate the Business  39 Summary  39 Basic Features of ESOPs 40 Operating Considerations of an ESOP  40 Contributions to an ESOP Are Tax Deductible Within Statutory Limits  44 Contributions to an ESOP Based on Dividends (C Corporation)  50 Contributions to an ESOP Based on Distributions (S Corporation)  52 IRC Section 1042 Tax-Free Rollover (C Corporation)  54 Nontaxable Income Related to ESOP Stock (S Corporation)  58 Assets in ESOP Remain Untaxed Until Retirement  59 Appendix 3A—Sample Documents Relating to the Internal Revenue Code Section 1042 Election  61 Sample Statement of Election  62 Sample Statement of Consent for ABC, Inc  63 Sample Statement of Purchase  64 Chapter 4: Employee Stock Ownership Plan Transactions and C Corporations Sample Facts—ABC, Inc (C Corporation)  65 Abbreviated Financial Statements  66 FMV of Common Stock for the Purposes of an ESOP  67 Common Entities in Transactions  68 Example—Stock Contributed to ESOP (Capital Formation ESOP)  69 Example—Leveraged ESOP With IRC Section 1042 Rollover  70 IRC Section 1042 Restrictions  71 Example—Prefunded ESOP With IRC Section 1042 Rollover  72 IRC Section 1042 Restrictions  74 Example—Leveraged ESOP With IRC Section 1042 Rollover and Control  75 Example—Leveraged ESOP With IRC Section 1042 Rollover, Multiple Classes of Stock, and Control  78 Summary  83 Chapter 5: Employee Stock Ownership Plan Transactions and S Corporations Sample Facts—ABC, Inc (S Corporation)  85 Abbreviated Financial Statements  86 FMV of Common Stock for the Purposes of an ESOP  87 Common Entities in Transactions  88 Example—Stock Contributed to ESOP (Capital Formation ESOP)  89 Example—Leveraged ESOP (Paying Capital Gains)  90 Example—Prefunded ESOP With No Bank Debt  92 Example—Convert to C Corporation—Leveraged ESOP With IRC Section 1042 Rollover and Control  94 IRC Section 1042 Restrictions  98 Example—Leveraged Sale of 100 Percent to the ESOP in a Single Transaction  100 Summary 103 Chapter 6: Advanced Employee Stock Ownership Plan Applications Mergers and Acquisitions—Buying a Target Company With Pretax Dollars 106 Purchase of Stock  106 Purchase of Assets  107 Mergers and Acquisitions—Extending the Internal Revenue Code Section 1042 Rollover to a Target Company  107 Extending the IRC Section 1042 Rollover to an Investment in Another Closely Held Company 108 Multiple Investor ESOPs 108 Charitable Giving and ESOPs 109 Contributions of Closely Held Stock to Charities  109 Charitable Remainder Income Trusts and ESOPs  110 Summary  110 Chapter 7: Valuation Issues and Considerations Issues Regarding ESOP-Based Valuations 112 Identify the Client  112 Standard of Value 113 IRS  113 DOL  115 Valuation Independence and SOX 119 Impact of SOX  119 AICPA Newsletter: CPA Expert, Summer 2003  119 Valuation Perspective on the Repurchase Obligation and the Put Option 120 Valuation Report Date and Events 121 Opinion of Value at a Point in Time  123 Approaches to Establishing Value 123 Initial Valuation: C Versus S Corporation Considerations 123 Income Approach  125 Market Approach  127 Asset Approach  128 Lack of Marketability Adjustment (Discount)  129 Ownership Characteristics 129 Minority and Control Positions 129 Multistage Transactions  130 Dilution Considerations and Outstanding Shares  131 Dilution With the ESOP Contribution of Newly Issued Stock  132 Leveraged ESOPs—Initial Valuation and Annual Updates 133 Annual ESOP Update Issues 134 Fluctuations in Value Between Years  134 Valuation Methodology—Issue of Consistency  135 Increasing Value With Time  136 Multi-Investor ESOPs and Allocation Considerations 136 Multiple Classes of Stock in C Corporation ESOP Transactions  137 Practical Valuation Considerations 139 Chapter 8: Administration and Transaction Considerations Initial Considerations and ESOP Feasibility Study 141 Team of Advisors  142 Team of Advisers Summary—Have a Transaction “Quarterback”  145 Feasibility Study  146 Informal Planning Process  146 Written ESOP Feasibility Study  146 Feasibility Summary  147 Strategic ESOP Design Considerations 148 Contribution and Addition Limits to Qualified Plans Expanded  148 Maintaining Both an ESOP and a 401(k) Plan  148 Creation of a Preferred Stock or Super Common Stock for the ESOP in a C Corporation  149 Compatibility With the S Corporation Election  150 Senior Management Compensation and Incentives  150 Special S Corporation Considerations  152 ESOP Trustee and Transaction Considerations  152 Benefits of an Independent Fiduciary  154 ESOP Fairness Opinion  155 Fairness From Only a Financial Viewpoint  155 Common Components of the Fairness Opinion  155 Rights of ESOP Participants  156 Right to Demand Employer Securities  156 ESOP Participant Voting Rights  156 Written Materials  158 Dispute Settlement  158 Diversification Requirements  158 Stock Repurchase Obligation  159 Practical Insights  159 Repurchase Studies  160 Funding the Repurchase Obligation  161 Election: Redeeming the ESOP Stock Back to the ESOP  162 Election: Redeeming the ESOP Stock to the Company Treasury  163 ESOP Termination  163 Plan Termination With Outstanding ESOP Debt  164 Disadvantages of ESOPs  165 Complex Regulatory Environment  165 Fiduciary Responsibilities  166 Initial Cost and Ongoing Expenses  166 Repurchase Obligation  167 Employees Fail to Understand and Appreciate the ESOP  167 Summary  168 Chapter 9: Financial Considerations Financing Overview for ESOPs 169 ESOP Loan Exemption  170 Financing an ESOP—Internal Sources  171 Financially Successful Employer (Plan Sponsor)  171 Prefunding the ESOP  171 Stock Contributions to the ESOP  172 Inside Loan From the Company to the ESOP  173 Financing an ESOP—Seller Financing  173 S Corporation Application  173 C Corporation Application  174 Leveraged QRP Solution  174 Floating Rate Note  175 Financing an ESOP—Third-Party Financing (Bank Debt) 176 Historical Note—Repeal of ESOP Loan Interest Exclusion  176 Overview of General Banking Concerns  176 Common Loan Mechanics  177 C Corporation ESOPs  178 S Corporation ESOPs 178 Summary  179 Chapter 10: Litigation and Significant Cases The Employee Retirement Income Security Act of 1974 and ESOPs  181 The Importance of Court Cases  182 The IRS  182 The DOL  183 Significant Court Cases  183 Court Case: Donovan v Cunningham  184 Court Case: Hines v Schlimgen  185 Court Case: Las Vegas Dodge, Inc v US  186 Court Case: Gary L Eyler v Commissioner  187 Court Case: William R Davis v Torvick, Inc  190 Court Case: Delta Star v Patton  191 Chapter 11: Practical Considerations and Employee Stock Ownership Plan Resources Qualifying ESOP Candidates  195 Qualities of Successful ESOP Candidates  196 Characteristics of Less Successful ESOP Candidates  196 Practical Insights Summary  198 Overview of ESOP-Related Resources  198 The EA Publications  198 NCEO Publications  199 The Ohio Employee Ownership Center  199 Other ESOP Resources  200