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Chapter 1..........................................................................................................................................

ESOPs AND CONGRESSIONAL INTENT.......................................................................


Objectives................................................................................................................
Introduction..............................................................................................................
ESOP Defined..........................................................................................................
1984 Tax Act............................................................................................................
Planning Points........................................................................................................
1986 Tax Act............................................................................................................
Thirty-Percent Test.......................................................................................
Exclusive Benefit.........................................................................................
Disqualification............................................................................................
Two Important Concepts..........................................................................................
1989 Tax Act............................................................................................................
1997 Tax Act............................................................................................................
Reason for Change.....................................................................................
Explanation of Provisions..........................................................................
Effective Date............................................................................................
2001 Tax Act..........................................................................................................
Summary................................................................................................................
Chapter 2........................................................................................................................................
ALTERNATIVES TO AN ESOP.......................................................................................
Objectives..............................................................................................................
Introduction............................................................................................................
Sales to ESOPs.......................................................................................................
Leveraged Recapitalization....................................................................................
IPOs 13
Sale 13
Estate Planning Considerations..............................................................................
Enhanced Estate Planning Strategies.....................................................................
Chapter 3........................................................................................................................................
RULES FOR SELLING STOCK TO AN ESOP WITHOUT RECOGNIZING
GAIN......................................................................................................................
Objectives..............................................................................................................
Introduction............................................................................................................
Section 1042 Rules................................................................................................
Sale of Qualified Securities...................................................................................
Election..................................................................................................................
Notarized Statement...............................................................................................
Other Considerations.............................................................................................
Types of Stock Which Can be Acquired by an ESOP............................................
Chapter 4........................................................................................................................................
HOW ESOP TRANSACTIONS ARE...............................................................................
STRUCTURED FROM A FINANCIAL PERSPECTIVE................................................
Objectives..............................................................................................................
Introduction............................................................................................................

Cash Flow Analysis................................................................................................


Overview....................................................................................................
Nonleveraged ESOP..................................................................................
Leveraged ESOP........................................................................................
Cash Flow Diagrams..............................................................................................
Initial Purchase of Stock........................................................................................
Annual Cash Flow..................................................................................................
Loans 24
Repayments............................................................................................................
Seller-Financed......................................................................................................
Stock-Issuance.......................................................................................................
Chapter 5........................................................................................................................................
SELLER-FINANCED ESOPs AND INVESTMENT STRATEGIES..............................
Objectives..............................................................................................................
Introduction............................................................................................................
Seller-Financed ESOPs..........................................................................................
Structure.....................................................................................................
PLR 8644024.........................................................................................................
PLR 9102017.........................................................................................................
Rulings Requested.................................................................................................
IRS Rulings............................................................................................................
Investment Strategies.............................................................................................
Passive Strategy.....................................................................................................
Active Strategy.......................................................................................................
Example5-1:...................................................................................
Chapter 6........................................................................................................................................
TAX RULES LIMITING THE AMOUNT OF ANNUAL CONTRIBUTIONS TO
AN ESOP...............................................................................................................
Objectives..............................................................................................................
Introduction............................................................................................................
Tax Rules...............................................................................................................
Overview....................................................................................................
Section 409(n)........................................................................................................
Deduction for Dividends Paid on C Corporation Stock.........................................
PLR 9821064.........................................................................................................
Tax Rules Regarding the Internal Loan and ESOP Deal Structure........................
Section 306 Treatment Issues.....................................................................
Section 306 Stock Definition.....................................................................
Rev. Rul. 79-163....................................................................................................
Facts 44
Law and Analysis.......................................................................................
Holding......................................................................................................
Rev. Rul. 81-91.....................................................................................................
Facts 46
Law and Analysis.......................................................................................
Holding......................................................................................................

Rev. Rul. 66-332....................................................................................................


Rev. Rul. 79-122....................................................................................................
Treas. Reg. 4975..................................................................................................
Example 6-1:..................................................................................
Planning Point:.......................................................................................................
DOL Regulations...................................................................................................
PLR 9503002.........................................................................................................
Issues: 58
Facts: 58
Law and Analysis:......................................................................................
Characterization of Elective Contributions............................................................
Use of Elective Contributions to Service Loan......................................................
Conclusions............................................................................................................
PLR 9416043.........................................................................................................
Chapter 7........................................................................................................................................
CONTROL OF THE CORPORATION AND HOW SHARES ARE
ALLOCATED........................................................................................................
Objectives..............................................................................................................
Introduction............................................................................................................
Control of the Corporation After an ESOP Acquires Shares.................................
Overview....................................................................................................
Corporate Governance...........................................................................................
Voting Rights.........................................................................................................
Right to Receive Stock...........................................................................................
Planning Point........................................................................................................
Treas. Reg. 54.4975.............................................................................................
Put Option or Shares Distributed...........................................................................
Vesting Rules.........................................................................................................
Five-Year Vesting...................................................................................................
Three- to Seven-Year Vesting................................................................................
Three-Year Vesting.........................................................................
Two or Six Year Vesting.................................................................
Section 401(a)(28).................................................................................................
Right of Participants to Diversify Their ESOP Accounts..........................
Notice 88-56...........................................................................................................
Put Option Rules....................................................................................................
Treas. Reg. 54.4975.............................................................................................
General rule....................................................................................
Special rule.....................................................................................
Other Put Option Provisions..................................................................................
Manner of exercise.........................................................................
Time excluded from duration of put option...................................
Price 77
Payment terms................................................................................
Payment restrictions.......................................................................
DOL 2550............................................................................................................

Other terms of loan........................................................................


Status of plan as ESOP..................................................................
PLR 938002...........................................................................................................
Issue 79
Facts 80
Law and Analysis...................................................................................................
Conclusion.............................................................................................................
Emerging Repurchase Liability.............................................................................
COI 83
Chapter 8........................................................................................................................................
S CORPORATION ESOPs................................................................................................
Objectives..............................................................................................................
Introduction............................................................................................................
S Corporation Taxation..........................................................................................
Section 1362...........................................................................................................
Electing S Corporation Status................................................................................
ESOPs and S Corporations....................................................................................
Big Tax...................................................................................................................
Planning Point........................................................................................................
Special Considerations...........................................................................................
Special Anti-Abuse Rules For S Corporation Esops..............................................
Definition of Prohibited Allocation...............................................
Effect of a Prohibited Allocation...................................................
Prevention of Nonallocation Year..................................................
Treatment of Family Members as Disqualified Persons........................................
Determination of Number of Shares of Non-Stock-Based Synthetic Equity
....................................................................................................................
S Corporations Compared to C Corporations having ESOPs................................
as Shareholders......................................................................................................
Corporate Level Taxation.......................................................................................
Tax on Liquidation.................................................................................................
Deduction of Current Losses.................................................................................
Basis of Stock Upon Death....................................................................................
Taxation at the Shareholder Level.........................................................................
Example 8-1:..................................................................................
Chapter 9........................................................................................................................................
FIDUCIARY AND ERISA ISSUES..................................................................................
Objectives..............................................................................................................
Introduction............................................................................................................
ERISA 404...........................................................................................................
ERISA 406 AND 408.........................................................................................
ERISA 409...........................................................................................................
DOL REG. 2509..................................................................................................
Proposed Dol Rule...............................................................................................
Background..............................................................................................
Description of the Proposal......................................................................

General Rule and Scope...........................................................................


Fair Market Value....................................................................................
Good Faith...............................................................................................
Valuation ContentGeneral....................................................................
Valuation Content Special Rule............................................................
Rev. Rul. 95-57....................................................................................................
DOL 2510...........................................................................................................
Fair Market Value.........................................................................
Good Faith....................................................................................
Valuation Content.........................................................................
Special Rule.................................................................................
Summary..............................................................................................................
Chapter 10....................................................................................................................................
ACCOUNTING FOR ESOPs..........................................................................................
Objectives.............................................................................................................
Introduction..........................................................................................................
Accounting Rules.................................................................................................
Reporting the Purchase of Shares by ESOPs...........................................
Reporting the Release of ESOP Shares....................................................
Reporting Redemptions of ESOP Shares.............................................................
Reporting of Debt and of Interest........................................................................
Earnings per Share...............................................................................................
Common Stock Equivalents.................................................................................
Number of Shares Outstanding............................................................................
Adjustments to Earnings......................................................................................
Accounting for Terminations...............................................................................
Reporting Redemptions of ESOP Shares.............................................................
Disclosures...........................................................................................................
EXHIBIT 10-1.............................................................................
Results of Applying SOP.............................................................
Journal Entries.............................................................................
Illustration of Termination...........................................................
Tax and EPS Computations.........................................................
Tax Computations........................................................................
Reconciliation of Effective Tax Rate to Provision for
Income Taxes...................................................................
Illustrative Disclosure for End of Year 3.....................................
EXHIBIT 10-2.............................................................................
Table 2-b......................................................................................
Results of Applying SOP.............................................................
Journal Entries.............................................................................
Illustration of Termination...........................................................
Tax and EPS Computations.........................................................
Illustrative Disclosure for End of Year 3.....................................
Common Stock Non-Leveraged ESOP........................................
Journal Entries.............................................................................

Exhibit 10-4.................................................................................
Convertible Preferred Stock Leveraged ESOP With a Direct
Loan.................................................................................
Journal Entries.............................................................................
Tax and EPS Computations.........................................................
Reconciliation of Effective Tax Rate to Provision for
Income Taxes...................................................................
Convertible Preferred Stock Leveraged ESOP Used to Fund
401(k) Savings Plan With Employer Loan......................
Results of Applying SOP.............................................................
Journal Entries.............................................................................
Tax and EPS Computations.........................................................
If-Converted EPS Computation...................................................
Exhibit 10-5 (Continued).............................................................
Tax Computation..........................................................................
Reconciliation of Effective Rate to Provision for Income
Taxes................................................................................
Chapter 11....................................................................................................................................
CHARITABLE TOOLS, STRATEGIES AND ESOPS...................................................
Objectives............................................................................................................
Introduction..........................................................................................................
Charitable Remainder Trusts................................................................................
Strategies and Traps to Avoid..............................................................................
Combining ESOPs with Public Charitable Gifts.................................................
Chapter 12....................................................................................................................................
Reducing ESOP Transaction Risk Using Life Insurance.................................................
$10 Million Business Owner Example................................................................
Life Insurance and Phantom Stock Plans.............................................................
Life Insurance for Repurchase Liability..............................................................
Life Insurance owned by the ESOP Plan.............................................................
Life Insurance Agents Role in ESOP Transactions..............................................
Chapter 13....................................................................................................................................
CASE STUDIES..............................................................................................................
CASE STUDIES..................................................................................................
Objectives............................................................................................................
Introduction..........................................................................................................
Failure to File or Execute the Required Forms on Time......................................
PLR 9735046...........................................................................................
Law and Analysis.................................................................................................
PLR 9733001.......................................................................................................
Applicable Law and Analysis..............................................................................
Conclusion...........................................................................................................
Query for Discussion Purposes............................................................................
Deductions for Dividends Paid to the ESOP.......................................................
PLR 9829042.......................................................................................................

Dividends Were Allowed to Be Deducted by the Corporation and Used to


Make Payments on the Internal Loan......................................................
PLR 9522041.......................................................................................................
Invest QRP in Real Estate....................................................................................
PLR 9801053.......................................................................................................
ESOP Transaction................................................................................................
Post ESOP Purchase of Newco............................................................................
Using an ESOP in a Tax-free Corporate Reorganization.....................................
PLR 9721022.......................................................................................................
Investing the Tax-free Rollover Proceeds into Another Closely Held
Corporation..............................................................................................
PLR 9720026.......................................................................................................
Use an ESOP as a Technique to Acquire Another Company...............................
PLR 9631002.......................................................................................................
Facts 204
Applicable Law and Analysis..................................................................
Conclusion...........................................................................................................
A Company Uses its ESOP to Acquire the Business of a Target Company
..................................................................................................................
PLR 9705004.......................................................................................................
Facts 210
Operation of the Company A ESOP and The Merger of the Company A
ESOP Into the Company B ESOP............................................................
Conversion of Company A Shares Into Company B Shares and Subsequent
Events.......................................................................................................
Law and Analysis.................................................................................................
ISSUE 1.......................................................................................
ISSUE 2.......................................................................................
ISSUE 3.......................................................................................
ISSUE 4.......................................................................................
ISSUE 5.......................................................................................
ISSUE 6.......................................................................................
ISSUE 7.......................................................................................
ISSUE 8.......................................................................................
Conclusions..........................................................................................................
An Estate Where the Decedent Could Have, but Did Not, Elect 1042
Treatment During His Lifetime................................................................
PLR 9644024.......................................................................................................
Refinance the Internal Loan.................................................................................
PLR 9704030.......................................................................................................
Extend the Length of the Internal Loan Because the Company Ran into
Difficult Financial Times.........................................................................
PLR 9645023.......................................................................................................
Exchanging the Stock Owned by the ESOP for Another Stock Using a
Tax-free Exchange...................................................................................
PLR 9610026.......................................................................................................

How ESOPs Are Used to Spin off on Subsidiaries of Large Corporations


to Their Management and Employees.....................................................
PLR 9552043.......................................................................................................
Charitable Cases...................................................................................................
PLR 9547002...........................................................................................
PLR 9721035.......................................................................................................