| Purpose:
For tax purposes, to provide an independent determination
of the fair market value of the capital stock in privately
held companies in which a portion or all of the capital stock
is owned by an Employee Stock Ownership Trust.
An Employee Stock Ownership Plan (ESOP) is a tax-qualified,
defined contribution plan of deferred compensation under Section
401(a), Title 26, Subtitle A, chapter 1, subchapter D/P, subpart
A/Section 401 of the Internal Revenue Code. The primary objective
of an ESOP is to provide stock ownership interests to employees
so that they have a vested interest in the successful operations
of their companies. A qualified ESOP receives tax-favored
treatment under the Internal Revenue Code, including:
- Employers can deduct stock or cash
contributions to an ESOP;
- Employers can deduct dividends paid on ESOP-held
stock;
- An owner of a closely held C corporation
can defer capital gains taxation on stock he or she sells
to an ESOP;
- An S corporation ESOP is not taxable on
its share of corporate earnings; and
- Employees pay no tax on stock allocated
to their ESOP account until they receive distributions.
Because of these tax benefits, whenever an ESOP acquires employer’s
stock from the corporation or from certain shareholders, the
acquisition price must be less than or equal to “adequate
consideration.” For employer securities that are not
regularly traded, the Department of Labor defines adequate
consideration as the fair market value determined by an appraiser
independent of all parties to the transaction.
According to the Internal Revenue Service and the Department
of Labor, valuations are required at least annually for annual
contributions, determination of the plan account balance or
repurchase of small blocks of terminated participants’
shares. In addition, a separate valuation, as of the date
of the transaction, is required for the purchase of a non-participant’s
shares or the purchase of significant blocks of stock.
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