RLL

I think that the IRS has provided relief only for failure to obtain Statements of Purchase, which is a requirement imposed by the temporary regulations. Since the election is a statutory requirement of IRC section 1042(a)(1), the IRS is unlikely to permit the filing of a Statement of Election with an amended return. Also, inasmuch as section 1042©(6) requires that the election be made by the due date for filing the return, how can the IRS waive this clear statutory rule? The request for a PLR is probably a waste of time. I suggest that you discuss this matter with Employee Plans folks in the IRS National Office to ascertain their position. Perhaps the taxpayer can secure some relief by making claims against the advisers responsible for this error.

An ESOP is a qualified employee plan under IRC section 401(a). If an ESOP benefit distribution is paid in a form that constitutes an "eligible rollover distribution," such distribution proceeds can be rolled over to another qualified plan which accepts rollover contributions.

An LLC does not issue "stock" to represent its ownership interests. With the limited exception of certain publicly-traded entities, LLC membership interests (which are similar to limited partnership interests) would be employer securities which are NOT "qualifying employer securities" that can be held by an EIAP under ERISA section 407.

An EIAP is an "eligible individual account plan" under ERISA section 407(d)(3). An EIAP is exempt from ERISA's general diversification of investments requirement and the normal 10% limit with respect to investments in qualifying employer securities or qualifying employer real property. An EIAP can be an ESOP, a non-ESOP stock bonus plan or a profit sharing plan and must specifically provide for the percentage of plan assets that may be invested in such employer securities or employer real property. There are a number of special tax incentives and other features available only to ESOPs and NOT to other types of EIAPs. These include the ability to "leverage" the purchase of employer stock (using the employer's credit), higher limits on tax deductibility of employer contributions, tax deferred sales of stock (by shareholders) under IRC section 1042, tax deductibility of dividends (on employer stock) used to pay ESOP debt or "passed-thru" to participants, tax exemption for an ESOP's share of employer S corporation earnings, and greater flexibility in modifying benefit distribution options. There are also certain special qualification requirements applicable only to ESOPs under IRC section 4975(e)(7). There are many situations where a non-ESOP EIAP may accomplish the sharing of stock ownership with employees just as well as an ESOP. On the other hand, the special tax benefits available only to ESOPs are often very significant. Whether an ESOP is the appropriate vehicle in a particular situation depends on facts and circumstances, including the design and objectives of the program. I recommend that you get more information on this subject from the National Center for Employee Ownership at http://www.nceo.org and from The ESOP Association at http://www.esopassociation.org and from the Foundation for Enterprise Development at http://www.fed.org .

Hi John A --- The area of ESOP benefit distributions can be somewhat complicated. If the company stock is publicly-traded, it's usually an easier process. If not, the distributee of closely-held company stock must be granted a put option, allowing the sale of shares back to the company. There may also be a "cash distribution" option in the ESOP. In addition, if the participant's ESOP balance is more than $5000, he/she must give written consent to receive a distribution prior to retirement age. Also, the distribution likely is a qualifying rollover distribution...which involves written notices and elections. The tax consequences of the ESOP distribution to the distributee will vary depending on whether it's a lump sum distribution and whether it includes company stock. I recommend that you seek specific advice from an adviser who is very experienced in ESOP benefit distribution matters.

Hi Toni Jo --- An ESOP must be "designed to invest primarily in employer stock." The transaction whereby the ESOP sold all of its stock should have contemplated one of the following courses of action: (1) termination of the ESOP; (2) conversion (or merger) of the ESOP into another type of retirement plan, such as a profit-sharing plan; or (3) future purchases of employer stock, if available. If employer stock will not be available to the ESOP, #3 would not be an alternative. I wonder why the ESOP would sell all its stock ... unless it were in connection with the sale of the company and/or the termination of the ESOP. I recommend that you discuss this with your legal counsel, who presumably is experienced in ESOP matters.

cute name, barebtm1 !! Section 409(o)(1)(A)(i) of the Internal Revenue Code requires that an ESOP provide for benefit distributions to commence by the end of the plan year following the year in which there is separation from service by reason of "disability." This rule applies to ESOP benefits attributable to stock acquired by the ESOP after 1986 and requires payments of vested benefits over a period not exceeding five years. It certainly is possible that your "employee stock ownership plan" may not be an ESOP which is subject to this requirement, but there's no reason for you to accept what you've been told without further inquiry. I recommend that you read the required "summary plan description," which should outline your rights to benefits. Also, you could request a copy of the formal plan documents and check out the specific benefit distribution rules applicable to your situation.

eilano --- An ESOP may be terminated by the sponsoring company. Such a decision is generally made by the board of directors. In connection with the termination of an ESOP, there must be a plan for the ESOP to dispose of its company stock. Any decision for an ESOP to sell any of its company stock is to be made by an ESOP fiduciary who is looking out for the best interests of the ESOP participants and is required to maximize value for the benefit of participants. The ESOP cannot be required to sell its stock back to the company or the other shareholders. Accordingly, it would be improper for the ESOP to consider offers to purchase its stock without the ESOP's being represented by an independent party....that is, a fiduciary unrelated to and not working for the other shareholders. Such fiduciary should negotiate the highest possible selling price for the ESOP's shares...it's not enough to merely get an appraiser who will determine "fair market value." Since the "current (presumably, the non-ESOP) owners" want to eliminate the ESOP as an owner for their own benefit, they should be required to pay a premium price to acquire the ESOP's stock. There are certainly other less dramatic means of dealing with concerns about trustee liability. Have they looked into retaining an independent trustee? Have they obtained fiduciary liability insurance? Have they retained competent legal and financial advisers? Did they think about any of these issues before establishing the ESOP?

Dawn --- The requirement for valuation as of the transaction date is found in ERISA sections 408(e) and 3(18). The repurchase of stock by the employer from the ESOP is a party-in-interest transaction which qualifies for the PT exemption only if it's at a price not less favorable to the ESOP than fair market value. Obviously, this can only be determined as of the transaction date. See the DOL proposed regulation on "adequate consideration" under section 3(18). Also, check out the "valuation" provisions of the IRS's ESOP "requirements" regulations at section 54.4975-11(d)(5).

Hi Dawn --- It's not surprising that some DOL folks were unaware of an IRS position regarding ESOP loans. They may not know what an S corporation is. Some DOL folks don't even know their own agency's positions on certain issues. The fact that DOL is notifying IRS of the PT indicates that the IRS might be coming around to audit. I'd follow the advice of the ESOP lawyer. You may want to consider fixing ALL aspects of the ESOP loan, including the possible "improper" use of S corp distributions (on allocated shares) for loan payments. Under IRC section 4975, you must retroactively "correct" all defects to avoid the 100% excise tax. Also, if the defects are "corrected" now, you stop the addition of more years of 15% excise taxes. Why voluntarily contact IRS? They may lose (or never get) the notice from the DOL and never show up to audit. Also, you should note that the 15% per year excise tax on a "non-exempt" ESOP loan is based on the annual loan interest, not on the principal amount.

Hi Dawn --- If the ESOP needs cash to distribute benefits, what choice do the trustees have under the plan documents? Where else will the cash come from? Are there non-stock assets in the ESOP? Does the plan document allow the distribution of shares subject to a mandatory repurchase by the employer? If there's no other way for the ESOP to make the benefit distributions, the purpose is not to benefit the more-than-25% shareholders. I'm troubled by your statement that repurchased shares are "given" to management. Isn't there a requirement that the shares be "earned" ?

smm --- An ESOP fiduciary who entered into such an agreement is likely violating section 404(a)(1) of ERISA. As an ESOP must be "designed to invest primarily" in employer stock, a fiduciary would not be fulfilling its statutory duty to acquire employer stock for the benefit of participants if it entered into an agreement which might force the ESOP to give up its entire ownership interest in employer stock. By the way, what's the ESOP getting in return for giving the call option?

Suanne --- The company may purchase the shares from the ESOP, but only for cash at a price not less than fair market value as of the purchase date (assuming that the ESOP fiduciary agrees to sell the shares). This may require that the independent appraiser's opinion be updated from the year-end valuation. If the stock is distributed and then repurchased by the company from the distributee, the distributee may rollover sale proceeds to an IRA within 60 days of the distribution date (if the distribution was an "eligible rollover distribution"). This could be a problem if the company repurchases the shares on an "installment" basis.

friedbrain --- You can eliminate the right of ESOP participants to demand benefit distributions in employer stock under IRC section 411(d)(6)© only if the ESOP receives its merger consideration in the form of cash. If the merger results in the ESOP's exchanging its stock for stock of the merger survivor, that stock becomes the employer stock which is subject to IRC section 409(h)(1).

smithee --- You may also want to check with The ESOP Association at http://www.esopassociation.org and the Foundation for Enterprise Development at http://www.fed.org for additional information.

smm --- In connection with the solicitation of ESOP participant voting directions, such participants must be supplied with the same information and/or proxy statement which is supplied to other shareholders of the company in connection with the shareholder vote. The requirements for the content of such information/statement would be under applicable state corporate law.....however, if the company is a reporting company under the Securities Exchange Act of 1934, the SEC proxy statement requirements would apply. If the ESOP is to receive merger consideration in the form of stock, the solicitation of ESOP participant voting directions would involve the offering of a security. In such a situation, an offering circular, prospectus or private placement memorandum would also likely be needed, as required by applicable federal and/or state securities laws. I recommend that you seek specific advice from a corporate securities lawyer experienced in ESOP merger transactions.

kredlin --- Nonrecognition treatment under IRC section 1042 is available only if the ESOP satisfies the requirements of sections 401(a) and 4975(e)(7) at the time of the sale. A qualification defect which is not corrected on a timely basis could result in section 1042 treatment not being available. Note that a defect in satisfying section 4975(e)(7), other than a 401(a) defect, is not presently eligible for correction under the IRS programs. There are also numerous other requirements which must all be satified for 1042 to be available. included are the requirements that the employer consent to the potential excise taxes applicable to certain early dispositions of stock by the ESOP and to failure to comply with the allocation prohibitions under section 409(n).

RW --- IRC section 411(d)(6)© allows an ESOP to modify distribution options on a nondiscriminatory basis. It appears that this ESOP exception to the general "anti-cutback" rule should allow a plan amendment which eliminates dividend distributions. Why not propose an amendment to the plan and apply for an IRS determination letter?

boberlander --- S corporation distributions are dividends included in shareholders' income for financial reporting purposes but are generally not taxable income to such shareholders (who have already been taxed on the S corporation's income). However, IRC section 512(e)(3) exempts an ESOP from being taxed on its share of S corporation income.

J K Perry --- QDROphile has given you good advice. Terminating an ESOP can be quite tricky, with many traps for the unwary. You not only have to terminate the ESOP as an employee benefit plan, you likely must set up a fiduciary procedure for determining the manner in which the ESOP will dispose of its employer stock. This is not an exercise to be engaged in by novices. I can't image what circles you've been going in, but I strongly suggest that you check with the National Center for Employee Ownership at http://www.nceo.org and The ESOP Association at http://www.esopassociation.org for recommendations of lawyers experienced in terminating ESOPs.

Hi smm --- IRC Section 409(e)(3) requires a "pass-thru" of voting rights to ESOP participants (and beneficiaries) only on a specified "corporate matter which involves the voting of such shares..." If there is no shareholder vote required (or solicited) on a matter, there is nothing on which the ESOP shares can be voted. Unless the ESOP documents provide otherwise, the trustee would decide whether all ESOP-owned shares (both allocated and unallocated) are to be sold. It is not uncommon for an ESOP to provide for such a decision to be made by an ESOP fiduciary other than the trustee....such as an Administrative Committee or a non-trustee independent fiduciary.

Check with The ESOP Association at http://www.esopassociation.org and the National Center for Employee Ownership at http://www.nceo.org.

IRC section 3405(e)(1)(B)(iv) exempts ESOP dividend distributions from the withholding rules applicable to deferred compensation plans. Notwithstanding the IRS position that ESOP dividend distributions are generally reportable on Form 1099-DIV (rather than on Form 1099-R), such payments are not "dividends" taxable to the recipient under section 61(a)(7)...they are employee plan distributions taxable under section 402(a) and subject to the withholding rules under section 3405. Employee plan distributions are not "reportable payments" as defined in the backup withholding rules of section 3406. The IRS may not agree with this analysis....but I think the IRC supports it.

Maybe....IRC section 414(B) requires that all members of a "controlled group" of corporations be taken into account in determining whether an ESOP (or other retirement plan) meets the section 410(B) nondiscriminatory coverage requirement. So it depends on how many (and which) employees of the "controlled group" would be covered under the ESOP and how many (and which) would be excluded.

Your additional facts may change the anaysis. Clearly, sec 404(a)(9) isn't available for computing deductions to an S corp leveraged ESOP. Sorry, but I don't look at IRS regs anymore....the print is too small and, even if you can read 'em, it's too much work just to answer a message board post. Doesn't the "safe haven" interest rate exception under sec 482 apply?