Leveraging an ESOP

[Guest ESOPADMIN]

I have a plan that was effective in 2012, made a cash contribution in 2013 for 2012 and immediately purchased shares. The cash contribution and shares were allocated to the participants as of 12/31/2012. Now, for 2013 the company made a cash contribution in April of 2014. But the wrinkle is that as of 1/3/2014 the ESOP became leveraged. The client wants to use the contribution made for the 2013 plan year to pay on the loan that was effective 1/3/2014. Can the shares released with the 2013 contribution be allocated as of 12/31/2013???

[A Shot in the Dark]

This is not a wrinke, but sounds like a pretty typical set of events. I am assuming your have a calendar year end (December 31st) as the fiscal year end and plan year end and that the 2013 corporate tax return is on extension.

If I understand your question, the following occurred:

Contribution is declared for 2013 year amounting to "X".

Transaction occurs 1/3/2014

April of 2014, the declared 2013 contribution is made to the ESOP. That contribution is deductible for 2013. The contribution amount is then paid from the ESOP as debt service.

If those facts are correct and the stock purchase agreement and seller notes provide for the the above, then yes you would complete the share release for the 2013 contribution/payment for the 2013 year.

[ESOP Guy]

The only possible issue would be if you have a C corp ESOP and you are trying to deduct the interest on the loan. You can't deduct the interest in a year the loan didn't exist.

Otherwise what you describe is rather common.

[Bill Presson]

If those facts are correct and the stock purchase agreement and seller notes provide for the the above, then yes you would complete the share release for the 2013 contribution/payment for the 2013 year.

Would or Could complete the share release for 12/31/13?

And back to the OP question regarding "immediately" purchasing shares: how far into 2013 could you purchase shares and allocate them as of 12/31/2012? What share price would you use in that scenario?

[A Shot in the Dark]

Bill:

using the calender year as the plan year scenario and assuming the corporate tax return is on extension, any contribution received by the ESOP by September 15th of the year following the respective plan year that is used to service the debt can be used for the share release of the respective year.

Adding all of the caveats, the corporate tax return is not filed until the contribution is made, all of the regulations (415 and 404) are followed and of course the seller note and stock purchase agreement are being followed.

In the scenario that the OP was discussing, shares are not being purchased with contributions. All of the shares were purchased at the transaction date. Contributions are being used to satisfy the debt that was used to purchase the shares on the transaction date. As the debt is paid down shares are released for allocation.

[ESOP Guy]

If those facts are correct and the stock purchase agreement and seller notes provide for the the above, then yes you would complete the share release for the 2013 contribution/payment for the 2013 year.

Would or Could complete the share release for 12/31/13?

And back to the OP question regarding "immediately" purchasing shares: how far into 2013 could you purchase shares and allocate them as of 12/31/2012? What share price would you use in that scenario?

The price you use to purchase the shares have to be the FMV of the shares on the date of sale/purchase. An ESOP always has to show they paid no more then FMV. There is a presumption the seller didn't allow themselves to get paid too little.