AvoidanceReduction of Sec. 4978 Excise Tax

[Guest Rob Perry]

Hello-

Has anyone come across a creative way to avoid the imposition of the 4978 excise tax? The ESOP at issue bought $11 million dollars of employer stock 1-11-99. As sale of the company is contemplated. I am looking for any ways to avoid or minimize the excise tax? Any thoughts?

[RLL]

Hello Rob Perry !!

Ways to avoid or minimize the IRC section 4978 excise tax upon sale of company:

* Delay the closing of the sale until 1/12/02....more than three years after the ESOP's stock purchase.

* Structure the sale as a tax-free merger or other stock-for-stock exchange, per section 4978(d)(2).

* If the ESOP is leveraged, use cash sales proceeds to repay the ESOP loan (with independent fiduciary approval) and take the position that the excise tax is computed only on "net" proceeds.

* Were all the shares acquired by the ESOP subject to a section 1042 election?

[Guest Rob Perry]

Yes, the sale was accompanied by a 1042 election.

Thanks for your help.

[IRA]

Can you avoid the excise tax if the ESOP sells shares before the 1042 sale and then after the 1042 sale the ESOP still meets all relevant rules (e.g., holds 30%). In other words:

(1) One day after date of 1042 sale, ESOP sells the 1042 shares, and thus (2) there is a 4978 excise tax; but

(1) One day before the date of the 1042 sale, the ESOP sells a number of shares equal to the number of 1042 shares to be acquired in the 1042 transaction, and thus (2) there is no 4978 tax provided that the shares held by the ESOP for three years does not fall below the number held on the date of the 1042 transaction (and all other requirements are met).

Also, is there any authority for taking the position that using the cash proceeds to pay the ESOP loan reduces the amount recognized?