ESOPs

Chapter 5

Employee Stock Ownership Plan Transactions and S Corporations

This chapter illustrates many of the tax planning aspects previously described. An example company is described in sufficient detail to provide insights into structuring employee stock ownership plan (ESOP) transactions in S corporations. The examples in chapter 4, "Employee Stock Ownership Plan Transaction and C Corporations," largely parallel the examples in this chapter, with the key difference being the income tax election of the company.

Sample Facts—ABC, Inc. (S Corporation)

The hypothetical ESOP candidate, ABC, Inc. (ABC), has been selected to illustrate many attributes of successful installations. Abbreviated financial statements for the company are presented for analysis purposes. An abbreviated analysis is presented of the fair market value (FMV) of the stock of the company for the purposes of an ESOP.

The ownership of ABC is a single shareholder, Mr. Robert Smith (age 61), who is the founder, is active in the daily operations of the business, and currently serves as the president. Mr. Smith is the only member of the family active in the company. ABC is a well-established manufacturing company that has demonstrated consistent profitability and is recession resistant. Sales have grown consistently, but future growth is expected to be slightly ahead of inflation. ABC operates from two production facilities, and the company owns both facilities. The compensation to Mr. Smith is reasonable for valuation ...