ESOPs Subject of Telecon Featuring Indiana Treasurer

 

 

Berwyn, Pennsylvania – September 21, 2008 –  There are more than 10 million people in 11,500 employee ownership plans in the U.S. according to statistics compiled by the ESOP Association , an association for employee ownership plans.

 

Legislation has been introduced that would amend the IRS Code to exclude from the gross income compensation employees receive in the form of stock distributions.  Introduced by Congressman Dana Rohrabacher (R-CA), H.R. 6419 would exempt the value of company stock paid directly to an employee if the employee holds the stock for 10 years.

 

Given these facts and the role ESOP companies play in our economy, Indiana State Treasurer Richard Mourdock will be sharing his insights at an October 14 teleconference titled “Employee Stock Ownership Plans: Legal, Business & Governmental Strategies.”

 

Treasurer Mourdock came to his post with experience in ESOPs, and has launched an initiative to encourage establishment of the plans in his state.  “ESOPs have a clear track record of creating wealth, encouraging entrepreneurial attitudes and increasing productivity,” said Mourdock.

 

Mourdock will be joined by two experts to provide business valuation and legal insights into these plans. Mike Hartman is a principal of Willamette Management Associates, a national economic analysis firm, and Stephen D. Smith who, as part of his dedicated ESOP practice since 1984, has been responsible for structuring more than 175 ESOP transactions.  Smith is with the law firm of Krieg DeVault LLP in Indiana.

 

“This is a truly unique set of perspectives on ESOPs,” said Tom Hagy, publisher of BVR Legal, the host of the call.  “Mourdock, Hartman and Smith will provide an overview of the falsehoods and realities of these plans, as well as to offer insights into their structure and tax benefits.  The panel will offer guidance on risk management, drafting transaction fairness opinions, and ensuring compliance.”  The panel will field questions from callers as well.

 

 

BVR Legal, a division of Business Valuation Resources LLC, is an education and information company serving attorneys and business experts in complex disputes involving businesses and related assets. 

 

 

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Red Flags ‘Waving Wildly in the Wind’

Bergquist v. Comm’r, 2008 U.S. Tax Ct. LEXIS 20 (T.C. July 22, 2008)

The IRS recently advocated—and convinced the Tax Court to adopt—combined discounts for lack of marketability and lack of control amounting to nearly 65% in determining the fair market value for a medical service corporation.  In Bergquist v. Commissioner (July 28, 2008), several doctors took charitable deductions for donating their stock in the medical corporation, which was slated for conversion to a tax-exempt organization.  They relied on an appraisal that used the going concern premise to value the stock at nearly $402 per share—but under the same facts, the IRS assumed a liquidation value for the company, and determined the stock was worth approximately $37 per share, including the substantial discounts.  According to Judge Swift’s opinion, the taxpayers’ appraisers neglected to explain “how or why they selected a going concern premise of value, and they conveniently and incredibly make no mention of the scheduled . . . consolidation.”

Commentators are already talking about Bergquists’ potential impact on estate planners and appraisers alike.  “Estate planners who work with valuation discounts will be encouraged by the valuation analysis employed by the government’s expert and the adoption of that analysis by the [Tax Court],” according to Steve Leimberg’s Estate Planning Newsletter (#1329, August 8, 2008).  Notably—although the published opinion does not name the IRS expert, a current press release reveals that it was Texas-based HSSK healthcare expert (and frequent BVResources contributor) Don Barbo.

At the same time, appraisers could be discouraged by the hefty, 40% accuracy-related penalties that the Tax Court assessed on the taxpayers.  A recent e-report from the McIntyre School of Commerce Foundation, for example, notes that “each of the six doctors was promised a ‘150K’ benefit.  Instead. . . the doctors ended up paying taxes, penalties and interest of over $100,000 each.  When they were told not to involve their personal tax advisors in the meeting, the red flags were waving wildly in the wind.  While the appraisal firm also bears some responsibility for an assumption the court deemed highly unreasonable, the doctors and their advisors should also have been forewarned of future problems.” 

 

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