Valuation for ESOP Purposes
BRIAN T. NAPIER
Although Employee Stock Ownership Plans (ESOPs) have been a viable employee benefit program, along with Pension and Profit Sharing Plans, since the adoption of the Internal Revenue Code of 1954, they were not recognized as such by Congress until the Regional Rail Reorganization Act of 1973. The Employee Retirement Income Security Act of 1974 (ERISA) governs the operation of deferred employee compensation plans. This legislation gave ESOPs an explicit statutory definition. Since both leveraged and nonleveraged plans were included in this definition, these ESOPs were exempted from a general prohibition on acquiring and holding “qualifying employer securities” in excess of 10 percent of the fair market value of the assets in the plan. Further, ERISA allowed the direct acquisition of qualifying employer securities by an eligible individual account plan.
Subsequent to ERISA, a number of legislative measures significant to the development of ESOPs were enacted by Congress, one of the most important of which is the Tax Reform Act of 1986 (TRA86). The preponderance of this legislation has been very favorable for ESOPs, and has served to expand their use. For example, Congress recently authorized ESOPs to be implemented in S corporations. The intent of Congress was made clear when it included language in the TRA86 specifically endorsing the use of ESOPs as techniques of corporate finance.
>The Internal Revenue Code and accompanying Income Tax Regulations provide the major guidelines under which ESOPs may be