What is it about Iowa and ESOPs? Iowa seems to have more than its fair share of tax litigation involving Employee Stock Ownership Plans. (See here, here, and here for examples) Iowa’s unusual prominence in this obscure area of the tax law is due in part to a group of Iowa accountants who pushed the plans heavily in the 1970s and 1980s, touting “The Miracle of ESOP.”
An Iowa ESOP will need a miracle on appeal after being revoked retroactively yesterday by the Tax Court. Judge Gerber upheld the 2010 revocation of the plan back to 1995 for several reasons, including failure to timely amend plan documents for tax law changes and failure to get a properly-documented appraisal of the ESOP stock.
Judge Gerber discussed the appraisal problem:
Thielking was the person selected to appraise common stock of a company’s employee stock ownership plan (ESOP) in another case before this Court. In that case, involving similar taxable years, this Court addressed Thielking’s failure to set forth his qualifications as follows:
Petitioner asserts that Thielking was a permissible appraiser of the ESOT’s stock in petitioner. We hold otherwise. Section 401(a)(28)(C) provides that all employer securities which are not readily tradable on an established securities market must be valued by an “independent appraiser”. Since petitioner’s stock is not traded on an established securities market, an independent appraiser had to value the ESOT’s holdings of that stock. As relevant here, an “independent appraiser” means a “qualified appraiser” as defined by section 1.170A-13(c)(5)(i), Income Tax Regs.
The ESOP fails at least two requirements of that section. First, section 1.170A-13(c)(5)(i), Income Tax Regs., requires that the appraisal summary contain a declaration that the individual holds himself out to the public as an appraiser. The appraisal letters covering the 2001 through 2003 plan years state that “The undersigned holds himself out to be an appraiser”. However, there is no signature below that statement on any of the letters (there is an unsigned line for a signature with the word “appraiser” typed below). Second, section 1.170A-13(c)(3)(ii)(F) and (5)(i)(B), Income Tax Regs., requires that the qualified appraiser who signs the appraisal must list his or her background, experience, education, and membership, if any, in professional appraisal associations. The appraisal here is not signed, and the appraisal summary does not list the referenced information.
Hollen v. Commissioner, T.C. Memo. 2011-2, slip op. at 9-10, aff’d, 437 Fed. Appx. 525 (8th Cir. 2011). Thielking’s failure to set forth his qualifications was part of the basis for this Court’s holding that the common stock in that case was not appraised by a “qualified appraiser”.
The circumstances in Hollen were substantially similar to the circumstances in this case.
The appraiser in this case once was associated with a man who told a client I worked with in the 1980s that (I paraphrase) ”Sure, you can use a fancy-pants appraiser and spend a lot of money. You can also use an expensive lawyer for a divorce or you can file your own papers. You’ll be just as divorced, and you’ll save the legal fees.” That apparently works about as well in ESOPs as in contested divorces.
ESOPs can be great tools, but they are not easy to use. 15 years of plan disqualification is likely to be pricey.
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Howard Gleckman, What Is Barack Obama’s Tax Plan?
It’s five o’clock somewhere, so catch tomorrow’s Buzz today at Robert D. Flach’s place!
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