Attorney-at-Law

AN ESOP FABLE

In Uncategorized on 08/17/2017 at 17:40

Sorry, guys, it’s been a tough day. And today’s Sum. Op.s  were uninteresting, although I will blog Kurt Hickam, under separate cover.

And I’m subject to promissory estoppel until tomorrow to take up a new rant.

But to the rescue comes The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable, Incontrovertible, Indefatigable, ineluctable, Ineffable, Imperturbable and Incomparable Foe of the Partitive Genitive (although he is getting better, I must admit), Old China Hand and Master Silt Stirrer, Judge Mark V. Holmes.

He sends out a designated hitter, Paza Staffing Services, Inc, Docket 6881-12R, filed 8/17/17. Yes, 2012; the case is aged five years, while VSOP Cognac needs to be only four-and-a-half years old, I’m told. And the Docket suffix “R” is apparently a marker for retrofitting retirement plan cases.

This deal is the device of a certain Doctor Z (name omitted), who puts all the shares of Paza in an ESOP, of which he is sole trustee and beneficiary. The value of said stock grows from about $12K at inception to $333K in a year, which is the year at issue.

During the year at issue, Paza leases five employees from Golden Gate, another company of which Dr Z is sole owner, shareholder, officer and director. He pays himself an $83K annual salary from Paza during the year at issue. None of the leased employees from Golden Gate participate in the Paza ESOP.

Dr Z disputes IRS’ top-heavy disqualification of the Paza ESOP. He’s the sole participant, and anyway he doesn’t own the Paza stock, the ESOP does.

OK, but is it only Paza with which we’re concerned?

“The primary issue in this case stems from I.R.C. § 410(b)(1)(B), which requires qualified plans to benefit ‘a percentage of employees who are not highly compensated employees which is at least 70 percent of the percentage of highly compensated employees benefitting under the plan.’ But what group of people do we consider in our math? If we only need to include Paza employees in the group, then we need only confirm that [Doctor Z] is covered because he is Paza’s only employee. But Paza loses its case if we must include Golden Gate’s employees in the group. See I.R.C. § 410(b)(1)(B).” Order, at p. 3. (Footnote omitted; like the Ancient Mariner, Judge Holmes considers only one of three possible employee groups, but everyone agrees the other two are irrelevant).

So how does the IRC marry corporations for ESOP purposes? Why, Sections 1563(a)(2) and (f)(5) perform the ceremony. Where fewer than five (count ‘em, five) individuals own at least 80 percent of the total value of shares of all classes of stock of each corporation, and more than 50 percent of the total combined voting power, with this clause I thee wed.

So what, says Dr. Z? I don’t own any Paza stock, the ESOP does.

This is what, says Judge Holmes. “But [Dr Z] is the ESOP’s sole beneficiary, and he therefore has constructive ownership of the stock. I.R.C. § 1563(e)(3)(A). That means, that for our purposes, [Dr. Z] owns 100 percent of the value of the shares, and 100 percent of the voting power of Paza and Golden Gate. See I.R.C. §§ 1563(a)(2) and (f)(5). Therefore, Paza is a controlled group — consisting of Paza and Golden Gate. Id.” Order, at p. 4 (Footnotes omitted).

To end the suspense, the omitted footnotes say that Dr Z claimed his rights in the ESOP hadn’t yet vested for the year at issue. Now it was Judge Holmes’ turn to say “So what?” Vesting is not mentioned in the statute. Besides, Section 1563(a)(3) talks about an actuarial interest, and you got that.  Order, at p. 4, Footnotes 4 and 5.

So the five Golden Gaters are in, Dr Z and his ESOP are out, retroactive to year-at-issue and all subsequent years.

Advertisements

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s

%d bloggers like this: