ESOP POWER An Advanced Planning Strategy For For Private Corporations Presented by: ATI Capital Group, Inc.

ESOP POWERAn Advanced Planning Strategy

For

For Private CorporationsPresented by:

ATI Capital Group, Inc.

ATICG © 2002 ATI Capital Group, Inc. 2

What is an ESOP

• ESOP = Employee Stock Ownership Plan• An ESOP is a QUALIFIED PLAN under

the Employees’ Retirement Income Security Act of 1974 (ERISA)

• See Sections 401(a), 4975(e)(7), and 501(a) of the Internal Revenue Code of 1986, as amended, and Section 407(d)(6) of ERISA, 1974


Unique Features of ESOT

An ESOP trust “ESOT” has three very unique features:

1. ESOT must own “principally” stock in its sponsor company.

2. An ESOT is the ONLY qualified plan under ERISA allowed to BORROW MONEY!!

3. The trust can purchase the Company in “Stages” (multiple transactions).


Powerful Use #1: Exit Strategy

ESOP

$ Loan 2

Stock

$3

QRPsSec. 1042

QualifiedReplacementProperty= Stocks& Bonds

Div

’d $

$ 4

5

Collateral

No Tax onTransactionCompany

Deducts Princ.On Loan

Lender

The BasicTransaction

Corporation

1$ Loan


Benefits to the Corporation

100% deductibility of PRINCIPAL and interest on ESOP loan to buy-out Shareholder.

Increased cash flow due to deductibility of principal on loan.

100% deductibility of DIVIDENDS paid to reduce ESOP debt or distribute to participants.

Collateral for ESOP created outside company. Preferred terms on ESOP loan.

Principal shareholder bought out for $0.66 dollars, compared to $1.52 dollars.


How to Deduct Principal Under ERISA

Results:Tax Deductible

Principal &Interest

Assumptions:•$10,000,000 ESOP transaction•Terms: 8% APR; 10 yr. Amortization•Monthly P + I = $121,328

Assumptions:•$10,000,000 ESOP transaction•Terms: 8% APR; 10 yr. Amortization•Monthly P + I = $121,328

Lender Step 3 Co. makes payment to lender

$121,328

Step 2 ESOP makes mirror payment on Note Payable to Co.

$

ESOP

ABCManufacturing

Company

Step 1 $121,328 Co. makes contribution to ESOP (fully deductible)

$


Benefits to the Selling Shareholder

• Tax Deferral on 100% of the proceeds from the sale of stock to the ESOP, under Sec. 1042 of the Internal Revenue Code!

If the transaction is structured properly, capital gains tax may be permanently deferred!!

NO CAPITAL GAINS TAX ON THE SALE OF YOUR STOCK TO AN ESOP – EVER!

•


Powerful USE #2: Purchase of Capital Goods

Lender

Corporation

ESOP

CapitalGoods

1$ Loan

$ Loan 2 Stoc

k

3

4

5


Collateral

Capital GoodsPurchased WithPre-Tax Dollars =INCREASED CASH FLOW

$ C

ash

$ Cash

Cap. Goods

CAUTION:Dilution!!



100% deductibility of PRINCIPAL and interest on ESOP loan to buy capital goods.

In addition to above deduction, can write-off capital goods a

second time by means of DEPRECIATION.


Collateral for loan created by acquiring the capital goods.

Preferred terms on ESOP loan to acquire capital goods.

Capital Goods Acquired for $0.66 dollars (PT),compared to $1.52 dollars (AT).


Powerful USE #3: Purchase of a Target Company

Lender

Corporation

ESOP

TargetCompany

1$ Loan

$ Loan 2 Stoc

k

3

4

5


Collateral

Target CompanyPurchased WithPre-Tax Dollars =INCREASED RETURN ON INV.

$ C

ash

$ Cash

Ownership

CAUTION:Dilution!!



100% deductibility of PRINCIPAL and interest on ESOP loan to buy Target Company.


Collateral for loan created by acquiring the Target Company.

Preferred terms on ESOP loan to acquire Target Company.

Target Company Acquired for $0.66 dollars (PT),compared to $1.52 dollars (AT).

ESOPs For ‘S’ Corporations

A New Opportunity For

Tax Planning


New LegislationNew Opportunities

• UNDER THE TAXPAYERS RELIEF ACT OF 1997 (effective January 1, 1998)

• UBIT No longer imposed

‘S’ CORPORATIONS CAN NOW UTILIZE ESOPs


Tax Consequences

• Assumptions: S Corp 50% owned by

ESOP and 50% owned by individuals who pay tax at a 39.6% MTR

C Corp pays no dividends and pays tax at a 34% MRT

Both corporations earn $1M taxable income

Earnings net of tax left in company

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

C Corp S Corp


Tax Consequences

• Assumptions: S Corp 100% owned by

ESOP and 0% owned by individuals who pay tax at a 39.6% MTR

C Corp pays no dividends and pays tax at a 34% MRT

Both corporations earn $1M taxable income

Earnings net of tax left in company

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

C Corp S Corp


The Power & The Reality of‘S’ Corporation ESOPs

You can have a “For Profit”

corporation that is

“NOT”

subject to Federal Income

Tax on any level!!


What Are the Differences??

• ‘C’ Corp. ESOPs Seller can take

advantage of Sec. 1042

25% of qualified payroll is deductible if leveraged; 15% if not leveraged

Earnings of Corp. are fully taxable

• ‘S’ Corp. ESOPs Seller cannot take

advantage of Sec. 1042

25% of qualified payroll is deductible

Earnings of Corp. are not subject to Federal Income Tax, to extent company is owned by ESOP


What Are the Differences??

• ‘C’ Corp. ESOPs Seller, family of Seller, &

25% S/H are excluded from ESOP

Second class of stock allowed in ESOP, if it is the highest class of stock or convertible into the highest class of stock

Valuation reflects tax-affecting

• ‘S’ Corp. ESOPs Extensive exclusions for

family members and 10% or greater S/Hs under anti-abuse rules

Second class of stock not allowed (can have common non-voting)

Valuation often does not reflect tax-affecting


Okay, But Who’s in Control??

Because if it’s not me, I don’t want any part of this ESOP concept!!

All I want is to controlmy business now and

after I die.


The Structure of Control

A. If an ESOP holds a minority interest in

its Sponsoring Company’s Securities, control has not changed. No further action is necessary.

B. If an ESOP holds a controlling interest in its Sponsoring Company’s Securities, control has technically passed & further action is necessary.


Methods of Maintaining Control

Maintaining Absolute Voting Control

• Don’t Do Any Planning & Don’t Sell Any Portion of Your Stock Holdings

• Own 51% Voting Control Outside of ESOP


Methods of Maintaining Control

Maintaining Function Voting Control

• Be Appointed Trustee of ESOP – (temporary)

• Become Chairman of ESOP Committee That Directs the Trustee

• Obtain Lifetime Appointment as Chairman of the Board of Directors

• Obtain Lifetime Appointment as CEO


The Flow of Control

Unallocated ESOP Shares

Allocated Shares

Directives

Participants

ESOP Committee

Vote

Vote

Trustee

Chairperson ofCommittee controls

Block could be controlling interest or minority interest.

Minority shareholders

- merger - reorganization - sale of assets- acquisition - liquidation

Company BOD Appoints: •ESOP Committee•Trustee of Plan

Shares actually in Partici-pant’s account.

Shares not in Participant’saccount.

Control is a matter of

proper structuring!


The Emotional Issue of Control

• ASSIGNMENT: Defend financially (not emotionally)

why anyone would insist on owning 100% of a company, if he/she controls the vote.


The Alliance

Project Manager/Consultant

CPA

Attorney for ESOP

Attorney for Corporation

Valuation Professional

Insurance Professional

Trustee

Plan Administrator

Lender

Investment Advisor

We ProvideYour

One-Stop-Shop

ESOP AllianceYour Strategic Partner


Contact Information

• Sam G. Torolopoulos, CPA-ABV 222 West Las Colinas Blvd., Ste. 1346-E, Irving, TX 75039 214-920-1616, fax 214-920-1617 [email protected]

Web Sites:www.aticg.com

ESOP POWER An Advanced Planning Strategy For For Private Corporations Presented by: ATI Capital Group, Inc.

Documents

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esop loan

ati capital group

strategy esop

loan slide

esop power

esop debt

writeoff capital goods