This episode we are following up on the August IRS notification entitled “IRS cautions plan sponsors to be alert to compliance issues associated with ESOPs” Allison Wilkerson is a frequent speaker at ESOP conferences and works at McDermott Will and Emery out of Texas. She has a very strong background in working through complex IRS and DOL issues related specifically to ESOPs. She offers some insight into what this notification means as it relates to ESOPs. The highlights of this episode are going to help folks not be overly concerned with this notification by the IRS, however, Allison does point out areas that you should be aware of in putting together your ESOP and possible IRS exposure issues.
This episode we are following up on the August IRS notification entitled “IRS cautions plan sponsors to be alert to compliance issues associated with ESOPs” Allison Wilkerson is a frequent speaker at ESOP conferences and works at McDermott Will and Emery out of Texas. She has a very strong background in working through complex IRS and DOL issues related specifically to ESOPs. She offers some insight into what this notification means as it relates to ESOPs. The highlights of this episode are going to help folks not be overly concerned with this notification by the IRS, however, Allison does point out areas that you should be aware of in putting together your ESOP and possible IRS exposure issues.
[0:11] Everybody this is the the esop guy and we are on a journey to an ESOP so glad that you could join us today and if this is brand new to you on this podcast what this episode what this podcast really is a resource to help, really understand what is behind an employee stock ownership plan and just really helping as a resource to determine like things that you might.
Are interested to know more about and so to do that sometimes we do topics other times we do interviews today we get to do an interview.
And I'm super excited about the topic even though it sounds like I shouldn't be we are going to talk about the IRS and Aesop's and I'm excited because I think.
There are a lot of misconceptions about the IRS and how you know as they look at an ESOP Transaction what their role is and to do that we have.
[0:59] I asked Allison Wilkerson with a with McDermott will and Emery to join us she is an attorney, out of Texas and she's going to help guide us through that whole idea between you know how the IRS effects ESOP so with all that Allison thank you so much for joining us today.
[1:15] Thank you for having me be cool alright so I as we start off I just wanted to kind of do a bit of an icebreaker.
Tell me what you're tell us what your favorite movie is in why.
[1:28] So actually probably the movie that go to to re-watch generally for a laugh is called snatch it's like Guy Ritchie UK movie, named my dog after the main character Turkish in it and quite frankly I just find the humor actually, relatively high level the acting is pretty good but it is my go-to kind of chuckle, or the movie that my husband and I quote to each other usually at inappropriate times yes this pretty cool all right well cool.
So you have been doing esops for a good number of years tell us a little bit about how you got into Aesop's originally as an attorney.
And just kind of what led you to where you are today doing work in esops.
[2:12] Sure so I've always been a big law attorney so I started my practice in 2002 with a sort of larger Regional firm, and became an erisa attorney and quite frankly I actually intended to work mostly compliance although I suspect that I got into an Arisa role because I said yes when somebody offered me an opportunity, nobody grows up wanting to be interested attorney and then one of the women that was working in the group had an ESOP transaction that she had lost some help with.
And basically walked out of her office I happen to be standing there and she asked me if I could follow directions the appropriate answer seems to be yes so, when I was about six months out of law school I said yes and it turned out that was nice up transaction and I really enjoy client interactions I enjoy sort of the.
[3:02] At the ability to see what people do for a living that comes with Aesop's there's a lot of people interaction kind of a people person, and so really leaned into it it helped that the woman who pulled me into it was an incredible mentor and, to this day actually she just left the practice of law after partnering with me for 20 years.
[3:21] So as I tell young attorneys I found somebody that I thought could Mentor guide me in a trance and an opportunity that I had an aptitude for and the rest was history so, walking through doors that seem to be open is kind of how I became an ESOP attorney awesome yeah I love you know I love that too because it's really it's really helpful to be mentored into, you know whatever it is it's almost like the old Apprentice right you have to get your education but the same time, you know it's helpful to have people to really guide you through those things and that's and that's helpful and you just basically fell in love with Aesop's and that's how you wanted to, build your career I absolutely fell in love with you sobs and as you know actually the soapbox I was even talking to my dad about this weekend which is, you know the one thing especially from a big firm attorney we work for companies and big believer in the capitalist side of Esau absolon somebody build something, they should be able to sell it for fair market value preserve Legacy preserve preserve their wealth preserve what they've done you know the the building a better mousetrap, but quite frankly the other thing I really like about it is the path I think to some of the wealth inequality that we have in this country is truly ownership you don't often times get there from kind of a regular salary Etc and we have a large bunch of folks in this country that has.
[4:43] Not as much tax to investment in other things and so that be an implied being provided by the employer I think is really important, that's especially true for a nerissa nerd perspective which is as we watch defined benefit plans go by the wayside which is kind of the last Bastion of employer dollars for retirement ESOP sort of fill that Gap 401 k plans are fantastic, but if you made 20 bucks an hour Which is far exceeding the minimum wage you're strolling making 40,000 dollars a year so you ability to contribute to your own future your own savings.
[5:19] It's robbing Peter to pay Paul and so the ability for the employer to provide a backstop to that is something that I really like.
In man the things that people make money at the people that things that people do better than other things is so much fun to watch it is it is it's exiciting I think every ESOP person would say the same exact thing like, we all love that it's just like exciting to see the differences but, and the the bottom line is you are making a difference we are making a difference for people that do make twenty dollars an hour.
Um and so I think that is a it bodes well for our country in Aesop's are that's why it's exciting.
[5:55] On your discipline within the ESOP world as it as it relates to the you know like one question get from people as.
All these different people do all these different things how would you describe your role in whether it's a transaction ESOP transaction or it's just an ongoing you know company stop company that has Arisa issues how would you describe that.
[6:16] I am fortunate that my practice allows me to either represent a company or the fiduciary or trustee as we all know every ESOP transaction has two parties right the company, we just sometimes an alter ego for the sellers who are transitioning to employee ownership, and the trustee that represents a participants in the plan and the by side.
The trustee obviously has to act in accordance with kind of a service of fiduciary responsibilities and as Marissa nerd.
I can actually fill both roles albeit not in the same transaction which is a really important footnote, so we we get to see it from both sides I'm depending on how we're engaged I often say folks come to Aesop's kind of a different route they may be a corporate attorney a tax attorney or a nerissa attorney.
Because of how I come at it I do a lot of fiduciary counseling which given the DOL oversight and the IRS facts that we're going to talk about, I think is really important because they guiding tenants of Aesop's are you know not paying more than fair market value usually see in routes and things like that so I counsel as to kind of all of those aspects both on company aside as well as fiduciary.
[7:33] If we are fortunate enough to be engaged on the company side I also incredibly proud that we often keep those relationships so I got a stable of over 100 plans that we just provide ongoing compliance and that can include everything from truly.
Plan amendments making sure we are compliant with IRS rules or kind of what I have seen the ease up sustainability and I think part of this is I've been doing this for 20 years so a lot of the plans that I started with are we eating that you know we're getting to the midpoint of our ESOP when we've got a lot of allocated shares maybe we haven't been paint out all of our distributions, how do we start planning for that next tranche of ESOP ownership and making sure that if we wish to continue to be employee-owned we're well positioned to do so.
So that I call it sustainability has really taken over a good chunk of my practice, as you are kind of keeping your eye on the ball to make sure that it remains something that the company can fund and can continue to provide timely and meaningful benefit so, I spent a good deal of time both counseling and transactions probably evenly split between the two so I can start kind of both roles in and really enjoy doing so yeah I think that's a great vantage point because you do see both sides.
[8:51] You know and that helps really to give good guidance on both sides so it's and I think it's a lot of like for people just to get their heads around.
You know the process who do you need for what but I think you I think you said that really well when you only integrate introduce the IRS to the whole equation.
Um which is really where we're going to go.
[9:12] What is the internal revenues roll here when you get down to you know ESOP companies whether it be in the transaction or the ongoing.
Issues that might Prevail so when I introduce esops to people that my starting point is these are.
[9:28] And so you know I think the nomenclature the four letter acronym kind of freaks people out, but my conversation with people and it's not a Perfect Analogy is, if you are new to Aesop's think about it as a 401k or profit sharing plan you know it's employer contributions how you allocate the only differences they will never have employed they rarely have employee dollars, and so because of that at its heart it's a retirement plan with some special attributes it has a couple of regulating bodies so, the Department of Labor and the i.r.s. Really hold their hand on hold each other's hands.
On how they administered how they review retirement plans generally that's not an ESOP specialty that is there.
Function as the Arbiter of retirement plan kind of guidance, and so you really then have those two and kind of an overlapping been diagram The Dol is solely as to Arisa so there is like guidelines Department of Labor regulations, obviously overseen by the Department of Labor and they go to fiduciary standards are these in the appropriate interest of participants are they protecting retirement benefits, governing that I call it the softer side mainly because it's not mad.
[10:44] Dirs comes in sort of on the other side and they govern for all retirement plans making sure that retirement plans are broad based programs.
And that's actually going to become important as we talk about some of the guidance that came out but when I say it's looking at math they're looking at you know is it discriminatory do we have benefits going to the highly comped employees on the nine Holly comped employees, an appropriate measures that those are appropriate balance.
Are we allocating shares or benefits according to the formula a lot of Aesop's do that on kind of pro rata compensation you know what levels of compensation go into the formula so the IRS really has kind of those written standards.
[11:27] And their oversight really reviews that and then the middle of our Venn diagram is kind of the ease up transactional space, so the prohibited transaction rules for both the Internal Revenue Service as well as the Department of Labor oversee those transactions to make sure that esops are not paying more than fair market value when they buy, or selling for less than fair market when they sell to certain parties and interest and the rules for those standards over the to, or very echoey if you look at the two books the Internal Revenue code and irisa and so they really overlap is to their standards there.
Again the IRS is Chopra viewing is more on am a standard is it overpaying Etc where the DOL does overlay kind of a fiduciary concept as well as, if the math is Right are there still other aspects that make this video share really prudent but those two really intersect to govern how esops are administered and regulated in the United.
[12:29] Cool I think you said that really really well and there's a lot to it right there's a lot of those parts and pieces that people have to kind of think through and listen to.
In what we want to accomplish today really is the new guidance in one thing that happens in our ESOP Community as is anything that gets kind of like.
Notified if it's IRS guidance everybody's like what's going on you know because there's there is a sense of.
Or Sensitivity I guess in the ESOP professional Community as far as what does the IRS looking at and what is Department of Labor looking at.
Because we want to be really making sure that these companies are you know protected and doing the right thing.
And at the same time you know there's always going to be some kind of guidance that's going to come out because that's their job that's their job to, to help with the process so what would you how would you describe the recent guidance that the IRS has kind of come forward I think that was about three or four months ago.
[13:26] I think it was in the middle of August and of August I was so it was it was it August okay I thought I feel like it was I was I was on a big transaction that sort of ate my timeline but it was I remember it coming out and trying to figure out if we were needing to advise, on sight of these transactions and a different way but as you said so you saw tend to be a more regulated type of retirement plan because of how they can use debt and how they value and some of the other mechanisms they do tend to be reviewed by both the Department of Labor and the IRS a little bit of higher.
As with all regulation we don't have the big book of law where everything is written down right so I mean one of the reasons that you seek counsel and quite frankly pay big law rates.
Is because there is a lot of what is your experience tell you what is your judgment tell you what is my interaction with Regulators tell me, and because of that often times both the Department of Labor and rs sometimes Phil what they are perceiving as gaps in the written regulation, bye.
[14:33] External guidance or extemporaneous conversation or whatever and the use of community because of small as direct lines and to both sides for conversation and sometimes we learn more information about that.
And you know and again it's not just esab see the DOL did something with cybersecurity for retirement plans in general right publishing what they thought is is kind of best practices so we get a lot of this.
Hey hear my thoughts from regulators and so.
[15:02] August finish maybe end of July that the IRS came out in because they don't have a ton of things to call things they sort of called it a bulletin and so all of a sudden, it sounds very very official it was published publicized on the IRS website and obviously picked up by a number of the national Publications to.
[15:23] Elevated as far as.
Start your I suppose but anywho so the IRS publishes some rhetoric that really started to.
[15:34] Focus on what we want to make sure high-income folks are paying appropriate taxes, then of Aesop's are used that they are not aggressive tax schemes and that the IRS was cautioning folks entering into these transactions.
Did you say with knowledgeable providers and make sure that they weren't venturing into shifting value from the ESOP to kind of the former owners or diverting benefits that should other guys go to a rank-and-file.
And it was a relatively strongly-worded six paragraphs that really sort of indicated some concerns with these Ops.
[16:12] As you noted that you sub Community with its high degree of Regulation is sometimes sensitive to government regulation of rhetoric that is somewhat imprecise.
And so the reaction because we had not worn in the IRS had not previewed this with any of the trade associations Etc was a kind of knee-jerk reaction as you oh gosh what is this mean or transactions being called into question.
Okay nurses are retroactive effect I believe at one point they reference kind of a holding company structure.
A lot of these tops are set up that you have a hold code and then a number of different operating subsidiaries because I may have different lines of business but truly operational subsidiaries.
So we had clients calling going well we have a holding company so unfortunately I think the IRS was trying to Target or hint at some things that they saw in the industry that was concerning them, but in doing so with relatively broad based language because they didn't want to issue affirmative guidance I would have to go through obviously the regular the administrative procedures.
They kind of killed a knot with the sledgehammer and so the reaction was all of a sudden everybody hypothesizing what might be Pat transactions which is unfortunate because I think us throwing out things that.
Whether or not their transactions I would do and you know.
[17:35] Telling ourselves without any further guidance I don't know if that's particularly productive but but in reviewing the rhetoric and we'll probably get to this is.
[17:45] I believe it was more the IRS wanting to remind folks that the IRS has a regulatory arm here they are keeping an eye out on the standards but you know I think what was most telling is they really ended the the discuss the guidance the bulletin however there are now characterizing it.
With a link and a description as to how to avoid to report abuse of transactions and so this is and I think I said it when you and I first talked kind of a, pigs get fat or fat Hogs get slaughtered warning to me, which is like there's a lot of planning that is absolutely appropriate for an ESOP that can be beneficial to all parties.
When you start reading into however an abusive structure that is where the IRS has some concerns and I think a lot of that is, when is obser set up to take advantage of incredibly favorable tax structures in many instances they become almost tax-free for federal income tax purposes.
[18:45] But then ultimately divert a large portion of the value to non rank-and-file so it really gets their ability to operate also as a benefit plan.
So I think one of our not meeting that kind of three-legged stool that includes providing benefits to employees.
The IRS wanted to raise that and say look we're seeing some things that concern us I don't think this was a broad-based attack on you saw, how to for example in your experience and not that you guys do this and we don't do it but how would somebody create an ESOP transaction to divert.
[19:18] The primary benefit so we're an escort we state where we come tax-free right we are going to kind of use the normal that the normal benefit and that's Corporation becomes tax.
How do they actually divert the the actual benefit of the ESOP to the higher the higher ranking people when we have.
[19:34] Qualified retirement plan that has the requirements of non-discriminatory ESOP plan documents that say hey we're going to allocate shares based on.
Compensation whatnot so how does that actually work it's actually a really good question because the I think one of the challenges that you sought Community had when the IRS came out with this is.
[19:53] As you know our world is very small and so a lot of us working together had not seen these types of transactions and so we're all positive what are they talking about excetera honestly it wasn't one that jump to the top of the mindset because quite frankly, it's not one that I see particularly.
And I and that's neither here nor there is simply not in my practice but I think what they were going to and this has been sort of indicated both in the press release as well as.
Kind of conversations off the Record that we've had with IRS since because again the IRS don't you stop Community has a pretty, pretty good relationship it's a place we can raise our hand if you like we want to do this right please let us know what we're going to have to it and the interesting thing is is this didn't seem to be, qualms with how the esof is a plan was set up the retirement plan seem to function exactly how it should people got shares based on relative comp excetera.
What it really looked at was how folks were really using the underlying investment so if the ESOP owns hold Co or company.
[20:59] How are we impacting the value of company X and that was seemingly diverting Assets in the forms of in this was in the press release I'm not hypothesizing.
Loans made to former sellers so we're taking a good chunk of the value out of the company to go to the former former owners or divert those assets questionable as to whether or not those loans were ever repaid, and so I suspect with the IRS was seen is the value actually flowing up to the ESOP in the form of those annual evaluations, was really being gutted by the use of the asset so instead of as we see in most of them the operating company growing adding value and you know the per share value going from $2 to $5 to $10 as the company grows.
That person or value I suspect was either staying static or declining as cash and other assets were diverted for other.
[21:53] So that that is my hypothesis based on what has been said again it's not it's not a transaction or a structure that I see very commonly.
A I believe this was really looking at one Aesop's of small companies were small employee based now quite frankly I've got some in Aesop's I've small employee based that to me is not a red flag.
As long as ultimately that's not coupled with the value being diverted to other uses and so if it's a small employee count you know where the small employee counts still seen the benefit, of that stock growth in a ordinary course or an operating company if that's the case and I think these are.
[22:32] Subject to whole lot of caveats and other rules really design with the benefit plan was intended to do it really does seem that.
A is up that is implemented to provide broad-based benefits.
And not divert assets out of what you would consider the ordinary course of a business IE a business isn't in the process of learning loaning money to former owners Etc or not being paid back loans.
I don't believe is going to fall within the net that the IRS was attempting to cast I believe they saw some.
Promotions of Aesop's for users that they simply don't agree with and that's what's going to be targeted yeah and that I don't want to confuse that with a normal structure is let's just throw out Bank financing for a second.
The seller takes back a note.
[23:17] Operating company they company buys the shares the seller gets in the note a promissory note which is called the outside note.
And then those shares go into the ESOP trust through the inside note that's not what we're talking about that's the normal spot.
And I think that is a super important clarification is, this to me is not the prototypical debt for an ESOP implementation right if you're selling to a knees up that may at times often at times include seller debt that is part of the purchase price and that is did I pay the right price for it, that is going to continue to be monitored by the IRS lady lol under the rules we talked about at the beginning, these are really extemporaneous uses of cash even once the ESOP is paid so the ESOP is set its value based on.
[24:03] We anticipate this casual we anticipate this operations Etc but the value generated by those operations ongoing is continuing to be pushed out to other sources.
So now this is not to suggest that all that the general ESOP financing that we see in a prototipo e sub would be called into question in my in my view the decision-making of other like diverting out now like now I'm borrowing money from other companies where that's the board of directors, Lisa so write the book The Board of Directors would have to choose within there, Pino approach to what's best for the company right and that and that comes back to the governance that people ask about a lot like you know how does governance work well your board of directors there's usually an independent board member or multiple independent more board members.
[24:50] That are part of the negotiation so why would the board I mean the board's job is to guilt to build value in the company right for the most part why would the board do that unless they had basically a.
A bias or Prejudice and words them and that is quite frankly where having not seen that transaction I don't know it was built into sort of all the underlying documents and I do think that that's part of the irs's concern, so I guess a couple things I wonder if you know what you said is I don't believe that the general governance which is the board of directors is strategy.
[25:24] The officers are day-to-day in the easel quite frankly is a shareholder so the question is is you know is my board acting improperly you know we get into lots of conversations about control with esops, But ultimately the board the shareholder elects the board and then you anticipate a a properly acting board right, I also don't want to suggest that a company entering into debt obligations post transaction is problematic.
But in my head that would be productive debt so even if it is debt from a former seller it is debt that I would anticipate well the company is doing something productive with that cash, versus sending that out with the idea that it would be paid out from that seller and again there are instances where that too is okay, I think the driving kind of construct there is is the board acting to operate the business in a way that does ultimately accrete value to its shareholders, if it's taken on debt is it productive debt is it to buy an asset is a dish or something I mean we have lines of credit all the time any cell phone companies.
Because of timing of cash flows and so I don't want to take away here to be.
After you get past seller debt there's no dead that makes sense I think ultimately where the board is looking at is need an answer the question that look is it productive debt that is allowing the company to grow or do something that meets its strategic goals.
[26:46] If we are lending money out because keep in mind that's all the company borrowing money to do something if we are lending the money out one do we anticipate it being paid, if we're lending out large chunks of money with no expectation of that being paid we really would need to discover why, so I don't know that any of these instances in and of themselves or in microcosms aren't appropriate but I think the biggest takeaway here is exactly what you said is, the born needs to be able to have in conversations as to why it is an operational decision for the company and where they do see it building value either now or some point in the future, those conversations should be had kind of regardless of why the setup is because of the governance structure of actually any company shareholder board management obligations, But ultimately somebody should be able to answer the question of what.
What is this serving for the company this should not be something that set up to move assets of the company that are not productive or that are intended kind of shift value away from the company that would otherwise be seen by day by the ESOP shareholders, totally makes sense, okay so other when we think about other aggressive tax schemes and you know we talked about this you know and other call but the idea of going from an S2 a sea and back to an s.
[28:08] What that means for a selling shareholder is if I'm an existing s-corporation.
I can convert the company to an a-c take the 1042 capital gains tax deferral.
Then flip it immediately back to an ass and get the exemption now you know both of us kind of agreed to this but.
We don't do that we never advise that but I do know that that happens and it is it is recommended in the ESOP space for the community.
Um and I just wanted to kind of hit that on I don't know if that's what the IRS commissioner's looking at as part of this Bulletin.
But first off what are your thoughts on that and secondly just.
You know do you think that that's something the IRS would challenge because I know there's some private letter rulings that maybe support someone's position on that.
[28:54] Absolutely so I actually don't think that the service was going to that structure in this particular press release I will say that and again I don't advise on that I also quite frankly I'm very very hesitant to say how other people do transactions are wrong, they have tax advisors they like to whatever so so I don't want their showing up at some point is that Alison said you can never do this right good point yeah they got some point because, because I don't like it when people say that on transaction structures that I've gotten comfortable with so you know this is this is really everybody kind of doing their own own research but in my experience to be honest.
Is you know the the s2c I think you know the general concept is you would wait five years before going back to an.
There are there are some guidance out there that suggests that if you have a buyer that then you might be able to go back to us.
Quicker the idea being that that buyer was separate and distinct from the change to a c-corporation and therefore shouldn't necessarily be married to or held to the obligations on kind of a prior owner.
[30:05] In my experience on as I read the rules and I believe my tax guys also agree with me we tend to believe that that would be truly an arm's length transaction versus an ESOP, how nice of MMA or often hard-fought negotiated truly kind of arms like standard as far as.
I want the market terms I don't believe that the change to ESOP would meet sort of some of those, True Market terms that would allow kind of back to us so we're typically not advising that that would be the course that we would we would suggest but again you know with PL ours out there except our you can certainly find other guidance out there.
I do also think that while the IRS is not spending a significant amount of time overseeing 10:42 they do tend to take 1042 transactions when they are audited, a little bit with a grain of salt because they are so powerful tax deferral features or inappropriate state tanning tax.
Avoidance you know if you die and get the step up the IRS tends to be relatively skeptical of anything that.
[31:12] Delays defers get rid of taxes entirely so I do see that they tend to be a bit more aggressive of their perusing of 10:42 and do you think that when they do find those transactions, that would be something that they argue so to the extent we have companies that are looking to do that I had one company that was looking at being more aggressive we would actually recommend that they do so through the plr process so that they aren't living by that type of open.
[31:39] Audit risk right so the question is is you know do you do you want that protection enough to kind of pay for them to look at your facts and make that argument so, I'll be much more comfortable with submitting that to a true IRS Arbiter and having somebody rule on my fax, something only way we truly see guidance in this area is a plr which are clearly only addressable to that taxpayer and I don't believe that the IRS is going to allow those to really control in these instances, ultimately my client decided not to do so so I don't even know where that Widow we're in and out but but I do believe that when we do so for a client that was just to be more aggressive on those chances we probably suggest doing at the IRS mechanism for doing so, yeah and I think that that's very fair like did you give them the option to consider that and I would agree with you every escort by I've had that has looked at this.
And it's just been like you know what I'm I'm the I don't even want the 10:42 when they actually actually really start looking at.
That's a you know for whatever reason it could happen but I just haven't had a lot of s's try to even convert to see.
And I think that's really good advice because I think sometimes.
[32:56] You know if somebody wants to go through all that trouble and it's worth it financially to take all of the you know that go through that whole process.
I do agree to the I did go through that with an open audit risk is like that's where I feel like some people don't get the advice that they need and then they jump in and I called this is greatest thing ever my buddy did it too and we're all doing it and next thing you know they got they get audited by the IRS and.
And that is challenged and then who knows what happens and interestingly enough the challenge for that is not just the risk on the 1040 to but it is well I'm in paying taxes from a corporate perspective so now I have an ESOP own company, that may be assessed taxes for back a few years so I think that can be a relatively expensive risk I think you know the the positive are we got so many good advisers now, because I think as people enter into Aesop's understanding the various paths become really important right because none of these are.
[33:50] A Panacea of well I've solved for all of my problems right and so, C corporation with 1042 can be incredibly powerful but sometimes meeting the 10:42 reinvestment can be an expensive proposition right it's, you have to invest all of it in a relatively short term that said leaving it as an escort may keep the company in a way that has, it's not paying its tax big to the federal government so now it's got much more cash to pay off debt so it catches up on day.
Coupled with installment sale treatment may be a really favorable tax position as well.
That's about an installment sale we've seen a couple of these some of the the taxing of those notes under the the deferral of those taxes, you can also get very expensive and so I do think that while esops tend to be a relatively, finally MMA you know I common saying that in a private Equity Group somebody walking away tick so be it.
An ESOP nobody really wins at the transactions not done right so I think there's a lot of impetus to make sure that everybody is playing well in the sandbox from making sure that the transactions done right this is not cooking the books or.
Or any of those areas this is truly is the transaction Done Right is sort of an everybody's best interest.
[35:05] But making sure that you bring inappropriate advisors that can also weigh in on some of the tasks complexities Etc, because there are a lot of goals and there are a lot of different paths that once you are down that path it can be very very costly than a comply with the rules and so understanding.
Those decision points are important and this I suspect is funny coming from a lawyer but being cheap on seeking that advice.
I think can cost you significantly in the long run I never enjoyed the conversation where I'm having to explain to somebody that their installment note yeah you don't repay principal until it's paid but you're also paying the federal government a good deal of.
Excise tax for the pleasure of that deferral so exactly there's a lot of a lot of impetus there that I do think that pain to make sure that you are getting tax advice that you're getting corporative is that you're getting a state planning device.
Is really important if you want to make sure that you're ending up with the appropriate results yep yeah I think that's part of what I would say just in general.
[36:08] Take your time like 40 people like look at like don't have to don't rush through this.
Do your work do your research investigate all the options because I think sometimes like in a like a non ESOP transaction if it's just an m&a deal.
Um there's a lot of emotions like their people are really emotional.
In there they're like they're excited about getting it done and but some people don't they just jump off and like let's just do it and then the people that they're working with may not have looked at all those things or may not have thought through May because they don't have the experience.
The worst thing that can happen is they do it and then down the road it comes up.
[36:46] Best thing is they get into it and they realize oh we got to do we got a course-correct like in the middle and I've had that happen with some clients where there, they went down one road and I like the something doesn't feel right and my advice to people if something doesn't feel right then stop.
[37:01] Because this is a regulated em a transaction it and there's a lot of this is part of the podcast today I mean there's a lot of things that you have to think about.
That you don't have to worry about later down the road you know you can't just like if I sell my company to a private Equity Group or a strategic buyer I walk away I get my money I walk away.
I'm done with an ESOP you're going to be involved in this thing for a while and you do not want to be thinking about this you know down the road.
And you don't want your employees to be affected negatively either I mean that's the other consideration so.
I think that's exactly right I had a record keeper and I like this saying that said when you've seen one he's up you see money song and I do think that, yeah we talked a lot about the basic ESOP transaction we have a lot of folks looking at that basically sub transaction is a solution for a lot of problems.
I'm like it provides the backbone but I think Aesop's have gotten very sophisticated and I think they can be incredibly positive an incredibly powerful for, retention for company growth for retirement assets but I do think there are a lot of bells and whistles to them that.
[38:08] I get concerned if somebody shows up and just says we don't want to pay taxes ever as the goal right because we actually can get you there but it is at the most, powerful for the employees as it gets you paid off your seller data is quickly excetera you know so I think a lot of folks who are using the attributes provided whether it be, modeling whether it be structure but that are lucky now on the road trying to make sure they understand the ramifications to both personal as well as corporate requirements, are important and I think that protects the transaction again you know the the transaction, is as you said you know the seller is not going to play golf on Fiji you know they likely have seller debt or they may still be involved in the business, so from that perspective you don't you don't take the money and run an ESOP so there is the impetus to have a transaction with a company is still incredibly powerful.
From a fiduciary standard that's legally required so the good news is those dovetails of goals.
Make is a transaction something that are able to be collaborative again as two goals I don't want I don't want to make it anything but I know those negotiations are important.
But I do think that you know kind of the appropriate transactions really the standard were looking for with respect to Esau absent and quite frankly either on a corporate or fiduciary side that's often.
My guidance that you know the the one up and an ESOP transaction is is a little bit dangerous.
[39:33] Totally what would there be any other aggressive tax schemes that you would want to mention before we.
The kind of clothes or anything else you saw that you would kind of like when people to think about.
[39:44] You know I don't know that there is and part of that is mainly the one is keeping the IRS press release on a little bit of a box and this has been echoed by, some of the conversations we've had with the service although keep in mind I certainly don't speak for them and it shows I think they really are looking for you know a small group of folks who seem to be promoting esops that are diverting diverting the value away from the Esau you know the ESOP Community is other transactions that they are are questioning and there are certain guidelines out there, and by end of day is.
[40:19] I haven't looked to the side of those transactions because they're not transactions I do and so therefore I don't want to kind of off the cuff say that look this transactions bad this transactions good.
What I would say is exactly what you said is I think for ESOP transaction it's really important for the parties to understand their goals.
And for them to understand there's a lot of paths to meet that goal and what makes sense for that versus kind of the, calling up and saying I want an ESOP done in 60 days right that's be like oh you know what's going on that's going on yeah I mean especially if people want to get the money out as fast I mean like I get that you know.
[40:57] That's why modeling is so important looking at all the different options educating like you said the ESOP can be very very unique in the sense of how you structure it.
And in some cases it may not work for what they're wanting to accomplish in I'm okay with that like I'm not trying to like tell people.
You know doing ESOP I mean if it works for what you want to do then it works great but but there's no sense in putting something through like a.
Something a circle through a square peg it won't work eventually and you're going to get frustrated spend a lot of money and then you'll be like I should have done something.
An ESOP is expense under put in there much more expensive to take out, and so I do want to make sure that folks know what they're getting in before I start a good deal of my quiet client goals with what our client conversations with what are your goals because I get a shocking number of calls say I went and ESOP.
And when I ask what your goals are It is Well I want my management really to take over the business and we've got okay what do you want everybody have suck no no we really want the manager to be home by then you don't want an ESOP so you know or I've sat across from folks who had a group of people who wanted to retire well who's going to run the company don't know we want to retire.
[42:13] If you sell to an ESOP how long you stick around not at all going to Fiji okay then you don't want an ESOP you have time somebody that runs the business and trustee doesn't so those initial conversations of what are your goals who's going to run the company what's up the company up for success.
[42:28] Is my quick take a step back which may frustrate people at times because I've had no I want an ESOP you don't and and I am not an ESOP at all cost attorney.
Now I think that's and that's very healthy and I and I think that's predominantly what people will find in these up Community for the most part are people like what how you're thinking about.
[42:48] I'm sorry yeah well great so again the IRS how they affect esops I think we hit a lot of different obviously broad broader topics but.
I think overall I think both of us would agree that.
[43:02] You know this this guidance is just kind of normal as the IRS communicates to the ESOP Community we certainly want to make sure that we both.
[43:10] Don't get people like oh you know you can't do any salt because the IRS is going to look at it I think that you would agree with that right.
[43:16] Absolutely you know the IRS has been auditing my plans since 2017 they stepped it up I quite frankly IRS audits are, pretty perfunctory you know it's we've got a good relationship with the service they run through their rules they check their boxes.
They closed audits relatively routinely and I don't think anything about this change this the IRS to me is not changed him some existential threat esops exactly.
Well Allison thank you for your time today it was really really helpful and appreciated and if people wanted to reach out to you how would they reach out to you.
I'm on the McDermott's website probably MW in Aesop's I'm gonna I'm gonna be the first name that pops up there so I appreciate it sir this is going to get this has been fun awesome well thank you so much, for everybody else thank you for joining today and we will look forward to our next step on this journey to an ESOP.