Seller Financed
ESOP Technique
This transaction allows a company's
shareholder(s) to sell his or her stock without paying any capital gains
on the sale. Under Section 1042 of the Internal Revenue Code, a
shareholder can realize a tax deferred (possibly tax free) sale of his stock if he purchases with
the proceeds of the sale bonds or stocks of a domestic corporation, which
is known as Qualified Replacement Property (QRP). As long as the seller
does not sell the stocks or bonds, he pays no taxes. The below technique
enables a shareholder to sells his stock to the ESOP in exchange for
payment through a note from the ESOP. As company tax-deductible
contributions are deposited into the ESOP, the ESOP pays the seller and
the seller receives the principal note payments tax-free, along with
interest payments. Within one year of the date of the note, the seller
borrows approximately 90% of the value of the stock being sold to purchase
the QRP with money received from the ESOP and the borrowed funds, thus
qualifying under the tax deferred (possibly tax free) transaction of Section 1042.
Steps:
- Shareholder
sells his stock to the ESOP in exchange for a note from the ESOP to the
seller.
- Company makes
tax-deductible contributions up to 25% of annual payroll for principal
payments, plus interest payments to pay shareholder's note.
- Shareholder
receives from the ESOP tax-free principal payments, and interest from
the note.
- Shareholder
borrows from lending institution approximately 90% of the value of the
stock he or she is selling.
- With the money
borrowed, and some of the money received from the ESOP, the shareholder
purchases the QRP.
For more information about SCS
Administration and our services,
Please call at 858-272-8973 or
e-mail us at bturner@scsadmin.com
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