May 8, 1995

Ouch! Court Upholds 125% Excise Tax in Improper ESOP Valuation Case

NCEO founder and senior staff member

In Eyler v. Commissioner, the U.S. Tax Court ruled that a taxpayer (Gary Eyler) must pay a tax of 100% of the transaction plus an additional tax of 5% per year for the five years the tax was delinquent on a $10,000,000 sale to an ESOP. Eyler was chairman, CEO, and principal stockholder of CTS Corporation. In December of 1986, he sold shares to an ESOP for $10 million at $14.50/share. Before the sale, CTS had tried to go public, but withdrew the offer when there was only enough interest at a $13 to $16 price range to sell $1 million worth of stock. The stock was then sold to the ESOP. No independent valuation was performed; instead the board relied on the statement of the CFO that the $14.50 price was a fair. In 1989, the company went bankrupt.

The decision is not precedential, but still provides important guidance. For example, the court ruled that the mere fact of a put option does not eliminate a repurchase discount, as the company argued. More important, perhaps, the decision concludes that the excise tax should be on the entire value of the transaction, not just the amount the ESOP overpaid.