Employee Ownership Legal Digest
Corey Rosen (15)

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NCEO founder and senior staff member

Corey Rosen

April 01, 2022

Court Dismisses Some Claims in ESOP Valuation Case

In Novosel v. Azcon Inc. Employee Benefits Plan Committee, No. 21 C 3080, (N.D. Il, E.D., March 8, 2022), a district court dismissed two claims concerning the valuation of stock for their plaintiff in Azcon’s ESOP, but allowed her to continue a breach of contract claim alleging that Azcon miscalculated her share value and distributed $50,000 less than she was owed. Novosel retired in 2015 and took advantage of a diversification option. She had understood the value of the diversified shares to be $1,840 per share, but a midyear valuation that would serve as the actual basis for the diversification set the value at only $165 per share. Novosel filed a claim against the administrative committee, and they agreed to settle to allow her to rescind her diversification and wait until she reached retirement age in 2019. The distribution would be paid in two or possibly more than two installments based on the value of the shares. In 2019, the share value had gone back to $1,055 per share, but dropped back to $561 after a midyear valuation an independent trustee asked for based on the significant hit to the company business from COVID. Novosel sued.

Corey Rosen

April 01, 2022

Court Rules Plaintiffs Have to Plead More Than Suspicion of Wrongdoing to Justify Case Proceeding

In recent years, plaintiffs have been seeking to move to discovery in ESOP litigation based largely on complaints of a drop in share price after a transaction. In Plutzer v. Bankers Trust Company of South Dakota et. al., No. 1:21-cv-03632-MKV (S.D.N.Y., February 28, 2022), a court dismissed a claim against Bankers Trust of South Dakota, the trustee for the ESOP at Tharanco Group. In 2015, an ESOP bought 100% of Tharanco for $133 million. The sale was fully leveraged, and the stock dropped to $13 million the next year. It rose in the following years, but dropped down to $9.8 million in 2019. The plaintiff essentially argued that the decrease was sufficient cause to move to the next stage of a trial. The court ruled that the mere statement of a claim followed by “threadbare” justification is insufficient to show the plaintiff could demonstrate actual harm.

Corey Rosen

April 01, 2022

IRS Issues Proposed Regulations for Required Minimum Distributions Under SECURE Act

On February 24, the IRS issued proposed regulations for retirement distributions under the SECURE Act. The 273-page proposal deals with a wide variety of issues, such as how RMDs are distributed to heirs after a participant’s death, how annuities are treated, and other issues.

Corey Rosen

April 01, 2022

Court Rules Plaintiffs Have to Plead More Than Suspicion of Wrongdoing to Justify Case Proceeding

Corey Rosen

March 21, 2022

Moving Qualified Replacement Property into Grantor Trust Is Not a Disposition Under Section 1042

In PLR 202206009, Feb. 11. 2022, the IRS ruled that a taxpayer who sold stock to an ESOP and took the capital deferral treatment available under Section 1042 of the Code will not be treated as having made a disposition of the qualified replacement property purchased after the sale into a grantor trust the taxpayer controls. The IRS rules that “Section 673 [of the Code] provides that the grantor shall be treated as the owner of any portion of a trust that the grantor has a reversionary interest in either the corpus or the income therefrom, if, as of the inception of that portion of the trust, the value of such interest exceeds five percent of the value of such portion.”

Corey Rosen

March 21, 2022

Casino Queen Must Face ESOP Lawsuit

In Hensiek v. Bd. of Dirs. of Casino Queen Holding Co., No. 3:20-CV-377-DWD (S.D. Ill., Jan. 28, 2022), a federal judge denied an Illinois casino company’s motion to dismiss a proposed class action from former employees who allege the company’s ESOP overpaid for shares in the now closed casino company. Plaintiffs allege the company’s 2012 purchase of the company for $170 million was based on excessively optimistic projections. They also allege the company sold and then leased back real property it owned for too low a price and that the two trustees for the deal were insiders with conflicts of interest and subject to direction from the board and ESOP administrative committee. Defendants responded that they hired an independent outside trustee to direct the insiders.

Corey Rosen

March 21, 2022

Employee in Sham S ESOP Must Pay Taxes

In Larson v. Commissioner, T.C. Memo 2022-3, No. 15809-11, (U.S. Tax Court, Feb. 2, 2022), the tax court rejected an appeal by the plaintiff over an assessment of several million dollars in taxation for his nominally restricted stock. The deal terms were a variation of sham ESOP transactions that were attempted in the early 2000s and were shut down by the IRS. The deal included assigning all profits to a minority S ESOP and granting large amounts of nominally restricted stock to Larson and his partners. Larson contended his stock grants were not taxable because of the restrictions, which included performance terms, but the court concluded that because of the control he and his colleagues exercised, the restrictions were not likely to be enforced and that, in any event, the ESOP trustees were not properly informed of the grants or their terms. To top it off, the firm’s business was to sell tax shelters that the IRS named as listed transactions. As a very good article explaining this elaborate tax dodge put it, “You cannot make this stuff up.”

Corey Rosen

March 21, 2022

Suit Against World Travel Can Move Forward

In Ahrendsen, et al. v. Prudent Fiduciary Services, LLC, et al., No. 2:21-cv-02157 (E.D., PA, Feb. 2, 2022), a district court allowed an ESOP valuation case against the sellers and the trustee on the case to proceed to trial. An ESOP bought World Travel from members of the Wells family in 2017 for $200 million. Plaintiffs allege the plan overpaid because of faulty projections, including not accounting for liabilities for potential refunds of commissions to its clients, improper discount rates, and using the wrong discount rates. The plaintiffs also allege that the ESOP paid for control it did not have because the sellers retained board control. The court ruled that at this stage, plaintiffs had pled sufficient allegation to allow the case to proceed. The court also allowed challenges to the indemnification for the trustee to proceed on the basis that the clause did not include an exemption for instances where the trustee was found to have violated ERISA. It dismissed the case against two of the three family member defendants, however, because they were not shown to have sufficient control over the transaction to be fiduciaries, while allowing the case against Jim Wells, the CEO, to continue.

Corey Rosen

February 11, 2022

ESOPs Added to IRS Volume Adopter Letter of Determination Program:

In Revenue Procedure 2021-4, the IRS added ESOPs to Form 5307, the form used to submit letter-of- determination requests.

Corey Rosen

February 11, 2022

ESOP Company and Trustee Agree on Settlement in Valuation Case

In Walsh v. Reliance Trust et. Al., No. 17-CV-04540 (D.C. Minn. Jan. 5, 2022), Reliance Trust and the directors of Kurt Manufacturing agreed on a $9.4 million settlement in an ESOP valuation case. Reliance will pay $8.4 million to the company’s ESOP and the directors and officers of Kurt Manufacturing will pay $989,000. The directors and officers also agreed not to serve as ESOP fiduciaries in the future and will not get future stock appreciation rights. The current trustee (Reliance had been replaced) will appoint an independent outside board member.

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