Valuation of company stock in the ESOP must be made by an independent appraiser annually, and any time the ESOP purchases company stock from the company or an employee, officer, director, or 10% or greater shareholder.
The DOL and IRS have issued guidance on the factors that must be taken into account when appraising a company, and who should do the valuation. Basically, a qualified appraiser must (i) hold himself/herself out to the public as an appraiser or perform appraisals on a regular basis, and be qualified to make appraisals of the type of property being appraised; and (ii) be independent with respect to the company and other parties to the ESOP transaction.
The credibility the IRS or DOL attaches to the appraisers conclusion of fair market value will be greatly influenced by their assessment of the expertise demonstrated by the individual or firm doing the appraisal. The same can be said for the independence of the appraiser. In order to satisfy the independence criteria, the valuation cannot be done by:
- The taxpayer who maintains the ESOP
- A party to the transaction in which the ESOP acquired the property
- An employee of the taxpayer who maintains the ESOP
- An individual or firm regularly used by the taxpayer maintaining the ESOP who does not perform a majority of his or her appraisals for entities other than the taxpayer maintaining the ESOP