Ch. 22: Management Companies,
Leasing Companies and ESOPs

• Management Company Structures

Synopsis: Discusses the use of Management Company structures to absorb corporate liability and provide control functions.

Definition: Management Company – A company formed primarily to act as a manager of another entity, distance control of the other entity from the owners, and absorb liabilities arising from the management function.

• Offshore Management Companies

Synopsis: Discusses the uses of Management Companies formed in debtor haven jurisdictions.

Definition: Offshore Management Company – A company formed in a foreign debtor having jurisdiction primarily to act as a manager of another entity, distance control of the other entity from the owners, and absorb liabilities arising from the management function.

• Leasing Companies

Synopsis: Discusses the uses of Leasing Companies for risk management.

Definition: Leasing Company – A company used to hire employees and lend those to the underlying business, to reduce profits in a liability-producing company or to shift employment liabilities away from a valuable business.

• ESOPs

Synopsis: Discusses the use of ESOPs to further encapsulate liability in the underlying entity.

Definition: Employee Stock Ownership Plan (ESOP) – A plan formed to benefit and incentivize the employees of a business, and which can qualify for advantageous tax treatment.

Addenda: In Revenue Ruling 2003-6, the "S" corporation/management company structure was deemed by the IRS to be abusive, and a "listed transaction" under the corporate tax shelter regulations. Because the Revenue Ruling creates the potential for the structure to be deemed not to have been a qualified plan ab initio, this may throw into question whether the ERISA anti-alienation benefits would operate to protect the assets held in the Rabbi trusts. There is also a concern that the entire arrangement may be called into question because rank-and-file employees receive benefits that are relatively insubstantial compared to that of the primary business owners. Notably, both the National Center for Employee Ownership as well as The ESOP Association worked closely with the IRS and Congress to stamp out this practice that they believed to be abusive. See Revenue Ruling 2003-6

Courtesy of Mr. Roland Thon of http://flpsop.com the following Advisories may also be helpful:

• Advisory 106 - S Corp Abuse Rules
• Advisory 115 - Beals Bros.
• Advisory 132 - S Corp Mgt Co
• Advisory 136 - Update on S Corp ESOPs
• Advisory 147 - Rev Rul 2003-6 Leimberg
• Advisory 162 - Tax Shelter Regs