1. Shareholders sell their stock to the ESOP trust in exchange for a note to be repaid over a term of years. The company guarantees the loan.
2. The company makes cash contributions to the ESOP to coincide with the debt service required under the loan. These contributions are fully deductible for federal income tax purposes to the company.
3. The ESOP trust, in turn, uses the cash contributions to pay the selling stockholders according to the terms of the note between the ESOP trustee and the selling stockholders.

© 2002 California Society of Certified Public Accountants. For reprint permission, contact Aldo Maragoni, managing editor.