What Makes an Annual Aviation ESOP Valuation Defensible

Abstract

1. Introduction

A charter operator sells itself to its employees. The price is set by an appraisal. Seven years later the Department of Labor asks how that number was reached, and the answer is a file, not a figure.

The valuation of a closely held company owned through an employee stock ownership plan is a different assignment from an ordinary business appraisal, and the difference is structural rather than technical. When an owner sells a private company to a third party, the price is whatever the parties agree. There is no external standard of correctness and no regulator with standing to unwind the transaction. When an employee stock ownership plan buys the same company, the trustee is a fiduciary to the plan participants, the price is constrained by statute to fair market value, and the Department of Labor may sue trustees who overpay (Brundle v. Wilmington Trust 2019; Pizzella v. Vinoskey 2019). The appraisal becomes the evidentiary record of whether the trustee met the standard, which is why the trustee and counsel care as much about how the number was reached as about the number.

The work also recurs. A plan needs a valuation at formation to set the purchase price and a fresh independent appraisal every year afterward to value participant accounts, price distributions and the statutory put, and support annual reporting (Internal Revenue Code 2026a; National Center for Employee Ownership 2026a). Each annual update is its own fiduciary act, reviewed by the trustee and measured against the same standard as the original. Over the life of a mature plan the annual update, not the formation opinion, is the document usually in front of an investigator.

This paper asks a narrow question: what makes that recurring appraisal defensible when the subject is an aviation services company. Sections 2 through 6 establish the legal and procedural frame, which is not aviation specific but is frequently misstated. Section 7 is the sector contribution and the reason the paper exists. Two features of aviation service economics, the fuel margin at a fixed-base operator and the technician labor cost at a Part 145 repair station, distort reported earnings so predictably that failing to normalize them produces a fair market value that is not fair market value. That is not a technical lapse. Under the standard developed in Section 2, it is a fiduciary exposure. Section 8 tests the argument against the enforcement record and Section 9 reduces it to a protocol.

The intended readers are ESOP trustees, ERISA counsel, and valuation professionals engaged on aviation subjects. The paper draws on the statute, the case law, agency guidance current to September 2026, the valuation literature, and federal energy and workforce data. It does not address the design of an ESOP transaction, the leveraged financing structure, or the repurchase liability study as a standalone exercise.

2. Adequate Consideration as a Conjunctive Standard

2.1 The two prongs

The governing standard is adequate consideration. ERISA Section 3(18)(B) defines it, for an asset other than a security with a generally recognized market, as "the fair market value of the asset as determined in good faith by the trustee or named fiduciary pursuant to the terms of the plan and in accordance with regulations promulgated by the Secretary" (Employee Retirement Income Security Act 2026a). Fair market value carries its usual meaning, the price at which property would change hands between a willing buyer and a willing seller, neither under compulsion and both reasonably informed, which is the formulation Revenue Ruling 59-60 uses for closely held stock (Internal Revenue Service 1959). The phrase that generates the litigation is "determined in good faith."

The courts read the definition as conjunctive. The first prong is substantive: the price must equal fair market value. The second is procedural: that value must be the product of a good-faith determination, which the Fifth Circuit established is an objective inquiry rather than a search for sincerity. "This is not a search for subjective good faith," the court held in Donovan v. Cunningham (1983), because "a pure heart and an empty head are not enough." Fiduciaries carry their burden "by showing that they arrived at their determination of fair market value by way of a prudent investigation in the circumstances then prevailing." The Sixth Circuit adopted the same formulation two decades later (Chao v. Hall Holding Co. 2002).

Both prongs must be satisfied and neither rescues the other. The Department of Labor's position, stated in its 1988 proposal, is that a plan is not relieved of the prohibited transaction rules if it pays more than fair market value, because the adequate consideration requirement is then unmet (Department of Labor 1988). A careful process does not cure an overpayment, and a fortunate number does not cure a careless process. The consequence of failing the standard is not a valuation dispute. The purchase becomes a prohibited transaction under ERISA Section 406, the exemption for acquiring qualifying employer securities at ERISA Section 408(e) is unavailable, the fiduciary is liable for the plan's loss, and the counterparties face excise tax under Internal Revenue Code Section 4975 at 15 percent of the amount involved per year, rising to 100 percent if the transaction is not corrected (Employee Retirement Income Security Act 2026b, 2026c; Internal Revenue Code 2026b).

Who must prove what is settled and favors the government. The Section 408(e) exemption is an affirmative defense, which the Supreme Court confirmed in 2025 for the ERISA Section 408 exemptions generally: they are written "in the orthodox format of an affirmative defense" and "must be pleaded and proved by the defendant who seeks to benefit from them" (Cunningham v. Cornell University 2025). The trustee, not the plaintiff, bears the burden of establishing that the plan received adequate consideration. The appraisal file is the trustee's proof.

Table 1. The two prongs of the adequate consideration test

Source: ERISA Section 3(18)(B); Donovan v. Cunningham, 716 F.2d 1455 (5th Cir. 1983); Chao v. Hall Holding Co., 285 F.3d 415 (6th Cir. 2002).

2.2 The regulation that has not arrived

The statutory phrase "in accordance with regulations promulgated by the Secretary" points to a regulation that does not exist. The Department of Labor proposed a definition of adequate consideration at 29 CFR 2510.3-18 in May 1988 and never finalized it (Department of Labor 1988). Courts and practitioners treat the proposal as persuasive interpretation rather than binding law. Thirty-eight years later it remains outstanding.

Congress addressed the gap in the SECURE 2.0 Act of 2022, whose Section 346 directs the Secretary of Labor, in consultation with the Secretary of the Treasury, to issue formal guidance on "acceptable standards and procedures to establish good faith fair market value for shares of a business to be acquired by an employee stock ownership plan" (Worker Ownership, Readiness, and Knowledge Act 2022). The statutory language is about good faith fair market value rather than about defining adequate consideration, a distinction worth preserving, though the agency treats it as the mandate for the adequate consideration rulemaking.

What followed is instructive for anyone relying on the pending rule. The Employee Benefits Security Administration publicly released an unpublished notice of proposed rulemaking and a companion proposed prohibited transaction class exemption on 16 January 2025, under RIN 1210-AC20 (Employee Benefits Security Administration 2025). Publication in the Federal Register was scheduled for 22 January 2025 and did not occur; both documents were withdrawn from the public inspection queue following the change-of-administration regulatory freeze, and neither ever took legal effect (Morgan Lewis 2025). As of the Unified Agenda published in July 2026, RIN 1210-AC20 remains at the proposed rule stage with a target notice date of November 2026 (Office of Information and Regulatory Affairs 2026). There is no proposed rule, no final rule, and no new docket.

Two developments since then change the practical environment without changing the standard. In January 2026 the agency removed ESOPs from its national enforcement project list (Plan Sponsor Council of America 2026). In April 2026 it issued Field Assistance Bulletin 2026-01, which instructs that "until EBSA complies with the Congressional directive to provide 'acceptable standards and procedures to establish good faith fair market value for shares of a business to be acquired by an employee stock ownership plan,' all pending and proposed ESOP valuation investigations must be reviewed against this guiding principle of fairness" (Employee Benefits Security Administration 2026). Separately, the Senate passed the Retire Through Ownership Act by unanimous consent on 9 October 2025, which would permit an ESOP fiduciary to rely in good faith on an independent appraiser applying Revenue Ruling 59-60; the House companion cleared committee in September 2025 and has not received a floor vote (Plan Sponsor Council of America 2025).

The consequence for a trustee is that the governing authorities in September 2026 are the statute, the 1988 proposal as persuasive interpretation, Revenue Ruling 59-60, the independent appraiser requirement of the Internal Revenue Code, the process agreements described in Section 6, and the case law. A defensible appraisal is built on those. An appraisal built on the anticipated content of a rule that has not been proposed is built on nothing.

3. Revenue Ruling 59-60 in an Aviation Application

Fair market value is a standard, not a method. The method the Department of Labor and the courts accept for closely held stock is the one set out in Revenue Ruling 59-60. Though written for estate and gift tax, the ruling is the common reference point for ESOP valuations because its definition of fair market value is the one ERISA borrows and its list of factors is the checklist an appraiser is expected to address (Internal Revenue Service 1959). Section 4.01 directs the appraiser to eight factors, and a defensible aviation appraisal shows its work on each rather than defaulting to a single multiple.

Table 2. The Revenue Ruling 59-60 factors applied to an aviation services company

Source: Internal Revenue Service, Revenue Ruling 59-60, 1959-1 C.B. 237, sec. 4.01.

The ruling's lesson for the ESOP context is that no single factor and no single method controls, and that the weighting is a matter of judgment rather than mechanical averaging. An appraiser who values a fixed-base operator on a revenue multiple alone, or a repair station on one year of earnings before interest, taxes, depreciation and amortization, has not done what the ruling asks, and a trustee who accepts that work has not met the good-faith prong. The factors that usually carry the weight in an aviation appraisal are earning capacity, which turns on the normalizations in Section 7, and the guideline-company and prior-sale evidence, which must be adjusted for the subject's size, concentration, and control characteristics. The companion paper on the founding transaction treats the guideline-company problem and the aviation value architecture at greater length (Carter 2026a).

4. The Annual Independent Appraisal

Two requirements make the appraisal both mandatory and recurring. Internal Revenue Code Section 401(a)(28)(C) provides that a plan meets its requirements only if "all valuations of employer securities which are not readily tradable on an established securities market with respect to activities carried on by the plan are by an independent appraiser," and defines that term as an appraiser "meeting requirements similar to the requirements of the regulations prescribed under section 170(a)(1)," the charitable contribution appraiser rules (Internal Revenue Code 2026a). The annual cadence rests on a ruling rather than on practice. Revenue Ruling 80-155 provides that a defined contribution plan does not qualify unless plan assets are valued "at least once a year, on a specified date, and according to a method consistently followed and uniformly applied" (Internal Revenue Service 1980). That sentence supplies both halves of what this paper is about: the appraisal repeats every year, ordinarily as of the last day of the plan year, and the method must not move between years without a reason. Independence is a real constraint. The appraiser must be independent of the sponsor, the selling shareholders, and any party structuring the transaction, and must be selected by the plan fiduciary rather than by anyone else.

What independence does not accomplish is frequently misread. An independent annual appraisal satisfies the appraiser qualification requirement of the Code. It does not establish that the trustee made a good-faith determination of value under ERISA. The two are separate obligations with separate sources: the Code says who may perform the appraisal, ERISA says what the trustee must do with it. A trustee who hires an independent appraiser and then accepts the report without reading and testing it has satisfied the first and failed the second, which is the holding of every case in Section 8 in which a trustee lost.

The annual update differs from the formation valuation in emphasis rather than in standard. The formation valuation supports a specific transaction at a specific date, often with a fairness opinion and a negotiated price, and it is the one usually litigated, because it is where money changes hands. The annual update carries value forward. It is performed as of the plan year end, it should apply the same methodology as the prior year so that a change in value reflects the business rather than the appraiser, and it refreshes normalizations, projections and market multiples while reconciling them against the prior year's expectations. The trustee's task on the update is to read the full report, compare it to the prior year, test actual results against the projections the appraiser relied on a year earlier, and question any methodology change or unexplained movement. Consistency of method across years is itself evidence of defensibility; an unexplained shift in approach is the kind of anomaly an investigator pursues.

5. Control, Marketability, and the Statutory Put

5.1 The control conclusion

Whether the appraisal concludes at a control or a minority level is a judgment that draws sustained scrutiny in ESOP work, because it moves price materially and because trustees have been held liable for getting it wrong. The governing principle is that value must reflect the degree of control the plan actually holds. A plan may pay a control-based price only where control passes in substance as well as in form: the practical ability to change management, set compensation, and direct distributions, not a share count above 50 percent. Where the plan buys a nominal majority but the sellers keep the board and the trustee is bound to vote as the board directs, the plan does not hold control, and paying for control is an overpayment.

That is what the Fourth Circuit found in Brundle v. Wilmington Trust (2019). The appraiser applied a 10 percent control premium and devoted a single sentence to justifying it. The selling shareholders retained the power to appoint a majority of the board, and the plan documents required the trustee to vote the plan's shares as the board rather than the plan directed, leaving litigation as the plan's only recourse. The courts faulted the trustee for never questioning an assumption that carried such consequences, and affirmed a judgment of roughly $29.8 million. The related error is double counting: applying control-level normalizing adjustments to earnings, such as resetting owner compensation to market, and then adding an explicit control premium on top. Mercer Capital (2015) states the objection directly. Where normalization and control adjustments have already been applied to cash flows, "the additional application of a discrete control premium implies that there are further achievable control attributes," and the result is "a potential overstatement in the valuation" that the agency treats as a possible foundation for a prohibited transaction claim.

The empirical literature on control premiums supplies a further caution that is rarely raised in ESOP practice. Studies of United States block trades and dual-class share prices estimate private benefits of control at a low level: an average block premium of 20 percent and a median of 16 percent over the post-announcement exchange price, which corresponds to roughly 4 percent of total firm equity value (Barclay and Holderness 1989); 1.8 percent of equity value unadjusted, or 3.5 percent adjusted for differences in security benefits, in a 39-country comparison (Dyck and Zingales 2004); and a low single-digit share of firm market value in the United States on dual-class voting premium evidence, against much larger figures in weaker-protection jurisdictions (Nenova 2003). A more recent synthesis puts United States block premia at a mean of 4.3 percent and a median of 2.1 percent of equity value (Holderness 2003). The acquisition premiums observed in public takeovers include buyer-specific synergies a financial buyer would not realize. An appraiser deriving a control conclusion from strategic acquisition premiums, rather than from financial control evidence, will overstate the amount at stake in the control question.

5.2 Marketability and the put option

Marketability runs the other way in the ESOP context because of the statutory put. Internal Revenue Code Section 409(h)(1) provides that a participant entitled to a distribution has a right to demand distribution in employer securities and, where those securities are not readily tradable on an established market, "a right to require that the employer repurchase employer securities under a fair valuation formula" (Internal Revenue Code 2026c). The put must remain open for at least 60 days after distribution plus a further 60-day period in the following plan year, and where the securities are distributed as part of a total distribution the employer may pay in "substantially equal periodic payments (not less frequently than annually)" over a period not exceeding five years, beginning not later than thirty days after the put option is exercised, with adequate security and reasonable interest (Internal Revenue Code 409(h)(5)).

That assured exit compresses the discount for lack of marketability relative to an ordinary private-company minority interest. Mercer Capital (2015) reports that "most ESOP appraisals that involve a minority interest definition of value reflect a relatively minimal DLOM of 5-10%," attributable to the put. The comparison point is the restricted-stock literature, which the Internal Revenue Service (2009) compiles at a mean of 31.4 percent and a median of 33 percent across thirteen studies, with the caution that those central tendencies span a range from 13 percent to the mid-40s and that reliance on their average is a methodological weakness rather than a shortcut.

The compression is conditional, and the condition is the point. Menke (2011) argues that the put-option rationale is theoretically unsound as usually stated, because the value of the put depends on the company's actual financial capacity to honor it, and concludes that the appropriate range for an ongoing annual valuation is 5 to 20 percent depending on that capacity. The National Center for Employee Ownership (2026b) reaches the same practical result from the other direction: the discount "should shrink, perhaps to little or nothing" to the extent the company has assets available or a credible plan in place to fund repurchases. The defensible formulation is therefore not that the put eliminates illiquidity but that it compresses the discount in proportion to demonstrated funding capacity, which makes the repurchase obligation study part of the marketability analysis rather than a separate exercise. The levels-of-value framework within which both adjustments sit, and the arithmetic of applying them in sequence, are developed in the standard treatises (Pratt and ASA Educational Foundation 2022; Mercer and Harms 2021) and in the companion paper on minority interests in aviation operating companies (Carter 2026b).

The same obligation constrains the cash flows to which any discount rate is applied. The repurchase obligation is a real future claim on company cash and should be carried in the projections. The National Center for Employee Ownership (2026c) reports that most advisors, trustees and the Department of Labor now argue it affects value, particularly in mature plans, and that ignoring it means "the company will be paying an artificially inflated price to those who depart sooner and a lower price to those leaving later." Its survey data place median annual repurchases at 5 percent of outstanding shares and the mean at 6 percent (National Center for Employee Ownership 2026d). The modeling discipline is consistency. An appraiser cannot suppress the marketability discount on the theory that repurchases are fully funded and simultaneously omit the cost of funding them.

Table 3. Marketability evidence relevant to an ESOP minority conclusion

Source: Internal Revenue Service (2009); Mercer Capital (2015); Menke (2011); National Center for Employee Ownership (2026d).

6. Process and the GreatBanc Standard

One scope point belongs at the front of this section. The 2014 agreement is a settlement between the Department and one trustee, and by its terms it governs transactions rather than annual valuation updates. It binds nobody else, and the Department has not adopted it as a rule. It is used here because it is the most detailed written statement of what the agency expects a fiduciary process to contain, and because a trustee building an annual valuation file has nothing better to work from. Extending it from transactions to annual updates is this paper's recommendation, not the agreement's requirement.

Because the good-faith prong is procedural, the trustee's own conduct is examined alongside the appraiser's number. The controlling idea, stated by the Fifth Circuit in 1983 and quoted by the Fourth Circuit in Brundle, is that "[a]n independent appraisal is not a magic wand that fiduciaries may simply wave over a transaction to ensure that their responsibilities are fulfilled" (Donovan v. Cunningham 1983; Brundle v. Wilmington Trust 2019). Reliance on an appraiser is reasonable only where the trustee investigated the expert's qualifications, supplied complete and accurate information, and then relied on the advice reasonably in the circumstances, including any known conflicts. Because the trustee bears the burden under Section 408(e), the record of that process is the trustee's defense.

A detailed guide to what the process should contain is the Department of Labor's 2014 settlement with GreatBanc Trust Company, formally the Agreement Concerning Fiduciary Engagements and Process Requirements for Employer Stock Transactions (Department of Labor 2014). It arose from the agency's suit over the Sierra Aluminum Company ESOP, in which the trustee was alleged to have let the plan buy stock at inflated prices in 2006 by failing to scrutinize an appraisal containing aggressive projections and by requesting revised valuations to justify a higher price; the settlement was $5.25 million, comprising $4.77 million in restitution and a civil penalty of $477,272.73 (Employee Benefits Security Administration 2014). The agreement binds one trustee and is not a regulation, but the agency and practitioners treat it as the de facto standard of care because it is the agency's own detailed statement of what a prudent process contains. A parallel agreement with First Bankers Trust Services, under the different title Agreement Concerning Process Requirements for Employee Stock Ownership Plan Transactions, was filed on 21 September 2017 (Department of Labor 2017).

Table 4. GreatBanc process requirements and the trustee's corresponding action

Source: Department of Labor, Agreement Concerning Fiduciary Engagements and Process Requirements for Employer Stock Transactions (2014).

On the annual update the process is lighter than at formation but not absent. The trustee reads the report, tests the projections against the prior year's actual results, confirms that the methodology is consistent, and documents the review. Documentation is the operative word. A trustee able to produce a file showing that it engaged an independent appraiser, questioned the key assumptions, and understood the report has built the record that makes the valuation defensible, whatever the number turns out to be.

7. Normalization in Aviation Services Companies

The place a generalist appraiser most often goes wrong on an aviation company, and where the error becomes a fiduciary exposure, is in normalizing reported results to sustainable earnings. Revenue Ruling 59-60 asks for earning capacity, which means the earnings the business can sustain rather than the earnings it happened to report in a volatile year. Two aviation-specific items distort reported earnings so predictably that missing them signals an appraiser who does not know the sector.

7.1 Fuel margin at a fixed-base operator

A fixed-base operator earns much of its gross profit selling fuel, and the measure that matters is margin per gallon rather than fuel revenue. The margin is the spread between the operator's laid-in cost and the price realized from the customer. Enticknap and Jackson (2015) set out the build-up: a base spot price for Jet A of $1.90 per gallon, to which are added the supplier differential, transportation, taxes and airport flowage fees, producing a total into-plane cost of $2.577 per gallon, on which the operator layers projected gross profit of $2.25 to reach a posted retail price of $4.83. Realized price is lower than posted for most gallons, because contract fuel programs discount against the posted figure. Marsh (2019) reports discounts ranging from a nickel per gallon, with ten cents common, through a quarter on the major fuel cards, to 55 to 65 cents on some programs.

Fuel revenue is therefore close to meaningless as a measure of the business, because the input price is volatile and largely passes through. Federal spot price data make the magnitude concrete. The annual average United States Gulf Coast kerosene-type jet fuel spot price fell to $1.099 per gallon in 2020 and rose to $3.374 in 2022, a factor of 3.07 in two years, and moved from $3.056 in 2012 to $1.252 in 2016, a decline of 59 percent over four (Energy Information Administration 2026). The same gallons, pumped at the same spread, would produce radically different revenue across those years.

Table 5. Annual average Jet A spot price, selected years

Source: Energy Information Administration, U.S. Gulf Coast Kerosene-Type Jet Fuel Spot Price FOB, annual series EER_EPJK_PF4_RGC_DPG.

What the operator controls is the spread and the volume, and small movements in the spread dominate volume effects. Enticknap and Jackson (2017) work a case in which Jet A posted at $4.14 against a laid-in cost of $2.68 yields a margin of $1.46 per gallon and $14,600 of gross profit on 10,000 gallons; raising the price 41 cents to $4.55 while losing 1,000 gallons of volume produces $16,830, a better result on fewer customers, while a 7 percent discount cuts gross profit to $11,800 and requires another 2,372 gallons merely to recover the ground given up.

The normalization follows from that structure. Normalize the cents-per-gallon spread across a full fuel-price cycle rather than at a single date; separate higher-margin retail volume from thinner-margin contract-fuel volume and forecast the mix rather than a blended average; and let normalized margin per gallon and gallons pumped drive the projection, on the understanding that movements in the headline fuel price pass through to customers rather than permanently changing the spread. An appraiser who normalizes on revenue, or who treats one year of fuel gross profit as sustainable, will misstate earning capacity by a wide margin, and the direction of the error depends on nothing more principled than where in the price cycle the valuation date happens to fall.

7.2 Technician labor at a repair station

A repair station certificated under 14 CFR Part 145 (Code of Federal Regulations 2026) flexes capacity with contract and temporary technicians, bringing in licensed mechanics for heavy checks, aircraft-on-ground work, and seasonal peaks. Contract labor bills at a higher hourly rate than direct payroll, which the trade literature states as a general proposition: widespread use of contractors "might distort the labor-rate picture somewhat, since their hourly rates are generally higher than full-time staff" (Aviation Week Network n.d.). The magnitude of that premium is not documented in any public source located for this paper. An appraiser who needs a number should develop it from the subject's own payroll and vendor records and disclose it as an assumption, not import a figure from the trade press.

The direction of the distortion is nevertheless clear. A year with heavy contract-labor use carries a higher effective labor cost than base staffing suggests, and a year with light use carries a lower one, so reported labor cost taken at face value overstates sustainable margin in a busy year and understates it in a slow one. The normalization is to recast contract and temporary technician cost to a fully loaded through-cycle equivalent, strip out non-recurring overtime and rate spikes, and test technician cost per billable hour and labor gross margin against several years and against peers.

Two features of the current labor market argue for normalizing toward a rising trend rather than a historical average. Oliver Wyman's maintenance, repair and overhaul survey reports that labor rates rose 5.5 to 6.0 percent across most categories in 2025, roughly double the pre-pandemic rate of about 3.0 percent, that two-thirds of respondents found hiring aircraft technicians and mechanics moderately to very challenging, and that more than half expected attrition to worsen in the following year (Sargent, Prentice, and Costanza 2026). The certification pipeline supports the same reading. The Aviation Technician Education Council (2025) reports slightly more than 9,000 new mechanic certificates issued in 2024, with graduates from certificated schools down 5 percent from 2023 even as enrollment rose 9 percent, and projects a 10 percent shortage of certificated mechanics in 2025 narrowing to 7 percent by 2035, still roughly 10,000 mechanics short from commercial air transport demand alone. Boeing (2026) forecasts demand for 728,000 new maintenance technicians worldwide between 2026 and 2045, a figure that covers commercial passenger and freight operations and expressly excludes business aviation, so general aviation and repair-station demand sits on top of it rather than within it. A normalized labor cost built on a three-year historical average, in that environment, understates the cost of delivering the same hours in the forecast period.

7.3 The recurring adjustments

Beyond the two sector-specific items, the same normalizations recur across fixed-base, charter, and repair-station engagements. Each is a valuation adjustment, and each, if missed, is a fiduciary exposure, because an overstatement of earning capacity overstates value and a plan that pays that value has not received adequate consideration.

Table 6. Normalizations to sustainable earnings in an aviation ESOP appraisal

Source: Author's analysis, drawing on Revenue Ruling 59-60, sec. 4.01(d), and the sector evidence in Sections 7.1 and 7.2.

8. What the Enforcement Record Shows

The decided ESOP valuation cases are, with one instructive exception, a record of process failures, and they set out plainly what a trustee must avoid. Read together they say the same thing: the fiduciary who documents a questioning process defends the valuation, and the fiduciary who defers to the appraiser does not.

Table 7. Selected ESOP valuation decisions and settlements

Source: Reported decisions and Department of Labor enforcement releases cited in the References.

The exception repays study, because it shows the defense working. In Walsh v. Bowers (2021) the court entered judgment for the defendants after what it called a one-week nonjury trial, finding that the government's expert had treated roughly $10 million of subconsultant fees as company expenses when they were pass-through costs billed to clients, and had "significantly and unreasonably undervalue[d]" the company as a result. The court declined to treat a rejected nonbinding indication of interest as a benchmark of value, observing that the offer itself recognized the need for adjustment for cash and debt on the balance sheet, and it rejected the inference of overpayment from the subsequent decline in share price. The company had been valued at $40.15 a share on 14 December 2012 and at $6.53 a share two weeks later, and the court found that "[t]he reason for this marked drop is that the later valuation took into account the Company's obligations relating to the sale of Company stock to the ESOP," the company having guaranteed the plan's loan, so that "the decrease in valuation flowed from the debt incurred when the ESOP purchased the Company's stock." The trustee in that matter had settled by consent judgment before trial, so the decision vindicates the valuation rather than the trustee's process, but the valuation is what the appraiser controls.

A second defence verdict arrived shortly before this paper was written, and it matters more than the first because of who won it. In Rush v. GreatBanc Trust Co. (7th Cir. 2026) the Seventh Circuit affirmed judgment for the trustee and the board in a challenge to the 2016 sale of an employee-owned printing company for $265 million, the plan being the seller rather than the buyer. Three holdings bear on this paper.

The court stated the conjunctive test in the same terms Section 2 uses: adequate consideration requires "a substantive requirement that the value assigned reflect the fair market value of the asset" and "a procedural requirement that the fiduciary actually determine the value assigned in good faith." That is the most recent circuit-level statement of the standard the whole of this paper is built on.

It then added something this paper would otherwise not have reported. Judicial review of an ERISA trustee's decisions "is deferential unless there is a conflict of interest," and the court held that GreatBanc's "careful and impartial investigation of the sale fulfilled its fiduciary duty under ERISA." The enforcement record read on its own suggests a standard that trustees routinely fail. The deferential standard for an unconflicted fiduciary is the other half of the picture, and a paper that omitted it would be overstating the exposure.

The third point is the one that closes the loop on Section 6. The winning trustee is the signatory of the 2014 process agreement this paper treats as the working standard of care. A trustee that built its file the way that agreement requires took a nine-figure transaction to a circuit court and was affirmed.

The composite lesson is not that trustees usually win, nor that they usually lose. It is that a valuation grounded in sound methodology, complete information, and a documented negotiation is defensible even against the government, that an unconflicted fiduciary who investigates is reviewed deferentially, and that a later fall in value is not itself evidence of overpayment. One caution belongs with that. On the fee appeal in Bowers the Ninth Circuit held that the government's position had been "substantially justified" even though the defendants won, so prevailing is not the same as facing a frivolous case. That is the standard the annual aviation appraisal should be built to meet.

9. A Defensibility Protocol

The analysis reduces to a sequence the trustee, counsel, and appraiser can apply at formation and repeat on every annual update.

First, confirm that the standard is adequate consideration under ERISA Section 3(18)(B) and treat it as conjunctive: the number must equal fair market value, and the process must be a documented good-faith determination measured objectively.

Second, engage a qualified independent appraiser under Internal Revenue Code Section 401(a)(28)(C), independent of the sponsor and the sellers and selected by the fiduciary, and record that independence alone does not satisfy the good-faith prong.

Third, require the appraisal to address the eight Revenue Ruling 59-60 factors and to develop value through more than one method, with earning capacity built on normalized sustainable earnings rather than on a reported year.

Fourth, test the control conclusion against the control the plan actually holds. Do not accept a control premium where the sellers keep the board or the trustee must vote as directed, do not apply control-level normalizing adjustments and an explicit control premium to the same cash flows, and derive any premium from financial rather than strategic control evidence.

Fifth, confirm that the marketability discount reflects both the statutory put and the company's demonstrated capacity to fund repurchases, and that the repurchase obligation is carried in the projections rather than assumed away.

Sixth, run the GreatBanc process: vet the appraiser, insist on reliable financial statements, test the projections against history and peers, read and understand the full report, question the assumptions in writing, and retain the file for six years.

Seventh, on the aviation specifics, verify that fuel margin is normalized per gallon across the price cycle with retail and contract volume separated, that contract technician labor is recast to a through-cycle loaded cost with any assumed premium disclosed as an assumption, and that owner compensation, related-party terms, non-recurring items, concentration and cyclicality are each addressed on the record.

Eighth, keep the methodology consistent from year to year, reconcile each update against the prior year's projections, and explain any change in approach in the report rather than leaving it to be discovered.

10. Conclusion

The recurring appraisal is the instrument through which an ESOP trustee discharges a statutory duty, and its quality is measured on two axes that the case law keeps separate: whether the number is right and whether the process that produced it was prudent. Neither axis forgives a failure on the other, and the trustee carries the burden on both.

For an aviation subject, the substantive axis turns on normalization more than on any other judgment. A fixed-base operator whose fuel input price moved by a factor of three in two years, and a repair station whose labor rates are rising at roughly twice their pre-pandemic pace against a contracting certification pipeline, cannot be valued from reported results without adjustment. The appraiser who makes those adjustments and shows the work has produced earning capacity in the sense Revenue Ruling 59-60 intends. The appraiser who does not has produced a number that is not fair market value, which converts a valuation question into a prohibited transaction.

The regulatory environment in September 2026 does not relieve anyone of this. No adequate-consideration regulation has been proposed, the agency has told its own investigators to measure pending matters against a fairness principle in the meantime, and the statutory safe harbor for appraiser reliance has passed one chamber and not the other. Until that changes, the file is the defense, and the file is built one annual engagement at a time.

References

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This paper is research and general information for professionals evaluating aviation businesses and aviation real estate. It is not appraisal, legal, or tax advice, and it does not create an engagement. Legal authorities and agency positions are stated as of September 2026.