What Makes an Annual Aviation ESOP Valuation Defensible

Executive Summary

An employee stock ownership plan that holds stock in a closely held aviation company needs an independent appraisal when it is formed and one every year afterward, for as long as the plan exists. That recurring appraisal is not a formality. It sets the price at which the plan buys and the value at which every participant’s account is carried, and it is the document a Department of Labor investigator or a plaintiff’s expert reaches for first if the plan is ever challenged. For the trustee who signs off on it and the ERISA counsel who advises that trustee, the question is not whether the appraisal produces a number but whether the number, and the process behind it, will hold up. Defensibility is the product.

Defensibility has a precise legal shape. Under ERISA, the plan may pay no more than adequate consideration, which for stock that does not trade on an established market means fair market value determined in good faith by the fiduciary. Courts read that as a two-part test, and both parts must be satisfied: the price must actually equal fair market value, and it must be the product of a prudent, good-faith process. Neither prong rescues the other. A flawless process that overpays is still a prohibited transaction, and a correct number reached by rubber-stamping an appraiser is still a fiduciary breach. Revenue Ruling 59-60 supplies the valuation framework the DOL and the courts accept, the Internal Revenue Code requires that the appraiser be independent, and the DOL’s 2014 GreatBanc process agreement has become the practical standard of care for how a trustee engages and oversees that appraiser.

This paper is written for the people who have to defend the valuation. It works through the adequate-consideration standard and its two prongs, the Revenue Ruling 59-60 factors as applied to an aviation company, the annual independent-appraisal requirement and how an update differs from a formation valuation, the control-versus-minority question that sank the trustee in Brundle v. Wilmington Trust, and the trustee’s process obligations under GreatBanc. It then turns to the normalizations that separate a defensible aviation appraisal from a generalist’s: the fuel-margin volatility that makes a fixed-base operator’s reported earnings misleading, the contract labor that distorts a repair station’s margins, and the related-party and concentration issues that recur in this sector. Getting those normalizations wrong is not just a valuation error. It is a fiduciary exposure, because it produces a fair market value that is not, in fact, fair market value.

1. Defensibility Is the Product

The reason an ESOP valuation is a different assignment from an ordinary business appraisal is that it is performed inside a fiduciary structure with a statutory standard and an enforcement agency. 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 it. When an ESOP buys the same company, the trustee is a fiduciary to the plan participants, the price is constrained by law to fair market value, and the Department of Labor can and does sue trustees who overpay. The appraisal is the evidentiary record of whether the trustee met that standard, which is why the trustee and counsel care as much about how the number was reached as about the number itself.

This is also why the work recurs. The plan needs a valuation at formation to set the purchase price, and then a fresh independent appraisal every year to value participant accounts, price distributions and the statutory put, and support the plan’s annual reporting. Each annual update is its own fiduciary act, reviewed by the trustee and exposed to the same standard as the original. An appraiser who earns the trustee’s confidence on the formation valuation is engaged year after year, and an appraiser who produces a report the trustee cannot defend is a liability the trustee will replace. The remainder of this paper is about what makes the report defensible, beginning with the standard it must meet.

2. Adequate Consideration: The Two-Part Test

The governing standard is adequate consideration. ERISA Section 3(18)(B) defines it, for securities without a generally recognized market, as the fair market value of the asset determined in good faith by the trustee or named fiduciary. Fair market value carries its usual meaning, the price at which stock would change hands between a willing buyer and a willing seller, neither under compulsion and both reasonably informed, which is the same willing-buyer, willing-seller formulation found in Revenue Ruling 59-60 and the estate-tax regulations. The phrase that does the work, and that generates the litigation, is determined in good faith.

The DOL and the courts read the definition as a conjunctive two-part test. The first prong is substantive: the price must actually equal fair market value. The second is procedural: that value must be the product of a good-faith determination, meaning a prudent process undertaken in conformity with ERISA’s duties of prudence and loyalty. Both must be satisfied. The DOL’s long-standing position, stated in its still-only-proposed 1988 regulation, is that under no circumstances is the plan relieved of the prohibited-transaction rules if it pays more than fair market value, because the adequate-consideration requirement is then not met. In other words, a careful process does not cure an overpayment, and a fortunate number does not cure a careless process. When a trustee fails the standard, the consequence is not merely a valuation dispute; the purchase becomes a prohibited transaction under ERISA Section 406, exposing the fiduciary to liability for the plan’s loss and the counterparties to excise tax under Internal Revenue Code Section 4975.

Table 1. The two-part adequate-consideration test

The test is conjunctive: both prongs must be satisfied, and neither cures a failure of the other.

A word on the regulatory landscape is necessary because it is often misunderstood. There is no finalized DOL regulation defining adequate consideration. The 1988 rule remains a proposal, relied upon as persuasive interpretation rather than binding law, a point the courts themselves note. The SECURE 2.0 Act directed the DOL to define the term, and the agency released a proposed regulation and a companion class exemption in unpublished form in January 2025, but the proposal was frozen by the change-of-administration regulatory moratorium and withdrawn before it was ever published in the Federal Register, so it carries no legal force. The practical consequence for a trustee is that the governing authorities remain the statute, the proposed 1988 rule, Revenue Ruling 59-60, the independent-appraiser requirement of the Internal Revenue Code, the GreatBanc process agreement, and the case law. A defensible appraisal is built on those, not on a rule that does not yet exist.

3. Revenue Ruling 59-60 as the Framework

Fair market value is a standard, not a method, and the method the DOL 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 same one ERISA borrows, and its list of relevant factors is the checklist an appraiser is expected to address. The ruling directs the appraiser to weigh 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 company

Revenue Ruling 59-60, 1959-1 C.B. 237. The ruling requires judgment weighting these factors to the facts, not mechanical averaging.

The ruling’s enduring lesson for the ESOP context is that no single factor and no single method controls. An appraiser who values an FBO on a revenue multiple alone, or a repair station on one year’s EBITDA, has not done what 59-60 asks, and a trustee who accepts that work has not met the good-faith prong. The factors that most often carry the weight in an aviation appraisal are earning capacity, which turns on the normalizations discussed in Section 7, and the comparable-company and prior-sale evidence, which must be adjusted for the subject’s size, concentration, and control characteristics.

4. The Annual Independent Appraisal

Two requirements make the appraisal both mandatory and recurring. The Internal Revenue Code, at Section 401(a)(28)(C), requires that all valuations of employer securities that are not readily tradable on an established market be performed by an independent appraiser, using qualification standards similar to those for charitable-contribution appraisals. And because participant accounts must be valued and the plan must report each year, the appraisal is repeated annually, ordinarily as of the last day of the plan year. Independence here is a real constraint: the appraiser must be independent of the sponsor, the selling shareholders, and any party structuring the transaction, and must not have been selected by anyone other than the plan fiduciary.

It is worth stating plainly what independence does and does not accomplish, because the point is frequently misread. An independent annual appraisal satisfies the appraiser-qualification requirement, but it does not, by itself, establish that the trustee made a good-faith determination of value. The two are separate. The Code tells the trustee who may perform the appraisal; ERISA tells the trustee what to do with it. A trustee who hires an independent appraiser and then accepts the report without reading and testing it has met the first requirement and failed the second. Independence is necessary, not sufficient.

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 most likely to be litigated because it is where the money changes hands. The annual update carries the value forward: it is performed as of the plan year-end, it should apply the same methodology as the prior year so that changes in value reflect the business rather than the appraiser, and it refreshes the normalizations, projections, and market multiples for the new year while reconciling them against the prior year’s expectations. The trustee’s job 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 swing. Consistency of method across years is itself a mark of defensibility; an unexplained shift in approach is a red flag an investigator will pursue.

5. Control Versus Minority, and the Put Option

Whether the appraisal uses a control value or a minority value is one of the most heavily scrutinized judgments in ESOP work, because it moves the price materially and because trustees have been held liable for getting it wrong. The governing principle is that the value must reflect the degree of control the ESOP actually holds. An ESOP may pay a control-based price only where actual control, in both form and substance, passes to the plan: the practical ability to change management, set compensation, and direct distributions, not merely a share count above fifty percent. Where the ESOP buys a nominal majority but the sellers retain the board and the trustee is bound to vote as the board directs, the ESOP does not have control, and paying a control price for it is an overpayment.

That is precisely what happened in Brundle v. Wilmington Trust. The appraiser applied a ten percent control premium, but the selling shareholders retained the power to appoint a majority of the board and the plan documents required the trustee to vote its shares as the board directed, so the ESOP, in the Fourth Circuit’s words, essentially had no power to control the company. A prudent fiduciary, the court held, would have probed that inconsistency rather than accepting the premium, and the trustee’s failure to do so, combined with a rushed process, produced liability. A related and common error is double-counting control: applying control-level normalizing adjustments to earnings, such as resetting owner compensation to market, and then also adding an explicit control premium on top. The DOL treats that stacking as a red flag, because the same control value is being counted twice, and it can be the basis of a prohibited-transaction claim.

Marketability runs the other way in the ESOP context, and the reason is the statutory put option. Because participants in a closely held ESOP have the right under Internal Revenue Code Section 409(h) to require the company to repurchase their distributed shares at fair market value under a statutory valuation formula, the shares carry an assured exit that ordinary private-company minority shares lack. That assured liquidity compresses the discount for lack of marketability, commonly to a modest five to ten percent rather than the twenty-five to forty percent range seen in non-ESOP minority interests. The compression is not automatic; it depends on the company actually being able to fund the repurchases, so where cash flow is weak or the repurchase obligation is large relative to the company’s resources, a larger discount is warranted. The repurchase obligation also has to be reflected in the earnings and cash-flow projections themselves, because it is a real future call on company cash. The modeling discipline is to be consistent: an appraiser cannot both eliminate the marketability discount on the theory that repurchases are fully funded and ignore the cost of funding them.

6. The Trustee’s Process and the GreatBanc Standard

Because the good-faith prong is procedural, the trustee’s own conduct is on trial alongside the appraiser’s number. The controlling idea, stated by the Fourth Circuit in Brundle, is that an appraisal is not a magic wand a fiduciary can wave over a transaction to discharge its duties. Reliance on an appraiser is reasonable only if the trustee prudently selected a qualified, independent appraiser, gave the appraiser complete and accurate information, and then critically read and tested the report rather than accepting it. The trustee bears the burden of proving that the plan received adequate consideration, so the record of that process is the trustee’s defense.

The most concrete guide to what that process should look like is the DOL’s 2014 GreatBanc agreement, formally the Agreement Concerning Fiduciary Engagement and Process Requirements. It is a settlement binding on one trustee, not a regulation, but the DOL 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. Its requirements map directly onto the annual engagement.

Table 3. GreatBanc process requirements and the trustee’s action

DOL Agreement Concerning Fiduciary Engagement and Process Requirements (2014); a parallel agreement followed with First Bankers Trust.

On the annual update, this process is lighter than at formation but not absent. The trustee still reads the report, still tests the projections against the prior year’s actual results, still confirms the methodology is consistent, and still documents the review. The documentation is the point: a trustee who can 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. The Normalizations That Trip Up Generalists

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, not 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 FBO fuel-margin volatility

A fixed-base operator makes much of its money selling fuel, and the number that matters is the margin per gallon, not fuel revenue. The margin is the spread between the operator’s laid-in cost, the base fuel plus freight, taxes, and into-plane handling, and the price to the customer, which varies between posted retail and discounted contract-fuel program pricing. Because jet-fuel prices swing widely, fuel revenue is highly volatile and largely meaningless as a measure of the business; the same gallons can produce very different revenue in two years while the margin per gallon barely moves. An appraiser who normalizes on revenue, or who takes a single year’s fuel gross profit as sustainable, will misstate earnings badly. The correct approach is to normalize the cents-per-gallon spread across a full fuel-price cycle, separate higher-margin retail volume from thinner-margin contract-fuel volume, and let normalized margin per gallon and gallons pumped drive the forecast, on the understanding that spikes and troughs in the headline fuel price largely pass through to customers rather than permanently changing the spread.

7.2 Contract labor at a repair station

A Part 145 repair station flexes its capacity with contract and temporary technicians, bringing in licensed mechanics to handle heavy checks, aircraft-on-ground work, and seasonal peaks. That contract labor bills at a premium hourly rate over direct payroll, so a year with heavy contract-labor use carries a higher effective labor cost than base staffing would suggest, and a year with light use carries a lower one. An appraiser who takes reported labor cost at face value will overstate sustainable margin in a busy year and understate it in a slow one. The normalization is to recast contract and temporary technician cost to a fully loaded, through-cycle equivalent, strip out one-time overtime and rate spikes, and test technician cost per billable hour and labor gross margin against multiple years and peers. This matters more now than it once did, because a structural shortage of certified mechanics is pushing both direct and contract labor rates up, so a normalized labor cost should reflect the rising trend rather than a temporarily favorable staffing mix.

7.3 The recurring adjustments

Beyond the two sector-specific items, the same normalizations recur across FBO, charter, and repair-station engagements, and each is both a valuation adjustment and, if missed, a fiduciary exposure.

Table 4. Normalizations to sustainable earnings in an aviation ESOP

Each adjustment ties to the earning-capacity factor of Revenue Ruling 59-60. Overstating earnings overstates value, which for an ESOP means paying more than fair market value: a prohibited transaction, not merely an error.

8. What the Cases Teach

The ESOP valuation case law is, with one instructive exception, a catalog of process failures, and it is the clearest available guide to what a trustee must avoid. Reading the cases together, the lesson is consistent: the trustee who documents a real, questioning process defends the valuation, and the trustee who defers to the appraiser does not.

Table 5. Selected ESOP valuation decisions

The GreatBanc process agreement itself arose from a separate DOL enforcement matter (the Sierra Aluminum transaction). Citations appear in the sources list.

The exception, Walsh v. Bowers, is the most useful case for a trustee to understand, because it shows the defense working. There the court ruled for the trustee, finding that the DOL’s own expert relied on inaccurate and incomplete information and improperly treated a rejected lowball offer as the benchmark of value, and that a post-transaction decline in value was attributable to acquisition financing rather than overpayment. The takeaway is not that trustees usually win; they often do not. It is that a valuation grounded in sound methodology, complete information, and a documented negotiation is defensible even against the government, and that a later drop in value is not itself proof of overpayment. That is the standard the annual aviation appraisal should be built to meet.

9. The Defensibility Checklist

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

Confirm the standard is adequate consideration under ERISA Section 3(18)(B), and treat it as a two-part test: the number must equal fair market value, and the process must be a documented, good-faith determination.

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

Require the appraisal to address the Revenue Ruling 59-60 factors and to develop value through more than one method, with earning capacity built on normalized, sustainable earnings.

Test the control conclusion against the control the ESOP actually holds; do not accept a control premium where the sellers keep the board or the trustee must vote as directed, and do not double-count control adjustments and a control premium.

Confirm the marketability discount reflects the statutory put and the company’s real capacity to fund repurchases, and that the repurchase obligation is carried in the projections.

Run the GreatBanc process: vet the appraiser, insist on reliable financials, test the projections, read and understand the full report, question the assumptions, and document every step.

On aviation specifics, verify the fuel margin is normalized per gallon across the price cycle, contract labor is recast to a through-cycle cost, and owner compensation, related-party terms, non-recurring items, concentration, and cyclicality are all addressed.

Keep the methodology consistent year over year, reconcile each update against the prior year’s projections, and retain the file for at least six years.

The recurring appraisal is the trustee’s standing insurance policy, and the appraiser who builds it to this standard is the one the trustee and counsel keep calling. A defensible number is worth little without a defensible process behind it, and in the aviation setting the process has to include the normalizations that only a sector-literate appraiser will catch.

Authorities and Sources

Statutes, regulations, and rulings

ERISA Section 3(18)(B) (adequate consideration); ERISA Section 406 (prohibited transactions); Internal Revenue Code Section 4975 (excise tax).

Internal Revenue Code Section 401(a)(28)(C) (independent appraiser); Section 409(h) (put option) and Section 409(o) (distribution timing).

DOL proposed regulation on adequate consideration, 29 CFR 2510.3-18 (1988, never finalized); DOL adequate-consideration proposal RIN 1210-AC20 (Jan. 2025, withdrawn before publication, no legal force).

Revenue Ruling 59-60, 1959-1 C.B. 237 (fair market value factors for closely held stock).

DOL guidance and cases

DOL, Agreement Concerning Fiduciary Engagement and Process Requirements for the Acquisition and Holding of Employer Securities (GreatBanc, 2014); parallel First Bankers Trust agreement.

Brundle v. Wilmington Trust, N.A., 919 F.3d 763 (4th Cir. 2019), aff’g 258 F. Supp. 3d 647 (E.D. Va. 2017).

Walsh v. Vinoskey, 19 F.4th 672 (4th Cir. 2021) (aff’g Acosta/Pizzella v. Vinoskey, W.D. Va. 2019).

Chao v. Hall Holding Co., 285 F.3d 415 (6th Cir. 2002); Perez v. First Bankers Trust Services; DOL settlement re Reliance Trust (Tobacco Rag Processors); Walsh v. Bowers (D. Haw. 2021).

Appraisal and aviation practice

NCEO and appraisal-practice guidance on ESOP valuation discounts, the put option, and repurchase obligations; Mercer Capital on ESOP discounts and control-premium double-counting.

Aviation-sector sources on FBO fuel-margin economics (AC-U-KWIK / NATA fuel-pricing commentary) and MRO labor (Oliver Wyman MRO survey); FAA Part 145 and NBAA Part 135 program materials.

Companion papers

Aeronautical Valuation Research Series: the hangar transfer-tax paper, “Property-Tax Assessment of Aircraft Hangars,” “Underwriting a Loan Against a Leasehold Hangar,” and “Pricing a Partner or Key-Employee Buy-In.” The buy-in paper develops the levels-of-value and discount framework applied here.

Disclaimer. This paper is a research synthesis for ESOP trustees, ERISA counsel, and valuation professionals and is not legal, tax, or valuation advice. The adequate-consideration regulation has never been finalized and the 2025 proposal was withdrawn; the governing standard could change, and any successor DOL guidance should be checked. Discount magnitudes, multiples, and fuel-margin figures are illustrative and must be developed and supported for the specific company and interest. The governing plan documents, current authority, and the facts of the transaction control.

This paper is research and general information for professionals evaluating aviation real estate. It is not appraisal, legal, or tax advice, and it does not create an engagement.