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The Employee Ownership Update

Corey Rosen

September 1, 1995

(Corey Rosen)

United Parcel Service to Become Employee-Owned

Since 1945, United Parcel Service (UPS) has been broadly owned by its 28,000 management and supervisory personnel. Now the 315,000-employee company will make ownership available to all full-time employees. The company will be expanding its shares by about one-third and making these available to employees through share purchases and voluntary conversions of retirement plan assets. Presumably, as managers sell their shares over time, ownership will broaden further.

UPS has long been known as a highly regimented organization with very strict guidelines for job performance. According to UPS CEO Kent Nelson, however, the times now require a different approach. "The marketplace is changing rapidly and customer expectations are increasing....we are calling on our people at all levels to take direct responsibility for the customer's satisfaction." So the company is reducing supervision, giving employees greater decision-making latitude, building time into the day for driver flexibility to meet customer needs, and training employees on business development issues. Given this, Nelson said, "it is appropriate that our non-management people be given the opportunity to have a personal stake in the company's performance."

UPS shares are not publicly traded. Their assessed value has never gone down and has averaged a 15% annual gain since the management ownership plan began.

IRS Issues Guidance on Pass-Through Voting in ESOPs

The IRS has now changed its position on pass-through voting of ESOP shares. According to the Department of Labor, as well as a recent federal court ruling in the Polaroid case, when a trustee does not receive timely directions from plan participants concerning how they want their allocated shares voted, the trustee must vote those shares. The trustee would make the voting decision independently based on the best interest of plan participants.

But until recently, the IRS seemed to disagree. For the last ten years, the IRS position was that these shares could not be voted at all. In Revenue Ruling 95-57, however, the IRS said that a trustee could vote the undirected shares.

Is a Flat Tax a Threat to ESOPs?

If Congress passed a flat tax, what would happen to ESOPs and other tax-favored employee ownership plans? At first blush, the answer might seem they would disappear. If there were no more tax deductions, there would be no more tax incentives. In fact, the situation is more complicated.

While a flat tax on personal income is fairly straightforward, it is more difficult to calculate for corporations. After all, the tax is on profits. But before a company can determine profits, it has to determine costs. These costs would still have to be deducted from revenues. So the key issue is how costs are defined. In the flat tax bill proposed by Ways and Means Committee Chair Bill Archer, compensation costs would be deductible, including contributions to retirement plans. In fact, Archer would eliminate any limitations on these contributions and any allocation rules. Presumably, leveraged and non-leveraged ESOPs would still be allowed and would still provide a tax-favored way for companies to acquire stock for employees.

On an individual basis, a flat tax would mean the elimination of the tax deferral available for sales to ESOPs owning at least 30% of the shares or privately held firms. That could have a significant impact, although probably not as great as most people believe if a sale to an ESOP continues to qualify for tax benefits at the corporate level. A sale to an ESOP would still be the most tax-efficient way for most business owners to plan for a sale.

But don't hold your breath on any of this. The last time Congress tried to move towards a flat tax (in the late 1980s) we ended up with a law that started out simpler and ended up more complex. Archer's proposal to eliminate restrictions on retirement contributions would be enormously expensive. And once a flat tax is actually seriously proposed, everyone whose deductions are threatened will be making the case for why their case is special. Eliminating mortgage deductions, for instance, would devastate the real estate market. A flat corporate tax would mean raising the tax rate on most businesses and lowering it for large companies, a political proposition that could be hard to advance.

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