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The Employee Ownership Update

Corey Rosen

January 17, 2006

(Corey Rosen)

Major Indian Tea Plantation Becomes Employee-Owned

Ninety-two percent of the 13,000 employees of Kanan Devon Hills Plantations (KDP), a South Indian tea plantation, have purchased stock to buy the company from its owner, Tata Tea. The plantation had been losing money until the 2004 buyout, but productivity has gone up 34% and solid profits have returned. Tata, which is largely owned by charitable trusts, could have sold the plantation to other buyers, but felt an obligation to the workers and to retaining the company's commitment to the plantation's environmental practices. Employees can elect board members and hold biweekly meetings in each of the company's 82 divisions to generate new ideas, a process that management reports has generated "smart talk on green-leaf harvesting" from people whose expertise had, they said, largely been ignored. Classes are organized for employees, most of whom are women, to help them participate more effectively. The plantation is now also able to diversify into other crops. When a statewide strike of tea workers shut down all tea operations in the area for 11 days, only KDP workers stayed on the job.

Electricite de France Launches Major Employee Ownership Initiative

As part of its partial privatization, Electricite de France has undertaken the largest continental European employee ownership plan to date. Employees can borrow money to buy up to 15% of the stock at 10% off the share price. Employees have to hold on to their shares for five years. If the shares go down, they get their cash back. If they go up, based on a multiple of the average stock price over the next five years, employees get the stock. The loans are made at a required rate of return given the risks, and the underwriter tries to hedge the debt for protection. In a case study of the Dexia Group in the September/October 2005 issue of the Employee Ownership Report (the NCEO's newsletter for members, archived in the members-only area of this site), we explained how these kinds of plans work in more detail.

Unions at the company had adamantly opposed privatization, but have taken up the offer eagerly given its terms.

IRS Issues Settlement Procedure for Abusive ESOP S Corporations

In Announcement 2005-80, the IRS set out the details of a proposed settlement procedure for a number of improper transactions, including three abusive applications of S ESOP rules. People who claimed a tax benefit from the transactions (but not promoters and their relatives, people in litigation over the transaction, or people where fraud or criminal investigations or settlements are involved) can apply. If the settlement is concluded, the taxpayers will only have to pay a 5% penalty, not a 20% penalty. They will, however, be responsible for all taxes due, plus interest. Their ESOP plan and/or S election could be terminated, causing further tax complications. Additional payments for improper calculation of basis, excise taxes, and/or employment taxes may be due once the transaction is undone.

The three abusive applications include management S corporations (those where all or almost all the benefits were structured to go to management), "Q Sub" structures (those funneling most or all profits to specially set up subsidiaries to benefit a small number of people), and transactions described in Revenue Rulings 2003-6 and 2003-1 C.B. 286 that applied to attempts to extend the grandfather date for transactions not meeting the requirements imposed by the anti-abuse rules.

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