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The Employee Ownership Update

Loren Rodgers

March 1, 2012

(Loren Rodgers)

President's Tax Reform Proposal Would Change S Corporation Taxation

President Obama's "Framework for Business Tax Reform" (available at this link) would change S corporation taxation rules so that "large" S corporations (the term "large" is undefined in the document) would be taxed as C corporations rather than as pass-through entities. There is no specific mention of ESOPs, but, presumably, if S corporation ESOP companies were now taxed as C corporations, the ability to avoid income tax on the percentage of ownership held by the ESOP would no longer apply.

The proposal is part of a sweeping set of recommended changes aimed at simplifying business tax rules and not using the tax system to favor specific kinds of investments or business forms. There is, however, no current effort to move on the proposals in Congress.

SEC No-Action Letter on RSUs in Private Companies Says RSUs Do Not Count Under Shareholder Limits

The SEC has issued a no-action letter to the law firm of Fenwick West saying that restricted stock units are not subject to the 500-shareholder limit that, if met or exceeded, requires a private company to comply with reporting requirements for public companies. A prior no-action letter to Facebook also came to this conclusion, but with this letter to a law firm, the ruling has more universal application.

Restricted stock units (RSUs) provide that an employee is granted the right to actual shares but must meet specific vesting requirements before the shares can actually be granted. Because RSUs only represent potential shares, they will not count as if the shares are already owned.

Iowa Closer to Passing Employee Ownership Law

The Iowa House of Representatives passed a bill to encourage ESOPs in the state by a vote of 92-3. The proposal, strongly backed by the governor, now moves to the Senate, where approval seems certain. The bill would exempt capital gains from taxation if a company is sold to an ESOP that owns at least 30% of the stock. No mention is made of a requirement that the company be a C corporation. The bill also provides for an appropriation of $1 million to the state economic development authority to establish a loan program for qualifying ESOPs, and to provide technical assistance, marketing, and education on ESOPs.

NCEO Works with South Africa on Employee Ownership

Corey Rosen, NCEO's senior staff member, traveled to South Africa in February to meet with government officials and speak at workshops on how the South African government can expand employee ownership. There are currently an estimated 500 employee ownership plans in South Africa. There are no tax incentives for these plans, but under the country's Black Economic Empowerment Program (BEE), companies get points for the degree to which they share ownership with blacks. There are a variety of ways to do that, but an employee ownership plan is one of the most favored, with more points awarded for plans with broad coverage and more ownership. Most of the plans are in large companies and typically own 3% to 7% of the stock through a trust that allocates shares equally or by salary, paying out periodically. The most successful of these, at Kumba Iron Ore, recently paid employees approximately $75,000 each after six years of plan operation, but most payouts are much smaller.

Under the leadership of the Industrial Development Corporation (IDC) in South Africa, the government is looking at ways to provide more incentives for these plans and clearer legal structures. These could include expanding BEE incentives, tax incentives, and/or the preferred sale of government holdings in companies (often through the IDC, which acts as an investor in job-creating companies) to a plan. Rosen also met with officials at the ministries of economic development and treasury, as well as a private group, Inclusive, which is working on creating an NCEO-like organization in South Africa as well as acting as a private equity firm for employee owned companies.

A large conference is now slated for July, and I, as NCEO executive director, am scheduled to attend.

Author biography and other columns in this series

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