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The Employee Ownership Update

Loren Rodgers

July 16, 2012

(Loren Rodgers)

UK Government Announces Employee Ownership Push

On July 4, UK Deputy Prime Minister Nick Clegg announced new initiatives to promote employee ownership. His announcement followed on the extensive recommendations of a report the UK government commissioned titled Sharing the Success: The Nuttall Review of Employee Ownership. The report outlined dozens of recommendations, mostly focusing on developing a smoother regulatory process, increasing awareness, and providing a means for employees to request that their employers to set up ownership plans.

Clegg said that the government's first steps would be to create an Institute for Employee Ownership, a national organization that will provide guidance, resources, models, and other information on employee ownership. A second initiative would create a "right to request" by employee groups, allowing employees to formally request that their employer set up some kind of employee ownership plan. Finally, the government will create "off the shelf" model employee ownership plans.

Announcing the California Center for Employee Ownership

The NCEO and the Beyster Institute at the University of California San Diego's Rady School of Business launched the California Center for Employee Ownership, a joint project to increase understanding of employee ownership in California among businesses and the general population. The Web site is at www.ownershipcalifornia.org. It highlights the impact of employee ownership on California's economy, helps interested businesses learn more, and describes some well-known California employee ownership companies.

Congressional Research Service Disagrees with Sen. Levin on Stock Option Deductions

In its report titled Employee Stock Treatment and Tax Issues (No. RL31458), the Congressional Research Service (CRS) finds that the current tax treatment of stock options is not abusive. The report is in response to Sen. Carl Levin's bill, the "Ending Excessive Corporate Deductions for Stock Options Act" (S. 1375). The bill would limit deductions to what the company declares as a compensation cost on its income statement, not the value of the spread on exercised options. In the case of Facebook, the options were expensed as low as six cents per share but exercised at $38, creating a $500 million deduction. But the CRS notes that this disconnect only occurs because the tax calculation and accounting calculation are done at different times for different reasons. The timing of the deduction to coincide with exercise is appropriate, the CRS says, because that is also when the employee recognizes (and pays tax) on the income. The windfall is, in effect, taxed the same way as any other compensation, meaning, the CRS concluded, that "there is generally little, if any, tax advantage to these options."

IRS Issues Sample Language for 83(b) Elections

In Revenue Procedure 2012-29, the IRS provided a model for employees wanting to make an 83(b) election for an equity award. Used most commonly with restricted stock, 83(b) elections allow employees to be taxed on the difference between the value of the award at grant minus any consideration paid and then to pay no further tax until the shares are sold. (Learn more about 83(b) elections in our article Stock Options, Restricted Stock, Phantom Stock, Stock Appreciation Rights (SARs), and Employee Stock Purchase Plans.) Until now, there has not been a model form to do this. The new form provides basic information, including the name, number of shares, transfer date, fair market value at transfer, amount paid, and amount includable in gross income. Taxpayers are not required to use the form, however.

Company Stock in 401(k) Plans: Trouble on Wall Street

Employees at the five largest Wall Street firms often have a portion of their 401(k) accounts invested in the stock of their employer, and in 2011 those holdings created losses of over $2 billion in those accounts, according to analysis by Bloomberg. More than half of that loss came from Bank of America, where 13% of 401(k) assets were in company stock. The portion of 401(k) assets in company stock at the big five firms ranged from 2% at Goldman Sachs to 24% at Morgan Stanley.

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