We see the real advantages as: (1) The creation of broad stock ownership by the employees of the company; (2) participation by the employees in the capital investment growth and the resultant rewards of that growth; (3) improved communication by way of employees receiving shareholders' messages, such as quarterly or annual reports and feedback from employees by way of their voting participation as common shareholders and by their comments to the company as shareholders.

(4) The creation of greater awareness in the employees of the conpanies progress; (5) and, in small measure, the investment benefit plan serves to build the personal retirement savings of the employees. This decreases demands for and the need for increasing social security and other retirement benefits.

From our point of view, S. 3241 is largely very meritorious. The contribution increase from 1 to 2 percent of qualified investment is very valuable, since it makes the individual benefit more substantial and meaningful.

Although capital intensive companies such as Dow would not benefit from the 1-percent compensation alternative, we believe this option will expand the use of employees' stock ownership plans because it will encourage participation by labor-intensive businesses. Thus, they and their employees may benefit, as have we.

Making the provisions for this benefit plan permanent is an extremely desirable feature. Letting the program die is like cutting the pay of all of the affected persons.

This fact highlights the need for stability in our tax laws.

The provision which would allow deductions for dividends paid for an employee stock ownership plan trust, which are subsequently distributed, is excellent. Elimination of double taxation on corporate profits is a desirable goal, and the proposal here is certainly a step in the right direction.

This bill addresses, in a helpful manner, other difficult technical problems such as reconciling investment tax credit recapture provisions with lump sum distribution benefit provisions to retirees.

I would like also to comment briefly on a provision of the bill requiring one-half of the employee stock ownership benefit contribution to be in newly issued securities. Although we appreciate the spirit in which this proposal is made, we believe that there are several reasons why the idea needs further thought.

(1) Under existing law, we believe the issuance of new securities would require the meeting of SEC registration requirements. (I do understand though, from conversations with other counsel last night, that that may be inaccurate.) (2) The employer may be reluctant to issue new securities at times when the price of the stock is depressed, or when to do so would significantly reduce earnings, and that might very well happen at a time of high capital expansion with consequently depressed earnings.

(3) Also, the rule could be circumvented if the employer repurchases shares of stock on the market.

Curing these enumerated problems may be difficult and costly. However, we do not reject this or any other idea with respect to employee stock ownership.

In summary, we are very supportive of this bill and feel that its concept, philosophy and purpose are worthwhile. We feel that our experience has been very positive as a result of employee stock ownership plan provisions of the Tax Reduction Act of 1975 and especially as modified in 1976.

And this bill will further desirably expand the value of the employee stock ownership plan.

Turning briefly to comments on the general stock ownership plan that has been introduced by Senator Gravel, we recognize that this is part of a highly innovative concept, Senator Gravel has been exploring for some time. It presents another aspect of the same thing of employee stock ownership plans.

There should be an effort to encourage more of the people in our society to participate in the ownership of stock in American corporations. Dow has actively advanced that position for many years by encouraging the ownership of corporate shares by its employees. Certainly, Senate bill 3223 is a better solution to broader public participation than governmental ownership.

We recognize that this proposal is essentially enabling legislation. However, the details necessary for development of a successful general stock ownership plan are not present in it. These details would be essential to be a successful development of the concept. Policy problems such as what investment criteria should be used, must be considered.

Thank you for the opportunity to testify. Dow believes that our employees have benefited from the employee stock ownership program and we hope for its continued and expanded existence.

The CHAIRMAN. Thank you very much, sir, for your very fine state

ment.

Any questions, gentlemen?

Senator GRAVEL. I have none, except to thank him for the endorsement.

Senator BYRD. No questions.

Senator DANFORTH. No questions.

Senator LAXALT. No questions.

The CHAIRMAN. Thank you very much, sir.

[The prepared statement of Mr. White follows:]

STATEMENT OF GLENN W. WHITE, DIRECTOR OF TAX, THE DOW CHEMICAL

COMPANY, JULY 19, 1978
Summary

The Dow Chemical Company has been interested in Employee Stock Ownership Plans for some time, and has maintained a similar stock program for employees since 1953. The Employee Stock Ownership Plan legislation has allowed Dow to expand its program so now most of its U.S. employees are shareholders. Following are details of Dow's plan:

1. Of 32.600 total U.S. employees, 29,300 are participants in the Employee Stock Ownership Plan. This is all of Dow's U.S. employees, except those employed less than one year. Employees represented by bargaining units are automatically participants.

2. In 1976, the first year of operation, the contribution to the Plan was $5,900,000. This was used to acquire about 187,000 shares of stock, providing 6.4 shares to the average employee for a value of about $200 per employee.

3. The contribution is divided among participants on the basis of compensation under $100,000. Corporate directors are not included as participants. Each participant is guaranteed at least one share of stock per year.

SENATE BILL 8241

Dow is strongly in favor of this Bill and believes the following provisions to be very meritorious:

1. Contribution increase from 1% to 2% of qualified investment is very valuable and meaningful to employees.

2. 1% of compensation alternative, although not helpful to Dow, should encourage participation by labor intensive businesses.

E. Permanent legislation is extremely desirable.

4. Deductions for dividends paid is a good step in the direction toward elimination of double taxation on corporation profits.

5. Correction of the technical problem regarding lump sum distribution will solve a problem Dow has been having relative to its Employee Stock Ownership Plan in that it would be able to use the separate account method of claiming investment tax credit recapture without affecting employees tax treatment on lump sum distribution.

AN AREA OF CONCERN

"Newly issued share" requirement would require SEC registration, creates administrative difficulties, dilutes the value of the stock the employee receives, and can be circumvented if the employer repurchases shares on the market.

CONFUSING PROVISIONS

1. Does proposed Section 416 (b) require that we give each employee the option of participation even though the Plan is not contributory? If so this would create a significant administrative burden.

2. A literal reading of proposed Section 7 (b) would allow an employer a charitable contribution in addition to a tax credit. Certainly this windfall is not intended.

SENATE BILL 3223

Although this is a highly innovative concept, we believe the detail should be worked out prior to passage of such enabling legislation.

Statement

Good morning. My name is Glenn White. I am the Director of the Tax Department for The Dow Chemical Company. We appreciate the opportunity to testify regarding this proposed legislation to expand the scope of Employee Stock Ownership Plans. We want to tell you about Dow's experience with employee stock ownership.

As early as 1953 Dow had adopted a plan which provided, to a broad group of employees, shares in the Company without out-of-pocket cost to the employee. The Dow Stock Benefit Plan makes available to a broad group of our employees an investment by the Company in shares for the employee's account at the rate of 2 percent of base salary per year. This plan is noncontributory. The shares are distributed to the employee upon termination or retirement.

The Dow concept of employee stock ownership was expanded with the adoption of the Dow Investment Benefit Plan. This was our response to the Employee Stock Ownership legislation. As a result, the employees now receive an additional benefit as provided under the Employee Stock Ownership Plan provisions to the extent of 1 percent of Dow's qualified property each year. This plan was extended to cover all U.S. employees with at least one year service, including those represented by bargaining units. As a result, 90 percent of 32,600 employees or 29,300 people became shareholders. This has helped make possible a long-term management objective of making as many Dow employees as possible owners of the Company.

In addition to the Stock Benefit Plan and the Investment Benefit Plan, Dow also has an Employee Stock Savings Plan that permits Dow employees on a worldwide basis to own stock in the Company.

The Dow Investment Benefit Plan (Dow's Employee Stock Ownership Plan) was so named to express the concept that through the Company's investment in new plants and equipment, the employees are sharing the planning, building, and operation of the Company and, thus, are deserving of receiving under this plan a share of the ownership. Without Dow's growth of capital investment, there would be neither tax benefits nor Employee Stock Ownership Plan stock benefits. In 1976, the first year our plan was in operation, $5,900,000 was contributed

to the plan. This was used to acquire about 187,000 shares of stock (6.4 shares for the average employee or about $200).

As prescribed in the law, the contribution is divided among participants on the basis of compensation under $100.000. However, following our intent that this plan substantially benefit rank-and-file employees, the corporate directors elected not to participate in this plan. Also, the plan guarantees that each participant will receive at least one share of stock per year in the allocation formula. The real advantage to Employee Stock Ownership Plans from Dow's viewpoint is not derived from the tax benefit. The tax benefit makes a desirable plan economically feasible. We see the real advantages as:

1. The creation of broad stock ownership by the employees of the Company.

2. Participation by the employees in the capital investment growth and the resultant rewards of that growth.

3. Improved communications by way of employees receiving shareholder messages, such as quarterly and annual reports.

4. Creation of greater awareness in the employees of the Company's progress. 5. In small measure, the Investment Benefit Plan serves to build the personal retirement savings of the employees. This reduces the demands and need for increasing Social Security and other retirement benefits.

SENATE BILL 3241

This proposal is for the most part very meritorious. The contribution increase from 1 to 2 percent of qualified investment is very valuable since it makes the individual benefit more substantial and meaningful. Although capital intensive companies such as Dow would not benefit from the 1 percent of compensation alternative, we believe this option will expand the use of Employee Stock Ownership Plans because it will encourage participation by labor intensive businesses. Thus, they and their employees may benefit as have we.

Making the provisions for this benefit plan permanent is extremely desirable. Ietting the program die is like cutting the pay of all affected persons. This fact highlights the need for stability in our tax laws.

The provision which would allow deducations for dividends paid to an Employee Stock Ownership Plan trust, which are subsequently distributed, is excellent. Elimination of double taxation on corporation profits is a desirable goal, and the proposal here is certainly a step in the right direction.

A technical problem about which we have been concerned is handled in the bill. Under current law there are three alternatives for dealing with shares affected by investment tax credit recapture.

One of these alternatives is to allow the plan to set up separate accounts for each participant which are segregated from other plan assets, against which investment credit recapture can be drawn. The problem arises when an employee retries or otherwise terminates his employment. It may not be known for a period of seven years thereafter if this "separate" account will be used up by the investment credit recapture, since the investment credit recapture rules are operable for a period of seven years after the investment credit property is placed in service.

Since our Employee Stock Ownership Plan also qualifies as a stock bonus plan under the Internal Revenue Code, lump sum distributions of employer securities from this plan qualify for special tax treatment on lump sum distributions under Section 402 (e) of the Internal Revenue Code. Lump sum distribution treatment is a very desirable tax provision as far as our employees are concerned. We are anxious to preserve its applicability. However, the term lump sum distributions is defined in Code Section 402 (e) (4) (A) as the balance in the account to the credit of the employee. The Treasury Department has issued rather explicit regulations defining these terms at Section 1.402 (e)-2(d); and as we interpret these regulations, an employee receiving a lump sum distribution from our Employee Stock Ownership Plan upon retirement would not be entitled to the special tax treatment on lump sum distributions under Section 402 (e) because the plan had not distributed to him the balance of his account. since there remained this "separate" account for investment credit recaptures. The only way

to preserve the special tax treatment for the retiring employee would be to hold the retiree's entire distribution for a period of seven years (an option which is obviously not very satisfactory from the employee's point of view), or for the company to use one of the other investment credit recapture provisions.

As a matter of fact, because of this problem, we have chosen to use one of the other recapture provisions. However, our choice, absent this problem, would have been to use the "separate account" method. Since Congress approved this as one of the legitimate methods of dealing with the investment credit recapture problem, we cannot believe that this contradiction with the lump sum distribution rules was intended. Rather, we are confident this was simply an oversight in the previous legislation and are pleased that the amendment to Section 416 (d) would alleviate this problem.

An alternative solution which would constitute a major departure from past practice would be to disregard investment tax credit recapture in respect of the Employee Stock Ownership Plan percentage. The chance for significant revenue loss seems remote since the employee is the beneficiary and the control over disposition of the assets is under the control of the employer.

I would also like to comment briefly on the provision in the bill requiring one half of the Employee Stock Ownership Plan contribution to be in newly issued securities. Although we appreciate the spirit in which this proposal is made, we believe there are several reasons why the idea needs further thought:

1. Under existing law the issuance of new securities would require the meeting of SEC registration requirements;

2. The employer may be reluctant to issue new securities at times when the price of the stock is depressed or when to do so would significantly dilute earnings; or

3. The rule could be circumvented if the employer repurchases shares on the market.

Curing these enumerated problems may be difficult and costly.

The SEC registration problem could be remedied by specifically exempting shares issued for an Employee Stock Ownership Plan from registration requirements.

Companies may avoid setting up a plan if the shares being issued are so issued at a very depressed price. For small companies, in the midst of expansionary cycles, the issuance of new shares could significantly dilute earnings. Moreover, issuance of new shares will naturally lower the price of all shares with the consequence that the employees may receive slightly less than would otherwise be the case.

There are many reasons why companies buy their own shares. It would not be feasible to prevent all purchases of company stock, and yet it would almost require a measure that stringent to prevent circumvention of the rule. For these reasons, we doubt whether this provision should be adopted.

There are two provisions in the bill whose purposes seem somewhat obscure. The first of these is Proposed Internal Revenue Code Section 416 (b) which says that the employer may not make participation in the plan a condition of employment and the plan may not require matching employee contributions as a condition of participation in the plan. We are not sure how this would apply to a plan like ours that automatically includes all employees but does not require employee contributions. We cannot think of any reason why an employee would not want to be part of the plan, and we certainly have not had any of our employees ask not to be covered. It would impose a significant administrative burden on us to affirmatively grant each employee an option of participation. We hope that the proposed legislation can be changed so that will not be a requirement.

Proposed Section 7(b) of the bill would allow a charitable contribution for Employee Stock Ownership Plan contributions. Certainly it cannot be the intent of this bill to grant an employer a charitable contribution in addition to a tax credit for the same contribution. However, we believe a literal reading of Section 7(b) could cause this result. This seems particularly likely since the limiting language in Section 1(b) for amending Internal Revenue Code Section 416 (a) (12) does not include Section 170.

For companies that are in heavy growth cycles, the one year carryforward may not be sufficient. Employee Stock Ownership Plans might be very worth33-902-78-8