The ESOP Council was formed last year as the first association to represent the interests of ESOP companies in Washington. The ESOP Council is also intended to serve as a forum for the exchange of ideas among ESOP companies, to work to promote the ESOP concept and to make ESOP's more readily usable by the companies that have them. The ESOP Council certainly is grateful for the support of this committee, and particularly Senator Long, for all of the improvements in the ESOP laws that have been made over the past 5 years.

We believe that this is just a first step, however, and that now is the time to take additional steps to further create incentives to broaden the opportunities for "ownership sharing" among millions of new workers. We also believe that not only is new legislation needed to create new incentives but, in addition, there are certain problems created by past legislation that can be corrected. Further, we believe that there have arisen in the past year or so certain regulatory problems that must be solved by the Congress.

Particularly, we refer to section 803 (h) of the Tax Reform Act of 1976 which stated the intent of Congress regarding ESOP's and which directed the Federal agencies not to promulgate regulations and rulings which would hamper the use of ESOP's. We believe that the agencies have not complied with the intent of Congress in this regard. We have been pleased over the past several months to provide assistance to the staff of the Finance Committee in the development in S. 3241 and in other matters relating to ESOP's. We strongly support this legislation and urge that it be enacted by Congress as quickly as possible. We believe that this will be an important step which will expand ESOP's from the point where several thousand companies have adopted them to the point where several hundreds of thousands of companies will adopt them, and many millions of workers will be covered by ESOP's.

Our written statement includes greater details on S. 3241 and the reasons that we endorse its provisions, but I just want to point out a few highlights. The provision to create a tax credit for ESOP's based on payroll, we think, is an essential provision. As mentioned earlier this morning by a number of companies, the investment tax credit provisions for ESOP's are not available to many companies. They are essentially limited to capital-intensive companies. We feel that it is critical for tax-credit ESOP's to be extended to those companies where the present investment tax credit provisions do not create a meaningful benefit. We believe that this will not only be of benefit to the 250 members of the ESOP Council, but also that it will enable hundreds of thousands of new corporations to provide "ownership sharing" for their employees.

We also believe that an increase in the additional investment tax credit for ESOP's to 2 percent is an important step, not only to create a more meaningful benefit to employees, but also to eliminate the matching employee contribution provision which were added by the 1976 Tax Reform Act. These provisions have created an administrative nightmare for the companies that have tried to implement them. We also believe it is an important step to make tax-credit ESOP's a permanent part of the Internal Revenue Code. This will not only give greater permanence to the idea, but will also show the IRS that the Congress means to provide for ESOP benefits on a permanent basis.

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We strongly endorse the provision of S. 3241 which would modify the voting rights provisions of the present TRASOP law. We believe that the providing of voting rights to employees, although desirable, creates great problems for closely-held corporations which do not presently solicit proxies from their shareholders. The costs and burdens of providing for a passthrough of voting rights in companies that are not publicly traded far outweigh the benefits that can be derived by the employees in having the right to vote a small portion of the company's stock. This provision of S. 3241 follows the approach which was suggested by the staff of the Joint Economic Committee of Congress in 1976 to limit the voting passthrough provisions to publicly traded companies which are already soliciting proxies for voting from their shareholders.

S. 3241 also includes an important provision to permit an ESOP to offer an employee the election to receive a distribution of cash in lieu of stock. We believe that in a closely held company, many employess would like to sell their stock and receive cash or cash equivalents in order to provide for retirement income. The present regulations of IRS make this extremely difficult to accomplish, and we believe that this option would be of benefit to ESOP's and employees in closely held companies by simplifying the administration of ESOP's through allowing employees the choice of directly receiving cash or stock.

S. 3241 also includes a provision that permits an individual to claim a charitable deduction for a "gift" to an ESOP, either during his lifetime or from his estate after his death. We think this is an important provision which will create an alternative whereby wealthy shareholders may transfer their stock to employees as an alternative to transferring it to a private foundation, where it would be sterilized forever from the tax base. The charitable deduction provision of S. 3241 would allow the stock to go to people, retain that capital in the tax base, and broaden the ownership opportunities for employees.

The dividend deduction provision of S. 3241, we believe, is also important. One of the problems with ESOP's among employees has been that they receive no current tangible benefits, in that their stock is held for them until they retire or otherwise terminate employment. In many companies, passing through dividends, to employees under present tax law would not provide a substantial enough benefit to the employees to warrant the administrative expenses of passing those dividends. through. We believe that a tax deduction provided to the corporation will not only encourage a passthrough of dividends, but will also provide for increases in the payment of corporate dividends to the employees. This should not diminish tax revenues because the dividends now received by the ESOP are received by a tax-exempt trust. This provision would merely pass on the tax to the employees, and would provide a current tangible benefit to the employees to help make their ESOP a more meaningful benefit to them.

S. 3241 also contains a number of provisions which will correct certain problems under existing law. I will not now address these issues, but the ESOP Council certainly suggests that the committee consider these provisions and act favorably upon them.

Last week, Senator Gravel introduced S. 3291, which would have the effect of raising the contribution limitations for ESOP's from 25 percent of payroll to 50 percent of payroll. The ESOP Council supports

such an increase and believes that it will be an important factor in increasing ownership opportunities for employees.

As far as regulatory problems, we believe that the IRS and the Department of Labor have not complied with the intent of Congress regarding ESOP's. It has been 2 years now since the tax-credit ESOP regulations were first proposed, and those regulations have not yet been finalized. We believe this delay is inexcusable and has caused a substantial detriment to companies that have been interested in the tax credit ESOP's.

We also believe that the regulations that the IRS finalized last September on leveraged ESOP's contain certain onerous provisions which are not within the spirit of section 803 (h) of the 1976 Tax Reform Act. We understand that the Finance Committee staff has discussed these problems with Treasury and has attempted to get changes made, but we have seen no changes made.

In addition, the Department of Labor has been delegated (under ERISA) with the responsibility for promulgating regulations on valuation of stock for closely held corporations. Four years after the enactment of ERISA, valuation regulations have not yet been issued. These are important regulations for ESOP's and will serve to protect the interests of employees.

Our written statement also includes a number of other suggestions and cites a number of other problems. We will continue our discussions with the staff to help work out these problems and seek solutions. We certainly thank the committee for its past support of ESOP's and urge you to favorably consider future legislation which will help the ESOP concept.

Thank you.

The CHAIRMAN. Thank you very much, Mr. Ludwig. The fact that the program, the employees' stock ownership program, has been able to survive the bureaucracy in the Department of Treasury and the Labor Department speaks well for the program. It takes a really meritorious program to survive all the bureaucracy in those two departments.

Mr. LUDWIG. Senator Long, both the IRS and the Department of Labor have continually talked about the possible abuses of ESOP's. The problem is that they have done nothing to deal directly with such abuses. We have made a number of suggestions to try to prevent abuses. One, in particular. is a procedure whereby the IRS would issue advance rulings on ESOP transactions before they take place. They would review the terms of the proposed transaction, including the valuation of the company stock if it is not publicly traded and any terms of the loan that are used to finance the purchase of this stock, after review, IRS would rule in advance that the proposed transaction complies with the rules of ERISA.

The present attitude of the IRS is to tell companies:

We cannot help you in advance. Go ahead and enter into your transactions. Of course, if the transaction is improper, we will come back after the fact and we will impose penalties and create liability for the fiduciaries of the plan.

I think this is grossly unfair. The only way to properly deal with abuses is for the IRS to create a procedure whereby the facts can be presented in advance. IRS and all the parties to the transaction can review it in advance to assure that the interests of the employees are protected and that the provisions of ERISA are complied with.

The CHAIRMAN. The Treasury and the Labor Department, in that regard, make me think of a mother who is so protective of her daughter that she insists on going along everytime the young lady goes on a date. Any young lady who had that much protection would have quite a difficulty to acquire a spouse who had any initiative, and it seems to me that perhaps we could help solve some of that by ourselves making the commitment that just, in the event somebody does abuse the ESOP program, that we will tax him retroactively, so that they need not

worry.

To me, it is really a shame that these agencies-I guess with good intentions have done so much to delay and impede a program that has so much to offer for the economy and for the workers of this company. Mr. LUDWIG. Senator, I think that the agencies do not fully understand the intent of the Finance Committee and the Congress in promoting the ESOP concept, I think that the agencies would prefer that ESOP's would go away so that they will not have to deal with them. We know that 2 years ago the agencies were told what the intent of Congress is, and that ESOP's are to be promoted. The Congress has shown a great deal of evidence that it intends to promote the ESOP concept. It is about time for the agencies to listen to Congress, not impede ESOP's, and not smother them, but to promote them, to promote the proper use of ESOP's and to provide the guidance that the companies need in order to properly operate their ESOP's.

We just have not seen it happen.

The CHAIRMAN. Senator Gravel?

Senator GRAVEL. I have no questions.

I appreciate the fine testimony and echo the views of the chairman. We have to keep pushing the bureaucracy to act on this issue and that is all the more reason why we have to get another law on the books. The CHAIRMAN. Thank you very much, Mr. Ludwig. [The prepared statement of Mr. Ludwig follows:]

STATEMENT OF RONALD L. LUDWIG, COUNSEL, EMLOYEE STOCK OWNERSHIP COUNCIL OF AMERICA

INTRODUCTORY REMARKS

The Employee Stock Ownership Council of America ("ESOP Council") welcomes the opportunity to present testimony at the ESOP hearings. We wish to express our gratitude to the Senate Committee on Finance, and to Chairman Long in particular, for the past support of the ESOP concept. The past five years have resulted in major improvements in ESOP legislation and the adoption of new ESOPS by hundreds of companies. The ESOP Council believes, however, that the time has come for the Congress to take steps which will greatly expand the use of ESOPS by thousands of companies. The Expanded Employee Stock Ownership Act (S. 3241) introduced by Senator Long is an important step in the right direction.

The ESOP Council was organized last year as the first national association for ESOP companies. We have had a successful first year of operations, and we are adding new members daily to a membership which is now approximately 250, and includes several of the largest U.S. corporations. We believe that the ESOP Council is the only broad-based organization which serves to represent the interests of ESOP companies and their employees. A copy of our Statement of Purposes is attached to our written testimony.

The ESOP Council serves as a forum for the exchange of ideas among ESOP companies and as a national clearinghouse for ESOP information. We provide assistance to our members in effectively managing their ESOPS and in communi

cating the benefits of the ESOP to their employees. We have also sponsored several ESOP studies in order to provide some qualitative and quantitative measures of the successful operation of ESOPs. Our First Annual Meeting, held in Los Angeles in May, was most successful and proved to be invaluable to the 140 attendees. We wish to thank Chairman Long for his participation in that meeting, through a filmed talk and through his sending a Finance Committee staff member to speak in person.

We believe that the ESOP Council has an important role in serving as a voice in Washington for ESOP companies. We have been privileged to provide assistance to the Finance Committee staff in the development of S. 3241 and in other matters relating to ESOP. We have also monitored other legislation effecting ESOPs, as well as actions of the Federal agencies which relate to ESOPs. We believe that ESOPS have been well-received by companies throughout the country. We are aware, however, of various actions (and inaction) by government agencies which adversely affect ESOPs. Our testimony will address itself to the need for additional ESOP legislation, not only to provide additional incentives for companies to provide ownership-sharing for their employees, but also to resolve certain problem areas created by past ESOP legislation and by actions of the agencies. We strongly support the statement of Congressional intent relating to ESOPS which was included in Section 803 (h) of the 1976 Tax Reform Act and urge the Congress to enact additional legislation to implement a national policy of broadened stock ownership through ESOPS and similar vehicles.

General

COMMENTS ON S. 3241

The ESOP Council strongly endorses the "Expanded Employee Stock Ownership Act of 1978" introduced by Chairman Long on June 23, 1978, as a means of implementing national policy regarding employee ownership. We were pleased to work with the staff of the Committee on Finance over several months to assist in the development of the provisions for S. 3241. We believe that the enactment of the Act would, for the first time, result in a statutory framework whereby ESOPS would be adopted by thousands of corporations, and millions of employees would be provided with the opportunity for sharing in the ownership of their employers. In addition, S. 3241 contains provisions which correct various ESOP problems under existing law.

The existing provisions of the Internal Revenue Code and the Tax Reduction Act of 1975 provide some tax incentives for the adoption of ESOPs. However, existing law has not yet resulted in the widespread implementation of ESOPS. We strongly urge the Congress to enact the provisions of S. 3241 in order to create incentives for hundreds of thousands of corporations to establish new ESOPS which will enable millions of new workers to share in ownership. We believe that the modest additional incentives under S. 3241 should go a long way toward accomplishing this objective. In addition, the provisions of S. 3241 would solve certain problems for ESOPs which the Internal Revenue Service has been unwilling to resolve.

Labor-Intensive ESOP

The provisions of Section 301(d) of the Tax Reduction Act of 1975 provided for an additional 1% investment tax credit for contributions to a tax credit ESOP (commonly called the "TRASOP"). Experience over the past three years has shown, however, that TRASOPS have largely been adopted only by the relatively small number of corporations which generate a substantial investment tax credit. Those companies which are not capital intensive have been unable to take advantage of the opportunity to establish a TRASOP.

S. 3241 creates an alternative to the additional investment credit, by permitting an ESOP to be established based upon a tax credit of 1% of covered payroll. This modest tax credit will accomplish the objective of prior ESOP legislation, by extending the availability of tax credit ESOPs to those companies which are labor intensive. The ESOP Council strongly endorses these provisions and believes that the objective of broadening capital ownership among all workers far outweighs any potential revenue loss resulting from this new tax credit.

Investment Tax Credit ESOP

The ESOP Council strongly endorses the provision of S. 3241 which increases the additional investment tax credit for ESOPS to 2%. In many cases, the existing 1% additional investment credit does not result in a meaningful benefit to