STATEMENT OF THE AMERICAN GAS ASSOCIATION On behalf of the American Gas Association and its 300 member natural gas transmission and distribution companies, the following written statement is submitted for the record in support of the Expanded Employee Stock Ownership Act of 1978 (S. 3241). A.G.A. is the national trade association for that portion of the gas industry which delivers natural gas from producers to final end-users. Approximately 43 million homes, businesses, and industrial facilities in all 50 states are served with natural gas. The distribution company members of the Association serve 93% of these customers. A recent study conducted in April, 1977 sponsored by the A.G.A. Gas Industry Finance Committee indicated that 49 A.G.A. member companies out of 119 surveyed had established an Employee Stock Ownership Plan (ESOP) under the Tax Reduction Act of 1975. Of those 49 plans, 35 provided for participation in the plan by all employees, and 15 of the 49 indicated plans to provide for matching contributions by employees beginning in 1977 (the additional one-half percent investment tax credit). Regarding stock issued under the ESOP, 23 companies used "outstanding stock issues and 27 used stock authorized, but not previously issued. Since the April, 1977 survey, many more plans have been implemented and more are under consideration within the gas industry. There is also greater use of unissued stock. The equity which has accrued on an annual basis to gas industry employees through these plans has grown significantly. The revisions in current law offered under S. 3241 are expected to expand that ownership further. For this reason, the gas industry endorses S. 3241 as an appropriate measure to expand the use of ESOPS and extend their benefits to additional corporate employees. This is an important consideration at a time when the gas industry faces massive capital formation requirements within the next decades to finance necessary supplemental gas supply projects, such as LNG, coal gasification and the Alaska pipeline. The increased credit based on investment will expand em. ployee ownership while providing an important source of capital for meeting these capital requirements that the gas industry faces. A.G.A. wishes to offer the following specific comments on S. 3241 for the Committee's consideration: A.G.A. strongly supports the 2 percent employee contribution provisions which should remove the source of substantial administrative problems for ESOPs. A.G.A. strongly favors abolition of the 2 percent employee contribution provisions which should remove the source of substantial administrative problems for ESOPs. A.G.A. urges the Committee to ensure that the new rules under S. 3241 conform to existing requirements under Section 401 of the Internal Revenue Code. A.G.A. also recommends that the legislation and the legislative history be sufficently specific so that the Treasury/IRS cannot limit the expression of Congressional intent regarding ESOPS by implementing regulations. PERMANENT INCREASE IN THE CREDIT BASED ON INVESTMENT The increase in the credit based on investment to 2 percent will provide a strong incentive making ESOPS more attractive to American corporations. S. 3241 also takes a major step to broaden employee ownership of stock in labor-intensive corporations by providing an alternative investment tax credit based on company payroll. This provides additional flexibility and broadens the appeal of ESOPS to labor-intensive as well as capital-intensive industries. A.G.A. also emphasizes that the increase in the credit to 2 percent must be made permanent. For the additional investment credit for ESOPs to achieve maximum effect, it must be made a permanent part of the tax laws to provide a stable environment for American industry and the financial community to plan and carry out capital expenditure programs that may be partially financed by ESOPS. One of the inhibiting factors in estbalishing ESOPS in the past has been the limited life for these plans under current law. ABOLITION OF ONE-HALF PERCENT EMPLOYEE CONTRIBUTION PROVISIONS A.G.A. also urges this Committee to abolish the one-half percent employee contribution provisions for ESOPS enacted in the Tax Reform Act of 1976. This would remove a source of substantial administrative problems and would effectively ensure that maximum advantage can be taken of the ESOP. The Com mittee should also consider permitting the company to refund prior employee contributions made under these provisions. This would remove many of the past problems associated with the one-half percent employee contribution provisions and contribute towards simpler administration of the ESOP. CONFORMING REQUIREMENTS UNDER SECTION 401 Finally, the Committee should take steps to ensure that the new rules enacted under S. 3241 conform to existing requirements under Section 401 of the IRC governing qualified pension, profit sharing, and stock bonus plans. The tax consequences of a non-qualified plan vary from those of a qualified plan. Considerable problems have occurred in the past regarding when a plan had to be in effect in order to qualify under Section 401. Ensuring conformity with Section 401 would effectively assure minimal disruption of ESOPS currently in effect. Also, the history of Treasury/IRS regulations to implement the ESOP provi sions of the Tax Reduction Act of 1975 and the Tax Reform Act of 1976 reflects a serious limitation of Congressional intent involving broad ownership of company stock by employees through ESOPs. In an effort to avoid this problem, as this Committee considers S. 3241, A.G.A. respectfully urges that the legislation be sufficiently specific to ensure that the Treasury/IRS cannot limit the expression of Congressional intent regarding ESOPs by its implementing regulations. In the alternative, the legislative history of this bill should express the Committee's dissatisfaction with prior regulations governing ESOPS and urge the Treasury/IRS to develop and interpret regulations governing ESOPS in a non-restrictive manner. CONCLUSION The gas industry strongly supports the ESOP concept and current efforts before this Committee to expand and broaden the appeal of the ESOP. We thank this Committee for the opportunity to submit this written statement for the record, and would be pleased to provide any additional information this Committee may require. STATEMENT OF RICHARD M. RASHMAN, TRUST COUNSEL, UNION BANK, LOS ANGELES, CALIF. Mr. Chairman and members of the committee: I am Trust Counsel for Union Bank, a California Bank which has been one of the leading trustees of ESOPs for a number of years. In fact, Union Bank may still be the only major commercial bank which is active in the ESOT field. We maintain a strong interest in ESOTS and have seen a great many successful plans established. Therefore, we support and commend your efforts to promote ESOTS and to expand employer stock ownership. We believe that your new proposals would go far toward encouraging a number of substantial companies to adopt these plans. Beyond supporting current legislation to encourage new ESOTS, we would like to comment on ways to deal with current problems with existing ESOPs. Our greatest concern is not just interference from agencies regulating ESOPs, or a need for higher benefits, but rather the general uncertainty which pervades this field. As long as companies and fiduciaries are unsure of the law governing these plans and of the risks incumbent with adopting them, it is difficult to expand their use regardless of the benefits. We would like to cite some specific areas as examples of where further guidance would be helpful. This could be in the form of additional statute, committee report or regulation. As a background, let me say a few words first about Union Bank's own ESOT policies and our view of the law in this area. First, we are unsure of the type of prudency test to be applied to ESOTs under ERISA, but we assume that some form of prudency test is mandated. Thus, we have a special committee of top trust division officers from the legal, investment, employee benefit and general trust management areas which review our ESOTS on a continuing basis to evaluate the prudency of investing in company stock. Aside from fulfilling our own fiduciary responsibility, we believe that this kind of extensive, continuing and independent review provides an important level of protection to the company and other fiduciaries. Second, we are concerned about the type of financial information that can be relied on in making these financial judgments. To be sure we can adequately meet our responsibility, we have decided to only trustee ESOTS for companies that provide certified financial statements. Third, we believe that the most critical decision is that of company stock price. In addition to requiring an inde pendent valuation of company stock, we subject the valuation to a review by a second independent valuation firm at our own expense. Fourth, we have closely followed the emerging discussion of federal securities laws as they relate to ESOTS and pay particular attention to issues raised by registration, proposed SEC Rule 13(e) (2) and Rule 144. In light of this discussion, we would suggest that a first important area requiring more guidance is company stock investment. Most would agree that the prudency test as applied to ESOPS is unclear. Beyond this, there are serious questions of what a fiduciary should do if it believes that company stock investment is imprudent. Stock sales or failure to invest in stock may contradict the terms of the plan and trust and subject the trustee to state law damages. The trustee may have investment discretion but be required by the trust to hold stock. Or, the trustee may be directed to buy and hold stock by a committee. What is a trustee to do? Should he resign, go to court to force a change in the trust or committee directions, inform the Internal Revenue Service, or just inform the company of its conclusions. In the absence of further federal guidance on such questions, we feel that the law in this area will be established by a cross pattern of state and federal court decisions which may only further confuse the problem and drive more companies and fiduciaries away from ESOTS. Second, the application of federal securities laws is a growing concern for all fiducaries and ESOT companies. Rather than let these many questions be answered piece-meal, if at all, through SEC and judicial deliberations, it would make more sense for the Congress to take a hard look at this problem and make a decision about what restrictions and requirements should be applied to ESOPS and pension plans in general. One answer is that pension plans be exempted from the securities laws with a overlay of additional pension law requirements if necessary to prevent abuses. If the current securities aws were technically and fully applied to ESOPS by the SEC, there seems little question but that ESOPS would become a practical impossibility. Further, we must pay increased attention to the application of state securities laws, assuming they will not be preempted by ERISA. Back in California, the Department of Corporations is currently considering regulations subjecting ESOPs to stock permit requirements which would make it very difficult for California ESOTs to continue. Third, we believe that more guidance should be given on the question of conversions. Current IRS regulations suggest that conversions of assets of prior plans are allowable, although they must still be subjected to fiduciary considerations. At Union Bank we will not allow conversions unless each employee can elect whether his individual account should be converted. This is because of the fiduciary questions involved and because of our belief that an employee's interest in a diversified plan should not be mandatorily converted to company stock. However, since such elections might mandate a federal securities law registration, it becomes impractical for most companies to undergo new types of conversion under our policy. We believe the Congress, should make a determination as to whether conversions are or are not to be allowed. Either they should be prohibited altogether or, alternatively, the umbrella of fiduciary risk should be removed and they should be specifically authorized so that the filduciaries can proceed. As a final comment, we would like to point to the problem of dealing with public companies where stock is thinly traded. There is a real question in such cases of whether fiduciaries should use the market price, an independent valuation, or some other device to determine fair market value. Perhaps the best means of establishing value in these cases would be "reverse tender offers" where the trustee invites bids from prospective sellers. The trustee can then proceed to buy up its needed shares beginning with the lowest prices tendered so that this reverse tender offer establishes a true market place. However, in the cases where we have expressed interest in such a procedure the SEC has not allowed it. Thus, we must struggle along and make an imperfect choice between a thinly and perhaps a questionable market versus an independent valuable which might differ from the actual market price. Mr. Chairman, let me thank you again for this opportunity to testify and to express some of our concerns and proposals. Union Bank expects to continue its active involvement with ESOTS and certainly appreciates your strong interest and assistance in the field. TRW, INC., Cleveland, Ohio, August 15, 1978. Hon. RUSSELL B. LONG, Washington, D.C. DEAR SENATOR LONG: TRW wholeheartedly endorses your bill, S. 3241, "Expanded Employee Stock Ownership Act of 1978", as a means of enabling additional corporations to implement an ESOP for the benefit of employees. We particularly support the provisions which will allow labor intensive corporations, such as TRW, to determine its ESOP contributions based on participants' compensation, as we have been unable to develop a meaningful plan for our employees based on the investment tax credit. We have one suggestion, which we believe would further enhance the possibility of corporations such as ours adopting ESOPs. We urge you to modify the requirement that one half of the securities which are transferred to an ESOP must be stock not previously issued. We suggest that in place of this requirement, publicly traded corporations be allowed to either transfer unissued stock to an ESOP or to contribute cash which will be used by the ESOP trustee to purchase stock on the open market. We would be glad to discuss our endorsement and comments on the bill with you or a member of your staff. TRW also intends to inform other members of Congress and other interested employers of our support for your bill. Sincerely yours, J. E. DUNLAP, STATEMENT OF GEORGE A. STRICHMAN, CHAIRMAN, COMMITTEE TO REFORM DOUBLE TAXATION OF INVESTMENT This statement is submitted on behalf of the COMMITTEE TO REFORM DOUBLE TAXATION OF INVESTMENT, an organization of over 830 corporate members (representing over 31 million shareholders) and 10,000 individual members. In addition, 8,000 other interested persons participate in the Committee's informational services. We commend Chairman Long for his commitment to the concept of Employee Stock Ownership Plans (ESOPs). We believe the hearings of the Senate Finance Committee on the subject can contribute significantly to the improvement of Federal tax laws as they affect the organization and viable operation of such plans. I strongly advocate the ESOP concept and urge, as a matter of practical desirability, the increase now of from one to two percent. The objective of our Committee is to support the phase-out of the present inequitable and economically burdensome double taxation of corporate earnings, and I take this opportunity to point out the significant relationship between employee stock ownership and double tax relief. Chairman Long's bill to stimulate the creation of ESOPS recognizes this relationship. In addition to the features designed to facilitate the acquisition of stock by employees, it proposes to allow ESOP corporations to deduct dividend payments made to employee shareholders, pursuant to Section 416 (a) (9) of the Tax Code. This would effectively eliminate the double tax with respect to ESOP-qualified, employee-owned securities. This obviously would make the prospect of stock ownership much more attractive in terms of the company's after-tax earnings. But to alleviate the double tax inequity for only one type of ownership would result in the creation of a "previleged" corporate class with ongoing competitive advantages over other businesses in their field. The only other for-profit corporations which now escape double taxation are those organized under Subchapter S. The severe limitations of Subchapter S and its potential adverse impacts on shareholders generally have limited its application to very small, individuallyowned or family-owned corporations. ESOP, however, is intended to apply to corporations of any size . . . some of which will have a significant share of the market for their products. To grant a benefit not available to competitors would be contrary to the concept of tax equity. Other incentives in Chairman Long's bill are more directly related to the establishment of ESOP's. These are: The two percent additional investment credit which the corporation is to contribute to the employee stock ownership fund, the elimination of the employees' matching contribution requirements, the extension of the tax credit to labor-intensive businesses, and improvements in treatment of employee retirement benefits. The across-the-board elimination of the double tax would undoubtedly encourage broader interest in stock ownership plans. Certainly, it would be more beneficial to our economy as a whole and more equitable if needed relief from double taxation were extended to all corporate ownerships. Many studies by economists and tax experts-some of them commissioned by our Committee-have demonstrated that the double tax is both inequitable and economically inefficient. Its repeal is justified on those grounds and on the basis that it would constitute a significant step toward ensuring the future economic prospects of all productive elements of our economy. These studies indicate that even a phase-in elimination of the double tax would substantially increase GNP, business and personal savings, business investment, real personal income, and employment. Initial revenue losses would be offset in later years by revenue gains resulting from increased business and investment activities. Virtually every other industrialized nation has recognized these benefits and has incorporated double tax reduction or elimination into its tax system. Finally, we believe that the ultimate success of employee-owned corporations is contingent upon the same economic management factors as publicly-held or closely-held corporations. These factors are: The overall vitality of the U.S. economy, the maintenance of a strong competitive marketplace, the stimulation of capital formation, and the wise use of such capital to improve productivity and innovation. Of one or more of these factors is missing, we all lose. The Committee to Reform Double Taxation of Investment urges, therefore, that Congress take steps to alleviate the stifling burden of double taxation on all for-profit corporations. We believe that such action, along with provisions specifically designed to make possible the acquisition of stock by employees, would better stimulate the development of ESOP's and would make their future more secure by creating a better economic climate in which to grow and prosper. We support the improvement of the Employee Stock Ownership Plans which is contained in the Chairman's bill as a proposal worthwhile of enactment now but would strongly urge its strengthening by full elimination of double taxation of corporate dividends with respect to ESOP and non-ESOP companies. Mr. MICHAEL STERN, Staff Director, Committee on Finance, AMTROL, INC., West Warwick, R.I., August 10, 1978. DEAR MR. STERN: It was interesting to note that hearings were held on Wednesday, July 19, and Thursday, July 20, 1978, relative to Employee Stock Ownership Plans (ESOP). Our ESOP was adopted in 1975, and since our experience has been positive over the last three years, we wish to submit written testimony for the Committee record. Enclosed you will find a packet of material (5 sets) which contain the following: 1. Memorandum from the individual in our company who coordinates the personal annual meeting with all employees and supervises and directs our entire employee benefit package (M .E. F. Almon). 2. A memorandum which outlines the retirees and distribution of AMTROL stock for the years 1975-76-77. 3. A representative individual account report which is submitted to each employee on an annual basis during their personal interview. 4. A copy of the AMTROL ESOP pamphlet which is distributed to each new employee. 5. An AMTROL Employee Financial Report, a copy of which is mailed to the employee's home annually. This report is prepared especially for our ESOP participants. |