S ESOPs Create More Revenue for the Treasury, Price Protection PLR

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S ESOPs Create More Revenue for the Treasury, Price Protection PLR

Posted by Aaron Juckett on Wed, Aug 06, 2008

The July 31, 2008 Employee Ownership Update is online and discusses the following:

University of Pennsylvania Paper Finds S Corporation ESOPs Help Employees, Employers, and Taxpayers
IRS Allows Price Protection for S Corporation ESOPs
IRS/Treasury Release Proposed ESPP and Incentive Stock Option Regulations
New FASB Staff Position on Dividends or Dividend Equivalents in Share Plans
Are You an Inner City 100 Company?
Ownership Thinking Conference September 18 and 19

The Update discusses how a recent study of S Corp ESOP Legislation Benefits and Costs found that S ESOPs are a net gain for taxpayers:

The increased performance of ESOP companies, plus the fact that foregone taxes on earnings are ultimately paid by employees when they start to take benefits out some time after termination, mean that S ESOPs are a net gain for taxpayers. In addition, when employees do pay tax on their distributions, they pay on the basis of (generally) appreciated stock, with part of that appreciation due to the company's ability not to pay taxes in the interim. Given assumptions about their tax rates, the authors conclude that, on balance, the Treasury is likely to end up with more revenue this way than if the income was taxed earlier.
The Update also discusses private letter ruling (PLR) 200827008 and the reason that ESOP companies enter into a Price Protection/Floor Price Agreements:

Many ESOP companies have multiple ESOP transactions. In some companies, after the first purchase of shares, often 30% to 50%, a second transaction is done to buy more shares. Other companies that are 100% ESOP-owned do additional leveraged transactions to acquire other companies. In either case, the new debt taken on can lower the price of the shares already in the plan. To deal with this, many ESOP companies offer some kind of price protection for existing participants. Sometimes that is limited to people over a certain age and/or to people getting distributions in the next x number of years. A floor price is set, and the company makes up the difference, if any, when the distribution is made.

It also discusses IRS Treasury Regulation - REG–106251–08 - Employee Stock Purchase Plans Under Internal Revenue Code Section 423 and FASB Staff Position (No. EITF 03-6-1), Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities.

Tags: Studies and Statistics, ESOP, employee stock ownership plan, rules and regulations

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