Compliance August 25, 2005

IRS Releases ESOP Deductions Proposals

August 25, 2005 (PLANSPONSOR.com) - The Internal Revenue Service (IRS) has proposed regulations to clarify several issues involving deductions for dividends on employer securities held in employee stock ownership plans (ESOP).
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Among other holdings,  the IRS notice issued Wednesday specifies which corporation is entitled to 404(k) dividend deductions and also asserts that payment in redemption of employer securities held by an ESOP is not deductible.

According to REG-133578-05, one purpose of the proposed rules is to specify the belief of the IRS and US Treasury Department that the corporation actually paying the dividends on stock held in the ESOP is entitled to the 404(k) deduction. This is true, the IRS document states, “regardless of whether the employees of multiple corporations benefit under the ESOP and regardless of whether another member of the controlled group maintains the ESOP.”

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On the issue of whether payments in redemption of stock held in an ESOP are deductible, the IRS document said that its legal interpretation held that such deductions were not valid.

The IRS document also includes:

  • provisions under Section 404(k) that confirm that payments made to reacquire stock held by an ESOP are not deductible under Section 404(k) because such payments do not constitute applicable dividends under Section 404(k)(2) and a deduction for such payments would constitute, in substance, an avoidance or evasion of taxation within the meaning of section 404(k)(5)
  • provisions under Section 162(k) that provide that Section 162(k), subject to certain exceptions, disallows any deduction for amounts paid or incurred by a corporation in connection with the reacquisition of its stock or the stock of any related person (as defined in Section 465(b)(3)(C)).
Benefits August 24, 2005

NLRB Upholds Employer's Ban On Employee Socializing

August 24, 2005 (PLANSPONSOR.com) - The National Labor Relations Board (NLRB) has ruled with a company which has a policy directing employees not to "…fraternize on or off duty, date, or become overly friendly with the client's employees or with co-employees."
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The Desert Sun reports that Daniel Higgins, a security guard for Guardsmark LLC, was subjected to a shift change after a supervisor at a San Francisco hotel claimed “he was leaving his post unattended and becoming too friendly with some of the other employees.” The ruling has created controversy similar to the one early this year surrounding Weyco’s policy banning employees from smoking during work or private time (See Lawyers Smolder over MI Firm’s No-Smoking Policy ).

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Locals interviewed by The Desert Sun mostly complained that not allowing socializing between coworkers would affect the friendliness and teamwork attitude at the workplace. Antonio Ruiz, a lawyer for Service Employees International Union, Local 24/7, feels the rule is another “Big Brother” step in the workplace.

But also at issue, Ruiz says, is the union’s position that this policy goes against workers right to organize.

In a BLR.com report, Guardsmark says the policy is necessary for business since “A security officer who is overly familiar with a fellow security officer or a client’s employee may overlook signals that, if detected, could be instrumental in preventing workplace violence.”

The ruling is under appeal in a US District Court in Washington D.C.

The NLRB ruling can be found here .

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