The federal government should encourage foreign corporations to offer employee stock ownership plans for U.S. employees.

Joe Marx, a consultant at Principal Financial Group Inc., Des Moines, Iowa, and a representative for the American Benefits Council, Washington, made that argument here today at a hearing convened by the U.S. Treasury Department and the Internal Revenue Service.

The hearing dealt with the agencies’ proposed interpretation of Internal Revenue Code Section 404(k).

Marx recommended that the regulation say that an employer, not the parent company, is entitled to the ESOP dividend deduction.

“This treatment would be consistent with fundamental principals of tax law and other interpretations of the Internal Revenue Code that treat the employer as the party entitled to a deduction for payments made by a related third party,” Marx testified.

Marx also recommended that officials change a section in the proposed regulation that might keep foreign companies with U.S. operations from offering ESOPs to U.S. employees.

“By denying the tax deduction to American employers with a foreign parent, the regulations, as proposed, would strongly discourage these companies from establishing or maintaining an ESOP,” Marx said. “Not only would this harm American employees, it contradicts the expressed intent of Congress: to encourage employers to establish ESOPs.”

The proposed treatment of foreign corporations is unfair, Marx added.

“It treats domestic companies that have a foreign parent less favorably than domestic companies that have a domestic parent,” Marx said. “Companies with a domestic parent generally can file consolidated returns to benefit from the deduction.”