Pro-ESOP Legislation

With the introduction of H.R. 2096 and S. 1212, we’ve shared a lot legislative information in the past few weeks. Following up on those efforts, we thought we would share the Washington Report column from the May 2015 ESOP Report, the newsletter of The ESOP Association, that provides additional information. More information about the ESOP Report is here.

As in past Congresses since 1990, key ESOP champions have introduced bills that would encourage the creation and operation of private company ESOPs.

First, on April 29, 2015, Congressman David Reichert (R-WA, 8th District), introduced H.R. 2096, Promotion and Expansion of Private Employee Ownership Act of 2015, joined by seven other members of the House tax committee, so that the eight original sponsor and co-sponsors were four Republicans and four Democrats — a sign of the continued bi-partisan support for employee stock ownership through the ESOP model. His three Republican colleagues were Representatives Charles Boustany (R-LA, 3rd District), Erik Paulsen (R-MN, 3rd District), and Pat Tiberi (R-OH, 12th District). The four Democrats joining their tax committee colleagues were Representatives Earl Blumenauer (D-OR, 3rd District), Bill Pascrell (D-NJ, 9th District), Ron Kind (D-WI, 3rd District), and Richard Neal (D-MA, 1st District). (When the Democrats were the majority in the House, Representative Kind was the so-called “lead” sponsor.)

Similar legislation was introduced eight years ago.

It has four provisions: 1. To permit sellers of S stock to an ESOP to utilize Internal Revenue Code Section 1042, as sellers of C stock to an ESOP can do, if the stock is not publicly traded; 2. Provide that a lender to an ESOP may exclude 50% of its interest income from the loan if the loan is to an S corporation, and the ESOP holds 50% or more of the shares at the close of the transaction; 3. Establishes an office in the Department of Treasury to assist S corporations establish and maintain its ESOP in accordance with the sometimes difficult laws governing allocations of ESOP stock in an S corporation; and 4. Ensure that a small business that qualifies for a Small Business Administration preference — so-called 8A preference does not lose that preference if it becomes 50% or more owned by an ESOP.

Since introduction on April 29th, the following members of Congress have joined these eight: Representatives Brad Ashford (D-NE, 2nd District), Robert Dold (R-IL, 10th District), and Gwen Moore (D-WI, 4th District).

The Senate legislation was introduced on May 6th, S. 1212, and the primary sponsor, Senator Ben Cardin (D-MD), was joined on May 6 by 12 other Senate colleagues: Senators Pat Roberts (R-KS), Sheldon Whitehouse (D-RI), Mike Crapo (R-ID), John Thune (R-SD), Al Franken (D-MN), Debbie Stabenow (D-MI), Heidi Heitkamp (D-ND), Patrick Leahy (D-VT), Roy Blunt (R-MO), James Risch (R-ID), Kelly Ayotte (R-NH), Susan Collins (R-ME), and Amy Klobuchar (D-MN). On May 11th, Senator Tammy Baldwin (D-WI) joined the group of bi-partisan Senators. On May 14th, Bernie Sanders (I-VT) joined as a co-sponsor. On May 18th, Senators Mark Kirk (R-IL) and Angus King, Jr. (I-ME) joined as co-sponsors.

Senator Cardin has led the introduction of this pro-ESOP bill for the past eight years.

WHY CARE?: Some ESOP advocate may wonder why they should care, as it seems one, the Congress is doing nothing, and two, these pro-ESOP provisions have never been given a hearing or serious consideration in any prior tax bill in the past eight years.

Two big reasons: Congress will sooner or later, maybe this year, maybe three to four years from now, send a massive tax reform bill to the President, whoever he or she may be. To protect ESOPs, to win in the tax reform effort, the best defense is a good offense. Having these men and women sponsor a pro-ESOP position, many on the tax committees that will write a tax bill repealing or reducing many special tax rules, stand up for ESOPs, and for having more ESOPs, means that they are much more likely to be “for” good ESOP laws when they are challenged in the tax reform review.

Secondly, the major pro-ESOP provision adopted in the last 20 years was first introduced in a bill like H.R. 2096 and S. 1212 eight years before Congress adopted legislation permitting S corporations to have an ESOP. In other words, it took over eight years for the 1990 S ESOP proposal to finally be adopted by the Congress and sent to the President. It is not farfetched as more and more women and men in Congress endorse something like having S corporations eligible for 1042 treatment to make its way into a big tax bill as the support grows.

To Do List: Consider contacting your Senators and Representatives if they are not listed above, and respectfully ask that they get on the bandwagon for ESOPs.

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