Moving to the Offense. Touchdown for ESOPs on the Horizon?

Please note, the following article originally ran as the Washington Report column in the August 2015 issue of the ESOP Report, the newsletter of The ESOP Association.

In the first decade or so of the 21st Century, after the perfection of the S ESOP law — which was being abused by one and two person 100% S ESOPs — at the turn of the Century, the general mantra of the Association’s government relation’s message has been: “The best defense is a good offense.” In non-sports terms, the thinking is that when a cause has many members of Congress especially, on key Congressional Committees expressing support for specific laws by openly co-sponsoring proposals to expand those laws, cynics about the specific laws are not likely to “win” their efforts to cut back those laws.

Whether we like it or not, there are still men and women in key policy positions among Congressional offices, and among Executive Branch agencies, that see ESOPs as a waste of tax payer money, as bad retirement savings plans due to lack of asset diversification, and as not real ownership. If these people had a chance, which they would if fewer members of Congress openly supported ESOPs, they would maneuver to severely diminish, or to even eliminate laws to encourage creation and operation of ESOP companies.

Since 1990, they have had no time when a movement to cutback or eliminate pro-ESOP laws appeared; why, because on the advice of former super ESOP champion former Congressman Beryl Anthony, the ESOP community has put forth modest, but meaningful pro-ESOP proposals to expand ESOPs. This defense is the best offense strategy led to the passage of the pro-ESOP S ESOP law in 1996, perfected in 1997, and protected in 2001 from attack.

In this 1990 to 2000 time frame, over 100 members of Congress stood up and publicly proclaimed, “I am for ESOPs!” (More comments about this later in this report.)

Now we have, just after a few months post introduction of S. 1212, and H.R. 2096, 23 Senators and 33 members of the House saying, expand ESOP law. These bills, formally titled “Promotion and Expansion of Private Employee Ownership Act of 2015” have a very positive statement of reasons for encouraging ESOPs as an introduction and three similar sections, with the House bill, H.R. 2096, having an additional fourth provision. The section that has garnered the most attention is to permit sellers of S stock to an ESOP to take advantage of IRC 1042 for deferral of gain of the sellers proceeds. (If law, this provision would trigger a substantial increase in the number of S corporations that hold 30% of the company’s stock, but not 100%.). See http://www.esopassociation.org/advocate/advocacy-kit to read all provisions.

Last Congress, support for the House version of H.R. 2096 was a factor that recommendations to eliminate special tax rules in the tax reform proposal developed by former Ways and Means Chair Dave Camp (R-MI) kept all positive rules for ESOPs untouched.

Now, this Congress, in this year, the Senate Finance Committee created task forces to study specific areas of the income tax laws, and the task force reviewing ERISA laws did not just propose that the Senate keep current ESOP tax laws, but encouraged the enactment of S. 1212. In other words, the task force was saying, “Let’s not stand pat for ESOPs; let’s have more ESOPs.”

Then on July 29, the Senate Small Business Committee released a proposal to change tax laws impacting small business that included S. 1212, as Title IV of its proposal.

Bottom line, if the ESOP community remains active, focused, and persistent, in getting more members of Congress, House and Senate, to openly support S. 1212 and H.R. 2096, it is doable, probably not this year, a little more likely next year, but really a possibility after 2016, to once again expand ESOPs, which are good for America, good for the communities where ESOP companies are located, and good for companies with ESOPs, and good for employees.

Number one, have your member of Congress see first-hand your ESOP company to learn what being “ESOP” means; and then politely ask, join your colleagues, Democrats and Republicans, liberal and conservative, and make our nation become more capitalistic, with more ownership by more employees. Sounds like big talk? Yes, and doable.

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