Positive ESOP Legislation and Remaining Vigilant

There has been a lot of positive ESOP legislation introduced in the 111th United States Congress:

• S. 2914: United States Employee Ownership Bank Act
  
• S. 2909: WORK Act
  
• H. Con. Res. 204: Expressing continued support for employee stock ownership plans
  
• H.R. 3586: S Corporation ESOP Promotion and Expansion Act of 2009
  
• S. 1612: Employee Stock Ownership Plan Promotion and Improvement Act of 2009
  
• H.R. 692: To amend the Internal Revenue Code of 1986 to exclude from gross income compensation received by employees consisting of qualified distributions of employer stock

While the ESOP community certainly deserves to be proud of their hard work in Meeting with their Congressional Representatives and Visiting with their Elected Representatives in Washington DC, everyone should continue to be aware of some of the recent proposed ESOP cuts:

• The Bush Administration Presidential Panel on Federal Tax Reform proposed replacing the current retirement plan structure with Employee Retirement Savings Accounts (ERSAs). The original proposal did not specifically address ESOPs. The proposed 2008 version clarified that it did not include ESOPs, but many questions were unanswered. (February 2007).
  
• The Congressional Budget Office (CBO) recommended Repealing 404(k). (February 2007)
  
• A Treasury Conference on Business Taxation and Global Competitiveness proposed reducing the corporate tax rate by eliminating "tax loopholes". One of the "special provisions" mentioned is "Special ESOP Rules". (July 2007)
  
• President Bush considered a fresh plan to cut the corporate tax rate that would eliminate the above-mentioned "tax loopholes". (August 2007)
  
• Rangel's Corporate Tax Proposal proposed cutting the corporate tax rate by eliminating "tax loopholes". Like the July Treasury Department report, Rangel's tax proposal eliminated "Special ESOP Rules" and included a provision that would create an additional income tax on synthetic equity and negatively impact many S Corporation ESOPs. (October 2007)
  
• President Obama asked Paul Volcker to Lead a Panel on Tax-Code Overhaul by December 2009. It is possible that they will return with solutions to increase taxes by eliminating "tax loopholes", including the ESOP rules that have already been suggested. (March 2009)
  
• The Congressional Budget Office (CBO) again recommended repealing 404(k): CBO Option 22: End the Preferential Treatment of Dividends Paid on Stock Held in Employee Stock Ownership Plans (August 2009)
  
• White House Tax Panel Stays Out Of Public Eye noted that the task force has held no public meetings and has not revealed whom the panel has met with in private. (September 2009)
  
• Obama Picks Simpson, Bowles for Panel on Cutting the Deficit discusses how President Obama has signed an executive order creating a commission focused on reducing the federal debt. (February 2010)
  
• Uncertain future for Obama's tax reform panel discusses how the tax reform panel may be folded into the fiscal commission review. (February 2010)

Although many of the proposals have expired, Obama's tax reform panel (or its successor panel or commission) may utilize some or all of the "tax loopholes" identified above to "fund" their proposed tax changes. This is why it is essential that the ESOP community continue to find as many ESOP Allies in Congress as possible.

In related coverage, we have recently discussed how Capital Gains Rates will be increasing in 2010 and a Proposal to Repeal ESOPs.