H. Con Res 333 Update – Five Co-Sponsors

There are currently five co-sponsors to H. Con. Res. 333: Expressing continued support for employee stock ownership plans, which was introduced by Rep Hinchey, Maurice D. [NY-22] on 4/24/2008:

• Rep Rohrabacher, Dana [CA-46] - 4/24/2008
• Rep Thompson, Mike [CA-1] - 4/30/2008
• Rep Jones, Walter B., Jr. [NC-3] - 5/15/2008
• Rep McCrery, Jim [LA-4] - 5/15/2008
• Rep Walz, Timothy J. [MN-1] - 5/15/2008

In addition to separately tracking any posts related to ESOP legislation, please note that we provide continuous updates on outstanding ESOP legislation, including links to the related The One-Stop ESOP Blog information page and The Library of Congress Official Webpage, in the left-hand sidebar in the Outstanding ESOP Legislation section.

Educating Members of Congress about the Value of ESOPs

News from ESCA’s April Lobby Days discusses how 30 employee-owners from member companies of Employee-Owned S Corporations of America (ESCA) met with almost 25% of the Senate offices (24) and 41 House offices to educate Members of Congress and their staff about "the value proposition and the political needs of S Corporation ESOPs" during two April Lobby Days.

H. Con. Res. 333: Expressing continued support for employee stock ownership plans

Rep. Maurice Hinchey [D-NY] introduced H. Con. Res. 333: Expressing continued support for employee stock ownership plans on April 24, 2008. The bill is cosponsored by Rep. Dana Rohrabacher [R-CA] and has been referred to the House Committee on Education and Labor. Here is the text of the legislation:

HCON 333 IH

110th CONGRESS

2d Session

H. CON. RES. 333

Expressing continued support for employee stock ownership plans.

IN THE HOUSE OF REPRESENTATIVES

April 24, 2008

Mr. HINCHEY (for himself and Mr. ROHRABACHER) submitted the following concurrent resolution; which was referred to the Committee on Education and Labor

CONCURRENT RESOLUTION

Expressing continued support for employee stock ownership plans.

Whereas in the Employee Retirement Income Security Act of 1974, Congress codified a technique of corporate finance which utilizes employee stock ownership, officially named an employee stock ownership plan (ESOP);

Whereas in the 33 years since the statutory recognition of ESOPs, there have been ample data collected by objective research indicating that the vast majority of corporations sponsoring employee stock ownership through ESOPs are high performing companies that, among other indicia of high performing companies, have better sales, are more sustainable, pay better, and provide more retirement savings compared to similar companies that are not employee-owned; and

Whereas Congress, in more than 15 laws since 1974, has made it explicit that ESOPs are to serve the dual purpose of providing retirement savings and stock ownership for employees, as well as being a financing technique for corporations: Now, therefore, be it

Resolved by the House of Representatives (the Senate concurring), That Congress expresses its continued support for employee stock ownership plans.

The ESOP Association has issued a press release applauding the resolution:

J. Michael Keeling, President of The ESOP Association, had this to say about the Resolution: "I welcome the bi-partisan efforts of Congressman Maurice Hinchey (D-NY) and Congressman Dana Rohrabacher (R-CA). The leadership of these House senior members to reiterate the thirty plus years of support for employee ownership through ESOPs is important. Clearly, change is in the wind but a commitment by Congress to a fair and more equitable form of ownership is as important in the 21st century as in the 20th. On behalf of the 2,500 plus members of The ESOP Association, I urge all members of Congress to co-sponsor this resolution. Research has consistently shown that employee owned companies are high performing, have better sales, and provide more retirement savings compared to their non-ESOP counterparts."

Updates:

• H. Con Res 333 Update – Five Co-Sponsors (6/8/08) - There are currently five co-sponsors to H. Con. Res. 333: Expressing continued support for employee stock ownership plans, which was introduced by Rep Hinchey, Maurice D. [NY-22] on 4/24/2008:
  
  Rep Rohrabacher, Dana [CA-46] - 4/24/2008
  Rep Thompson, Mike [CA-1] - 4/30/2008
  Rep Jones, Walter B., Jr. [NC-3] - 5/15/2008
  Rep McCrery, Jim [LA-4] - 5/15/2008
  Rep Walz, Timothy J. [MN-1] - 5/15/2008
  
• Employee-Owned Top Small Workplaces, IEI, HR 333, and Broad-Based Equity Grants (5/16/08) - "Maurice Hinchey (D-NY) and Dana Rohrabacher (R-CA) have introduced House Concurrent Resolution 333, which states, "Congress expresses its continued support for employee stock ownership plans." The resolution notes that "there have been ample data collected by objective research indicating that the vast majority of corporations sponsoring employee stock ownership through ESOPs are high performing companies that, among other indicia of high performing companies, have better sales, are more sustainable, pay better, and provide more retirement savings compared to similar companies that are not employee-owned." Hinchey is one of the more liberal members of Congress and Rohrabacher one of the most conservative."

ESOP Advocacy and The ESOP Promotion and Improvement Act of 2007 (S. 1322)

Last week we discussed an Update on Section 3701 of the Rangel Tax Proposal. The latest Employee Ownership Blog post suggests that now is the time to discuss The ESOP Promotion and Improvement Act of 2007 (S. 1322) with your Senators:

"Now is the time to contact your Senators and talk to them about this legislation. In light of the legislation introduced by Representative Charles Rangel, now is the time to reach out to your member of Congress. Contact their office and ask to arrange a visit to your company. If you can't arrange a visit to your company, make an appointment to go see them, or send a letter from the employee owners telling him/her why the ESOP is so important to your company and employee owners and what they can do to keep these jobs in their community."

Update on Section 3701 of the Rangel Tax Proposal

We recently discussed ESCA's position on Section 3701 of H.R. 3970: Tax Reduction and Reform Act of 2007, otherwise known in the ESOP world as the Rangel Corporate Tax Proposal. Progress, But No Victory, No Let Up is an Employee Ownership Blog post discussing Section 3701, including the progress in getting ESOP companies to understand the negative consequences of the bill:

There is progress in turning this impression around, as more and more S corporations with ESOPs are realizing that if Chair Rangel's provision became law, it would have a significant negative impact on their ability to compete, and on the likelihood of new S ESOPs being created by seller financing, or mezzanine financing...And as this impression grows of the potential negative impact if Section 3701 becomes law, more and more ESOP advocates are voicing their concerns to offices of U.S. Representatives....As a result of more companies expressing their views to their elected members of the House of Representatives, agents of The ESOP Association were asked to give more detail to top tax lawyers/staffers of the House Ways and Means staff. These views were given, but no views were changed.

The article points out that now that the proposal has been introduced and "scored", the proposal is fair game. The worst case scenario is that it is introduced in another tax bill as a way to raise revenue. It refers readers to their Advocacy Kit and stresses the importance of sharing your opposition with your member of the U.S. House "today, if not sooner". The article concludes with the following:

To repeat, despite evidence that some members of Congress have registered concern about Section 3701 to the House Ways and Means, there is no evidence that the leadership of the Ways and Means Committee is willing to alter the provisions of Section 3701. The provision, as introduced, can be so harmful our ESOP community should not wait to see if it will be considered. It could be considered at any time.

Non-Spouse Rollover Rules

We have been following the Non-Spouse Rollover Rule Changes since the passage of the PPA. The Pension Protection Act Blog notes that Rollovers to NonSpouse Beneficiaries Are Back With Passage of H.R. 3361 But For 2009 Instead of 2008:

Last week, the House of Representatives finally passed H.R. 3361, the Pension Protection Technical Corrections Act of 2008 (PPTCA). Since the Senate passed their version of the PPTCA, S. 1974, late last year, the Senate should make quick work of reconciling the differences between their bill and H.R. 3361, and have a version of PPTCA ready for the President to sign as early as mid-April.

For rollovers to nonspouse beneficiaries, the passage of H.R. 3361 has significant impact because of the IRS' position on rollovers to nonspouse beneficiaries.

The rule change is part of H.R. 3361: Pension Protection Technical Corrections Act of 2007, which was passed by the House of Representatives on March 12, 2008. Since the Senate passed a similar version, S. 1974: Pension Protection Technical Corrections Act of 2007, on December 19, 2007, it appears the bills could be reconciled and passed in the near future. This legislation is discussed further in House of Representatives Moves Forward on Pension Protection Technical Corrections Act.

Updates/Related Blog Posts:

• Rollovers to Roth IRAs/402(f) Safe Harbor Notice (1/24/08)
• Non-Spouse Rollover Rule Changes (1/22/08)
• Are nonspouse beneficiary rollovers required? (12/27/07)
• Non-spouse Beneficiary Rollovers (2/9/07)
• ERISA Compliance Calendar/PPA/Notice 2007-07 (1/19/07)
• Update on 409(p) Final Regulations and Notice 2007-07 (1/16/07)
• Miscellaneous Pension Protection Act Changes (1/11/07)
• Rollovers to Roth IRAs/402(f) Safe Harbor Notice (1/24/08)

Related Links:

• H.R. 3361: Pension Protection Technical Corrections Act of 2007
• S. 1974: Pension Protection Technical Corrections Act of 2007
• Employee Plans News - Special Edition, February 13, 2007
• IRS Notice 2007-7, 2007-5 I.R.B. 395 - Miscellaneous Pension Protection Act Changes
• The Pension Protection Act of 2006 (PPA)
  

• BenefitsLink Message Boards - NonSpouse Rollovers, Mandatory in 08?
  
• IRA Update: Mandatory or Voluntary? Congress Creates More Confusion on the Non-Spouse Rollover Provision under PPA 2006
• Good news gone awry - New retirement-plan rule was good news for beneficiaries, until IRS stepped in
• Revisiting Rollovers to NonSpouse Beneficiaries Before 2008
• 2007 Interim and Discretionary Amendments
• Nonspouse Beneficiary Rollover Document Change
• Definition of Spouse
• Update on Interim Amendments and EGTRRA Restatements

ESCA/Rangel Tax Proposal/Rangel Supports Employee Ownership?

A report from the Employee-Owned S Corporations of America's (ESCA's) 2008 Leadership Summit provides a political update on the Rangel Corporate Tax Proposal:

"That is what makes it so important that the S ESOP community not stir up a hornet's nest by campaigning actively and aggressively against the Rangel proposal just yet. We are working actively with staff to the Chairman to get a better sense of their intentions. Based upon that intelligence, which we are working to obtain through written submissions and several cordial discussions with Committee staff, we will make a decision about when and how to tackle this issue politically."

I find it ironic that we are discussing the Rangel tax proposal just one year after an ESCA update noted that Rangel told ESCA he supported employee ownership.

The report also discusses a meeting with members of the Treasury Department:

"In remarks to all ESCA conference attendees, Assistant Secretary Swagel observed that the tax treatment of S corporation ESOPs is similar to a consumption tax, which enhances business growth and productivity. He noted the success of the current S corporation ESOP tax structure in encouraging employee ownership among private companies….. With a major pension reform bill enacted more than a year ago and the imminent transition to a new Presidential Administration, both Morrison and Bortz indicated that Treasury guidance on qualified plans in 2008 would be relatively quiet, especially for ESOPs."

More LaRue, Global Equity Survey, Open-Book Management

The March 3, 2008 Employee Ownership Update is online and discusses the following:

• Supreme Court Says Individuals Can Sue Retirement Plan Fiduciaries; Implications for ESOPs Unclear
  
• Survey of Multinational Companies Shows Changes in Equity Practices
  
• New NCEO Board Members Elected
  
• 2008 National Gathering of Games Conference, April 30-May 2, 2008
  

More LaRue

The Update discusses LaRue v. DeWolff, Boberg & Assoc. Inc., No. 06-856 (Feb. 20, 2008) and provides a separate page with more analysis and ESOP implications.

"On February 20, 2008, in LaRue v. DeWolff, Boberg & Associates (No 06-856), the Supreme Court unanimously concluded that individuals do have the right to sue for individual monetary damages under Section 502(a)(2), although a concurring opinion in the case written by Chief Justice Roberts argued individuals have to exhaust administrative remedies first.

Global Equity Incentives Survey 2007

The Update discusses the results of the PriceWaterhouseCoopers Global Equity Incentives Survey 2007:

PwC's annual global equity survey covers a wide range of topics related to global equity compliance, design and administration, including: stock option expensing, compensation strategy and design, tax planning and compliance, global coordination, plan administration, and employee communications. The 2007 Survey will build on the insights gained over the last four surveys to help multinational companies as they monitor trends in equity compensation and plot their strategic position within their markets and industries. These results will become a useful tool for all of those impacted by the transformation of equity in the hands of employees: human resources professionals, finance executives, tax professionals, regulators, consultants, and employees.

The Update notes that companies are half as likely to offer options (at all levels) than they were in 2003. For more information about the results of the survey, here are links to a webcast, webcast slides, and executive summary.

Open-Book Management

The Update discusses the 2008 National Gathering of Games Conference, which is from April 30 – May 2:

Open-book management transforms organizations and gives them a major advantage over others who keep employees in the dark. It's not just about generating profits, cash and wealth but also about distributing it for the good of everyone involved – giving those who embrace open-book management a spirit of generosity and a willingness to openly spread the word to help each other succeed.

New Board Members

The NCEO also announced the new NCEO board members.

Transcripts of ESOP Commentary and Why ESOPs Should Care About the Rangel Proposal

Last month I discussed the 2007 Las Vegas Conference & Trade Show, including the keynote address by Dr. J. Robert Beyster and the commentary by ESOP Association President Michael Keeling. Here are links to the transcripts for your reference:

1. Dr. J. Robert Beyster keynote address at Employee Ownership Foundation luncheon – His address includes a discussion of using hybrid (ESOP and direct) ownership structures and blending employee ownership with a meritocracy. It also provided some specific examples of how the employee ownership system provided the company with a competitive advantage.
   
2. Why Now? – The November ESOP report contains a copy of the ESOP Association president J. Michael Keeling's commentary, which includes a discussion of five reasons why the ESOP community should be concerned about the current legislative climate.

Related to #2, Should S ESOPs Care About Proposed Law Change?, a post by J. Michael Keeling, explains why S Corporation ESOPs should be concerned about the Rangel Proposal (see related links below), even if they do not have any synthetic equity or if they are grandfathered in under the proposal. It also stresses how the legislation would be a bigger setback for the Association's Vision ("the number of employee owners through ESOPs grows and grows until a substantial majority of private sector employees are owners of the companies where they work") and how that could impact future ESOP law for both S and C corporations.

Related Links

Why the Number of ESOPs is not Growing at a Faster Rate
Detailed Description of Rangel Proposal with Examples
409A Extension/Rangel Proposal/ESOPs and Succession Planning/CEO Stock Options
Rangel's Corporate Tax Proposal
Update on Rangel's Corporate Tax Proposal
Text Of Rangel's Tax Proposal

Detailed Description of Rangel Proposal with Examples

The ESOP Law Blog provides a detailed description of the Rangel Proposal in Congress Proposes New Restrictions on S Corporation ESOPs:

"H.R. 3970 introduced by Hon. Charles Rangel on October 25, 2007, includes a Section 3701 that would add Section 409B to the Internal Revenue Code. The new provision would create an additional income tax on the holder of synthetic equity (as defined in Section 409(p)). The new rule would provide that when the holder "exercises" the synthetic equity, in addition to any taxable gain he may recognize from the exercise of the instrument, he must also recognize a new taxable amount. That amount is calculated by determining the amount of S corporation income the holder would have recognized each year, had he held actual stock instead of synthetic equity. In addition, once that amount of additional tax liability is calculated, Section 409B imposes an interest charge on the amount at the underpayment interest rates.

Under the proposed rule, it appears that the effective federal tax rates on employee stock options could exceed 100% and the rate on employee stock appreciation rights could exceed 70%. For warrant holders, the effective federal tax rate could exceed 80%. These effective federal rates do not include state income tax."

The post also contains three examples:

• Executive Compensation - Stock Options
  
• Executive Compensation - Stock Appreciation Rights
  
• Mezzanine Lender with Warrants
  

2007 Las Vegas Conference & Trade Show

I attended the ESOP Association's 2007 Las Vegas Conference & Trade Show last week.
This year's record-setting attendance was over 1,200. The conference provides an excellent opportunity to stay current on ESOP issues and to network with ESOP companies and professionals. This year was no exception.

Dr. J. Robert Beyster delivered the keynote address on Thursday:

"The subject I will present is "Beyond the ESOP," and my message will be that there is more to employee ownership than just ESOPs. We employed a variety of different equity sharing techniques at SAIC to achieve our goals of widespread employee ownership."

He shared his afterthoughts in Small Business Challenges.

On Friday, ESOP Association President Michael Keeling provided his "Commentary on Pending ESOP Legislation and Potential Impact on ESOPs". The Rangel Proposal was a major focus of the commentary, including the negative impact it would have on S Corporations with synthetic equity and future S Corporation ESOP candidates. Most importantly, he stressed that all ESOPs should be concerned about this proposal, regardless of whether or not they are directly impacted by it.

Text Of Rangel’s Tax Proposal

Here is the text of Section 409B of Rangel's Corporate Tax Proposal:

SEC. 409B. RECOGNITION OF ORDINARY INCOME ON SALE OR EXERCISE OF STOCK OPTION IN S CORPORATION WITH AN ESOP.

(a) IN GENERAL.—If an S corporation in which an employee stock ownership plan is a stockholder grants an option with respect to its stock and such option is sold or exercised, there shall be included in the gross income of the holder of such option (determined immediately before such sale or exercise) as ordinary income an amount equal to the income inclusion amount.

(b) INCOME INCLUSION AMOUNT.—For purposes of this section, the term 'income inclusion amount' means, with respect to the holder of any option, the excess (if any) of—

(1) the sum of the net income amounts with respect to such option for all taxable years of the S corporation ending during the taxpayer's holding period, over

(2) the sum of the net loss amounts with respect to such option for all such taxable years.

(c) NET INCOME AND LOSS AMOUNTS.—For purposes of this section, with respect to any taxable year of the S corporation—

(1) NET INCOME AMOUNT.—The term 'net income amount' means the excess (if any) of—

(A) the pass-thru income share for such taxable year, over

(B) the pass-thru loss share for such taxable year.

(2) NET LOSS AMOUNT.—The term 'net loss amount' means the excess (if any) of the amount described in paragraph (1)(B) over the amount described in paragraph (1)(A).

(d) PASS-THRU INCOME AND LOSS SHARES.—For purposes of this section, with respect to any taxable year of the S corporation—

(1) PASS-THRU INCOME SHARE.—The term 'pass-thru income share' means the excess (if any) of—

(A) the aggregate items of income taken into account under section 1366 by the employee stock ownership plan for such taxable year, over

(B) the aggregate items of income which would have been so taken into account if such option had been exercised upon being granted.

(2) PASS-THRU LOSS SHARE.—The term 'pass-thru loss share' means the excess (if any) of—

(A) the aggregate items of deduction and loss taken into account under section 1366 by the employee stock ownership plan for such taxable year, over

(B) the aggregate items of deduction and loss which would have been so taken into account if such option had been exercised upon being granted.

(e) INTEREST AT UNDERPAYMENT RATE.—

(1) IN GENERAL.—In the case of any taxpayer who includes any amount in gross income for any taxable year under subsection (a), the tax imposed by this chapter on such taxpayer for such taxable year shall be increased by interest at the under payment rate determined under section 6621 on the underpayments that would have occurred had the net income amounts with respect to each taxable year taken into account under subsection (c) been includible in the taxpayer's gross income for each of taxable year of the taxpayer in or with which the taxable year so taken into account ends.

(2) REDUCTION FOR PREVIOUS NET LOSS AMOUNTS.—For purposes of paragraph (1), the net income amount for any taxable year shall be reduced by the excess of—

(A) the aggregate net loss amounts for taxable years taken into account under subsection (c) with respect to the taxpayer, over

(B) the amount of such aggregate previously taken into account under this paragraph to reduce any net income amount.

(f) OTHER DEFINITIONS AND SPECIAL RULES.— For purposes of this section—

(1) OPTION.—The term 'option' includes any synthetic equity described in section 409(p)(6)(C).

(2) EFFECT OF STARTING OR TERMINATING AN S CORPORATION ELECTION.—With respect to any option, a corporation which is an S corporation for any taxable year which ends while such option is outstanding shall be treated for purposes of this section (other than subsection (d)) as an S corporation for all taxable years which end while such option is outstanding.

(3) ADJUSTMENTS TO BASIS.—

(A) INCREASE IN BASIS OF ACQUIRED STOCK.—The taxpayer's basis in any stock acquired pursuant to the exercise of an option to which subsection (a) applies shall be increased by the amount included in gross income by the taxpayer under subsection (a) with respect to such option.

(B) INCREASE IN BASIS OF OPTION ON SALE.—The taxpayer's basis in any option shall be increased by the amount included in gross income by the taxpayer under subsection (a) with respect to such option.''.

(b) CONFORMING AMENDMENTS.—

(1) Section 26(b)(2), as amended by this Act, is amended by striking ''and'' at the end of subparagraph (T), by striking the period at the end of sub paragraph (U) and inserting '', and'', and by adding at the end the following new subparagraph: ''(V) subsection (e) of section 409B (relating to interest on income recognized upon exercise of a stock option in an S corporation with an ESOP).''.

(2) Section 1016(a) is amended by striking ''and'' at the end of paragraph (36), by striking the period at the end of paragraph (37) and inserting '', and'', and by adding at the end the following new paragraph:''(38) to the extent provided in section 409B(f)(3).''.

(3) The table of sections for subpart A of part I of subchapter D of chapter 1 is amended by adding at the end the following new item:

''Sec. 409B. Recognition of ordinary income on sale or exercise of stock option in S corporation with an ESOP.''.

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to options granted after the date of the enactment of this Act.

As we discussed in the previously-mentioned post and this post, the bill is unlikely to pass earlier than 2008, if at all. For more coverage of the impact of the proposed tax bill on ESOPs, see Rangel Bill Would Tax Stock Option Exercise in S Corps. With ESOPs.

Update on Rangel’s Corporate Tax Proposal

The Employee Ownership Blog has provided more information on Rangel's Corporate Tax Proposal, also known as H.R. 3970 - Tax Reduction and Reform Act of 2007:

"Please note, the provision defines as an option any interest that is the same as what is defined as synthetic equity in IRC 409(p)(6)(C). The new tax provision would apply to options granted after the date of enactment."

The post also reiterates the fact that this bill is unlikely to make it through Congress:

"There is strong opposition to the entire bill, and enactment would be no earlier than some time in 2008, or perhaps even later, if ever."

Rangel’s Corporate Tax Proposal

Rangel's Corporate-Tax Bill May Frame Future Debate discusses how the "top tax writer is calling for a cut in the corporate income-tax rate, but would replace the lost revenue with other tax changes that would hit businesses." While the proposal is unlikely to make it through Congress, it sets the stage for a 2009 debate:

"The proposal, which Mr. Rangel plans to introduce later this week as part of a broad tax bill, is unlikely to make it through Congress this year, a fact even he has acknowledged. Still, it sets the stage for a future debate about taxes and could provide fodder for a broader overhaul when a new president takes office in 2009."

This is an area of concern for ESOPs. Rangel's tax proposal is similar to the Treasury Department report released in July and discussed in a recent ESOP Government Update:

"The report provided that if "special provisions" were eliminated, the corporate tax rate could be reduced from 35% to 27% without affecting overall tax revenue. One of the "special provisions" mentioned is "Special ESOP Rules". The "Special ESOP Rules" make up $23 billion of the $1,241 trillion (1.85%) of "special provisions"."

The ESOP Association posted a Legislative Alert on their blog: House Ways and Means Committee Proposes Cutback in Benefits of Stock Options in S ESOP Companies

"While precise legislative language is not available at this time, a summary of legislation introduced today by Chair of the House Ways and Means Committee, Charles Rangel [D-NY], has as a so-called loophole closer, a provision that impacts an S ESOP corporation's granting stock options to employees. Note, the proposal does not impact the underlying tax treatment of the S corporation's taxable income pro rated to the ESOP's ownership share."

The Alert clarified that the proposal "did not endorse the more anti-ESOP proposal embedded in the Treasury Department recommendation in August." The proposal "will supposedly raise $600 million over ten years, or a mere $60 million per year, in order to help pay for a near $400 billion reduction in corporate income taxes due to a proposed rate cut in the C corporation current rate of 35% to 30.5%, a proposal initiated by the Administration."

Here is the language from the proposal:

"Recognition of ordinary income on exercise of stock options in S corporation with an ESOP. Under current law, an individual that holds an option in an S corporation is not subject to tax on the income of the S corporation until such individual exercise their option and becomes a shareholder in the S corporation. During the period of time in which an individual holds an option in an S corporation, taxes on the income earned by the S corporation are intended to be paid by the other shareholders in the S corporation. However, a portion of the S corporation's earnings will never be subject to tax if one of the shareholders in the S corporation is a tax-exempt employee stock ownership plan (an "ESOP"). Certain taxpayers have taken advantage of these aspects of current law by having a tax-exempt ESOP hold a significant percentage of an S corporation's stock while taxable individuals hold stock options. The combined effect of this structure is that taxable investors are able to benefit from appreciation in the value of the S corporation while a significant portion of the S corporation's income completely avoids tax. The bill would require these option holders to recognize income when an option is recognized or sold in an amount equal to the amount of income that was shifted to the ESOP through this type of tax planning during the period of time that the option was held buy such taxpayer. Interest will be assessed at the underpayment rate on any amounts included under this provision. This proposal is estimated to raise $606 million over 10 years."

For another look at the proposal, check out Giant tax overhaul bill unveiled

Updates:

• H.R. 3970: Tax Reduction and Reform Act of 2007

• Update on Section 3701 of the Rangel Tax Proposal (4/10/2007)
• ESCA/Rangel Tax Proposal/Rangel Supports Employee Ownership? (3/20/2007)
• Kelso, Chrysler Bailout, Avis, Shared Capitalism, Tribune, Rangel Tax Proposal (1/20/2007)
• In the News: Sharing Your ESOP Story with Your Member of Congress (1/6/2007)
• Reasons for ESOP Plan Termination, Alternate Bonus Program, Five Errors in Equity Plan Design (12/18/2007)
• Transcripts of ESOP Commentary and Why ESOPs Should Care About the Rangel Proposal (12/6/2007)
• Detailed Description of Rangel Proposal with Examples (12/4/2007)
• 2007 Las Vegas Conference & Trade Show (11/13/2007)
• 409A Extension/Rangel Proposal/ESOPs and Succession Planning/CEO Stock Options (10/30/2007)
• Text Of Rangel’s Tax Proposal (10/29/2007)

ESOP Government Update

What does Washington have to say about ESOPs? This blog post will discuss the current proposed legislation, some indicators of future ESOP policy, and provide links to some additional ESOP information:

Current Proposed Legislation

There are currently two active pieces of proposed legislation, which are both positive for ESOPs:

The ESOP Promotion and Improvement Act of 2007

The United States Employee Ownership Bank Act

Indicators of Future ESOP Policy

• The Congressional Budget Office (CBO) Recommends Repealing 404(k) (February 2007)
  
  As discussed in the following posts, the CBO recommended repealing Internal Revenue Section 404(k):
  
  CBO Update - Key Congressional Players
  Update on Proposal to Repeal 404(k) - Letter to the CBO
  The Congressional Budget Office Recommends Repealing 404(k)
  
• Presidential Panel on Federal Tax Reform (Clarified February 2007)
  
  As discussed in this post: Clarification of Save At Work Proposal, the initial Presidential Panel on Federal Tax Reform proposed replacing the current retirement plan structure with Employee Retirement Savings Accounts (ERSAs), and did not specifically address ESOPs. While the 2008 proposed budget clarified that this did not include ESOPs, it left many questions unanswered.


• Treasury Conference on Business Taxation and Global Competitiveness (July 2007)
  
  The U.S. Department of the Treasury prepared a background paper to suggest some ways to reduce corporate taxes to make the United States more competitive in the global economy. The background paper was released on July 23, 2007 in preparation for a July 26 conference. According to the press release:
  
  “The paper details:
  
  * the extent to which special provisions narrow the business tax base;
  * the importance of the non-corporate sector generally subject to the individual tax rather than the corporate tax;
  * the various ways the tax system distorts economic decisions;
  * and how the level of U.S. tax compares with our major trading partners (G7, OECD, and emerging market countries).
  
  The paper also discusses the U.S. system for taxing international income and examines how that affects business decisions.”
  
  The report provides that if the “special provisions” were eliminated, the corporate tax rate could be reduced from 35% to 27% without affecting overall tax revenue. One of the “special provisions” mentioned is “Special ESOP Rules”. The “Special ESOP Rules” make up $23 billion of the $1,241 trillion (1.85%) of “special provisions”.
  
  The ESOP Association provides regular updates on the status of ESOP rules and regulations. The August 2007 ESOP Report summarized the Treasury Department’s suggestion as follows:
  
  “…it seems that the Treasury Department suggestion to repeal ESOPs to increase U.S. competitiveness is undeniably ridiculous on its face as 30 years of research demonstrates that ESOP companies are more competitive than non-ESOP companies.”
  
  
• Bush May Try to Cut Corporate Tax Rates (August 2007)
  
  “"Our tax structure makes us less competitive, and if we want to be a competitive nation, we've got to analyze a lot of things, including taxes, dependence on oil or good education policy," Bush said. "And so we will work through possible suggestions for Congress."
  
  Now he is focusing strictly on the corporate side of the code. A "determinant factor" in deciding whether to go forward, he said, will be whether advisers can craft a revenue-neutral plan, neither raising nor decreasing overall taxes.”
  
  The above-mentioned ESOP Report provided some commentary:
  
  "“This is very troubling to see,” said J. Michael Keeling, President of The ESOP Association. “While this Background Paper is not a proposal, it has obviously been picked up by the Administration as a part of a possible corporate tax package. In fact, it borders on the mind boggling to repeal incentives for ESOP creation in the name of increasing American competitiveness in the world. I calculate eliminating the ESOP tax incentive would permit a seven on-hundredths reduction in the corporate tax rate, or about $650 per $1 million in tax liability.”"

Additional ESOP Information

Here are two of many blog postings on this site documenting the research and benefits of ESOPs to companies, employees, and society:

Employee Ownership and Corporate Performance

The Benefits of ESOPs and Employee Ownership to Companies

Also, here are some links to recent ESOPs In the News:

ESOP Association Blog/In The News: Employee Ownership, Satisfaction, Competence, and Experimentation Culture/Countrywide Financial Stock Drop Lawsuit

In the News: Successful Employee Owned Grocer/Using an ESOP to Avoid Cutting Staff

Here are some links to the leading employee ownership information sites:

The National Center for Employee Ownership (NCEO)

The ESOP Association

Co-Sponsors Added to The ESOP Promotion and Improvement Act of 2007 (S. 1322)

The ESOP Promotion and Improvement Act of 2007 (S. 1322) was introduced on May 7, 2007 by Sen. Blanche Lincoln [D-AR] and now has four co-sponsors:

Sen. Michael Crapo [R-ID]
Sen. Mary Landrieu [D-LA]
Sen. Patrick Leahy [D-VT]
Sen. Sheldon Whitehouse [D-RI]

“This bill is in the first stage of the legislative process where the bill is considered in committee and may undergo significant changes in markup sessions.” It has been referred to the Senate Finance Committee. “The majority of bills never make it out of committee.”

Here is a summary of the bill:

“Employee Stock Ownership Plan Promotion and Improvement Act of 2007 - Amends the Internal Revenue Code to: (1) exempt certain distributions, including dividends, by S corporations to an employee stock ownership plan (ESOP) from the penalty tax for premature employee benefit plan withdrawals; (2) exempt deductions for ESOP dividends from corporate alternative minimum tax adjustments based on adjusted earnings and profits; (3) allow deferral of the recognition of gain for certain sales to ESOPs sponsored by any domestic corporation, including S corporations; (4) allow reinvestment of ESOP stock proceeds eligible for nonrecognition of gain in certain mutual funds; (5) modify certain ESOP stock ownership rules; and (6) allow a de minimis exception from pension plan investment diversification requirements for ESOP accounts with balances of $2,500 or less."

Updates:

• ESOP Advocacy and The ESOP Promotion and Improvement Act of 2007 (S. 1322) (04/18/08)
• The ESOP Promotion and Improvement Act of 2007 (05/10/07)