Finance Committee Passes Legislation to Eliminate "Section 133"

The Senate Finance Committee approved a Republican proposal to delete section 133 of the Internal Revenue Code. Section 133 currently allows commercial lenders to exclude 50% of the interest income they receive on loans to ESOPs that own (or will own after the loan) over 50% of the company's stock and that pass through full voting rights on the shares acquired by the loan. In practice, the provision has provided a 10% to 20% reduction in loan rates for qualifying loans because the lenders pass through part of the tax benefit to the borrower. Because of its restrictions, however, the provision is only occasionally used in ESOP transactions. Given currently low interest rates, moreover, the provision is rarely, if ever, critical to a transaction.

The committee said the tax savings would be $1 billion over seven years, but this seems wildly excessive. The provision would apply only to new ESOP transactions, not to existing transactions. While the provision itself is not very important any more, but it could send a message that ESOPs are vulnerable to further changes. The proposal is part of the larger tax bill and must be approved by the full Senate. Then it would go to a House-Senate conference. The House did not include the ESOP change in its bill, so the House conferees would have to approve the change. It is then subject to presidential veto. President Clinton has indicated he would not sign the tax cut bill because it contains too many tax breaks for upper-income people.