Newsweek Columnist Bashes S Corporation ESOPs

Newsweek columnist Allan Sloan wrote in the May 7 issue that the use of an ESOP in the Tribune Company transaction is not what Congress had in mind. He quotes the legislation's sponsor, former Senator John Breaux (D-LA) as saying that "I wanted to encourage employee ownership...I wasn't trying to encourage tax avoidance." Sloan portrays the S corporation ESOP rules as just another "tax dodge." He says the provision was "slipped in" to the Minimum Wage Act (actually, it was part of a broader reform of S corporation rules that became part of that law) and, in commentary on the NPR program "Marketplace," urged Congress to repeal the law.

It is debatable whether ESOPs really are tax avoidance. The way an S corporation works in the first place is that earnings are only taxed once at the level of the individual owners. If the ESOP trust is taxed, and then the individual employees are taxed when they receive a distribution, then earnings would effectively be taxed twice.