Ramstad-Breaux Bill Would Address ESOP S Corporation Issues

Congressman James Ramstad (R-MN) and Senator Donald Breaux (D-AL) have introduced legislation (HR 3082 and S 1732) designed to curb abuses of the S corporation ESOP law. The proposal builds on a similar bill that was in the tax bill President Clinton vetoed. It defines as a disqualified person anyone who has more than 10% of the deemed fully allocated shares of the company, or whose family has more than 20%. If this group owns 50% or more of the company, including through synthetic equity, then no one in the group can get an allocation of shares in the ESOP that year. Violations trigger a 50% corporate excise tax and individual income tax. If these anti-allocation rules are triggered, there would also be a 50% excise tax on the company on any "synthetic" equity that this group holds that year.

The bill has been passed by the Senate as part of a bill extending certain provisions of the tax code; the House has not acted on it. It appears likely that if the bill is not included in a tax bill this year, it will be included in some future bill next year.