Rangel Proposal Would Tax Synthetic Equity in S Corporation ESOPs

Congressman Charles Rangel (D-NY) has proposed taxing synthetic equity at exercise in S corporation ESOPs in a way that would reflect their share of the foregone corporate taxes attributable to the ESOP as income. Interest would be charged on any resulting underpayment for the period. In effect, the bill would treat holders of synthetic equity as if they actually owned an equivalent value of the S corporation's stock and would be subject to taxation on corporate profits for their pro-rata share of net income during that period. The law would apply only to grants issued after enactment.

Congressman Rangel claims that the provision would save $606 million over 10 years. The proposal was reportedly sparked by reaction to the pending Tribune Company transaction. If that transaction is completed, however, it would be well in advance of any conceivable time frame for passage of the bill. The proposal is part of a massive overhaul of corporate taxes. It will not be voted on this year and is, like all such sweeping proposals, sure to face strong opposition from many affected parties. Pieces of it, however, could appear in future tax bills. It is notable that the proposal does not seek to undo the basic framework for S corporation ESOP tax benefits.

The language of the proposal can be found in Section 3701. Go here for details.