Senate Rejects Amendment to Restore "Section 133" Interest Income Exclusion for ESOPs

By a vote of 56-42 the Senate rejected an amendment to the budget reconciliation bill to restore section 133 of the Internal Revenue Code. The section provides commercial lenders a 50% interest income exclusion for loans to ESOPs that own over 50% of a company's stock and pass through full voting rights to participants. Lenders typically pass on part of the tax benefit to qualified borrowers, resulting in loan rates 10-15% lower than they would otherwise be. The restrictions on the loans, however, have meant that relatively few ESOPs use them.

The Senate Republicans led the effort to drop the provision in the Senate Finance Committee markup of the bill. They estimated that the cost of the provision would be $1 billion over seven years. In fact, the NCEO and ESOP practitioners agree the real number is probably under $5-$10 million per year. The effort to restore the provision was led by Senators Paul Simon (D-IL) and Jeff Bingaman (D-NM). Senate Majority Leader Robert Dole said the provision was a "major ESOP loophole" whose elimination would help reduce "corporate welfare." The Senate Republicans want to use the money to help pay for income and capital gains tax cuts.

There is no comparable House provision, so the issue will have to be resolved in conference. There does not appear to be much chance that the House conferees will block its adoption, however. The Clinton Administration has taken a neutral stance on the issue. Reportedly, the Treasury Department opposes the provision while the Labor Department favors it.