Tax Bill Would Help S Corporation ESOPs

Both the American Jobs Creation Act of 2004 (H.R. 4520) and the Jumpstart Our Business Strength Act (S. 1637, and something of a stretch of a title even for the acronym-obsessed denizens of D.C.) would allow S corporation ESOPs to use distributions paid on both allocated and unallocated stock in an ESOP to repay an ESOP loan. Current regulations allow only distributions on unallocated shares to be used. Most ESOP experts see this as a reasonable literal interpretation of the law but argue that it was simply drafting oversight that failed to make treatment of dividends and distributions in C and S corporations parallel for this purpose.

The two tax bills easily passed both houses of Congress, but the Senate bill is about seven times as long, and both bills contain what many critics, left and right, have called one of the worst cases of logrolling in years. The basic purpose of the bills was to amend the treatment of U.S. corporate income earned overseas. Both also reduce top corporate tax rates, either directly (as in the House bill, from 35% to 32%) or indirectly (the Senate bill does much the same thing through tax deductions). But both bills, especially in the Senate, served as magnets for every pet tax incentive members always wanted. In theory, the revenue losses were to be offset by other changes (see below, for instance), but now the bill will be quite costly. The bill is supposed to be headed to a conference committee, but many observers now think it may never get passed this Congress, meaning tax reformers would have to start off again next year.