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The Employee Ownership Update

Corey Rosen

April 23, 2004

(Corey Rosen)

Pro-ESOP Legislation Introduced in Senate

S. 2298, introduced by Senator John Breaux (D-LA) on April 7, 2004, would make a number of changes in ESOP law. The bill has been referred to the Senate Finance Committee. It would:
  1. Eliminate the current 10% penalty tax on the distribution of S corporation earnings passed on to the ESOP, allocated to employee accounts, and later paid out to employees who receive their plan distributions before reaching retirement age. Distributions from earnings to shareholders are similar to (but not the same as) dividends paid on shares in C corporations. When these dividends are paid out to employees, they are not subject to the 10% penalty tax that other early distributions are. The IRS has stated that in S corporations, distributions of earnings are not the same as dividends and should be treated for distribution tax purposes as company contributions instead.
  2. S corporations could use distributions paid on allocated shares, not just unallocated shares, to repay an ESOP loan.
  3. Sellers to an ESOP in an S corporation could take advantage of tax-deferral reinvestment opportunities now available only to sellers to ESOPs in C corporations.
  4. Dividends paid on ESOP shares would not be considered preference items for purposes of the Alternative Minimum Tax.
  5. Proceeds from the sale of stock to an ESOP that qualify for the tax-deferred rollover could be reinvested in mutual funds.
  6. For purposes of Section 1042 (allowing the tax deferral of gains made from the sale of stock to an ESOP), more-than-25% owners would be considered owners of voting shares only, not owners of any class of shares; and
  7. Early withdrawals from an ESOP for use in first-time home purchases and college tuition would be allowed.

No hearings have yet been scheduled.

Congressional Budget Office Says Stock Option Expensing Won't Affect Stock Prices of Economy

An analysis by the Congressional Budget Office (CBO) of the impact of stock option expensing concludes that neither stock prices nor the economy will be significantly affected. The CBO argued that the information on option expenses is already contained in footnotes and thus will not affect investment patterns. The report says, however, that the greater transparency expensing will provide is desirable. For a copy, go to www.cbo.gov. The study is titled "Accounting for Stock Options."

Anti-Expensing Bill Makes Progress

The "Broad-Based Stock Option Plan Transparency Act" (H.R. 3574), sponsored by Rep. Richard Baker and over 100 bipartisan cosponsors, has gained additional momentum in the House of Representatives, where it now appears likely that the House Financial Services Committee may vote on the matter some time this spring. Passage is uncertain in committee, but looks increasingly promising. The full House could vote by early summer. Even if the bill passes the House, however, it faces stiff opposition in the Senate, where the chair and ranking minority member of the Senate Banking Committee have so far not agreed to hold any hearings and have promised not to move a bill.

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