Boustany and Pomeroy Introduce ESOP Improvements Act

Reps. Charles Boustany (R-La.) and Earl Pomeroy (D-N.D.) have introduced the "Employee Stock Ownership Plan Promotion and Improvement Act of 2010" (H.R. 5207) in the U.S. House of Representatives. The bill would:

• eliminate the 10% penalty tax on distributions made directly to ESOP participants in S corporation ESOPs (these are now taxed as early distributions, not dividends);
• exempt qualifying dividends paid on ESOP shares from alternative minimum tax calculations;
• allow sellers of stock to qualifying ESOPs in S corporations to take a deferral of gains under Section 1042 of the Code (this is currently available only to C corporations);
• allow sellers to ESOPs taking a deferral of gains in the proceeds to invest in certain mutual funds;
• redefine 25% ownership for purposes of Section 1042 of the Code to mean owners of 25% or more of all the voting shares or the total value of all the shares (current rules define a 25% owner as one owning 25% or more of the shares of any class of stock; 25% owners are excluded from allocations of shares subject to Section 1042 treatment); and
• redefine a business that otherwise meets the definitions of a small business under various federal loan and procurement programs to include those that are 50% or more owned by an ESOP (current rules exclude such businesses).