ESOP Improvements Act Introduced in Congress

Each Congress, ESOP advocates, working with the ESOP Association, introduce the ESOP Improvements Act. The bill's supporters do not expect the bill to pass per se, but it serves as a useful tool for proposing amendments to any tax legislation that comes up. In the past, some elements of the biennial proposal have become part of the law.

This year's version, S. 1612 has several elements:

• The 10% tax on S corporation distributions passed through to employees in cash would be repealed (the tax arises because these payments are considered early distributions from the plan).
• Exempt dividends paid by C corporations on ESOP stock would no longer be a preference item for Alternative Minimum Tax calculations.
• Sellers to an ESOP qualifying for a tax deferral under Section 1042 of the Code could invest the proceeds in mutual funds.
• A "25% or more owner under Section 1042 of the Code would be redefined to refer to 25% or more ownership of voting stock, or 25% or more ownership of all stock of the corporation, not 25% of any class of stock.
• Businesses with more than 50% of their voting stock owned by their ESOP would qualify for various small business and minority contracting preferences if these businesses' demographics characteristics (such as ownership by a qualifying minority through participation in an ESOP) otherwise qualify under the tests.

The bill was introduced by Senators Blanche Lincoln (D-AR) and Mary Landrieu (D-LA). The text can be found at this link.