For several months after the publication of the tax reform legislation introduced by the Chair of the House Ways and Means Committee Charles Rangel [D-NY] it seemed many ESOP company leaders felt its small provision on S ESOPs was not of any concern.

 

There is progress in turning this impression around, as more and more S corporations with ESOPs are realizing that if Chair Rangel’s provision became law, it would have a significant negative impact on their ability to compete, and on the likelihood of new S ESOPs being created by seller financing, or mezzanine financing. [The precise provision is Section 3701 of H.R. 3970, introduced last October.]

 

And as this impression grows of the potential negative impact if Section 3701 becomes law, more and more ESOP advocates are voicing their concerns to offices of U.S. Representatives.

 

This fact represents progress in making sure the S ESOP laws remain usable and attractive for the development of more employee ownership in America, and for the successful operation of current S ESOP companies.

 

As a result of more companies expressing their views to their elected members of the House of Representatives, agents of The ESOP Association were asked to give more detail to top tax lawyers/staffers of the House Ways and Means staff. These views were given, but no views were changed.

 

Worst Case Scenario: When running conducting a legislative advocacy campaign, the best planning is to do worst case scenario planning. With regard to Section 3701, the worse case scenario is that this anti S ESOP provision is not held back by Chair Rangel for consideration in 2009 or 2010 as part of a massive tax code overhaul, but that it is taken up tomorrow as part of some relatively small tax bill, say dealing with agriculture, or stimulating the economy, and similar provision in order to raise revenue that would pay for the tax cuts in the smaller tax bill.

 

There is a general rule of thumb that once a tax law change is introduced by the Chair of the House Ways and Means Committee, and has been “scored” as they say in the tax legislative process, meaning an estimate has been made as to how much new tax money the provision will raise, that proposed change becomes fair game for any member of the Committee to propose to pay for her or his pet tax cut idea. [Please see page 1 story on how The ESOP Association has joined other benefits groups to alter Congressional policy that assigns big tax loss numbers to retirement savings tax laws.]

 

So, there is no reason for the ESOP community to sit around “waiting” for tax reform to tell their member of the U.S. House that they do not like Section 3701.

 

It should be done today, if not sooner.

 

The Association’s website has all the ammo needed to make the case against Section 3701, both under the News topic related to a Congressional visit to an ESOP company, and under the News topic labeled “Advocacy Kit.”

 

To repeat, despite evidence that some members of Congress have registered concern about Section 3701 to the House Ways and Means, there is no evidence that the leadership of the Ways and Means Committee is willing to alter the provisions of Section 3701. The provision, as introduced, can be so harmful our ESOP community should not wait to see if it will be considered. It could be considered at any time.