Legislative Highlight --- S. 1612
S. 1612, the Employee Stock Ownership Plan Promotion and Improvement Act of 2009, was introduced in the Senate on August 6, 2009 by Senator Blanche Lincoln [D-AR].
S. 1612 was co-sponsored by the following Senators:
Senator Maria Cantwell [D-WA]
Senator Saxby Chambliss [R-GA]
Senator Mike Crapo [R-ID]
Senator Johnny Isakson [R-GA]
Senator Patrick J. Leahy [D-VT]
Senator Mary L. Landrieu [D-LA]
Senator Sheldon Whitehouse [D-RI]
S. 1612 Summary:
One, S. 1612 would repeal the punitive 10% penalty tax on S corporations distributions from current earnings, also referred to as dividends, placed on the distributions from current earnings that are passed through to ESOP participants in cash.
Two, S.1612 would clarify that dividends paid by C corporations on ESOP stock are not a preference item in calculating the corporate alternative minimum tax.
Three, S. 1612 improves the 1042 ESOP tax deferred rollover provisions by (a.) permitting sellers to the ESOP of an S corporation to utilize the ESOP tax benefit referred to as the tax deferred rollover, or the so-called 1042 treatment; (b.) permitting proceeds received from a 1042 transaction to be reinvested in mutual funds consisting of operating U.S. corporation securities; and (c.) redefining what is a 25% owner, for purposes of IRC 1042, as a 25% owner or more of voting stock, or 25% owner or more of all stock of the corporation, instead of current law definition that owning of 25% of any class of stock is a 25% owner for purposes of IRC 1042.
And, four, S. 1612 would eliminate a bias against majority owned ESOP companies by making clear that a non-ESOP small businesses currently eligible for any Small Business Administration program is still eligible for the SBA program if becoming a majority owned ESOP company with the same characteristics it had before if it becomes a majority owned ESOP company. (A majority owned ESOP company is 50% plus owned by the ESOP on behalf of the employees.)
S. 1612 Status:
The bill was read twice and referred to the Senate Committee on Finance.
Importance of S. 1612 to ESOP Community: Like all pro-ESOP bills, a primary strategic reason S. 1612 is important to the ESOP community is that it is a tool that identifies who in Congress will be for ESOPs, by opposing negative ESOP proposals, as well as, supporting new, good ESOP laws.
Specifically the 10% early withdrawal tax in passing through S dividends to ESOP participants results in an S ESOP having little cash flow enhancements for less than 100% ESOPs. In addition, where the ESOP is just one of multiple shareholders, distributions to pay tax to the non-ESOP shareholders that remain in the ESOP, literally transfers the ESOP status, as cash becomes more than the value of the ESOP stock.
It is important to permit sellers of S stock to take advantage of code section 1042, as there continues to be a waste of resources in conversion of a C to S to enable 1042 treatment.
And it is very wrong to deny a small business owned by an ESOP to be denied SBA status and preferences. This unjustified SBA position often results in a small business with SBA preference losing that preference if ownership is transferred to the ESOP.
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