The ESOP Promotion and Improvement Act of 2007
May 10, 2007 The ESOP Association published the following press release on its website: The President of The ESOP Association Urges Congress to Enact the ESOP Promotion and Improvement Act of 2007 and Start Building an Ownership Society
The press release announces the introduction of The ESOP Promotion and Improvement Act of 2007 (S. 1322) on May 7, 2007 by Senator Blanche L. Lincoln (D-AR). The press release summarized the highlights of the Act as follows: - Repeal the punitive 10% penalty tax on S corporations’ distributions from current earning, also referred to as dividends, paid on ESOP stock that are passed through to ESOP participants in cash
- Clarify that dividends paid by C corporations on ESOP stock are not a preference item in calculating the corporate alternative minimum tax
- Permit sellers of stock to an ESOP on an S corporation to utilize the ESOP tax benefit referred to as the tax deferred rollover or the 1042 treatment
- Permit proceeds received from a 1042 transaction to be invested in mutual funds consisting of operating US corporation securities
- Redefine what is a 25% or more owner for purposes of IRC 1042 to be 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
- Increase the de minimus amount eligible for diversification from ESOP stock balances over $500 to balances over ESOP stock $2,500
The ESOP Association website also addresses the following Frequently Asked Questions About S. 1322: - How much will the proposed ESOP Promotion and Improvement Act of 2007 Cost the Federal Treasury?
- Why should S Corporation ESOPs be exempt from the 10% early withdrawal penalty tax when the purpose of ERISA plans such as an ESOP is to hold money for retirement, not to have it passed through and spent before retirement?
- Would employees of an S corporation pay the regular federal tax rate on their dividends?
- What purpose is served by exempting C corporations with ESOPs from the corporate AMT?
- Why is it necessary to have the tax deferred rollover treatment, or 1042, for sales of S corporation stock to an ESOP, when the gain on sale of S stock is usually not as great as the gain on sales of C corporations?
- Why should certain 25% owners of stock in an ESOP also acquire stock acquired in a 1042 transaction participate in the ESOP?
- Since the Enron and other corporate collapses, experts, and many in Congress have urged more diversification of company stock in ERISA plans, not less; so why would Congress wish to raise the de minimus rule for the opportunity of ESOP participants to diversify from company stock as they near retirement?
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