The proposed legislation – Senate Bill 2298, the “Employee Stock Ownership Plan Promotion and Improvement Act of 2004” – contains provisions benefiting both S corporations and C corporations with ESOPs. Most relevant and potentially helpful for the organizations is the inclusion in the legislation of a provision repealing the punitive 10% penalty tax on S corporations’ distributions from current earnings, which would allow participants to pay regular income tax on the cash received, according to a news release issued by the ESOP Association.
Other provisions of the bill include:
- Permitting S corporations distributions’ from current earnings paid on ESOP stock, both allocated and unallocated, to be used to pay ESOP debt.
- Permitting sellers of stock to the ESOP of an S corporation to utilize the ESOP tax benefit referred to as the tax deferred rollover, or the 1042 treatment.
- Clarifying that dividends paid by C corporations on ESOP stock are not a preference item in calculating the corporate alternative minimum tax.
- Permitting proceeds received from a 1042 transaction to be invested in mutual funds consisting of operating U.S. corporation securities.
- Redefining what is a 25% owner for purposes of IRC 1042 to be 25% owner of voting stock, or all stock of the corporation, not 25% of any class of stock.
- Permitting early withdrawals from ESOP for first time home purchases, and college tuition under limited circumstances.
“Senator Breaux has been an instrumental supporter of pro-ESOP legislation over the years and we thank him,” ESOP Association President J. Michael Keeling said in the news release. “But I believe he and all ESOP advocates would agree the modest proposals he puts forward transcend any individual’s work for employee ownership in America because S 2298 will solidify and expand our nation’s ownership policies.”