[Congressional Record Volume 141, Number 195 (Friday, December 8, 1995)]
[Extensions of Remarks]
[Pages E2324-E2325]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




             INTRODUCTION OF THE ESOP PROMOTION ACT OF 1995

                                 ______


                          HON. CASS BALLENGER

                           of north carolina

                    in the house of representatives

                       Thursday, December 7, 1995

  Mr. BALLENGER. Mr. Speaker, it is with pleasure that I join my 
colleagues, Mr. Rohrabacher of California and Mr. Payne of Virginia, in 
introducing the ESOP Promotion Act of 1995.
  Ever since my arrival in the Congress in 1986, I have tried to assist 
the promotion and improvement of employee stock ownership plans, or 
ESOP's. It is my personal belief that ESOP's and employee ownership are 
excellent arrangements for a free enterprise, capitalist economy. The 
ESOP provides a method for current owners of stock to sell, at fair 
market value, their stock to a trust that holds the stock for eventual 
distribution to employees upon their death, disability, or retirement.
  Mankind has never known a better economic system that one with 
private property, and a market that is established by competition. And 
there is no better way to preserve that system than to ensure that 
those who work responsibily in the system have an opportunity to own--
to have an equity stake in the product of their labor, be it 
manufacturing, professional services, financial services, or any other 
business endeavor.
  Since Congress first codified the employee stock ownership plan 
approach, which permits the contribution of employer stock to a trust 
for employees and permits borrowed funds using the credit of the 
corporation, the amount of stock acquired by employee-owned companies 
in America has grown significantly.
  All of us I assume have read about the big name companies that are 
employee-owned, such as Avis, United Airlines, and Weirton, but just 
like American business, most of the approximately 10,000 employee-owned 
companies are not publicly traded on stock exchanges, but are privately 
held.
  I know ESOP's first hand, as my family's business utilized an ESOP 
for transferring much of the family's stakehold to those who had 
contributed so much to our business' success--the employees.
  I believe that employee ownership, properly managed, creates a win-
win situation for all involved--including America and our economic 
system as we increase competitiveness with employee ownership, and as 
we provide more opportunity for ownership for those who frankly would 
not have much of a chance at all to acquire stock ownership.
  Following my remarks is a synopsis of this year's bill. Generally, 
the bill reflects my, and many of my colleagues, longstanding goal to 
permit subchapter S corporations to sponsor ESOP's as a one section. 
The bill would reinstate a provision of law that was repealed in 1989 
which permitted an ESOP corporate sponsor to pay the estate tax of an 
estate that transfers stock to an ESOP. Also, for those corporations 
that have deducted dividends paid on ESOP stock, and who did so before 
the issuance of IRS regs, which were retroactive on these companies and 
subjected them to the alternative minimum tax, the bill would clarify, 
for that group of companies, there would be no AMT on the ESOP 
dividends.

  Also, with the advent of providing stock directly to employees under 
a variety of schemes, such as stock options, the bill would clarify 
that employees with that stock, acquired under a plan conditioned on 
employment, could sell that stock to an ESOP and take the same 
treatment for their proceeds as an owner-founder selling to an ESOP, or 
outside investors. And the bill would under limited circumstances 
permit a deduction for stock transferred to an ESOP from a charitable 
remainder trust.
  Finally, my bill corrects a glitch in the 1989 law that denies the 
availability of the ESOP lender interest exclusion for ESOP's that are 
known as employee-owned co-ops, where the stock is voted one person-one 
vote as opposed to proportional voting based on share ownership.
  Mr. Speaker, I am aware that H.R. 2491, the Balanced Budget of 1995, 
vetoed by the President, had a provision added by the other body that 
repealed this particular ESOP incentive, the ESOP lender interest 
exclusion. Certainly, I and the other original drafter of the 1995 ESOP 
Promotion Act will make adjustments in our bill, or any section of our 
bill that might be affected by a provision in a budget bill that 
becomes law.
  I close by urging my colleagues to join with us and demonstrate their 
support for ESOP's and employee ownership by cosponsoring this 
legislation. Since 1989, the House has shown strong support for ESOP's, 
and I think it is important to confirm this support in this Congress. 
We should not let the position of the other body on one ESOP provision 
leave the impression with the American people that this Congress is 
abandoning the over 20 years of strong congressional support for ESOP's 
and employee ownership.
  I appreciate the opportunity to explain the ESOP Promotion Act of 
1995, and ask that the synopsis be included in the Record at this 
point.

                 Synopsis of ESOP Promotion Act of 1995

       Section 1: Names legislation ESOP Promotion Act of 1995.
       Section 2: Under current law, corporations that operate 
     under the tax law referred to as Subchapter S cannot sponsor 
     an ESOP. There are hundreds of thousands of Subchapter S 
     corporations; most are small, closely-held, businesses 
     employing millions of people. There is no justification to 
     deny employee ownership through ESOP's to this class of 
     corporations. The proposed legislation would permit 
     Subchapter S corporations to sponsor an ESOP. Because there 
     is no corporate tax on income of these S corporations, the 
     proposal would subject that share of the corporation's 
     taxable income assignable to the ESOP's share of the income 
     to a tax equal to the corporate tax.
       Section 3: From 1984 until 1989, an estate with shares of 
     certain closely-held corporations could transfer stock in the 
     corporation to the corporation's ESOP, and the ESOP would 
     assume the estate tax liability on the value of the 
     transferred stock. The Tax Act of 1989 repealed this law. The 
     proposed legislation would restore this incentive for stock 
     to be transferred to an ESOP.
       Section 4: The tax laws of 1984 and 1986 permitted 
     dividends paid on ESOP stock to be tax deductible. Until 
     1989, these ESOP dividends were not subject to the corporate 
     Alternative Minimum Tax, or AMT. In the tax bill of 1989, 
     Congress altered the complex calculations utilized to figure 
     the AMT. When the IRS issued regulations implementing the new 
     formulas, on March 15, 1991, IRS retroactively deemed ESOP 
     dividends to be subject to the corporate AMT. The proposed 
     legislation would clarify that the IRS position is an 
     incorrect interpretation of the law, and that ESOP dividends 
     are not subect to the corporate AMT, if the ESOP was 
     established before the IRS issued its retroactive regulation.
       Section 5: Current law does not permit holders of stock in 
     a closely-held corporation who acquired the stock as a 
     condition of employment, from a plan, other than an ERISA 
     plan, to sell that stock to an ESOP and receive a deferral of 
     the tax on the gain. 

[[Page E 2325]]
     (Known as a Section 1042 ESOP transaction.) Any other shareholder, 
     including outside investors, are eligible for the special 
     1042 deferral. The proposed legislation would end the 
     different treatment for shares acquired from a compensation 
     arrangement as a condition of employment compared to stock 
     acquired otherwise. This Section would also clarify that 
     those who hold 25 percent, or more, of voting stock of a 
     corporation, or a similar amount of stock as measured by 
     corporate value, are not eligible to participate in an ESOP 
     established with stock acquired in a 1042 transaction. 
     Current law applies this restriction to any class of stock.
       Section 6: The 1989 tax law had a technical glitch that 
     inadvertently repealed the availability of one ESOP tax 
     advantage for certain ESOPs which have employees vote on a 
     one-person, one-vote basis as compared to the traditional 
     one-share, one-vote basis. The glitch occurs because current 
     code section 133, as amended in 1989 does not reference to 
     code section 409(e)(5), as is the case in other relevant ESOP 
     laws.
       Section 7: Current law does not permit an estate tax 
     deduction for closely-held shares transferred to an ESOP from 
     a charitable remainder trust even though such a deduction is 
     permitted for transfers to charity. The proposal, in limited 
     circumstances would permit such a deduction.

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