[Congressional Record Volume 145, Number 82 (Thursday, June 10, 1999)]
[Extensions of Remarks]
[Pages E1225-E1226]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


           THE INTRODUCTION OF THE ESOP PROMOTION ACT OF 1999

                                 ______
                                 

                          HON. CASS BALLENGER

                           of north carolina

                    in the house of representatives

                        Thursday, June 10, 1999

  Mr. BALLENGER. Mr. Speaker, I come before the House today to 
introduce legislation to promote more employee ownership in America. I 
believe this is a modest proposal which can be deemed technical and 
clarifying in many respects. Entitled the ``ESOP Promotion Act of 
1999,'' this bill builds on legislation I introduced in the 102nd, 
103rd, 104th and 105th Congresses with bipartisan support. Nearly 100 
sitting members of this House have cosponsored this legislation over 
the years and, if former members are included, the number is over 200.
  Mr. Speaker, let me point out that the last Congress aided the 
creation of employee ownership through Employee Stock Ownership Plans 
(or ESOPs) by enabling a Subchapter S corporation to sponsor an ESOP. 
This provision was added to the Balanced Budget Act of 1997 (Public Law 
105-34) by Senator John Breaux in the Senate Finance Committee and has 
been part of my ESOP bills since 1990. The effort to have these small 
businesses offer employee ownership to their employees started in 1987. 
Many private sector groups, representing both professionals and 
businesses, have supported permitting Subchapter S corporations to 
sponsor ESOP's. I am grateful to my colleagues for their support of 
this important change in the code.
  I encourage my colleagues in the 106th Congress to stand up for 
employee ownership and enhance the positive record for one of the most 
encouraging economic trends in America today--ownership by employees of 
stock in the companies where they work through an ESOP. As many of my 
colleagues know, I came to Congress first and foremost with a small 
business background, having created an ESOP plan for the company I 
founded over 40 years ago. 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. I believe the employee ownership which 
we promoted at my company will continue to be a valuable retirement 
asset for our employees and their families for years to come.
  I believe that employee ownership, properly managed, creates a win-
win situation for all involved. America and our economic system benefit 
as we increase competitiveness through employee ownership and provide 
more opportunity for ownership for those who, frankly, would not have 
much of a chance to acquire stock ownership otherwise. Since 1989, the 
House has shown strong support for ESOP's, and I think it is important 
to confirm this support in the 106th Congress.
  Allow me to explain each section of my bill:
  Section 1: Names the bill ``The ESOP Promotion Act of 1999.''
  Section 2: Current law permits a corporate deduction for dividends 
paid on ESOP stock that are passed through to the employees in cash or 
used to pay the ESOP stock acquisition debt [Internal Revenue Code 
Section 404(k)]. Section 2 would amend Section 404(k) to permit the 
deduction if the employees participating in the ESOP are allowed, as 
their choice, to have the dividend reinvested in more employer stock. 
In fact, current ESOP and 401(k) sponsors can nearly accomplish the 
same result under current law with a convoluted system that requires an 
IRS letter ruling.
  Why is this simplification? Because under very complex chain of 
events which the IRS has approved in a series of letter rulings, the 
employee can have ``constructive receipt'' of the cash dividend, and 
then ``constructively'' take the dividend money back to the payroll 
office and reinvest it. Since the employee has received the dividend in 
cash, the deduction is allowed, although in reality it was reinvested. 
This legislation says cut to the chase. Where the employee has made 
clear a desire for the dividends to be reinvested, why have an 
expensive, confusing system that the IRS has to review after the ESOP 
sponsor spends dollars on designing the new system? The ESOP sponsor 
can put these resources to more productive use, and the employees can 
put their dividends to use in further bolstering their retirement 
savings with this change.
  Section 3: From 1984 until 1989, an estate with share of certain 
closely-held corporation 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 [former Internal Revenue Code 
Section 2210]. Unfortunately, the Tax Act of 1989 repealed this law 
which was an effective way to create more employee ownership. The 
proposed legislation would restore this incentive for stock to be 
transferred to an ESOP. No estate tax is being avoided here, it is just 
shifted from the estate to an American, closely-held corporation that 
has employee ownership through an ESOP.
  Section 4: This section would current what I believe is an anomaly in 
the current law. Internal Revenue Code Section 1042 provides that if a 
seller of closely-held stock reinvests his/her proceeds from the sale 
in the equities of a U.S. operating corporation, the gain on the sale 
to the ESOP is deferred until the replacement property is disposed of, 
if and only if the ESOP holds at least 30% of the outstanding shares of 
the corporation when the sale of stock to the ESOP is completed. This 
provision of current law plays a major role in the creation of over 50% 
of the ESOP companies in America. Current law benefits owner-founders, 
and outside investors of closely-held companies, but it 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. Section 4 would end the different treatment for shares acquired 
from a compensation arrangement as a condition of employment compared 
to stock acquired otherwise.
  Section 4 would expand the list of permissible reinvestment to U.S. 
mutual funds that represent U.S. operating corporation securities. This 
change would apply to an owner-founder or outside investor, as well as 
an individual who acquired the stock as a condition of employment.
  Section 4 also would correct another technical anomaly in current 
law. As presently written, Section 1042 provides that any holder of 25% 
or more of any class of stock in a company cannot participate in an 
ESOP established with stock acquired in a Section 1042

[[Page E1226]]

transaction. My bill would change the measure so that the 25% would be 
measured by the voting power of the stock, or the value of the stock in 
terms of total corporate value. This kind of measure is used in other 
sections of the code.
  Section 5: Amends the Internal Revenue Code of 1986 to permit limited 
distributions from ESOPs, without incurring a 10-percent penalty on 
early withdrawals, for high education expenses and first-time home 
purchases. The limitations relate to how much can be distributed and a 
requirement that the person have at least five years of participation 
before making the request for the distribution. The early withdrawal 
provision would be discretionary with the plan sponsor.
  I urge those of my colleagues who want to encourage employee 
ownership in America to join me by cosponsoring the ``ESOP Promotion 
Act of 1999'' and working hard to include these provisions in the tax 
bill that will soon be considered by the House Ways and Means 
Committee.

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