Bloomberg News

Employee Stock Ownership Plans Seen Threatened by Reform: Taxes

May 24, 2013

U.S. Representative Pat Tiberi

U.S. Representative Pat Tiberi, a Republican from Ohio, said he didn’t want to do anything in tax reform that would have a detrimental effect on ESOPs and S corporations, a change in the tax law that he said has won approval from Democrats and Republicans. Photographer: Scott J. Ferrell/Congressional Quarterly via Getty Images

Representative Pat Tiberi may have given promoters of employee stock ownership plans for certain kinds of companies an excuse for concern at a hearing on tax reform last week: He praised them.

It was a surprise that Tiberi, the Ohio Republican who runs the House Ways and Means Subcommittee on Select Revenue Measures, mentioned the stock ownership plans and S corporations at all, Bloomberg BNA reported. That may point to a potential threat the tax-favored plans face as congressional tax-writers prepare to revamp the Internal Revenue Code.

Participants in so-called ESOPs -- which were allowed to form in S corporations beginning in the late 1990s -- are aware that a broad swath of tax provisions are a topic of discussion in tax reform, particularly tax expenditures and the treatment of such passthrough businesses, said Michael Keeling, president of the ESOP Association, which advocates for the plans.

“They see that there’s a lot of reviewing going on,” Keeling told Bloomberg BNA.

House Republicans have made rewriting the tax code a chief priority. Representative Dave Camp, chairman of the Ways and Means Committee, wants the biggest tax overhaul in decades. He has released draft proposals for revamping narrow areas of the tax laws. His drafts so far represent a small portion of the law and aren’t fully spelled out. He wants his committee to pass a bill by the end of the year that would raise just as much money as the current tax system generates.

The government collects $6.1 trillion in tax receipts from S corporations, with more than 40 percent of it from wholesale and retail companies, according to the National Small Business Association.

Meaningfully Tagged

The small business draft for tax reform that was the topic of the May 15 hearing doesn’t delve into ESOPs and S corporations. Still, the Obama administration, and the Simpson-Bowles deficit reduction commission, proposed limits on the size of S corporations, which could affect ESOPs, Keeling said.

Perhaps more ominous to some supporters, Keeling said, the congressional Joint Committee on Taxation pointed out more than once that ESOPs receive special treatment as tax-exempt trusts in its own explanation of the Ways and Means Committee’s proposal on passthrough entities.

“When JCT puts something on paper, it’s meaningful,” Keeling said.

Congress expanded ESOPs to S corporations in 1996 and 1997. Profits attributable to an ESOP’s ownership of stock in an S corporation aren’t subject to federal income tax, according to the National Center for Employee Ownership. A 30 percent ESOP pays no tax on 30 percent of its income; a 100 percent ESOP pays no tax at all, often on state taxes as well, the center said.

Taking Off

Congress created the tax break to encourage the creation of ESOPs, and the experiment has been a success, lawmakers and the plan’s supporters say.

Congress further modified the law in 2000 to prevent the creation of ESOPs for just a handful of people in a corporation.

“That’s when things really began to take off,” Keeling said. In January 1998, the ESOP Association had no membership among S corporations; now about 78 percent of its membership consists of S corporations, which number about 1,500, he said.

“The ESOP community is energized and realizes there is a potential for change,” Keeling said.

The association wrote to the Ways and Means working group on pensions and retirement in March, defending the plans and noting that companies with ESOPs shed fewer workers during the recession and have been more productive and profitable than other businesses.

Tiberi’s Remarks

At the hearing, Tiberi said he didn’t want to do anything in tax reform that would have a detrimental effect on ESOPs and S corporations, a change in the tax law that he said has won approval from Democrats and Republicans.

“I’m not sure I would tinker with that,” said witness Thomas Nichols, a tax attorney with Meissner Tierney Fisher and Nichols. “It seems to be working very well.”

The issue is more active in the House than in the Senate, where the Finance Committee’s direction on ESOPs is unclear, Keeling said.

“The House has been so much more transparent,” he said, with the working groups and public posting of comments to the committee. Generally, Keeling said, he expects the discussions around tax reform in 2013 are not just for show.

“Tax reform is a very real thing going on,” Keeling said.

To contact the editor responsible for this story: Cesca Antonelli at

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