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A Better Partnership


Sep 2009
September 08, 2009

Will Congress Pull the Plug on ESOPs?

Our latest edition of The ESOP Advisor discussed The ESOP Promotion and Improvement Act of 2009. This proposed legislation was recently introduced in the U.S. Senate and would make beneficial changes in the ESOP law. Let's call that the "Good News."

Now, it's time to advise you of what could become the "Bad News." The Congressional Budget Office ("CBO") recently released a list of 188 options that would either decrease federal spending or increase federal revenue. The options come from previous legislative proposals, the President's budget, Congressional and CBO staff and other sources. They are intended to advise Members of Congress on areas where revenue might be raised. The budget options include the possible elimination of the special ESOP tax advantages. CBO specifically references the Section 1042 deferral of capital gain tax on sales of stock to an ESOP, and the deductibility of dividends paid on stock held by an ESOP. CBO estimates the elimination of these tax advantages would increase revenues by $4.9 billion by 2014, and $13.3 billion by 2019.

Although CBO indicates it is providing "objective, impartial analysis," it also gratuitously offers that "[S]everal arguments can be made against giving preferential tax treatment to ESOPs." It then mentions the different tax treatment of dividends, non-diversification of employees' retirement investments and the occasional use of an ESOP for reasons not intended by Congress, as arguments against ESOPs.

On the positive side, CBO does mention that employee productivity may be promoted by an ESOP. However, it then indicates "studies linking employee ownership to productivity have exhibited mixed results." The CBO discussion of ESOPs would not be characterized as a ringing endorsement of the concept.

The ESOP community needs to keep its eyes wide open to see whether future legislative proposals encompass the repeal of one or more of these ESOP benefits.

If you would like to learn more about ESOPs, please contact Vern Saper at 616.752.2116 or at, or Justin Stemple at 616.752.2375 or at

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