Creation Act of 2004 Signed by President Bush
Pro ESOP Provision is Retroactive to January 1, 1998

On October 22, 2004, President Bush signed the American Jobs Creation Act of 2004 (AJCA), which contains the provision that permits S corporations sponsoring an ESOP to use distributions from current earnings on both allocated and unallocated ESOP stock to pay the loan used by the ESOP to acquire stock for the employees. The law is now effective as of January 1, 1998.

The legislation, which has many controversial provisions, was passed by the Congress on October 11, 2004. Despite many differences among Members of Congress on the final wording of the bill, there was significant support by both the Senate Finance Committee and the House Tax Committee, as it was the Chair of the Senate Committee, Charles E. Grassley [R-IA], and the ranking Democratic Senator Max Baucus [D-MT], who asked for the ESOP (Section 240 of the legislation) to be included in the final version with the retroactive date.

In 1998, IRS had taken the position that only distributions from current earnings on unallocated shares could be used to pay debt. The provision, just like in the C corporation area, requires that employee owners have stock placed in their accounts that equals their shares of the distributions that is used to pay the debt.

AJCA deals primarily with the U.S. tax regime pertaining to income earned by U.S. corporations overseas and offers tax benefits for domestic manufacturing, the business community, and energy related industries among many others. Clearly the men and women involved with this legislation had no problem with trying to expand ESOPs and helping create more employee owners in America .

For more information about this legislation, please visit The ESOP Association’s web site at www.esopassociation.org. Click on the Advocacy link on the homepage.