Rangel Bill Would Tax Stock Option Exercise in S Corps. with ESOPs

According to the summary  of The Tax Reduction and Reform Act of 2007 by Rangel, chairman of the House Ways and Means Committee, the proposal requires the recognition of ordinary income on the exercise of stock option in a S corporation with an Employee Stock Ownership Plan (ESOP).

Rangel’s bill would require S corporation option holders “to recognize income when an option is recognized or sold in an amount equal to the amount of income that was shifted to the ESOP” during the time the taxpayers held the options.   Interest will be assessed at the underpayment rate on any amounts included under this provision.

Under current law, the summary said, an individual that holds an option in an S corporation is not subject to tax on the income of the S corporation until such individuals exercise their option and become a shareholder in the S corporation. During the time in which an individual holds an option in an S corporation, taxes on the income earned by the S corporation are intended to be paid by the other shareholders in the S corporation.

The general tax reductions also proposed by Rangel include:

• An extension for one year special rules that permit active duty reservists to make penalty-free withdrawals from retirement plans.
• An extension for one year a $100 per day excise tax on group health plans that impose limits on mental health benefits that are not imposed on medical and surgical benefits.
• An extension for one year the current-law provision that permits tax free charitable contributions from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per taxable year, which is estimated to cost $452 million over 10 years.

“For too long, hardworking families have struggled to keep pace with the rising cost of living in America,“said Rangel, in the statement.   “This legislation would put money back in their pockets to combat the growing economic insecurity gripping our nation.”

For the full text of the bill, go here .