A bill to amend the Internal Revenue Code of 1986 to improve the operation of employee stock ownership plans, and for other purposes.

Summary: Employee Stock Ownership Plan Promotion and Improvement Act of 2007 - Amends the Internal Revenue Code to: (1) exempt certain distributions, including dividends, by S corporations to an employee stock ownership plan (ESOP) from the penalty tax for premature employee benefit plan withdrawals; (2) exempt deductions for ESOP dividends from corporate alternative minimum tax adjustments based on adjusted earnings and profits; (3) allow deferral of the recognition of gain for certain sales to ESOPs sponsored by any domestic corporation, including S corporations; (4) allow reinvestment of ESOP stock proceeds eligible for nonrecognition of gain in certain mutual funds; (5) modify certain ESOP stock ownership rules; and (6) allow a de minimis exception from pension plan investment diversification requirements for ESOP accounts with balances of $2,500 or less.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Employee Stock Ownership Plan 
Promotion and Improvement Act of 2007''.

SEC. 2. 10 PERCENT PENALTY TAX NOT TO APPLY TO CERTAIN S CORPORATION 
              DISTRIBUTIONS MADE ON STOCK HELD BY EMPLOYEE STOCK 
              OWNERSHIP PLAN.

    (a) In General.--Clause (vi) of section 72(t)(2)(A) of the Internal 
Revenue Code of 1986 (relating to general rule that subsection not to 
apply to certain distributions) is amended by inserting before the 
comma at the end the following: ``or any distribution (as described in 
section 1368(a)) with respect to S corporation stock that constitutes 
qualifying employer securities (as defined by section 409(l)) to the 
extent that such distributions are paid to a participant in the manner 
described in clause (i) or (ii) of section 404(k)(2)(A)''.
    (b) Effective Date.--The amendments made by this section shall 
apply to distributions made after the date of the enactment of this 
Act.

SEC. 3. ESOP DIVIDEND EXCEPTION TO ADJUSTMENTS BASED ON ADJUSTED 
              CURRENT EARNINGS.

    (a) In General.--Section 56(g)(4)(C) of the Internal Revenue Code 
of 1986 (relating to disallowance of items not deductible in computing 
earnings and profits) is amended by adding at the end the following new 
clause:
                            ``(vii) Treatment of esop dividends.--
                        Clause (i) shall not apply to any deduction 
                        allowable under section 404(k) if the deduction 
                        is allowed for dividends paid on employer 
                        securities held by an employee stock ownership 
                        plan established or authorized to be 
                        established before March 15, 1991.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 1989.
    (c) Waiver of Limitations.--If refund or credit of any overpayment 
of tax resulting from the application of the amendment made by this 
section is prevented at any time before the close of the 1-year period 
beginning on the date of the enactment of this Act by the operation of 
any law or rule of law (including res judicata), such refund or credit 
may nevertheless be made or allowed if claim therefor is filed before 
the close of such period.

SEC. 4. AMENDMENTS RELATED TO SECTION 1042.

    (a) Deferral of Tax for Certain Sales to Employee Stock Ownership 
Plan Sponsored by S Corporation.--
            (1) In general.--Section 1042(c)(1)(A) of the Internal 
        Revenue Code of 1986 (defining qualified securities) is amended 
        by striking ``C''.
            (2) Effective date.--The amendment made by paragraph (1) 
        shall apply to sales after the date of the enactment of this 
        Act.
    (b) Reinvestment in Certain Mutual Funds Permitted.--
            (1) In general.--Clause (ii) of section 1042(c)(4)(B) of 
        the Internal Revenue Code of 1986 (defining operating 
        corporation) is amended to read as follows:
                            ``(ii) Financial institutions, insurance 
                        companies, and mutual funds.--The term 
                        `operating corporation' shall include--
                                    ``(I) any financial institution 
                                described in section 581,
                                    ``(II) any insurance company 
                                subject to tax under subchapter L, and
                                    ``(III) any regulated investment 
                                company if substantially all of the 
                                securities held by such company are 
                                securities issued by operating 
                                corporations (determined without regard 
                                to this subclause).''.
            (2) Effective date.--The amendment made by paragraph (1) 
        shall apply to sales of qualified securities after the date of 
        the enactment of this Act.
    (c) Modification to 25-Percent Shareholder Rule.--
            (1) In general.--Subparagraph (B) of section 409(n)(1) of 
        the Internal Revenue Code of 1986 (relating to securities 
        received in certain transactions) is amended to read as 
        follows:
                    ``(B) for the benefit of any other person who owns 
                (after the application of section 318(a)) more than 25 
                percent of--
                            ``(i) the total combined voting power of 
                        all classes of stock of the corporation which 
                        issued such employer securities or of any 
                        corporation which is a member of the same 
                        controlled group of corporations (within the 
                        meaning of subsection (l)(4)) as such 
                        corporation, or
                            ``(ii) the total value of all classes of 
                        stock of any such corporation.''.
            (2) Effective date.--The amendment made by paragraph (1) 
        shall take effect on the date of the enactment of this Act.

SEC. 5. DE MINIMIS EXCEPTION TO DIVERSIFICATION OF INVESTMENT 
              REQUIREMENT.

    (a) In General.--Paragraph (28) of section 401(a) of the Internal 
Revenue Code of 1986 (relating to additional requirements relating to 
employee stock ownership plans) is amended by adding at the end the 
following new subparagraph:
                    ``(D) Exception for de minimis account balance.--A 
                plan shall not fail to meet the requirements of this 
                subparagraph for a plan year solely because the plan 
                provides that clause (i) does not apply to any 
                participant's account in the plan which, as of the 
                close of the preceding plan year, has an account 
                balance which does not exceed $2,500.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to plan years beginning after the date of the enactment of this Act.