ESOP Promotion Act of 1997

Summary: ESOP Promotion Act of 1997 - Repeals provisions of the Small Business Job Protection Act of 1996 which made certain employee stock ownership plan (ESOP) benefits inapplicable to S corporations (certain small business corporations). 
Excludes from gross income transfers of qualified securities in connection with the performance of services if such securities are sold to an ESOP within 60 days of the taxable event. 
Permits ESOP dividends to be reinvested without losing the dividend deduction.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``ESOP Promotion Act of 1997''.

SEC. 2. PROVISIONS RELATING TO S CORPORATIONS ESTABLISHING EMPLOYEE 
              STOCK OWNERSHIP PLANS.

    (a) Repeal of Provision Making Certain ESOP Benefits Inapplicable 
to S Corporations.--Section 1316(d) of the Small Business Job 
Protection Act of 1996 is repealed, and the Internal Revenue Code of 
1986 shall be applied and administered as if the amendments made by 
such section had not been enacted.
    (b) Repeal of Application of Unrelated Business Income Tax.--
Section 512(e) of the Internal Revenue Code of 1986 is amended--
            (1) by striking ``described in section 1361(c)(7)'' in 
        paragraph (1) and inserting ``described in section 501(c)(3) 
        and exempt from taxation under section 501(a)'', and
            (2) by inserting ``Charitable Organizations Holding Stock 
        in'' after ``Applicable to'' in the heading.
    (c) ESOPs Allowed To Distribute Cash Rather Than Stock.--
            (1) In general.--Section 409(h)(2) of the Internal Revenue 
        Code of 1986 is amended by adding at the end the following new 
        subparagraph:
                    ``(8) Plan maintained by s corporation.--In the 
                case of a plan established and maintained by an S 
                corporation which otherwise meets the requirements of 
                this subsection or section 4975(e)(7), such plan shall 
                not be treated as failing to meet the requirements of 
                this subsection or section 401(a) merely because it 
                does not permit a participant to exercise the right 
                described in paragraph (1)(A) if such plan provides 
                that the participant entitled to a distribution from 
                the plan shall have a right to receive the distribution 
                in cash.''
            (2) Conforming amendments.--Section 409(h)(2) of such Code 
        is amended--
                    (A) by striking ``A plan'' and inserting:
                    ``(A) In general.--A plan'', and
                    (B) by striking ``In the case of an employer'' and 
                inserting:
                    ``(B) Plans restricted by charter or bylaws.--In 
                the case of an employer''.
    (d) Exemptions From Prohibited Transaction Rules Available to ESOPs 
and Shareholder Employees.--The last sentence of section 408(d) of the 
Employee Retirement Income Security Act of 1974 (29 U.S.C. 1108(d)) is 
amended by striking all that precedes ``a participant or beneficiary'' 
and inserting ``For purposes of this subsection,''.
    (e) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1997.

SEC. 3. AMENDMENTS RELATED TO SECTION 1042.

    (a) Extension of Section 1042 Principles to Stock Received as 
Compensation for Services.--
            (1) In general.--Section 83 of the Internal Revenue Code of 
        1986 (relating to property transferred in connection with 
        performance of services) is amended by adding at the end the 
        following new subsection:
    ``(i) Exception for Transfers of Qualified Securities Sold to 
Employee Stock Ownership Plans.--
            ``(1) Exclusion from income.--Subsections (a) and (b) shall 
        not apply to, and no amount shall be includible in gross income 
        with respect to, the transfer of any qualified security (as 
        defined in section 1042(c)(1)) in connection with the 
        performance of services if, and to the extent that, within 60 
        days after the event which would cause the recognition of 
        income pursuant to subsection (a) or (b) but for this 
        subsection, the transferee sells such qualified security to an 
        employee stock ownership plan (as defined in section 
        4975(e)(7)) and the requirements of section 1042(a) are met 
        with respect to such sale.
            ``(2) No deduction by employer.--Notwithstanding the 
        provisions of subsection (h), the person for whom the services 
        were performed in connection with which any qualified security 
        is transferred shall not be entitled to a deduction with 
        respect to such transfer if, and to the extent that, paragraph 
        (1) applies to such transfer.''
            (2) Conforming amendments.--
                    (A) Section 424(c)(1) of such Code is amended by 
                striking ``or'' at the end of subparagraph (B), by 
                striking the period at the end of subparagraph (C) and 
                inserting ``, or'', and by adding at the end the 
                following new subparagraph:
                    ``(D) a sale to which section 1042 applies.''
                    (B) Section 1042(a) of such Code is amended--
                            (i) by striking ``which would be recognized 
                        as long-term capital gain'' from the first 
                        sentence thereof, and
                            (ii) by adding at the end the following new 
                        sentence: ``Any gain which is recognized after 
                        the application of the preceding sentence shall 
                        be treated as ordinary income to the extent of 
                        the lesser of the amount of such gain or the 
                        amount which would have been treated as 
                        ordinary income but for this section.''
                    (C) Section 1042(b)(4) of such Code is amended by 
                adding at the end the following new sentence: ``The 
                requirements of the preceding sentence shall not apply 
                to qualified securities received by the taxpayer in a 
                transfer to which section 83 or 422 applied (or to 
                which section 422 or 424 (as in effect on the day 
                before the date of enactment of the Revenue 
                Reconciliation Act of 1990) applied).''
                    (D) Section 1042(c)(1)(B) of such Code is amended 
                to read as follows:
                    ``(B) were not received by the taxpayer in--
                            ``(i) a distribution from a plan described 
                        in section 401(a), or
                            ``(ii) a transfer pursuant to a right to 
                        acquire stock to which section 423 applied.''
                    (E) The first sentence of section 1042(d) of such 
                Code is amended to read as follows: ``The basis of the 
                taxpayer in qualified replacement property purchased by 
                the taxpayer during the replacement period shall be 
                reduced by the amount of gain not recognized by virtue 
                of such purchase, taking into account the application 
                of subsection (a) and, if applicable, the application 
                of section 83(i) or section 424(c)(1)(D).''
                    (F) Section 1042(e)(1) of such Code is amended to 
                read as follows:
            ``(1) In general.--If a taxpayer disposes of any qualified 
        replacement property, then, notwithstanding any other provision 
        of this title, gain (if any) shall be recognized to the extent 
        of the gain which was not recognized by reason of the 
        acquisition by such taxpayer of such qualified replacement 
        property, taking into account the application of subsection (a) 
        and, if applicable, the application of section 83(i) or 
        424(c)(1)(D). Such gain shall be treated as ordinary income to 
        the extent of the excess (if any) of the amount which would 
        have been treated as ordinary income but for the application of 
        such sections over the amount treated as ordinary income under 
        the last sentence of subsection (a).''
            (3) Effective date.--The amendments made by this subsection 
        shall apply to sales of qualified securities on or after the 
        date of the enactment of this Act.
    (b) Modification to 25-Percent Shareholder Rule.--
            (1) In general.--Section 409(n)(1)(B) of such Code 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. 4. ESOP DIVIDENDS MAY BE REINVESTED WITHOUT LOSS OF DIVIDEND 
              DEDUCTION.

    (a) In General.--Section 404(k)(2)(A) of the Internal Revenue Code 
of 1986 (defining applicable dividends) is amended by striking ``or'' 
at the end of clause (ii), by redesignating clause (iii) as clause 
(iv), and by inserting after clause (ii) the following new clause:
                            ``(iii) is, at the election of such 
                        participants or their beneficiaries--
                                    ``(I) payable as provided in clause 
                                (i) or (ii), or
                                    ``(II) paid to the plan and 
                                reinvested in qualifying employer 
                                securities, or''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1997.