I

104TH CONGRESS

1ST SESSION H. R. 2741

To amend the Internal Revenue Code of 1986 and Employee Retirement

Income Security Act of 1974 in order to promote and improve employee

stock ownership plans.

IN THE HOUSE OF REPRESENTATIVES

DECEMBER 7, 1995

Mr. BALLENGER (for himself, Mr. ROHRABACHER, and Mr. PAYNE of Virginia) introduced the following bill; which was referred to the Committee

on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 and Employee

Retirement Income Security Act of 1974 in order to

promote and improve employee stock ownership plans.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘ESOP Promotion Act

5 of 1995’’.

6 SEC. 2. CERTAIN CORPORATIONS ALLOWED TO SPONSOR

7 EMPLOYEE STOCK OWNERSHIP PLANS.

8 (a) IN GENERAL.—Subparagraph (A) of section

9 1361(c)(2) of the Internal Revenue Code of 1986 (defin-
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1 ing S corporation) is amended by adding at the end the

2 following new clause:

3 ‘‘(v) A trust established pursuant to

4 an employee stock ownership plan (as de5 fined in section 4975(e)(7)).’’

6 (b) TRUSTEE TREATED AS SHAREHOLDER.—Sub7 paragraph (B) of section 1361(c)(2) of such Code is

8 amended by adding at the end the following new clause:

9 ‘‘(v) In the case of a trust described

10 in clause (v) of subparagraph (A), the

11 trustee shall be treated as the share12 holder.’’

13 (c) S CORPORATION TO PAY ESOP’S UNRELATED

14 BUSINESS TAX.—

15 (1) IN GENERAL.—Section 1361 of such Code

16 is amended by adding at the end the following new

17 subsection:

18 ‘‘(e) SPECIAL RULE FOR EMPLOYEE STOCK OWNER19 SHIP TRUSTS.—A trust shall not be treated as described

20 in clause (v) of subsection (c)(2)(A) unless the S corpora21 tion sponsoring such trust pays, or guarantees the pay22 ment by such trust of, any tax imposed by section 511,

23 in such manner as the Secretary may prescribe, and pay24 ment by the corporation shall not be treated as a contribu25 tion to the trust under section 404(a).’’
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1 (2) CONFORMING AMENDMENTS.—

2 (A) Section 408(b) of the Employee Retire3 ment Income Security Act of 1974 (29 U.S.C.

4 1108(b)) is amended by adding at the end the

5 following new paragraph:

6 ‘‘(14) Any guarantee or payment of a tax liabil7 ity as described in section 1361(e) of the Internal

8 Revenue Code of 1986.’’

9 (B) Subsection (d) of section 4975 of such

10 Code is amended by striking ‘‘or’’ at the end of

11 paragraph (14), by striking the period at the

12 end of paragraph (15) and inserting ‘‘; or’’, and

13 by inserting after paragraph (15) the following:

14 ‘‘(16) any guarantee or payment of a tax liabil15 ity as described in section 1361(e).’’

16 (d) S CORPORATION STOCK DISTRIBUTIONS TO

17 ESOP NOT TREATED AS CONTRIBUTIONS.—Section

18 404(a) of such Code is amended by adding at the end the

19 following new paragraph:

20 ‘‘(10) DISTRIBUTIONS WITH RESPECT TO

21 STOCK OF S CORPORATION.—Distributions with re22 spect to the stock of an S corporation made to an

23 employee stock ownership plan (as defined in section

24 4975(e)(7)) shall not be considered contributions for

25 purposes of this section or under section 415(c).’’
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1 (e) DEDUCTION FOR S CORPORATION STOCK DIS2 TRIBUTIONS.—Paragraph (6) of section 404(k) of such

3 Code is amended by adding at the end the following new

4 subparagraph:

5 ‘‘(C) DIVIDEND.—The term ‘dividend’

6 shall include distributions with respect to stock

7 of an S corporation which would be treated as

8 a dividend but for the application of section

9 1368(a).’’

10 (f) RULES RELATING TO UNRELATED BUSINESS

11 TAX.—

12 (1) Subsection (b) of section 513 of such Code

13 is amended by inserting before the period ‘‘or by an

14 S corporation of which it is a shareholder’’.

15 (2) Subsection (c) of section 512 of such Code

16 is amended by striking the subsection heading and

17 paragraph (1) and inserting the following:

18 ‘‘(c) SPECIAL RULES APPLICABLE TO PARTNER19 SHIPS AND S CORPORATIONS.—

20 ‘‘(1) IN GENERAL.—If a trade or business regu21 larly carried on by a partnership of which an organi22 zation is a member or an S corporation of which an

23 employee stock ownership trust is a shareholder is

24 an unrelated trade or business with respect to such

25 organization or trust, such organization or trust, in
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1 computing its unrelated business taxable income

2 shall, subject to the exceptions, additions, and limi3 tations contained in subsection (b), include its share

4 (whether or not distributed) of the gross income of

5 the partnership or S corporation from such unre6 lated trade or business and its share of the partner7 ship or S corporation deductions directly connected

8 with such gross income.’’

9 (g) ESOP MAY DISTRIBUTE CASH.—The second sen10 tence of paragraph (2) of section 409(h) of such Code is

11 amended to read as follows: ‘‘In the case of an employer

12 that is an S corporation or whose charter or bylaws re13 strict the ownership of substantially all outstanding em14 ployer securities to employees or to a trust described in

15 section 401(a), a plan which otherwise meets the require16 ments of this subsection or section 4975(e)(7) shall not

17 be considered to have failed to meet the requirements of

18 this subsection or section 401(a) merely because it does

19 not permit a participant to exercise the right described

20 in paragraph (1)(A) if such plan provides that participants

21 entitled to a distribution from the plan shall have a right

22 to receive such distribution in cash, except that such plan

23 may distribute employer securities subject to a require24 ment that such securities may be resold to the employer
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1 under terms which meet the requirements of paragraph

2 (1)(B).’’

3 (h) EFFECTIVE DATE.—The amendments made by

4 this section shall take effect on the date of the enactment

5 of this Act.

6 SEC. 3. ESOP ASSUMPTION OF ESTATE TAX.

7 (a) IN GENERAL.—Subchapter C of chapter 11 of the

8 Internal Revenue Code of 1986 (relating to miscellaneous

9 estate tax provisions) is amended by adding at the end

10 thereof the following new section:

11 ‘‘SEC. 2210. LIABILITY FOR PAYMENT IN CASE OF TRANS12 FER OF EMPLOYER SECURITIES TO AN EM13 PLOYEE STOCK OWNERSHIP PLAN OR A

14 WORKER-OWNED COOPERATIVE.

15 ‘‘(a) IN GENERAL.—If—

16 ‘‘(1) employer securities—

17 ‘‘(A) are acquired from the decedent by an

18 employee stock ownership plan or by an eligible

19 worker-owned cooperative from any decedent,

20 ‘‘(B) pass from the decedent to such a

21 plan or cooperative, or

22 ‘‘(C) are transferred by the executor to

23 such a plan or cooperative, and

24 ‘‘(2) the executor of the estate of the decedent

25 may (without regard to this section) make an elec-
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1 tion under section 6166 with respect to that portion

2 of the tax imposed by section 2001 which is attrib3 utable to employer securities; and

4 then the executor is relieved of liability for payment of

5 that portion of the tax imposed by section 2001 which

6 such employee stock ownership plan or cooperative is re7 quired to pay under subsection (b).

8 ‘‘(b) PAYMENT OF TAX BY EMPLOYEE STOCK OWN9 ERSHIP PLAN OR COOPERATIVE.—

10 ‘‘(1) IN GENERAL.—An employee stock owner11 ship plan or eligible worker-owned cooperative—

12 ‘‘(A) which has acquired employer securi13 ties from the decedent, or to which such securi14 ties have passed from the decedent or been

15 transferred by the executor, and

16 ‘‘(B) with respect to which an agreement

17 described in subsection (e)(1) is in effect,

18 shall pay that portion of the tax imposed by section

19 2001 with respect to the taxable estate of the dece20 dent which is described in paragraph (2).

21 ‘‘(2) AMOUNT OF TAX TO BE PAID.—The por22 tion of the tax imposed by section 2001 with respect

23 to the taxable estate of the decedent that is referred

24 to in paragraph (1) is equal to the lesser of:
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1 ‘‘(A) the value of the employer securities

2 described in subsection (a)(1) which is included

3 in the gross estate of the decedent, or

4 ‘‘(B) the tax imposed by section 2001 with

5 respect to such taxable estate reduced by the

6 sum of the credits allowable against such tax.

7 ‘‘(c) INSTALLMENT PAYMENTS.—

8 ‘‘(1) IN GENERAL.—If—

9 ‘‘(A) the executor of the estate of the dece10 dent (without regard to this section) elects to

11 have the provisions of section 6166 (relating to

12 extensions of time for payment of estate tax

13 where estate consists largely of interest in close14 ly-held business) apply to payment of that por15 tion of the tax imposed by section 2001 with re16 spect to such estate which is attributable to em17 ployer securities, and

18 ‘‘(B) the plan administrator or the cooper19 ative provides to the executor the agreement de20 scribed in subsection (e)(1),

21 then the plan administrator or any authorized officer

22 of the cooperative may elect, before the due date (in23 cluding extensions) for filing the return of such tax,

24 to pay all or part of the tax described in subsection
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1 (b)(2) in installments under the provisions of section

2 6166.

3 ‘‘(2) INTEREST ON INSTALLMENTS.—In deter4 mining the 4-percent portion for purposes of section

5 6601(j)—

6 ‘‘(A) the portion of the tax imposed by sec7 tion 2001 with respect to an estate for which

8 the executor is liable, and

9 ‘‘(B) the portion of such tax for which an

10 employee stock ownership plan or an eligible

11 worker-owned cooperative is liable,

12 shall be aggregated.

13 ‘‘(3) SPECIAL RULES FOR APPLICATION OF SEC14 TION 6166(g).—In the case of any transfer of em15 ployer securities to an employee stock ownership

16 plan or eligible worker-owned cooperative to which

17 this section applies—

18 ‘‘(A) TRANSFER DOES NOT TRIGGER AC19 CELERATION.—Such transfer shall not be treat20 ed as a disposition of withdrawal to which sec21 tion 6166(g) applies.

22 ‘‘(B) SEPARATE APPLICATION TO ESTATE

23 AND PLAN INTERESTS.—Section 6166(g) shall

24 be applied separately to the interests held after
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1 such transfer by the estate and such plan or

2 cooperative.

3 ‘‘(C) REQUIRED DISTRIBUTION NOT TAKEN

4 INTO ACCOUNT.—In the case of any distribution

5 of such securities by such plan which is de6 scribed in section 4978(d)(1)—

7 ‘‘(i) such distribution shall not be

8 treated as a disposition or withdrawal for

9 purposes of section 6166(g), and

10 ‘‘(ii) such securities shall not be taken

11 into account in applying section 6166(g) to

12 any subsequent disposition or withdrawal.

13 ‘‘(d) GUARANTEE OF PAYMENTS.—Any employer—

14 ‘‘(1) whose employees are covered by an em15 ployee stock ownership plan, and

16 ‘‘(2) who has entered into an agreement de17 scribed in subsection (e)(2) which is in effect,

18 and any eligible worker-owned cooperative shall guarantee

19 (in such manner as the Secretary may prescribe) the pay20 ment of any amount such plan or cooperative, respectively,

21 is required to pay under subsection (b).

22 ‘‘(e) AGREEMENTS.—The agreements described in

23 this subsection are as follows:

24 ‘‘(1) A written agreement signed by the plan

25 administrator, or by any authorized officer of the eli-
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1 gible worker-owned cooperative, consenting to the

2 application of subsection (b) to such plan or cooper3 ative.

4 ‘‘(2) A written agreement signed by the em5 ployer whose employees are covered by the plan de6 scribed in subsection (b) consenting to the applica7 tion of subsection (d).

8 ‘‘(f) EXEMPTION FROM TAX ON PROHIBITED TRANS9 ACTIONS.—The liability which is assumed under this sec10 tion by an employee stock ownership plan of any portion

11 of the liability for any portion of the tax imposed by sec12 tion 2001 shall be treated as a loan described in section

13 4975(d)(3).

14 ‘‘(g) DEFINITIONS.—For purposes of this section—

15 ‘‘(1) EMPLOYER SECURITIES.—The term ‘em16 ployer securities’ has the meaning given such term

17 by section 409(l).

18 ‘‘(2) EMPLOYEE STOCK OWNERSHIP PLAN.—

19 The term ‘employee stock ownership plan’ has the

20 meaning given such term by section 4975(e)(7).

21 ‘‘(3) ELIGIBLE WORKER-OWNED COOPERA22 TIVE.—The term ‘eligible worker-owned cooperative’

23 has the meaning given to such term by section

24 1042(c)(2).
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1 ‘‘(4) PLAN ADMINISTRATOR.—The term ‘plan

2 administrator’ has the meaning given such term by

3 section 414(g).

4 ‘‘(5) TAX IMPOSED BY SECTION 2001.—The

5 term ‘tax imposed by section 2001’ includes any in6 terest, penalty, addition to tax, or additional amount

7 relating to any tax imposed by section 2001.’’

8 (b) CONFORMING AMENDMENT.—Section 408(b) of

9 the Employee Retirement Income Security Act of 1974

10 (29 U.S.C. 1108(b)) (as amended by section 2(c)(2)(A))

11 is amended further by adding at the end the following new

12 paragraph:

13 ‘‘(15) Any transaction described in section 2210

14 of the Internal Revenue Code of 1986.’’

15 (c) CLERICAL AMENDMENT.—The table of sections

16 for subchapter C of chapter 11 of such Code is amended

17 by adding at the end thereof the following new item:

‘‘Sec. 2210. Liability for payment in case of transfer of employer

securities to an employee stock ownership plan or

a worker-owned cooperative.’’

18 (d) EFFECTIVE DATE.—The amendments made by

19 this section shall apply to transfers of employer securities

20 after the date of enactment of this Act.

21 SEC. 4. ESOP DIVIDEND EXCEPTION TO ADJUSTMENTS

22 BASED ON ADJUSTED CURRENT EARNINGS.

23 (a) IN GENERAL.—Section 56(g)(4)(C) of the Inter24 nal Revenue Code of 1986 (relating to disallowance of
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1 items not deductible in computing earnings and profits)

2 is amended by adding at the end thereof the following:

3 ‘‘(v) TREATMENT OF ESOP DIVI4 DENDS.—Clause (i) shall not apply to any

5 deduction allowable under section 404(k) if

6 the deduction is allowed for dividends paid

7 on employer securities held by an employee

8 stock ownership plan established or author9 ized to be established before March 15,

10 1991.’’

11 (b) EFFECTIVE DATE.—The amendment made by

12 subsection (a) shall apply to taxable years beginning after

13 December 31, 1989.

14 (c) STATUTE OF LIMITATIONS.—If refund or credit

15 of any overpayment of tax resulting from the application

16 of subsection (a) is prevented at any time before the close

17 of the 1-year period beginning on the date of the enact18 ment of this Act by the operation of any law or rule of

19 law (including res judicata), refund or credit of such over20 payment (to the extent attributable to the application of

21 subsection (a)) may, nevertheless, be made or allowed if

22 claim therefor is filed before the close of such 1-year pe23 riod.
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1 SEC. 5. AMENDMENTS RELATED TO SECTION 1042.

2 (a) EXTENSION OF SECTION 1042 PRINCIPLES TO

3 STOCK RECEIVED AS COMPENSATION FOR SERVICES.—

4 (1) IN GENERAL.—Section 83 of the Internal

5 Revenue Code of 1986 (relating to property trans6 ferred in connection with performance of services) of

7 the Internal Revenue Code of 1986 is amended by

8 adding at the end thereof the following new sub9 section:

10 ‘‘(i) EXCEPTION FOR TRANSFERS OF QUALIFIED SE11 CURITIES SOLD TO EMPLOYEE STOCK OWNERSHIP

12 PLANS.—

13 ‘‘(1) EXCLUSION FROM INCOME.—Subsections

14 (a) and (b) shall not apply to, and no amount shall

15 be includible in gross income with respect to, the

16 transfer of any qualified security (as defined in sec17 tion 1042(c)(1)) in connection with the performance

18 of services if, and to the extent that, within 60 days

19 after the event which would cause the recognition of

20 income pursuant to subsection (a) or (b) in the ab21 sence of this subsection, the transferee sells such

22 qualified security to an employee stock ownership

23 plan (as defined in section 4975(e)(7)) and the re24 quirements of section 1042(a) are met with respect

25 to such sale.
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1 ‘‘(2) NO DEDUCTION BY EMPLOYER.—Notwith2 standing the provisions of subsection (h), the person

3 for whom were performed the services in connection

4 with which any qualified security is transferred shall

5 not be entitled to a deduction with respect to such

6 transfer if, and to the extent that, paragraph (1) ap7 plies to such transfer.’’

8 (2) CONFORMING AMENDMENTS.—

9 (A) Section 424(c)(1) of such Code is

10 amended by striking ‘‘or’’ at the end of sub11 paragraph (B), by striking the period at the

12 end of subparagraph (C) and inserting ‘‘, or’’,

13 and by adding at the end thereof the following

14 new subparagraph:

15 ‘‘(D) a sale to which 1042 applies.’’

16 (B) Section 1042(a) of such Code is

17 amended—

18 (i) by striking ‘‘which would be recog19 nized as long-term capital gain’’ from the

20 first sentence thereof, and

21 (ii) by adding at the end thereof the

22 following new sentence: ‘‘If any gain is rec23 ognized after the application of the preced24 ing sentence, the portion of such recog25 nized gain (up to the whole of such recog-
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1 nized gain) which is equal to the amount

2 of ordinary income, if any, that was not

3 recognized with respect to such qualified

4 securities by virtue of section 83(i) or

5 424(c)(1)(D) shall be treated as ordinary

6 income.’’.

7 (C) Section 1042(b)(4) of such Code is

8 amended by adding at the end thereof the fol9 lowing new sentence: ‘‘The requirements of the

10 preceding sentence shall not apply to qualified

11 securities received by the taxpayer in a transfer

12 to which section 83 or 422 applied (or to which

13 section 422 or 424 (as in effect on the day be14 fore the date of enactment of the Revenue Rec15 onciliation Act of 1990) applied).’’.

16 (D) Section 1042(c)(1)(B) of such Code is

17 amended to read as follows:

18 ‘‘(B) were not received by the taxpayer

19 in—

20 ‘‘(i) a distribution from a plan de21 scribed in section 401(a), or

22 ‘‘(ii) a transfer pursuant to a right to

23 acquire stock to which section 423 ap24 plied.’’
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1 (E) The first sentence of section 1042(d)

2 of such Code is amended to read as follows:

3 ‘‘The basis of the taxpayer in qualified replace4 ment property purchased by the taxpayer dur5 ing the replacement period shall be reduced by

6 the amount of gain or ordinary income not rec7 ognized by virtue of such purchase, taking into

8 account the application of subsection (a) and, if

9 applicable, the application of section 83(i) or

10 section 424(c)(1)(D).’’

11 (F) Section 1042(e)(1) of such Code is

12 amended to read as follows:

13 ‘‘(1) IN GENERAL.—If a taxpayer disposes of

14 any qualified replacement property, then, notwith15 standing any other provision of this title, gain (if

16 any) shall be recognized to the extent of the gain or

17 ordinary income which was not recognized by reason

18 of the acquisition by such taxpayer of such qualified

19 replacement property, taking into account the appli20 cation of subsection (a) and, if applicable, the appli21 cation of section 83(i) or 424(c)(1)(D). The portion

22 of such gain (up to the whole thereof) equal to the

23 amount of ordinary income that was not recognized

24 by reason of such acquisition shall be treated as or25 dinary income.’’
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1 (3) EFFECTIVE DATE.—The amendments made

2 by this subsection shall apply to sales of qualified se3 curities on or after the date of the enactment of this

4 Act.

5 (b) MODIFICATION TO 25-PERCENT SHAREHOLDER

6 RULE.—

7 (1) IN GENERAL.—Section 409(n)(1)(B) of

8 such Code is amended to read as follows:

9 ‘‘(B) for the benefit of any other person

10 who owns (after the application of section

11 318(a)) more than 25 percent of—

12 ‘‘(i) the total combined voting power

13 of all classes of stock of the corporation

14 which issued such employer securities or of

15 any corporation which is a member of the

16 same controlled group of corporations

17 (within the meaning of subsection (l)(4))

18 as such corporation, or

19 ‘‘(ii) the total value of all classes of

20 stock of any such corporation.’’

21 (2) EFFECTIVE DATE.—The amendment made

22 by paragraph (1) shall take effect on the date of the

23 enactment of this Act.
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1 SEC. 6. CLARIFICATION OF VOTING RIGHTS REQUIREMENT

2 UNDER EXCLUSION FOR INTEREST ON LOANS

3 USED TO ACQUIRE EMPLOYER SECURITIES.

4 (a) IN GENERAL.—Subparagraph (A) of section

5 133(b)(7) of the Internal Revenue Code of 1986 (relating

6 to voting rights of employer securities) is amended by

7 striking ‘‘section 409(e)(2)’’ and inserting ‘‘paragraph (2)

8 or (5) of section 409(e)’’.

9 (b) EFFECTIVE DATE.—The amendment made by

10 subsection (a) shall apply to loans made after July 10,

11 1989.

12 (c) STATUTE OF LIMITATIONS.—If refund or credit

13 of any overpayment of tax resulting from the application

14 of subsection (a) is prevented at any time before the close

15 of the 1-year period beginning on the date of the enact16 ment of this Act by the operation of any law or rule of

17 law (including res judicata), refund or credit of such over18 payment (to the extent attributable to the application of

19 subsection (a)) may, nevertheless, be made or allowed if

20 claim therefor is filed before the close of such 1-year pe21 riod.

22 SEC. 7. GRATUITOUS TRANSFERS FOR THE BENEFIT OF EM23 PLOYEES.

24 (a) IN GENERAL.—Subparagraph (C) of section

25 664(d)(1) of the Internal Revenue Code of 1986 and sub26 paragraph (C) of section 664(d)(2) of such Code are each
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1 amended by striking the period at the end thereof and in2 serting ‘‘or, to the extent the remainder interest is in

3 qualified employer securities (as defined in paragraph

4 (3)(C)), is to be transferred to an employee stock owner5 ship plan (as defined in section 4975(e)(7)) in a qualified

6 gratuitous transfer (as defined by paragraph (3)).’’

7 (b) QUALIFIED GRATUITOUS TRANSFER DEFINED.—

8 Subsection (d) of section 664 of such Code is amended

9 by redesignating paragraph (3) as paragraph (4) and by

10 inserting after paragraph (2) the following new paragraph:

11 ‘‘(3) QUALIFIED GRATUITOUS TRANSFER OF

12 QUALIFIED EMPLOYER SECURITIES.—

13 ‘‘(A) IN GENERAL.—For purposes of this

14 section, the term ‘qualified gratuitous transfer’

15 means a transfer of qualified employer securi16 ties to an employee stock ownership plan (as

17 defined in section 4975(e)(7)) but only to the

18 extent that—

19 ‘‘(i) the securities transferred pre20 viously passed from a decedent to a trust

21 described in paragraph (1) or (2);

22 ‘‘(ii) no deduction under section 404

23 is allowable with respect to such transfer;

24 ‘‘(iii) such plan provides that the se25 curities so transferred are allocated to plan
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1 participants in a manner consistent with

2 section 401(a)(4);

3 ‘‘(iv) such plan treats such securities

4 as being attributable to employer contribu5 tions but without regard to the limitations

6 otherwise applicable to such contributions

7 under section 404;

8 ‘‘(v) such plan provides that such se9 curities are held in a suspense account

10 under the plan to be allocated each year,

11 up to the limitations under section 415(c),

12 after first allocating all other annual addi13 tions for the limitation year, up to the lim14 itations under sections 415(c) and (e); and

15 ‘‘(vi) the employer whose employees

16 are covered by the plan described in this

17 subparagraph files with the Secretary a

18 verified written statement consenting to

19 the application of sections 4978 and

20 4979A with respect to such employer.

21 ‘‘(B) QUALIFIED EMPLOYER SECURI22 TIES.—For purposes of this section, the term

23 ‘qualified employer securities’ means employer

24 securities (as defined in section 409(l)) which

25 are issued by a domestic corporation which has
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1 no outstanding stock which is readily tradable

2 on an established securities market.

3 ‘‘(C) TREATMENT OF SECURITIES ALLO4 CATED BY EMPLOYEE STOCK OWNERSHIP PLAN

5 TO PERSONS RELATED TO DECEDENT OR 5-PER6 CENT SHAREHOLDERS.—

7 ‘‘(i) IN GENERAL.—If any portion of

8 the assets of the plan attributable to secu9 rities acquired by the plan in a qualified

10 gratuitous transfer are allocated to the ac11 count of—

12 ‘‘(I) any person who is related to

13 the decedent (within the meaning of

14 section 267(b)), or

15 ‘‘(II) any person who, at the time

16 of such allocation or at any time dur17 ing the 1-year period ending on the

18 date of the acquisition of qualified

19 employer securities by the plan, is a

20 5-percent shareholder of the employer

21 maintaining the plan,

22 the plan shall be treated as having distrib23 uted (at the time of such allocation) to

24 such person or shareholder the amount so

25 allocated.
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1 ‘‘(ii) 5-PERCENT SHAREHOLDER.—

2 For purposes of clause (i), the term ‘5-per3 cent shareholder’ means any person who

4 owns (directly or through the application

5 of section 318(a)) more than 5 percent

6 of—

7 ‘‘(I) any class of outstanding

8 stock of the corporation which issued

9 such qualified employer securities or

10 of any corporation which is a member

11 of the same controlled group of cor12 porations (within the meaning of sec13 tion 409(l)(4)) as such corporation, or

14 ‘‘(II) the total value of any class

15 of outstanding stock of any such cor16 poration; and

17 For purposes of the preceding sentence,

18 section 318(a) shall be applied without re19 gard to the exception in paragraph

20 (2)(B)(i) thereof.

21 ‘‘(iii) CROSS REFERENCE.—

‘‘For excise tax on allocations described in clause

(i), see section 4979A.’’

22 (c) CONFORMING AMENDMENTS.—

23 (1) Section 401(a)(1) of such Code is amended

24 by inserting ‘‘or by a charitable remainder trust pur-
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1 suant to a qualified gratuitous transfer (as defined

2 in section 664(d)(3)(A)),’’ after ‘‘stock bonus

3 plans),’’.

4 (2) Section 404(a)(9) of such Code is amended

5 by inserting after subparagraph (B) the following

6 new subparagraph:

7 ‘‘(C) A qualified gratuitous transfer (as de8 fined in section 664(d)(3)(A)) shall have no ef9 fect on the amount or amounts otherwise de10 ductible under paragraph (3) or (7) or under

11 this paragraph.’’

12 (3) Section 415(c)(6) of such Code is amended

13 by adding at the end thereof the following new sen14 tence:

15 ‘‘The amount of any qualified gratuitous transfer

16 (as defined in section 664(d)(3)(A)) allocated to a

17 participant for any limitation year shall not exceed

18 the limitations imposed by this section, but such

19 amount shall not be taken into account in determin20 ing whether any other amount exceeds the limita21 tions imposed by this section.’’

22 (4) Section 415(e) of such Code is amended—

23 (A) by redesignating paragraph (6) as

24 paragraph (7), and
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1 (B) by inserting after paragraph (5) the

2 following new paragraph:

3 ‘‘(6) SPECIAL RULE FOR QUALIFIED GRATU4 ITOUS TRANSFERS.—Any qualified gratuitous trans5 fer of qualified employer securities (as defined by

6 section 664(d)(3)) shall not be taken into account in

7 calculating, and shall not be subject to, the limita8 tions provided in this subsection.’’

9 (5) Paragraph (3) of section 644(e) of such

10 Code is amended to read as follows:

11 ‘‘(3) acquired by a charitable remainder annuity

12 trust (as defined in section 664(d)(1)) or a chari13 table remainder unitrust (as defined in sections

14 664(d)(2) and (4)), or’’.

15 (6) Subparagraph (B) of section 664(d)(1) of

16 such Code and subparagraph (B) of section

17 664(d)(2) of such Code are each amended by insert18 ing ‘‘and other than qualified gratuitous transfers

19 described in subparagraph (C)’’ after ‘‘subparagraph

20 (A)’’.

21 (7) Paragraph (4) of section 674(b) of such

22 Code is amended by inserting before the period ‘‘or

23 to an employee stock ownership plan (as defined in

24 section 4975(e)(7)) in a qualified gratuitous transfer

25 (as defined in section 664(d)(3))’’.
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1 (8)(A) Section 2055(a) of such Code is amend2 ed—

3 (i) by striking ‘‘or’’ at the end of para4 graph (3),

5 (ii) by striking the period at the end of

6 paragraph (4) and inserting ‘‘; or’’, and

7 (iii) by inserting after paragraph (4) the

8 following new paragraph:

9 ‘‘(5) to an employee stock ownership plan if

10 such transfer qualifies as a qualified gratuitous

11 transfer of qualified employer securities within the

12 meaning of section 664(d)(3).’’

13 (B) Clause (ii) of section 2055(e)(3)(C) of such

14 Code is amended by striking ‘‘section 664(d)(3)’’

15 and inserting ‘‘section 664(d)(4)’’.

16 (9) Paragraph (8) of section 2056(b) of such

17 Code is amended to read as follows:

18 ‘‘(8) SPECIAL RULE FOR CHARITABLE REMAIN19 DER TRUSTS.—

20 ‘‘(A) IN GENERAL.—If the surviving

21 spouse of the decedent is the only beneficiary of

22 a qualified charitable remainder trust who is

23 not a charitable beneficiary nor an ESOP bene24 ficiary, paragraph (1) shall not apply to any in-
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1 terest in such trust which passes or has passed

2 from the decedent to such surviving spouse.

3 ‘‘(B) DEFINITIONS.—For purposes of sub4 paragraph (A)—

5 ‘‘(i) CHARITABLE BENEFICIARY.—The

6 term ‘charitable beneficiary’ means any

7 beneficiary which is an organization de8 scribed in section 170(c).

9 ‘‘(ii) ESOP BENEFICIARY.—The term

10 ‘ESOP beneficiary’ means any beneficiary

11 which is an employee stock ownership plan

12 (as defined in section 4975(e)(7)) that

13 holds a remainder interest in qualified em14 ployer securities (as defined in section

15 664(d)(3)) to be transferred to such plan

16 in a qualified gratuitous transfer (as de17 fined in section 664(d)(3)).

18 ‘‘(iii) QUALIFIED CHARITABLE RE19 MAINDER TRUST.—The term ‘qualified

20 charitable remainder trust’ means a chari21 table remainder annuity trust or a chari22 table remainder unitrust (described in sec23 tion 664).’’
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1 (10) Section 4947(b) of such Code is amended

2 by inserting after paragraph (3) the following new

3 paragraph:

4 ‘‘(4) SECTION 507.—The provisions of section

5 507(a) shall not apply to a trust which is described

6 in subsection (a)(2) by reason of a distribution of

7 qualified employer securities (as defined in section

8 664(d)(3)) to an employee stock ownership plan (as

9 defined in section 4975(e)(7)) in a qualified gratu10 itous transfer (as defined by section 664(d)(3)).’’

11 (11) The last sentence of section 4975(e)(7) of

12 such Code is amended by inserting ‘‘and section

13 664(d)(3)’’ after ‘‘section 409(n)’’

14 (12) Subsection (a) of section 4978 of such

15 Code is amended by inserting ‘‘or acquired any

16 qualified employer securities in a qualified gratu17 itous transfer to which section 664(d)(3) applied’’

18 after ‘‘section 1042 applied’’.

19 (13) Paragraph (2) of section 4978(b) of such

20 Code is amended—

21 (A) by inserting ‘‘or acquired in the quali22 fied gratuitous transfer to which section

23 664(d)(3) applied’’ after ‘‘section 1042 ap24 plied’’, and
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1 (B) by inserting ‘‘or to which section

2 664(d)(3) applied’’ after ‘‘section 1042 applied’’

3 in subparagraph (C) thereof.

4 (14) Subsection (c) of section 4978 of such

5 Code is amended by striking ‘‘written statement’’

6 and all that follows and inserting ‘‘written statement

7 described in section 664(d)(3)(A)(vi) or in section

8 1042(b)(3) (as the case may be).’’

9 (15) Paragraph (2) of section 4978(e) of such

10 Code is amended by striking the period and insert11 ing ‘‘; except that such section shall be applied with12 out regard to subparagraph (B) thereof for purposes

13 of applying this section and section 4979A with re14 spect to securities acquired in a qualified gratuitous

15 transfer (as defined in section 664(d)(3)(A)).’’

16 (16) Subsection (a) of section 4979A of such

17 Code is amended to read as follows:

18 ‘‘(a) IMPOSITION OF TAX.—If—

19 ‘‘(1) there is a prohibited allocation of qualified

20 securities by any employee stock ownership plan or

21 eligible worker-owned cooperative, or

22 ‘‘(2) there is an allocation described in section

23 663(d)(3)(C)(i),

24 there is hereby imposed a tax on such allocation equal to

25 50 percent of the amount involved.’’
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1 (17) Subsection (c) of section 4979A of such

2 Code is amended to read as follows:

3 ‘‘(c) LIABILITY FOR TAX.—The tax imposed by this

4 section shall be paid by—

5 ‘‘(1) the employer sponsoring such plan, or

6 ‘‘(2) the eligible worker-owned cooperative,

7 which made the written statement described in section

8 664(d)(3)(A)(vi) or in section 1042(b)(3)(B) (as the case

9 may be).’’

10 (18) Section 4979A of such Code is amended by re11 designating subsection (d) as subsection (e) and by insert12 ing after subsection (c) the following new subsection:

13 ‘‘(d) SPECIAL STATUTE OF LIMITATIONS FOR TAX

14 ATTRIBUTABLE TO CERTAIN ALLOCATIONS.—The statu15 tory period for the assessment of any tax imposed by this

16 section on an allocation described in subsection (a)(2) of

17 qualified employer securities shall not expire before the

18 date which is 3 years from the later of—

19 ‘‘(1) the 1st allocation of such securities in con20 nection with a qualified gratuitous transfer (as de21 fined in section 664(d)(3)(A)), or

22 ‘‘(2) the date on which the Secretary is notified

23 of the allocation described in subsection (a)(2).’’

24 (d) EFFECTIVE DATE.—The amendments made by

25 this section shall apply to transfers made by trusts to, or
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1 for the use of, an employee stock ownership plan after the

2 date of the enactment of this Act.

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