II 

109TH CONGRESS 

1ST SESSION S. 1319 

To amend the Internal Revenue Code of 1986 to improve the operation 

of employee stock ownership plans, and for other purposes. 

IN THE SENATE OF THE UNITED STATES 

JUNE 28, 2005 

Mrs. LINCOLN introduced the following bill; which was read twice and referred 

to the Committee on Finance 

A BILL 

To amend the Internal Revenue Code of 1986 to improve 

the operation of employee stock ownership plans, and 

for other purposes. 

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 ‘‘Employee Stock Own5 ership Plan Promotion and Improvement Act of 2005’’. 
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1 SEC. 2. 10 PERCENT PENALTY TAX NOT TO APPLY TO CER2 TAIN S CORPORATION DISTRIBUTIONS MADE 

3 ON STOCK HELD BY EMPLOYEE STOCK OWN4 ERSHIP PLAN. 

5 (a) IN GENERAL.—Clause (vi) of section 72(t)(2)(A) 

6 of the Internal Revenue Code of 1986 (relating to general 

7 rule that subsection not to apply to certain distributions) 

8 is amended by inserting before the comma at the end the 

9 following: ‘‘or any distribution (as described in section 

10 1368(a)) with respect to S corporation stock that con11 stitutes qualifying employer securities (as defined by sec12 tion 409(l)) to the extent that such distributions are paid 

13 to a participant in the manner described in clause (i) or 

14 (ii) of section 404(k)(2)(A)’’. 

15 (b) EFFECTIVE DATE.—The amendments made by 

16 this section shall apply to distributions made after the 

17 date of the enactment of this Act. 

18 SEC. 3. ESOP DIVIDEND EXCEPTION TO ADJUSTMENTS 

19 BASED ON ADJUSTED CURRENT EARNINGS. 

20 (a) IN GENERAL.—Section 56(g)(4)(C) of the Inter21 nal Revenue Code of 1986 (relating to disallowance of 

22 items not deductible in computing earnings and profits) 

23 is amended by adding at the end the following new clause: 

24 ‘‘(v) TREATMENT OF ESOP DIVI25 DENDS.—Clause (i) shall not apply to any 

26 deduction allowable under section 404(k) if 
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1 the deduction is allowed for dividends paid 

2 on employer securities held by an employee 

3 stock ownership plan established or author4 ized to be established before March 15, 

5 1991.’’. 

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

7 this section shall apply to taxable years beginning after 

8 December 31, 1989. 

9 (c) WAIVER OF LIMITATIONS.—If refund or credit of 

10 any overpayment of tax resulting from the application of 

11 the amendment made by this section is prevented at any 

12 time before the close of the 1-year period beginning on 

13 the date of the enactment of this Act by the operation 

14 of any law or rule of law (including res judicata), such 

15 refund or credit may nevertheless be made or allowed if 

16 claim therefor is filed before the close of such period. 

17 SEC. 4. AMENDMENTS RELATED TO SECTION 1042. 

18 (a) DEFERRAL OF TAX FOR CERTAIN SALES TO EM19 PLOYEE STOCK OWNERSHIP PLAN SPONSORED BY S COR20 PORATION.— 

21 (1) IN GENERAL.—Section 1042(c)(1)(A) of the 

22 Internal Revenue Code of 1986 (defining qualified 

23 securities) is amended by striking ‘‘C’’. 
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1 (2) EFFECTIVE DATE.—The amendment made 

2 by paragraph (1) shall apply to sales after the date 

3 of the enactment of this Act. 

4 (b) REINVESTMENT IN CERTAIN MUTUAL FUNDS

5 PERMITTED.— 

6 (1) IN GENERAL.—Clause (ii) of section 

7 1042(c)(4)(B) of the Internal Revenue Code of 1986 

8 (defining operating corporation) is amended to read 

9 as follows: 

10 ‘‘(ii) FINANCIAL INSTITUTIONS, IN11 SURANCE COMPANIES, AND MUTUAL

12 FUNDS.—The term ‘operating corporation’ 

13 shall include— 

14 ‘‘(I) any financial institution de15 scribed in section 581, 

16 ‘‘(II) any insurance company 

17 subject to tax under subchapter L, 

18 and 

19 ‘‘(III) any regulated investment 

20 company if substantially all of the se21 curities held by such company are se22 curities issued by operating corpora23 tions (determined without regard to 

24 this subclause).’’. 
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1 (2) EFFECTIVE DATE.—The amendment made 

2 by paragraph (1) shall apply to sales of qualified se3 curities after the date of the enactment of this Act. 

4 (c) MODIFICATION TO 25-PERCENT SHAREHOLDER

5 RULE.— 

6 (1) IN GENERAL.—Subparagraph (B) of section 

7 409(n)(1) of the Internal Revenue Code of 1986 (re8 lating to securities received in certain transactions) 

9 is amended to read as follows: 

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

11 who owns (after the application of section 

12 318(a)) more than 25 percent of— 

13 ‘‘(i) the total combined voting power 

14 of all classes of stock of the corporation 

15 which issued such employer securities or of 

16 any corporation which is a member of the 

17 same controlled group of corporations 

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

19 as such corporation, or 

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

21 stock of any such corporation.’’. 

22 (2) EFFECTIVE DATE.—The amendment made 

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

24 enactment of this Act. 
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1 SEC. 5. EARLY DISTRIBUTIONS FROM EMPLOYEE STOCK 

2 OWNERSHIP PLANS FOR HIGHER EDUCATION 

3 EXPENSES AND FIRST-TIME HOMEBUYER 

4 PURCHASES. 

5 (a) IN GENERAL.—Paragraph (2) of section 72(t) of 

6 the Internal Revenue Code of 1986 (relating to 10-percent 

7 additional tax on early distributions from qualified retire8 ment plans) is amended by adding at the end the following 

9 new subparagraph: 

10 ‘‘(G) DISTRIBUTIONS FROM EMPLOYEE

11 STOCK OWNERSHIP PLANS FOR HIGHER EDU12 CATION EXPENSES AND FIRST-TIME HOME13 BUYER PURCHASES.— 

14 ‘‘(i) IN GENERAL.—Distributions 

15 made to the employee from an employee 

16 stock ownership plan (within the meaning 

17 of section 4975(e)(7)), the amount of 

18 which does not exceed the sum of— 

19 ‘‘(I) qualified higher education 

20 expenses (as defined by paragraph 

21 (7)) reduced by the amount of such 

22 expenses taken into account under 

23 subparagraph (E), and 

24 ‘‘(II) qualified first-time home25 buyer distributions (as defined by 

26 paragraph (8)) reduced by the amount 
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1 of such distributions taken into ac2 count under subparagraph (F). 

3 ‘‘(ii) LIMITATION.—A distribution 

4 may only be taken into account under 

5 clause (i) if— 

6 ‘‘(I) such distribution is in the 

7 form of either employer securities 

8 (within the meaning of section 409(l)) 

9 or cash proceeds resulting from the 

10 sale of such securities made not more 

11 than 180 days before the date of such 

12 distribution for the purposes of such 

13 distribution, 

14 ‘‘(II) such securities so distrib15 uted or sold were held by such plan 

16 for at least 5 years before the date of 

17 such distribution or, if applicable, 

18 sale, and 

19 ‘‘(III) the number of shares in 

20 each class of such securities so dis21 tributed or sold, when added to all 

22 previous distributions and sales of 

23 each such class of such securities for 

24 such purposes on behalf of such em25 ployee, does not exceed 10 percent of 
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1 the aggregate number of shares of 

2 each class of such securities allocated 

3 to the account of such employee under 

4 such plan. 

5 ‘‘(iii) VALUATION OF DISTRIBUTED

6 SECURITIES.—For purposes of clause (ii), 

7 the value of a security shall be the value 

8 of such security on the date of distribu9 tion.’’. 

10 (b) CONFORMING AMENDMENTS.— 

11 (1) Paragraph (7) of section 72(t) of such Code 

12 is amended by striking ‘‘paragraph (2)(E)’’ and in13 serting ‘‘subparagraphs (E) and (G) of paragraph 

14 (2)’’. 

15 (2) Paragraph (8) of section 72(t) of such Code 

16 is amended by striking ‘‘paragraph (2)(F)’’ and in17 serting ‘‘subparagraphs (F) and (G) of paragraph 

18 (2)’’. 

19 (c) EFFECTIVE DATE.—The amendments made by 

20 this section shall apply to distributions made after the 

21 date of the enactment of this Act. 

22 SEC. 6. DE MINIMIS EXCEPTION TO DIVERSIFICATION OF 

23 INVESTMENT REQUIREMENT. 

24 (a) IN GENERAL.—Paragraph (28) of section 401(a) 

25 of the Internal Revenue Code of 1986 (relating to addi-
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1 tional requirements relating to employee stock ownership 

2 plans) is amended by adding at the end the following new 

3 subparagraph: 

4 ‘‘(D) EXCEPTION FOR DE MINIMIS AC5 COUNT BALANCE.—A plan shall not fail to meet 

6 the requirements of this subparagraph for a 

7 plan year solely because the plan provides that 

8 clause (i) does not apply to any participant’s 

9 account in the plan which, as of the close of the 

10 preceding plan year, has an account balance 

11 which does not exceed $2,500.’’. 

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

13 this section shall apply to plan years beginning after the 

14 date of the enactment of this Act. 

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