II 

111TH CONGRESS 

1ST SESSION S. 1612 

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 

AUGUST 6, 2009 

Mrs. LINCOLN (for herself and Ms. LANDRIEU) 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 2009’’. 


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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 ‘‘(vii) 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. SMALL BUSINESS AND EMPLOYEE STOCK OWNER2 SHIP. 

3 (a) FINDINGS.—Congress finds that— 

4 (1) since 1974, the ownership of many small 

5 business concerns (as defined under section 3 of the 

6 Small Business Act (15 U.S.C. 632)) in the United 

7 States has transitioned from the original owner, or 

8 owners, to an employee stock ownership plan (re9 ferred to in this section as an ‘‘ESOP’’), as defined 

10 in section 4975(e)(7) of the Internal Revenue Code 

11 of 1986; 

12 (2) data collected on the performance of these 

13 small business concerns owned 50 percent or more 

14 by an ESOP evidences that more often than not 

15 these ESOP-owned small business concerns provide 

16 significant benefit to the employees of the small 

17 business concerns and the communities in which the 

18 small business concerns are located; 

19 (3) under the Small Business Act (15 U.S.C. 

20 631 et seq.) and the regulations promulgated by the 

21 Administrator of the Small Business Administration, 

22 a business concern that qualifies as a small business 

23 concern for the numerous preferences of the Act, is 

24 denied treatment as a small business concern once 

25 50 percent or more of the business is acquired on 

26 behalf of the employees by an ESOP; and 


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1 (4) a small business concern that was eligible 

2 under the Small Business Act before being so ac3 quired on behalf of the employees by an ESOP, will 

4 no longer be treated as eligible, even if the number 

5 of employees, the revenue of the small business con6 cern, and the racial, gender, or other criteria used 

7 under the Act to determine whether the small busi8 ness concern is eligible for benefits under the Act re9 main the same, solely because of the acquisition by 

10 the ESOP. 

11 (b) EMPLOYEE STOCK OWNERSHIP PLANS.—The 

12 Small Business Act (15 U.S.C. 631 et seq.) is amended— 

13 (1) by redesignating section 44 as section 45; 

14 and 

15 (2) by inserting after section 43 the following: 

16 ‘‘SEC. 44. EMPLOYEE STOCK OWNERSHIP PLANS. 

17 ‘‘(a) DEFINITIONS.—In this section— 

18 ‘‘(1) the term ‘ESOP’ means an employee stock 

19 ownership plan, as defined in section 4975(e)(7) of 

20 the Internal Revenue Code of 1986; and 

21 ‘‘(2) the term ‘ESOP business concern’ means 

22 a business concern that was a small business con23 cern eligible for a loan or to participate in a con24 tracting assistance or business development program 

25 under this Act before the date on which 50 percent 


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1 or more of the business concern was acquired by an 

2 ESOP. 

3 ‘‘(b) CONTINUED ELIGIBILITY.—An ESOP business 

4 concern shall be deemed a small business concern for pur5 poses of a loan, preference, or other program under this 

6 Act if— 

7 ‘‘(1) on a continuing basis a majority of the 

8 shares of and control of the ESOP that owns the 

9 business concern are held by individuals who would 

10 otherwise meet criteria necessary to be eligible for 

11 the loan, preference, or other program (as the case 

12 may be); 

13 ‘‘(2) control of the ESOP business concern is 

14 vested in the shareholders of the ESOP; and 

15 ‘‘(3) the ESOP that owns the business concern 

16 complies with all requirements of a tax qualified de17 ferred compensation arrangement under the Internal 

18 Revenue Code of 1986.’’. 

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

20 this section shall take effect on January 1 of the first cal21 endar year beginning after the date of enactment of this 

22 Act. 

Æ 


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