II

104TH CONGRESS

2D SESSION S. 2110

To amend the Internal Revenue Code of 1986 to provide special rules for

certain gratuitous transfers of employer securities for the benefit of employees.

IN THE SENATE OF THE UNITED STATES

SEPTEMBER 24 (legislative day, SEPTEMBER 20), 1996

Mr. DASCHLE 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 provide

special rules for certain gratuitous transfers of employer

securities for the benefit of employees.

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

3 SECTION 1. GRATUITOUS TRANSFERS FOR THE BENEFIT

4 OF EMPLOYEES.

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

6 664(d)(1) of the Internal Revenue Code of 1986 and sub7 paragraph (C) of section 664(d)(2) of such Code are each

8 amended by striking the period at the end and inserting

9 ‘‘or, to the extent the remainder interest is in qualified

10 employer securities (as defined in paragraph (3)(B)), is
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1 to be transferred to an employee stock ownership plan (as

2 defined in section 4975(e)(7)) in a qualified gratuitous

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

4 (b) QUALIFIED GRATUITOUS TRANSFER DEFINED.—

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

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

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

8 ‘‘(3) QUALIFIED GRATUITOUS TRANSFER OF

9 QUALIFIED EMPLOYER SECURITIES.—

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

11 section, the term ‘qualified gratuitous transfer’

12 means a transfer of qualified employer securi13 ties to an employee stock ownership plan (as

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

15 extent that—

16 ‘‘(i) the securities transferred pre17 viously passed from a decedent to a trust

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

19 ‘‘(ii) no deduction under section 404

20 is allowable with respect to such transfer;

21 ‘‘(iii) such plan provides that the se22 curities so transferred are allocated to plan

23 participants in a manner consistent with

24 section 401(a)(4);
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1 ‘‘(iv) such plan treats such securities

2 as being attributable to employer contribu3 tions but without regard to the limitations

4 otherwise applicable to such contributions

5 under section 404;

6 ‘‘(v) such plan provides that such se7 curities are held in a suspense account

8 under the plan to be allocated each year,

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

10 after first allocating all other annual addi11 tions for the limitation year, up to the lim12 itations under sections 415 (c) and (e);

13 and

14 ‘‘(vi) the employer whose employees

15 are covered by the plan described in this

16 subparagraph files with the Secretary a

17 verified written statement consenting to

18 the application of sections 4978 and

19 4979A with respect to such employer.

20 ‘‘(B) QUALIFIED EMPLOYER SECURI21 TIES.—For purposes of this section, the term

22 ‘qualified employer securities’ means employer

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

24 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 the following new sentence:

14 ‘‘The amount of any qualified gratuitous transfer

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

16 participant for any limitation year shall not exceed

17 the limitations imposed by this section, but such

18 amount shall not be taken into account in determin19 ing whether any other amount exceeds the limita20 tions imposed by this section.’’

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

22 (A) by redesignating paragraph (6) as

23 paragraph (7), and

24 (B) by inserting after paragraph (5) the

25 following new paragraph:
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1 ‘‘(6) SPECIAL RULE FOR QUALIFIED GRATU2 ITOUS TRANSFERS.—Any qualified gratuitous trans3 fer of qualified employer securities (as defined by

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

5 calculating, and shall not be subject to, the limita6 tions provided in this subsection.’’

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

8 Code is amended to read as follows:

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

10 trust (as defined in section 664(d)(1)) or a chari11 table remainder unitrust (as defined in sections

12 664(d) (2) and (4)), or’’.

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

14 such Code and subparagraph (B) of section

15 664(d)(2) of such Code are each amended by insert16 ing ‘‘and other than qualified gratuitous transfers

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

18 (A)’’.

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

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

21 to an employee stock ownership plan (as defined in

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

23 (as defined in section 664(d)(3))’’.

24 (8)(A) Section 2055(a) of such Code is amend25 ed—
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1 (i) by striking ‘‘or’’ at the end of para2 graph (3),

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

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

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

6 following new paragraph:

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

8 such transfer qualifies as a qualified gratuitous

9 transfer of qualified employer securities within the

10 meaning of section 664(d)(3).’’

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

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

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

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

15 Code is amended to read as follows:

16 ‘‘(8) SPECIAL RULE FOR CHARITABLE REMAIN17 DER TRUSTS.—

18 ‘‘(A) IN GENERAL.—If the surviving

19 spouse of the decedent is the only beneficiary of

20 a qualified charitable remainder trust who is

21 not a charitable beneficiary nor an ESOP bene22 ficiary, paragraph (1) shall not apply to any in23 terest in such trust which passes or has passed

24 from the decedent to such surviving spouse.
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1 ‘‘(B) DEFINITIONS.—For purposes of sub2 paragraph (A)—

3 ‘‘(i) CHARITABLE BENEFICIARY.—The

4 term ‘charitable beneficiary’ means any

5 beneficiary which is an organization de6 scribed in section 170(c).

7 ‘‘(ii) ESOP BENEFICIARY.—The term

8 ‘ESOP beneficiary’ means any beneficiary

9 which is an employee stock ownership plan

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

11 holds a remainder interest in qualified em12 ployer securities (as defined in section

13 664(d)(3)) to be transferred to such plan

14 in a qualified gratuitous transfer (as de15 fined in section 664(d)(3)).

16 ‘‘(iii) QUALIFIED CHARITABLE RE17 MAINDER TRUST.—The term ‘qualified

18 charitable remainder trust’ means a chari19 table remainder annuity trust or a chari20 table remainder unitrust (described in sec21 tion 664).’’

22 (10) Section 4947(b) of such Code is amended

23 by inserting after paragraph (3) the following new

24 paragraph:
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1 ‘‘(4) SECTION 507.—The provisions of section

2 507(a) shall not apply to a trust which is described

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

4 qualified employer securities (as defined in section

5 664(d)(3)) to an employee stock ownership plan (as

6 defined in section 4975(e)(7)) in a qualified gratu7 itous transfer (as defined by section 664(d)(3)).’’

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

9 such Code is amended by inserting ‘‘and section

10 664(d)(3)’’ after ‘‘section 409(n)’’

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

12 Code is amended by inserting ‘‘or acquired any

13 qualified employer securities in a qualified gratu14 itous transfer to which section 664(d)(3) applied’’

15 after ‘‘section 1042 applied’’.

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

17 Code is amended—

18 (A) by inserting ‘‘or acquired in the quali19 fied gratuitous transfer to which section

20 664(d)(3) applied’’ after ‘‘section 1042 ap21 plied’’, and

22 (B) by inserting ‘‘or to which section

23 664(d)(3) applied’’ after ‘‘section 1042 applied’’

24 in subparagraph (C) thereof.
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1 (14) Subsection (c) of section 4978 of such

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

3 and all that follows and inserting ‘‘written statement

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

5 1042(b)(3) (as the case may be).’’

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

7 Code is amended by striking the period and insert8 ing ‘‘; except that such section shall be applied with9 out regard to subparagraph (B) thereof for purposes

10 of applying this section and section 4979A with re11 spect to securities acquired in a qualified gratuitous

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

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

14 Code is amended to read as follows:

15 ‘‘(a) IMPOSITION OF TAX.—If—

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

17 securities by any employee stock ownership plan or

18 eligible worker-owned cooperative, or

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

20 663(d)(3)(C)(i),

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

22 50 percent of the amount involved.’’

23 (17) Subsection (c) of section 4979A of such

24 Code is amended to read as follows:
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1 ‘‘(c) LIABILITY FOR TAX.—The tax imposed by this

2 section shall be paid by—

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

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

5 which made the written statement described in section

6 664(d)(3)(A)(vi) or in section 1042(b)(3)(B) (as the case

7 may be).’’

8 (18) Section 4979A of such Code is amended

9 by redesignating subsection (d) as subsection (e) and

10 by inserting after subsection (c) the following new

11 subsection:

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

13 ATTRIBUTABLE TO CERTAIN ALLOCATIONS.—The statu14 tory period for the assessment of any tax imposed by this

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

16 qualified employer securities shall not expire before the

17 date which is 3 years from the later of—

18 ‘‘(1) the 1st allocation of such securities in con19 nection with a qualified gratuitous transfer (as de20 fined in section 664(d)(3)(A)), or

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

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

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

24 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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