II

103D CONGRESS

1ST SESSION S. 1755

To amend the Internal Revenue Code of 1986 to promote and improve

employee ownership in the United States.

IN THE SENATE OF THE UNITED STATES

NOVEMBER 20 (legislative day, NOVEMBER 2), 1993

Mr. BINGAMAN 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 promote

and improve employee ownership in the United States.

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 Ownership

5 Promotion and Improvement Act of 1993’’.

6 SEC. 2. REFERENCES TO INTERNAL REVENUE CODE OF

7 1986.

8 Except as otherwise expressly provided, whenever in

9 this Act an amendment or repeal is expressed in terms

10 of an amendment to, or repeal of, a section or other provi-
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1 sion, the reference shall be considered to be made to a

2 section or other provision of the Internal Revenue Code

3 of 1986.

4 TITLE I—INVESTMENT

5 INCENTIVES

6 SEC. 101. EXCLUSION FOR GAIN FROM SALE OR EXCHANGE

7 OF CERTAIN STOCK OF AN EMPLOYEE

8 OWNED BUSINESS.

9 (a) IN GENERAL.—Part I of subchapter P of chapter

10 1 (relating to capital gains and losses) is amended by add11 ing at the end the following new section:

12 ‘‘SEC. 1203. EXCLUSION FOR GAIN FROM SALE OR EX13 CHANGE OF CERTAIN STOCK OF AN EM14 PLOYEE OWNED BUSINESS.

15 ‘‘(a) GENERAL RULE.—

16 ‘‘(1) EXCLUSION.—In the case of a taxpayer

17 other than a corporation who has gain from the sale

18 or exchange of qualified stock of an employee owned

19 business, gross income shall not include an amount

20 equal to the sum of the amounts determined by ap21 plying the applicable percentages determined under

22 paragraph (2) to such gain.

23 ‘‘(2) APPLICABLE PERCENTAGES.—The applica24 ble percentages under paragraph (1) shall be deter25 mined under the following table:
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The applicable

‘‘In the case of stock held: percentage is:

At least 5 years but less than 6 years ......................... 50

At least 6 years but less than 7 years ......................... 60

At least 7 years but less than 8 years ......................... 70

At least 8 years but less than 9 years ......................... 80

At least 9 years but less than 10 years ....................... 90

10 or more years .......................................................... 100.

1 ‘‘(b) LIMITATION.—

2 ‘‘(1) IN GENERAL.—The aggregate amount of

3 gain which may be excluded under subsection (a) for

4 a taxable year shall not exceed $250,000 reduced by

5 the aggregate amount of gain excluded by the tax6 payer under subsection (a) for prior taxable years.

7 ‘‘(2) TREATMENT OF MARRIED INDIVIDUALS.—

8 ‘‘(A) SEPARATE RETURNS.—In the case of

9 a separate return by a married individual, para10 graph (1) shall be applied by substituting

11 ‘$125,000’ for ‘$250,000’.

12 ‘‘(B) ALLOCATION OF EXCLUSION.—In the

13 case of any joint return, the amount of gain

14 taken into account under subsection (a) shall be

15 allocated equally between the spouses for pur16 poses of applying this subsection to subsequent

17 taxable years.

18 ‘‘(C) MARITAL STATUS.—For purposes of

19 this subsection, marital status shall be deter20 mined under section 7703.
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1 ‘‘(c) QUALIFIED STOCK OF AN EMPLOYEE OWNED

2 BUSINESS.—For purposes of this section—

3 ‘‘(1) IN GENERAL.—Except as otherwise pro4 vided in this section, the term ‘qualified stock of an

5 employee owned business’ means any stock in a cor6 poration which is issued by such corporation on or

7 after December 31, 1993, if—

8 ‘‘(A) as of the date of issuance, such cor9 poration is an employee owned business, and

10 ‘‘(B) except as provided in subsections (f)

11 and (h), such stock is acquired by the taxpayer

12 at its original issue (directly or through an un13 derwriter)—

14 ‘‘(i) in exchange for money or other

15 property (not including stock), or

16 ‘‘(ii) as compensation for services

17 (other than services performed as an un18 derwriter of such stock).

19 ‘‘(2) ACTIVE BUSINESS REQUIREMENT.—Stock

20 in a corporation shall not be treated as qualified

21 stock of an employee owned business unless, during

22 substantially all of the taxpayer’s holding period for

23 such stock, such corporation meets the active busi24 ness requirements of subsection (e).
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1 ‘‘(3) CERTAIN PURCHASES BY CORPORATION OF

2 ITS OWN STOCK.—

3 ‘‘(A) REDEMPTIONS FROM TAXPAYER OR

4 RELATED PERSON.—Stock acquired by the tax5 payer shall not be treated as qualified stock of

6 an employee owned business if, at any time dur7 ing the 4-year period beginning on the date 2

8 years before the issuance of such stock, the cor9 poration issuing such stock purchased (directly

10 or indirectly) any of its stock from the taxpayer

11 or from a person related (within the meaning of

12 section 267(b) or 707(b)) to the taxpayer.

13 ‘‘(B) SIGNIFICANT REDEMPTIONS.—Stock

14 issued by a corporation shall not be treated as

15 qualified stock of an employee owned business

16 if, during the 2-year period beginning on the

17 date 1 year before the issuance of such stock,

18 such corporation made 1 or more purchases of

19 its stock with an aggregate value (as of the

20 time of the respective purchases) exceeding 5

21 percent of the aggregate value of all of its stock

22 as of the beginning of such 2-year period.

23 ‘‘(C) TREATMENT OF CERTAIN TRANS24 ACTIONS.—If any transaction is treated under

25 section 304(a) as a distribution in redemption
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1 of the stock of any corporation, for purposes of

2 subparagraphs (A) and (B), such corporation

3 shall be treated as purchasing an amount of its

4 stock equal to the amount treated as such a

5 distribution under section 304(a).

6 ‘‘(D) EXCEPTION FOR PURCHASE OF

7 STOCK FROM EMPLOYEES.—Subparagraph (A)

8 shall not apply to the purchase of stock by a

9 corporation from an employee in connection

10 with such employee’s termination of employ11 ment with the corporation, or in connection

12 with repurchasing shares offered for sale by

13 employee shareholders.

14 ‘‘(4) SPECIAL RULES.—

15 ‘‘(A) REPURCHASE BY CORPORATION,

16 ETC.—If—

17 ‘‘(i) stock in a corporation in the

18 hands of a taxpayer would be qualified

19 stock of an employee owned business ex20 cept that it was issued before December

21 31, 1993, and

22 ‘‘(ii) the taxpayer sells such stock to

23 such corporation or to an employees’ trust

24 fund which is described in section 401(a)
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1 and which is exempt from the tax under

2 section 501(a),

3 such stock shall be treated as qualified stock of

4 an employee owned business for purposes of ap5 plying subsection (a) to any gain of the tax6 payer on such sale.

7 ‘‘(B) DISTRIBUTIONS TO EMPLOYEES.—If

8 an employees’ trust which is described in sec9 tion 401(a) and which is exempt from tax

10 under section 501(a)—

11 ‘‘(i) purchases stock in a corporation

12 at original issue from such corporation or

13 from a person who acquired such stock at

14 original issue from such corporation, and

15 ‘‘(ii) distributes such stock to an em16 ployee,

17 the stock distributed to such employee shall be

18 treated as acquired by the employee at original

19 issue and the employee’s holding period for

20 such stock shall include the period from issu21 ance to distribution.

22 ‘‘(d) EMPLOYEE OWNED BUSINESS.—

23 ‘‘(1) IN GENERAL.—For purposes of this sec24 tion, the term ‘employee owned business’ means any

25 domestic corporation if—
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1 ‘‘(A) at least 50 percent of the employees

2 of the corporation own directly, or have allo3 cated to an account in an employees’ trust de4 scribed in section 401(a) which is exempt from

5 tax under section 501(a), stock in such corpora6 tion, and

7 ‘‘(B) stock owned by the employees of the

8 corporation represents at least 30 percent of—

9 ‘‘(i) each class of outstanding stock of

10 the corporation, or

11 ‘‘(ii) the total value of all outstanding

12 stock of the corporation.

13 ‘‘(2) EXCLUSION OF CERTAIN STOCK FOR PUR14 POSES OF DEFINITION.—If an employee owns di15 rectly, or through an allocation to an account in an

16 employees’ trust described in section 401(a) which is

17 exempt from tax under section 501(a), stock rep18 resenting more than 5 percent of—

19 ‘‘(A) each class of outstanding stock of the

20 corporation, or

21 ‘‘(B) the total value of all outstanding

22 stock of the corporation,

23 no stock owned by such employee directly or through

24 such an allocation shall be included under paragraph

25 (1)(B).
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1 ‘‘(e) ACTIVE BUSINESS REQUIREMENT.—

2 ‘‘(1) IN GENERAL.—For purposes of subsection

3 (c)(2), the requirements of this subsection are met

4 by a corporation for any period if during such pe5 riod—

6 ‘‘(A) at least 80 percent (by value) of the

7 assets of such corporation are used by such cor8 poration in the active conduct of 1 or more

9 qualified trades or businesses, and

10 ‘‘(B) such corporation is an eligible cor11 poration.

12 ‘‘(2) SPECIAL RULE FOR CERTAIN ACTIVI13 TIES.—For purposes of paragraph (1), if, in connec14 tion with any future qualified trade or business, a

15 corporation is engaged in—

16 ‘‘(A) start-up activities described in section

17 195(c)(1)(A),

18 ‘‘(B) activities resulting in the payment or

19 incurring of expenditures which may be treated

20 as research and experimental expenditures

21 under section 174, or

22 ‘‘(C) activities with respect to in-house re23 search expenses described in section 41(b)(4),

24 assets used in such activities shall be treated as used

25 in the active conduct of a qualified trade or busi-
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1 ness. Any determination under this paragraph shall

2 be made without regard to whether a corporation

3 has any gross income from such activities at the

4 time of the determination.

5 ‘‘(3) QUALIFIED TRADE OR BUSINESS.—For

6 purposes of this subsection, the term ‘qualified trade

7 or business’ means any trade or business other

8 than—

9 ‘‘(A) any banking, insurance, financing,

10 leasing, investing, or similar business,

11 ‘‘(B) any farming business (including the

12 business of raising or harvesting trees), and

13 ‘‘(C) any business involving the production

14 or extraction of products of a character with re15 spect to which a deduction is allowable under

16 section 613 or 613A.

17 ‘‘(4) ELIGIBLE CORPORATION.—For purposes

18 of this subsection, the term ‘eligible corporation’

19 means any domestic corporation; except that such

20 term shall not include—

21 ‘‘(A) a DISC or former DISC,

22 ‘‘(B) a corporation with respect to which

23 an election under section 936 is in effect or

24 which has a direct or indirect subsidiary with

25 respect to which such an election is in effect,
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1 ‘‘(C) a regulated investment company, real

2 estate investment trust, or REMIC, and

3 ‘‘(D) a cooperative.

4 ‘‘(5) STOCK IN OTHER CORPORATIONS.—

5 ‘‘(A) LOOK-THRU IN CASE OF SUBSIDI6 ARIES.—For purposes of this subsection, stock

7 and debt in any subsidiary corporation shall be

8 disregarded and the parent corporation shall be

9 deemed to own its ratable share of the subsidi10 ary’s assets, and to conduct its ratable share of

11 the subsidiary’s activities.

12 ‘‘(B) PORTFOLIO STOCK OR SECURITIES.—

13 A corporation shall be treated as failing to meet

14 the requirements of paragraph (1) for any pe15 riod during which more than 10 percent of the

16 value of its assets (in excess of liabilities) con17 sists of stock or securities in other corporations

18 which are not subsidiaries of such corporation

19 (other than assets described in paragraph (6)).

20 ‘‘(C) SUBSIDIARY.—For purposes of this

21 paragraph, a corporation shall be considered a

22 subsidiary if the parent owns more than 50 per23 cent of the combined voting power of all classes

24 of stock entitled to vote, or more than 50 per-
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1 cent in value of all outstanding stock, of such

2 corporation.

3 ‘‘(6) WORKING CAPITAL.—For purposes of

4 paragraph (1)(A), any assets which—

5 ‘‘(A) are held as a part of the reasonably

6 required working capital needs of a qualified

7 trade or business of the corporation, or

8 ‘‘(B) are held for investment and are rea9 sonably expected to be used within 2 years to

10 finance research and experimentation in a

11 qualified trade or business or increases in work12 ing capital needs of a qualified trade or busi13 ness,

14 shall be treated as used in the active conduct of a

15 qualified trade or business. For periods after the

16 corporation has been in existence for at least 2

17 years, in no event may more than 50 percent of the

18 assets of the corporation qualify as used in the ac19 tive conduct of a qualified trade or business by rea20 son of this paragraph.

21 ‘‘(7) MAXIMUM REAL ESTATE HOLDINGS.—A

22 corporation shall not be treated as meeting the re23 quirements of paragraph (1) for any period during

24 which more than 10 percent of the total value of its

25 assets consists of real property which is not used in
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1 the active conduct of a qualified trade or business.

2 For purposes of the preceding sentence, the owner3 ship of, dealing in, or renting of real property shall

4 not be treated as the active conduct of a qualified

5 trade or business.

6 ‘‘(8) COMPUTER SOFTWARE ROYALTIES.—For

7 purposes of paragraph (1), rights to computer soft8 ware which produces active business computer soft9 ware royalties (within the meaning of section

10 543(d)(1)) shall be treated as an asset used in the

11 active conduct of a trade or business.

12 ‘‘(f) STOCK ACQUIRED ON CONVERSION OF OTHER

13 STOCK.—If any stock in a corporation is acquired solely

14 through the conversion of other stock in such corporation

15 which is qualified stock of an employee owned business

16 in the hands of the taxpayer—

17 ‘‘(1) the stock so acquired shall be treated as

18 qualified stock of an employee owned business in the

19 hands of the taxpayer, and

20 ‘‘(2) the stock so acquired shall be treated as

21 having been held during the period during which the

22 converted stock was held.

23 ‘‘(g) TREATMENT OF PASS-THRU ENTITIES.—

24 ‘‘(1) IN GENERAL.—If any amount included in

25 gross income by reason of holding an interest in a
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1 pass-thru entity meets the requirements of para2 graph (2)—

3 ‘‘(A) such amount shall be treated as gain

4 described in subsection (a), and

5 ‘‘(B) for purposes of applying subsection

6 (b), such amount shall be treated as gain from

7 a disposition of stock in the corporation issuing

8 the stock disposed of by the pass-thru entity

9 and the taxpayer’s proportionate share of the

10 adjusted basis of the pass-thru entity in such

11 stock shall be taken into account.

12 ‘‘(2) REQUIREMENTS.—An amount meets the

13 requirements of this paragraph if—

14 ‘‘(A) such amount is attributable to gain

15 on the sale or exchange by the pass-thru entity

16 of stock which is qualified stock of an employee

17 owned business in the hands of such entity (de18 termined by treating such entity as an individ19 ual) and which was held by such entity for

20 more than 5 years, and

21 ‘‘(B) such amount is includible in the gross

22 income of the taxpayer by reason of the holding

23 of an interest in such entity which was held by

24 the taxpayer on the date on which such pass25 thru entity acquired such stock and at all times
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1 thereafter before the disposition of such stock

2 by such pass-thru entity.

3 ‘‘(3) LIMITATION BASED ON INTEREST ORIGI4 NALLY HELD BY TAXPAYER.—Paragraph (1) shall

5 not apply to any amount to the extent such amount

6 exceeds the amount to which paragraph (1) would

7 have applied if such amount were determined by ref8 erence to the interest the taxpayer held in the pass9 thru entity on the date the qualified stock of an em10 ployee owned business was acquired.

11 ‘‘(4) PASS-THRU ENTITY.—For purposes of this

12 subsection, the term ‘pass-thru entity’ means—

13 ‘‘(A) any partnership,

14 ‘‘(B) any S corporation,

15 ‘‘(C) any regulated investment company,

16 and

17 ‘‘(D) any common trust fund.

18 ‘‘(h) CERTAIN TAX-FREE AND OTHER TRANS19 FERS.—For purposes of this section—

20 ‘‘(1) IN GENERAL.—In the case of a transfer

21 described in paragraph (2), the transferee shall be

22 treated as—

23 ‘‘(A) having acquired such stock in the

24 same manner as the transferor, and
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1 ‘‘(B) having held such stock during any

2 continuous period immediately preceding the

3 transfer during which it was held (or treated as

4 held under this subsection) by the transferor.

5 ‘‘(2) DESCRIPTION OF TRANSFERS.—A transfer

6 is described in this subsection if such transfer is—

7 ‘‘(A) by gift,

8 ‘‘(B) at death, or

9 ‘‘(C) from a partnership to a partner of

10 stock with respect to which requirements simi11 lar to the requirements of subsection (g) are

12 met at the time of the transfer (without regard

13 to the 5-year holding requirement).

14 ‘‘(3) CERTAIN RULES MADE APPLICABLE.—

15 Rules similar to the rules of section 1244(d)(2) shall

16 apply for purposes of this section.

17 ‘‘(4) INCORPORATIONS AND REORGANIZATIONS

18 INVOLVING NONQUALIFIED STOCK.—

19 ‘‘(A) IN GENERAL.—In the case of a trans20 action described in section 351 or a reorganiza21 tion described in section 368, if qualified stock

22 of an employee owned business is exchanged for

23 other stock which would not qualify as qualified

24 stock of an employee owned business but for

25 this subparagraph, such other stock shall be
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1 treated as qualified stock of an employee owned

2 business acquired on the date on which the ex3 changed stock was acquired.

4 ‘‘(B) LIMITATION.—This section shall

5 apply to gain from the sale or exchange of stock

6 treated as qualified stock of an employee owned

7 business by reason of subparagraph (A) only to

8 the extent of the gain which would have been

9 recognized at the time of the transfer described

10 in subparagraph (A) if section 351 or 368 had

11 not applied at such time. The preceding sen12 tence shall not apply if the stock which is treat13 ed as qualified stock of an employee owned

14 business by reason of subparagraph (A) is is15 sued by a corporation which (as of the time of

16 the transfer described in subparagraph (A)) is

17 an employee owned business.

18 ‘‘(C) SUCCESSIVE APPLICATION.—For pur19 poses of this paragraph, stock treated as quali20 fied stock of an employee owned business under

21 subparagraph (A) shall be so treated for subse22 quent transactions or reorganizations, except

23 that the limitation of subparagraph (B) shall be

24 applied as of the time of the first transfer to

25 which such limitation applied (determined after
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1 the application of the second sentence of sub2 paragraph (B)).

3 ‘‘(D) CONTROL TEST.—In the case of a

4 transaction described in section 351, this para5 graph shall apply only if, immediately after the

6 transaction, the corporation issuing the stock

7 owns directly or indirectly stock representing

8 control (within the meaning of section 368(c))

9 of the corporation whose stock was exchanged.

10 ‘‘(i) BASIS RULES.—For purposes of this section—

11 ‘‘(1) STOCK EXCHANGED FOR PROPERTY.—In

12 the case where the taxpayer transfers property

13 (other than money or stock) to a corporation in ex14 change for stock in such corporation—

15 ‘‘(A) such stock shall be treated as having

16 been acquired by the taxpayer on the date of

17 such exchange, and

18 ‘‘(B) the basis of such stock in the hands

19 of the taxpayer shall in no event be less than

20 the fair market value of the property ex21 changed.

22 ‘‘(2) BASIS OF S CORPORATION STOCK.—For

23 purposes of this section, the adjusted basis of stock

24 in an S corporation shall in no event be less than

25 its adjusted basis determined without regard to any
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1 adjustment to the basis of such stock under section

2 1367.

3 ‘‘(3) TREATMENT OF CONTRIBUTIONS TO CAP4 ITAL.—If the adjusted basis of any qualified stock of

5 an employee owned business is adjusted by reason of

6 any contribution to capital after the date on which

7 such stock was originally issued, in determining the

8 amount of the adjustment by reason of such con9 tribution, the basis of the contributed property shall

10 in no event be treated as less than its fair market

11 value on the date of the contribution.

12 ‘‘(j) TREATMENT OF CERTAIN SHORT POSITIONS.—

13 ‘‘(1) IN GENERAL.—If the taxpayer has an off14 setting short position with respect to any qualified

15 stock of an employee owned business, subsection (a)

16 shall not apply to any gain from the sale or ex17 change of such stock unless—

18 ‘‘(A) such stock was held by the taxpayer

19 for more than 5 years as of the first day on

20 which there was such a short position, and

21 ‘‘(B) the taxpayer elects to recognize gain

22 as if such stock were sold on such first day for

23 its fair market value.

24 ‘‘(2) OFFSETTING SHORT POSITION.—For pur25 poses of paragraph (1), the taxpayer shall be treated
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1 as having an offsetting short position with respect to

2 any qualified stock of an employee owned business

3 if—

4 ‘‘(A) the taxpayer has made a short sale of

5 substantially identical property,

6 ‘‘(B) the taxpayer has acquired an option

7 to sell substantially identical property at a fixed

8 price, or

9 ‘‘(C) to the extent provided in regulations,

10 the taxpayer has entered into any other trans11 action which substantially reduces the risk of

12 loss from holding such qualified stock.

13 For purposes of the preceding sentence, any ref14 erence to the taxpayer shall be treated as including

15 a reference to any person who is related (within the

16 meaning of section 267(b) or 707(b)) to the tax17 payer.

18 ‘‘(k) COORDINATION WITH EXCLUSION FOR GAIN

19 FROM CERTAIN SMALL BUSINESS STOCK.—In the case of

20 qualified stock of an employee owned business that is also

21 qualified small business stock (as defined in section

22 1202(c))—

23 ‘‘(1) the taxpayer shall elect whether gain from

24 the sale of such stock is excluded under this section

25 or section 1202, and
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1 ‘‘(2) the limitation under—

2 ‘‘(A) subsection (b) shall be reduced by the

3 amount of such gain excluded under section

4 1202, and

5 ‘‘(B) section 1202(b) shall be reduced by

6 the amount of such gain excluded under sub7 section (a).

8 ‘‘(l) REGULATIONS.—The Secretary shall prescribe

9 such regulations as may be appropriate to carry out the

10 purposes of this section, including regulations to prevent

11 the avoidance of the purposes of this section through split12 ups, shell corporations, partnerships, or otherwise.’’.

13 (b) EXCLUSION TREATED AS PREFERENCE FOR MIN14 IMUM TAX.—

15 (1) IN GENERAL.—Subsection (a) of section 57

16 (relating to items of tax preference) is amended by

17 adding at the end the following new paragraph:

18 ‘‘(8) EXCLUSION FOR GAINS ON SALE OF CER19 TAIN QUALIFIED STOCK OF AN EMPLOYEE OWNED

20 BUSINESS.—An amount equal to the amount ex21 cluded from gross income for the taxable year under

22 section 1203.’’.

23 (2) CONFORMING AMENDMENT.—Subclause (II)

24 of section 53(d)(1)(B)(ii) is amended by striking

25 ‘‘and (7)’’ and inserting ‘‘(7), and (8)’’.
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1 (c) CONFORMING AMENDMENTS.—

2 (1)(A) Section 172(d)(2) (relating to modifica3 tions with respect to net operating loss deduction) is

4 amended—

5 (i) by striking ‘‘and’’ at the end of sub6 paragraph (A),

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

8 subparagraph (B) and inserting ‘‘; and’’, and

9 (iii) by adding at the end the following new

10 subparagraph:

11 ‘‘(C) the exclusion provided by section

12 1203 shall not be allowed.’’

13 (B) Subparagraph (B) of section 172(d)(4) is

14 amended by inserting ‘‘(2)(C),’’ after ‘‘(2)(B),’’.

15 (2) Paragraph (4) of section 642(c) is amend16 ed—

17 (A) by inserting ‘‘or 1203(a)’’ after

18 ‘‘1202(a)’’, and

19 (B) by inserting ‘‘1203, respectively’’ after

20 ‘‘1202’’.

21 (3) Paragraph (3) of section 643(a) is amended

22 by inserting ‘‘or 1203’’ after ‘‘1202’’.

23 (4) Paragraph (4) of section 691(c) is amended

24 by striking ‘‘1202,’’ and inserting ‘‘1202, 1203,’’.
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1 (5) The second sentence of paragraph (2) of

2 section 871(a) is amended by striking ‘‘section

3 1202’’ and inserting ‘‘sections 1202 and 1203’’.

4 (6) The table of sections for part I of sub5 chapter P of chapter 1 is amended by adding after

6 the item relating to section 1202 the following new

7 item:

‘‘Sec. 1203. Exclusion for gain from sale or exchange of certain stock of an employee owned business.’’.

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

9 this section shall apply to stock issued on or after Decem10 ber 31, 1993.

11 SEC. 102. DEFERRAL OF CAPITAL GAINS TAX ON SALE OF

12 EMPLOYER SECURITIES MODIFIED TO IN13 CLUDE SECURITIES OF PUBLIC COMPANIES.

14 (a) IN GENERAL.—Section 1042(c)(1)(A) (relating to

15 sales of stock to employee stock ownership plans) is

16 amended by striking ‘‘that has no stock outstanding that

17 are readily tradable on an established securities market’’.

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

19 this section shall apply to sales of securities occurring on

20 or after December 31, 1993.

21 SEC. 103. ESOP DIVIDEND EXCEPTION TO ADJUSTMENTS

22 BASED ON ADJUSTED CURRENT EARNINGS.

23 (a) IN GENERAL.—Section 56(g)(4)(C) (relating to

24 disallowance of items not deductible in computing earnings
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1 and profits) is amended by adding at the end the following

2 new clause:

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

5 deduction allowable under section 404(k).’’.

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

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

8 December 31, 1993.

9 TITLE II—INCENTIVES TO

10 EMPLOYEES

11 SEC. 201. USE OF 401(k) PLANS WITHIN EMPLOYEE STOCK

12 OWNERSHIP PLANS.

13 (a) IN GENERAL.—Section 4975(e)(7) (relating to

14 the definition of employee stock ownership plan) is amend15 ed by adding at the end the following: ‘‘An employee stock

16 ownership plan may include a qualified cash or deferred

17 arrangement under the same rules which apply to stock

18 bonus plans under section 401(k), and an employee stock

19 ownership plan may provide for matching contributions

20 under the same rules which apply to stock bonus plans

21 under section 401(m). Any contributions described in sec22 tion 401(k)(2)(A), and any matching contributions de23 scribed in section 401(m)(4)(A), which are made to an em24 ployee stock ownership plan may be used to make pay25 ments on a loan incurred for the purpose of acquiring
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1 qualifying employer securities (as described in section

2 404(a)(9)).’’.

3 (b) ELECTIVE DEFERRALS.—

4 (1) INCREASE IN LIMIT FOR CERTAIN CON5 TRIBUTIONS.—Section 402(g) (relating to limitation

6 on exclusion for elective deferrals) is amended by

7 adding at the end the following new paragraph:

8 ‘‘(9) INCREASE IN LIMIT ON ELECTIVE DEFER9 RALS FOR CONTRIBUTIONS TO EMPLOYEE STOCK

10 OWNERSHIP PLANS.—The limitation under para11 graph (1), as increased under paragraph (4), shall

12 be increased by the lesser of—

13 ‘‘(A) the amount of any elective deferrals

14 for contributions to an employee stock owner15 ship plan (as defined in section 4975(e)(7)), or

16 ‘‘(B) $3,000.’’.

17 (2) COST-OF-LIVING ADJUSTMENT.—Section

18 402(g)(5) (relating to cost-of-living adjustment) is

19 amended to read as follows:

20 ‘‘(5) COST-OF-LIVING ADJUSTMENT.—The Sec21 retary shall—

22 ‘‘(A) adjust the $7,000 amount under

23 paragraph (1), and
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1 ‘‘(B) in the case of years beginning after

2 1994, adjust the $3,000 amount under para3 graph (9),

4 at the same time and in the same manner as under

5 section 415(d).’’.

6 (c) EFFECTIVE DATE.—

7 (1) The amendment made by subsection (a) is

8 effective as of November 6, 1979, with respect to

9 references to section 401(k) and effective October

10 22, 1986, with respect to references to section

11 401(m).

12 (2) The amendments made by subsection (b)

13 shall apply to taxable years beginning after Decem14 ber 31, 1993.

15 SEC. 202. REDUCTION OF TAX RATES ON EMPLOYEE STOCK

16 OWNERSHIP PLAN RETIREMENT DISTRIBU17 TIONS.

18 (a) IN GENERAL.—Section 402(a) (relating to tax19 ability of beneficiary of exempt trust) is amended to read

20 as follows:

21 ‘‘(a) TAXABILITY OF BENEFICIARY EXEMPT

22 TRUST.—

23 ‘‘(1) IN GENERAL.—Except as otherwise pro24 vided in this section, any amount actually distrib25 uted to any distributee by any employees’ trust de-
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1 scribed in section 401(a) which is exempt from tax

2 under section 501(a) shall be taxable to the distribu3 tee, in the taxable year of the distributee in which

4 distributed, under section 72 (relating to annuities).

5 ‘‘(2) EXCLUSION FOR PORTION OF LUMP-SUM

6 DISTRIBUTION FROM ESOPS.—

7 ‘‘(A) DISTRIBUTION OF SECURITIES.—In

8 the case of a lump-sum distribution of employer

9 securities from an employee stock ownership

10 plan (as defined in section 4975(e)(7)), there

11 shall be excluded from gross income 50 percent

12 of the net appreciation in securities of the em13 ployer corporation realized at the time of sale.

14 ‘‘(B) CASH DISTRIBUTION.—If an em15 ployee stock ownership plan (as defined in sec16 tion 4975(e)(7)) distributes cash in lieu of em17 ployer securities held immediately before the

18 distribution, there shall be excluded from gross

19 income an amount equal to 50 percent of the

20 net appreciation of such employer securities.

21 ‘‘(C) TREATMENT AS LUMP-SUM DISTRIBU22 TION.—For purposes of this paragraph, no dis23 tribution to any taxpayer other than an individ24 ual, estate, or trust may be treated as a lump25 sum distribution under this paragraph.’’.
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1 (b) EFFECTIVE DATE.—The amendments made by

2 this section shall apply to distributions made on or after

3 December 31, 1993.

4 SEC. 203. GAINS FROM THE SALE OR EXCHANGE OF CER5 TAIN EMPLOYER SECURITIES.

6 (a) IN GENERAL.—Part III of subchapter B of chap7 ter 1 (relating to items specifically excluded from gross

8 income) is amended by redesignating section 137 as sec9 tion 138 and by inserting after section 136 the following

10 new section:

11 ‘‘SEC. 137. GAINS FROM THE SALE OR EXCHANGE OF CER12 TAIN EMPLOYER SECURITIES.

13 ‘‘(a) TREATMENT OF GAIN.—

14 ‘‘(1) GENERAL RULE.—In the case of an indi15 vidual, gross income shall not include gain from the

16 sale or exchange of qualified employer securities but

17 only if the sale or exchange occurs—

18 ‘‘(A) after the individual has attained the

19 age of 55;

20 ‘‘(B) after the individual has held the

21 qualified employer securities for 10 years while

22 employed by the corporation which issued the

23 qualified employer securities; and

24 ‘‘(C) during the 1-year period following the

25 individual’s separation from service as an em-
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1 ployee of the corporation which issued the

2 qualified employer securities.

3 ‘‘(2) DOLLAR LIMITATION.—The aggregate

4 amount which may be excluded under paragraph (1)

5 for all taxable years shall not exceed $100,000.

6 ‘‘(b) DEFINITIONS.—For purposes of this section, the

7 term ‘qualified employer securities’ means stock in a cor8 poration which was originally issued to, or purchased by,

9 the individual while the individual was employed by such

10 corporation.’’.

11 (b) CLERICAL AMENDMENT.—The table of sections

12 for part III of subchapter B of chapter 1 is amended by

13 redesignating the item relating to section 137 as section

14 138, and by inserting after the item relating to section

15 136 the following new item:

‘‘Sec. 137. Gains from the sale or exchange of certain employer securities.’’.

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

17 this section shall apply to sales or exchanges occurring on

18 or after December 31, 1993.

19 SEC. 204. ALLOWANCE OF DEDUCTION WITH RESPECT TO

20 CERTAIN EMPLOYEE STOCK OPTIONS.

21 (a) IN GENERAL.—Section 421 (relating to general

22 rules regarding certain stock options) is amended by add23 ing at the end the following new subsection:

24 ‘‘(d) SPECIAL RULE.—
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1 ‘‘(1) IN GENERAL.—In the case of a transfer of

2 a share of stock in an employee owned business (as

3 defined in section 1203(c))—

4 ‘‘(A) subsection (a)(2) shall not apply, and

5 ‘‘(B) the corporation described in sub6 section (a)(2) shall be allowed, for the taxable

7 year in which the option is exercised, a deduc8 tion equal to the fair market value of the stock

9 at the time the option is exercised, reduced by

10 the fair market value of the stock at the time

11 the option is issued.

12 ‘‘(2) OPTIONS EXERCISED BY CERTAIN EM13 PLOYEES.—Paragraph (1) shall not apply to any op14 tion exercised by an employee who—

15 ‘‘(A) during the taxable year in which the

16 option is exercised, receives compensation from

17 the corporation which exceeds $200,000, or

18 ‘‘(B) on the date that the option is exer19 cised, owns stock representing greater than 5

20 percent of the total value of all outstanding

21 stock of the corporation.’’.

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

23 this section shall apply to options granted on or after

24 December 31, 1993.
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1 SEC. 205. CERTAIN CORPORATIONS ALLOWED TO SPONSOR

2 EMPLOYEE STOCK OWNERSHIP PLANS.

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

4 1361(c)(2) (relating to definition of S corporation) is

5 amended by inserting after clause (iv) the following new

6 clause:

7 ‘‘(v) A trust established pursuant to

8 an employee stock ownership plan (as de9 fined in section 4975(e)(7)).’’.

10 (b) TRUSTEE TREATED AS SHAREHOLDER.—Sub11 paragraph (B) of section 1361(c)(2) (relating to definition

12 of S corporation) is amended by adding at the end the

13 following new clause:

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

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

16 trustee shall be treated as the share17 holder.’’.

18 (c) APPLICATION OF UNRELATED BUSINESS TAX.—

19 (1) IN GENERAL.—Subsection (b) of section

20 513 (relating to unrelated trade or business) is

21 amended—

22 (A) by striking ‘‘or’’ before ‘‘by a partner23 ship’’ and inserting a comma, and

24 (B) by inserting ‘‘, or by an S corporation

25 of which it is a shareholder’’ before the end pe26 riod.
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1 (2) SPECIAL RULES.—So much of subsection

2 (c) of section 512 (relating to unrelated taxable in3 come) as precedes paragraph (2) is amended to read

4 as follows:

5 ‘‘(c) SPECIAL RULES APPLICABLE TO PARTNER6 SHIPS AND S CORPORATIONS.—

7 ‘‘(1) IN GENERAL.—If a trade or business regu8 larly carried on by a partnership of which an organi9 zation is a member, or by an S corporation of which

10 a trust established pursuant to an employee stock

11 ownership plan (as defined in section 4975(e)(7)) is

12 a shareholder, is an unrelated trade or business with

13 respect to such organization or trust, such organiza14 tion or trust shall, in computing its unrelated busi15 ness taxable income (and subject to the exceptions,

16 additions, and limitations contained in subsection

17 (b)), include its share (whether or not distributed) of

18 the gross income of the partnership or S corporation

19 from such unrelated trade or business and its share

20 of the partnership or S corporation deductions di21 rectly connected with such gross income.’’.

22 (d) S CORPORATION TO PAY ESOP’S UNRELATED

23 BUSINESS TAX.—
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1 (1) IN GENERAL.—Section 1361 (relating to

2 definition of S corporation) is amended by adding at

3 the end the following new subsection:

4 ‘‘(e) SPECIAL RULE FOR EMPLOYEE STOCK OWNER5 SHIP TRUSTS.—A trust shall not be treated as described

6 in clause (v) of subsection (c)(2)(A) unless the S corpora7 tion the stock of which is held by such trust pays, or guar8 antees the payment by such trust of, any tax imposed by

9 section 511. Any such payment or guarantee shall be made

10 in such manner as the Secretary may prescribe and shall

11 not be treated as a contribution to the trust under section

12 404(a).’’.

13 (2) CONFORMING AMENDMENTS.—

14 (A) Section 408(b) of the Employee Retire15 ment Income Security Act of 1974 is amended

16 by adding at the end the following new para17 graph:

18 ‘‘(14) Any guarantee or payment of a tax liabil19 ity as described in section 1361(e) of the Internal

20 Revenue Code of 1986.’’.

21 (B) Subsection (d) of section 4975 (relat22 ing to tax on prohibited transactions) is amend23 ed by striking ‘‘or’’ at the end of paragraph

24 (14), by striking the period at the end of para25 graph (15) and inserting ‘‘; or’’, and by insert-
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1 ing after paragraph (15) the following new

2 paragraph:

3 ‘‘(16) any guarantee or payment of a tax liabil4 ity as described in section 1361(e).’’.

5 (e) COMPUTATION OF TAX ON UNRELATED BUSI6 NESS INCOME.—Subsection (a) of section 511 (relating to

7 imposition of tax on unrelated business income of chari8 table organizations) is amended by adding at the end the

9 following new paragraph:

10 ‘‘(3) SPECIAL RULE FOR CERTAIN TRUSTS.—In

11 the case of a trust described in section

12 1361(c)(2)(A)(v), the tax imposed by paragraph (1)

13 on such trust’s pro rata share of an S corporation’s

14 income pursuant to section 1366 shall be computed

15 by multiplying its pro rata share of such income by

16 the highest rate of tax specified in section 11(b).’’.

17 (f) S CORPORATION STOCK DISTRIBUTIONS TO

18 ESOP NOT TREATED AS CONTRIBUTIONS.—Section

19 404(a) (relating to deductions for contributions of an em20 ployer to an employee trust) is amended by adding at the

21 end the following new paragraph:

22 ‘‘(10) DISTRIBUTIONS WITH RESPECT TO

23 STOCK OF S CORPORATION.—Distributions with re24 spect to the stock of an S corporation made to an

25 employee stock ownership plan (as defined in section
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•S 1755 IS

1 4975(e)(7)) shall not be considered contributions for

2 purposes of this section or section 415(c).’’.

3 (g) DEDUCTION FOR S CORPORATION STOCK DIS4 TRIBUTIONS.—Paragraph (2) of section 404(k) (relating

5 to deduction for dividends paid on certain employer securi6 ties) is amended by adding at the end the following new

7 subparagraph:

8 ‘‘(C) DIVIDEND.—The term ‘dividend’

9 shall include distributions with respect to stock

10 of an S corporation which would be treated as

11 a dividend but for the application of section

12 1368(a).’’.

13 (h) ESOP MAY DISTRIBUTE CASH.—The second

14 sentence of paragraph (2) of section 409(h) (relating to

15 right to demand employer securities put option) is amend16 ed to read as follows: ‘‘In the case of an employer that

17 is an S corporation or whose charter or bylaws restrict

18 the ownership of substantially all outstanding employer se19 curities to employees or to a trust described in section

20 401(a), a plan which otherwise meets the requirements of

21 this subsection or section 4975(e)(7) shall not be consid22 ered to have failed to meet the requirements of this sub23 section or section 401(a) merely because it does not permit

24 a participant to exercise the right described in paragraph

25 (1)(A) if such plan provides that participants entitled to
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1 a distribution from the plan shall have a right to receive

2 such distribution in cash, except that such plan may dis3 tribute employer securities subject to a requirement that

4 such securities may be resold to the employer under terms

5 which meet the requirements of paragraph (1)(B).’’.

6 (i) EFFECTIVE DATE.—The amendments made by

7 this section shall apply to plans sponsored on or after De8 cember 31, 1993.

9 TITLE III—STATE PROGRAMS TO

10 ENCOURAGE EMPLOYEE

11 OWNERSHIP

12 SEC. 301. PROGRAMS REGARDING EMPLOYEE OWNERSHIP

13 AND PARTICIPATION.

14 (a) ESTABLISHMENT OF PROGRAM.—Not later than

15 180 days after the date of the enactment of this Act, the

16 Secretary of Labor (referred to in this section as the ‘‘Sec17 retary’’) shall establish a program to facilitate the estab18 lishment of State programs to foster increased employee

19 ownership and greater employee participation in business

20 decisionmaking throughout the United States.

21 (b) PURPOSE OF PROGRAM.—The Secretary shall es22 tablish the program under subsection (a) to encourage

23 State programs which focus on the following:

24 (1) Activities involving education and outreach

25 to inform individuals about the possibilities and ben-
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1 efits of employee ownership, gainsharing, and par2 ticipation in business decisionmaking, including fi3 nancial education.

4 (2) Activities involving technical assistance to

5 assist employee efforts to become business owners.

6 (3) Activities involving participation training to

7 teach employees and employers methods of employee

8 participation in business decisionmaking.

9 (4) Activities involving training other organiza10 tions to apply for funding under this section.

11 (c) PROGRAM DETAILS.—In focusing on activities re12 ferred to in subsection (b), the Secretary may include in

13 the program provisions that would—

14 (1) in the case of activities under subsection

15 (b)(1)—

16 (A) provide for the targeting of key groups

17 such as retiring business owners, unions, man18 agers, trade associations, and community orga19 nizations;

20 (B) encourage cooperation in organizing

21 workshops and conferences; and

22 (C) provide for the preparation and dis23 tribution of materials concerning employee own24 ership and participation;
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1 (2) in the case of activities under subsection

2 (b)(2)—

3 (A) provide for the performance of

4 prefeasibility assessments;

5 (B) provide assistance in the funding of

6 objective third party feasibility studies; and

7 (C) provide a data bank to help employees

8 find legal, financial, and technical advice in con9 nection with company ownership;

10 (3) in the case of activities under subsection

11 (b)(3)—

12 (A) provide for courses on employee par13 ticipation; and

14 (B) provide for the development and fos15 tering of networks of employee-owned compa16 nies to spread the use of successful participa17 tion techniques; and

18 (4) in the case of activities under subsection

19 (b)(4)—

20 (A) provide for visits to existing programs

21 qualified under this title by staff from new pro22 grams receiving funding under this title; and

23 (B) provide materials to be used by organi24 zations qualified under this title.
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1 (d) REGULATIONS.—Regulations issued by the Sec2 retary pursuant to this title shall include provisions assur3 ing that any program within the several States established

4 for the purposes of this title be—

5 (1) proactive in encouraging actions and activi6 ties that will promote and encourage employee own7 ership of companies and participation in decision8 making therein; and

9 (2) comprehensive in emphasizing both em10 ployee ownership of companies and employee partici11 pation in company decisionmaking so as to boost

12 productivity and broaden capital ownership.

13 (e) GRANTS.—Any program established pursuant to

14 subsection (a) shall provide for grants to the program

15 within the several States in accordance with section 304.

16 SEC. 302. OFFICE OF EMPLOYEE OWNERSHIP AND PARTICI17 PATION.

18 (a) ESTABLISHMENT.—The Secretary shall establish,

19 within the Department of Labor, the Office of Employee

20 Ownership and Participation (hereinafter referred to as

21 the ‘‘Office’’) to promote employee ownership,

22 gainsharing, and employee participation in company deci23 sionmaking.

24 (b) FUNCTIONS.—The functions of the Office are

25 to—
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1 (1) support programs within the several States

2 approved by the Secretary as being in compliance

3 with the program established pursuant to section

4 301; and

5 (2) facilitate the formation of new programs

6 within the several States for the purpose of accom7 plishing the goals of this title.

8 (c) DUTIES.—In carrying out its functions under

9 subsection (b), the Office shall—

10 (1) in the case of activities under subsection

11 (b)(1), support those programs within the several

12 States that are designed to achieve the goals and

13 purposes set forth in this title and to provide such

14 support by—

15 (A) making matching Federal grants under

16 section 304; and

17 (B) acting as a clearinghouse on tech18 niques employed by the programs within the

19 several States and disseminating information to

20 such programs, or funding such information

21 gathering and dissemination programs by

22 groups outside the Office; and

23 (2) in the case of activities under subsection

24 (b)(2), facilitate the formation of new programs by

25 encouraging the establishment of such programs in
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1 each of the 50 States, including the holding or fund2 ing of an annual conference to bring together rep3 resentatives from existing programs with the several

4 States and representatives from States without such

5 existing programs.

6 SEC. 303. ORGANIZATION OF THE OFFICE.

7 (a) DIRECTOR.—There shall be at the head of the

8 Office a Director of Employee Ownership and Participa9 tion (hereinafter referred to as the ‘‘Director’’) who shall

10 be appointed by the Secretary.

11 (b) EMPLOYEES.—In carrying out the functions of

12 the Office, the Director may select, appoint, employ, and

13 fix the compensation of such employees as shall be nec14 essary to carry out the functions of the Office.

15 SEC. 304. GRANTS.

16 (a) IN GENERAL.—For the purpose of making grants

17 authorized under the program established pursuant to sec18 tion 301, the Office is authorized to make grants for use

19 in connection with programs within the several States for

20 any of the following activities:

21 (1) Education and outreach.

22 (2) Participation training.

23 (3) Technical studies, including prefeasibility

24 and feasibility studies.
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1 (4) Activities facilitating cooperation among

2 employee ownership firms.

3 (5) Training for newly formed organizations to

4 be provided by existing organizations qualified under

5 this title, except that such funding shall not exceed

6 10 percent of the total grants under this title and

7 will not require matching State contributions.

8 (b) MATCHING.—Grants under this section shall be

9 made by the Office on a matching basis, $1 of Federal

10 money for every 50 cents of non-Federal money.

11 (c) APPLICATIONS.—The Office shall prescribe the

12 form and information necessary for applications for grants

13 under this section.

14 (d) AMOUNTS AND CONDITIONS.—The Office shall

15 determine the amounts and the conditions for grants made

16 under this section.

17 (e) GRANTS ON BEHALF OF OTHER ENTITIES.—

18 (1) STATE APPLICATIONS.—Each of the several

19 States may sponsor and submit applications on be20 half of units of State or local governments, State21 supported institutions of higher education, and non22 profit organization programs meeting the require23 ments of this title, but in no case shall the aggregate

24 amounts of these grants made to any unit of State

25 or local government, State-supported institutions of
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1 higher education, or nonprofit organization pro2 grams exceed the amount set forth in subsection (g).

3 (2) APPLICATIONS BY ENTITIES.—In any case

4 in which a State fails to establish a program pursu5 ant to this title during any fiscal year, the Secretary

6 shall allow in the subsequent fiscal year entities de7 scribed in paragraph (1) to make applications for

8 grants on their own initiative. States would be al9 lowed to submit applications in subsequent years as

10 well but would no longer be able to screen applica11 tions first for submission to this program.

12 (f) ANNUAL REPORT.—Each grant recipient shall

13 submit an annual report to the Office setting forth how

14 all moneys from grants pursuant to this title were ex15 pended during the 12-month period preceding the date of

16 the submission of the report.

17 (g) LIMITATIONS.—Grants to each of the recipients

18 shall be limited for each fiscal year as follows:

19 (1) Fiscal year 1994, not to exceed, in the ag20 gregate $200,000.

21 (2) Fiscal year 1995, not to exceed, in the ag22 gregate $220,000.

23 (3) Fiscal year 1996, not to exceed, in the ag24 gregate $242,000.
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1 (4) Fiscal year 1997, not to exceed, in the ag2 gregate $266,200.

3 (5) Fiscal year 1998, not to exceed, in the ag4 gregate $292,000.

5 SEC. 305. AUTHORIZATIONS.

6 (a) IN GENERAL.—For the purpose of making grants

7 pursuant to section 304, there are authorized to be appro8 priated the following:

9 (1) For fiscal year 1994, $2,500,000.

10 (2) For fiscal year 1995, $4,250,000.

11 (3) For fiscal year 1996, $6,000,000.

12 (4) For fiscal year 1997, $7,750,000.

13 (5) For fiscal year 1998, $9,500,000.

14 (b) ADMINISTRATIVE EXPENSES.—For the purpose

15 of funding the Office, there is authorized to be appro16 priated for each of the fiscal years 1994 through 1998

17 an amount not in excess of 7.5 percent of the maximum

18 amount available under subsection (b), or $250,000,

19 whichever is the lesser.

20 SEC. 306. OFFICE REPORTING.

21 Prior to the expiration of the 36-month period follow22 ing the date of enactment of this Act, the Director shall

23 report to the Congress on the progress of employee owner24 ship and participation in businesses in the United States.
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1 The report shall include a critical cost and benefit analysis

2 of program activities.

Æ

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