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[Congressional Bills 103th Congress]
[From the U.S. Government Publishing Office]
[S. 1755 Introduced in Senate (IS)]

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.

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

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Employee Ownership Promotion and 
Improvement Act of 1993''.

SEC. 2. REFERENCES TO INTERNAL REVENUE CODE OF 1986.

    Except as otherwise expressly provided, whenever in this Act an 
amendment or repeal is expressed in terms of an amendment to, or repeal 
of, a section or other provision, the reference shall be considered to 
be made to a section or other provision of the Internal Revenue Code of 
1986.

                     TITLE I--INVESTMENT INCENTIVES

SEC. 101. EXCLUSION FOR GAIN FROM SALE OR EXCHANGE OF CERTAIN STOCK OF 
              AN EMPLOYEE OWNED BUSINESS.

    (a) In General.--Part I of subchapter P of chapter 1 (relating to 
capital gains and losses) is amended by adding at the end the following 
new section:

``SEC. 1203. EXCLUSION FOR GAIN FROM SALE OR EXCHANGE OF CERTAIN STOCK 
              OF AN EMPLOYEE OWNED BUSINESS.

    ``(a) General Rule.--
            ``(1) Exclusion.--In the case of a taxpayer other than a 
        corporation who has gain from the sale or exchange of qualified 
        stock of an employee owned business, gross income shall not 
        include an amount equal to the sum of the amounts determined by 
        applying the applicable percentages determined under paragraph 
        (2) to such gain.
            ``(2) Applicable percentages.--The applicable percentages 
        under paragraph (1) shall be determined under the following 
        table:

                                                         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.    
    ``(b) Limitation.--
            ``(1) In general.--The aggregate amount of gain which may 
        be excluded under subsection (a) for a taxable year shall not 
        exceed $250,000 reduced by the aggregate amount of gain 
        excluded by the taxpayer under subsection (a) for prior taxable 
        years.
            ``(2) Treatment of married individuals.--
                    ``(A) Separate returns.--In the case of a separate 
                return by a married individual, paragraph (1) shall be 
                applied by substituting `$125,000' for `$250,000'.
                    ``(B) Allocation of exclusion.--In the case of any 
                joint return, the amount of gain taken into account 
                under subsection (a) shall be allocated equally between 
                the spouses for purposes of applying this subsection to 
                subsequent taxable years.
                    ``(C) Marital status.--For purposes of this 
                subsection, marital status shall be determined under 
                section 7703.
    ``(c) Qualified Stock of an Employee Owned Business.--For purposes 
of this section--
            ``(1) In general.--Except as otherwise provided in this 
        section, the term `qualified stock of an employee owned 
        business' means any stock in a corporation which is issued by 
        such corporation on or after December 31, 1993, if--
                    ``(A) as of the date of issuance, such corporation 
                is an employee owned business, and
                    ``(B) except as provided in subsections (f) and 
                (h), such stock is acquired by the taxpayer at its 
                original issue (directly or through an underwriter)--
                            ``(i) in exchange for money or other 
                        property (not including stock), or
                            ``(ii) as compensation for services (other 
                        than services performed as an underwriter of 
                        such stock).
            ``(2) Active business requirement.--Stock in a corporation 
        shall not be treated as qualified stock of an employee owned 
        business unless, during substantially all of the taxpayer's 
        holding period for such stock, such corporation meets the 
        active business requirements of subsection (e).
            ``(3) Certain purchases by corporation of its own stock.--
                    ``(A) Redemptions from taxpayer or related 
                person.--Stock acquired by the taxpayer shall not be 
                treated as qualified stock of an employee owned 
                business if, at any time during the 4-year period 
                beginning on the date 2 years before the issuance of 
                such stock, the corporation issuing such stock 
                purchased (directly or indirectly) any of its stock 
                from the taxpayer or from a person related (within the 
                meaning of section 267(b) or 707(b)) to the taxpayer.
                    ``(B) Significant redemptions.--Stock issued by a 
                corporation shall not be treated as qualified stock of 
                an employee owned business if, during the 2-year period 
                beginning on the date 1 year before the issuance of 
                such stock, such corporation made 1 or more purchases 
                of its stock with an aggregate value (as of the time of 
                the respective purchases) exceeding 5 percent of the 
                aggregate value of all of its stock as of the beginning 
                of such 2-year period.
                    ``(C) Treatment of certain transactions.--If any 
                transaction is treated under section 304(a) as a 
                distribution in redemption of the stock of any 
                corporation, for purposes of subparagraphs (A) and (B), 
                such corporation shall be treated as purchasing an 
                amount of its stock equal to the amount treated as such 
                a distribution under section 304(a).
                    ``(D) Exception for purchase of stock from 
                employees.--Subparagraph (A) shall not apply to the 
                purchase of stock by a corporation from an employee in 
                connection with such employee's termination of 
                employment with the corporation, or in connection with 
                repurchasing shares offered for sale by employee 
                shareholders.
            ``(4) Special rules.--
                    ``(A) Repurchase by corporation, etc.--If--
                            ``(i) stock in a corporation in the hands 
                        of a taxpayer would be qualified stock of an 
                        employee owned business except that it was 
                        issued before December 31, 1993, and
                            ``(ii) the taxpayer sells such stock to 
                        such corporation or to an employees' trust fund 
                        which is described in section 401(a) and which 
                        is exempt from the tax under section 501(a),
                such stock shall be treated as qualified stock of an 
                employee owned business for purposes of applying 
                subsection (a) to any gain of the taxpayer on such 
                sale.
                    ``(B) Distributions to employees.--If an employees' 
                trust which is described in section 401(a) and which is 
                exempt from tax under section 501(a)--
                            ``(i) purchases stock in a corporation at 
                        original issue from such corporation or from a 
                        person who acquired such stock at original 
                        issue from such corporation, and
                            ``(ii) distributes such stock to an 
                        employee,
                the stock distributed to such employee shall be treated 
                as acquired by the employee at original issue and the 
                employee's holding period for such stock shall include 
                the period from issuance to distribution.
    ``(d) Employee Owned Business.--
            ``(1) In general.--For purposes of this section, the term 
        `employee owned business' means any domestic corporation if--
                    ``(A) at least 50 percent of the employees of the 
                corporation own directly, or have allocated to an 
                account in an employees' trust described in section 
                401(a) which is exempt from tax under section 501(a), 
                stock in such corporation, and
                    ``(B) stock owned by the employees of the 
                corporation represents at least 30 percent of--
                            ``(i) each class of outstanding stock of 
                        the corporation, or
                            ``(ii) the total value of all outstanding 
                        stock of the corporation.
            ``(2) Exclusion of certain stock for purposes of 
        definition.--If an employee owns directly, or through an 
        allocation to an account in an employees' trust described in 
        section 401(a) which is exempt from tax under section 501(a), 
        stock representing more than 5 percent of--
                    ``(A) each class of outstanding stock of the 
                corporation, or
                    ``(B) the total value of all outstanding stock of 
                the corporation,
        no stock owned by such employee directly or through such an 
        allocation shall be included under paragraph (1)(B).
    ``(e) Active Business Requirement.--
            ``(1) In general.--For purposes of subsection (c)(2), the 
        requirements of this subsection are met by a corporation for 
        any period if during such period--
                    ``(A) at least 80 percent (by value) of the assets 
                of such corporation are used by such corporation in the 
                active conduct of 1 or more qualified trades or 
                businesses, and
                    ``(B) such corporation is an eligible corporation.
            ``(2) Special rule for certain activities.--For purposes of 
        paragraph (1), if, in connection with any future qualified 
        trade or business, a corporation is engaged in--
                    ``(A) start-up activities described in section 
                195(c)(1)(A),
                    ``(B) activities resulting in the payment or 
                incurring of expenditures which may be treated as 
                research and experimental expenditures under section 
                174, or
                    ``(C) activities with respect to in-house research 
                expenses described in section 41(b)(4),
        assets used in such activities shall be treated as used in the 
        active conduct of a qualified trade or business. Any 
        determination under this paragraph shall be made without regard 
        to whether a corporation has any gross income from such 
        activities at the time of the determination.
            ``(3) Qualified trade or business.--For purposes of this 
        subsection, the term `qualified trade or business' means any 
        trade or business other than--
                    ``(A) any banking, insurance, financing, leasing, 
                investing, or similar business,
                    ``(B) any farming business (including the business 
                of raising or harvesting trees), and
                    ``(C) any business involving the production or 
                extraction of products of a character with respect to 
                which a deduction is allowable under section 613 or 
                613A.
            ``(4) Eligible corporation.--For purposes of this 
        subsection, the term `eligible corporation' means any domestic 
        corporation; except that such term shall not include--
                    ``(A) a DISC or former DISC,
                    ``(B) a corporation with respect to which an 
                election under section 936 is in effect or which has a 
                direct or indirect subsidiary with respect to which 
                such an election is in effect,
                    ``(C) a regulated investment company, real estate 
                investment trust, or REMIC, and
                    ``(D) a cooperative.
            ``(5) Stock in other corporations.--
                    ``(A) Look-thru in case of subsidiaries.--For 
                purposes of this subsection, stock and debt in any 
                subsidiary corporation shall be disregarded and the 
                parent corporation shall be deemed to own its ratable 
                share of the subsidiary's assets, and to conduct its 
                ratable share of the subsidiary's activities.
                    ``(B) Portfolio stock or securities.--A corporation 
                shall be treated as failing to meet the requirements of 
                paragraph (1) for any period during which more than 10 
                percent of the value of its assets (in excess of 
                liabilities) consists of stock or securities in other 
                corporations which are not subsidiaries of such 
                corporation (other than assets described in paragraph 
                (6)).
                    ``(C) Subsidiary.--For purposes of this paragraph, 
                a corporation shall be considered a subsidiary if the 
                parent owns more than 50 percent of the combined voting 
                power of all classes of stock entitled to vote, or more 
                than 50 percent in value of all outstanding stock, of 
                such corporation.
            ``(6) Working capital.--For purposes of paragraph (1)(A), 
        any assets which--
                    ``(A) are held as a part of the reasonably required 
                working capital needs of a qualified trade or business 
                of the corporation, or
                    ``(B) are held for investment and are reasonably 
                expected to be used within 2 years to finance research 
                and experimentation in a qualified trade or business or 
                increases in working capital needs of a qualified trade 
                or business,
        shall be treated as used in the active conduct of a qualified 
        trade or business. For periods after the corporation has been 
        in existence for at least 2 years, in no event may more than 50 
        percent of the assets of the corporation qualify as used in the 
        active conduct of a qualified trade or business by reason of 
        this paragraph.
            ``(7) Maximum real estate holdings.--A corporation shall 
        not be treated as meeting the requirements of paragraph (1) for 
        any period during which more than 10 percent of the total value 
        of its assets consists of real property which is not used in 
        the active conduct of a qualified trade or business. For 
        purposes of the preceding sentence, the ownership of, dealing 
        in, or renting of real property shall not be treated as the 
        active conduct of a qualified trade or business.
            ``(8) Computer software royalties.--For purposes of 
        paragraph (1), rights to computer software which produces 
        active business computer software royalties (within the meaning 
        of section 543(d)(1)) shall be treated as an asset used in the 
        active conduct of a trade or business.
    ``(f) Stock Acquired on Conversion of Other Stock.--If any stock in 
a corporation is acquired solely through the conversion of other stock 
in such corporation which is qualified stock of an employee owned 
business in the hands of the taxpayer--
            ``(1) the stock so acquired shall be treated as qualified 
        stock of an employee owned business in the hands of the 
        taxpayer, and
            ``(2) the stock so acquired shall be treated as having been 
        held during the period during which the converted stock was 
        held.
    ``(g) Treatment of Pass-Thru Entities.--
            ``(1) In general.--If any amount included in gross income 
        by reason of holding an interest in a pass-thru entity meets 
        the requirements of paragraph (2)--
                    ``(A) such amount shall be treated as gain 
                described in subsection (a), and
                    ``(B) for purposes of applying subsection (b), such 
                amount shall be treated as gain from a disposition of 
                stock in the corporation issuing the stock disposed of 
                by the pass-thru entity and the taxpayer's 
                proportionate share of the adjusted basis of the pass-
                thru entity in such stock shall be taken into account.
            ``(2) Requirements.--An amount meets the requirements of 
        this paragraph if--
                    ``(A) such amount is attributable to gain on the 
                sale or exchange by the pass-thru entity of stock which 
                is qualified stock of an employee owned business in the 
                hands of such entity (determined by treating such 
                entity as an individual) and which was held by such 
                entity for more than 5 years, and
                    ``(B) such amount is includible in the gross income 
                of the taxpayer by reason of the holding of an interest 
                in such entity which was held by the taxpayer on the 
                date on which such pass-thru entity acquired such stock 
                and at all times thereafter before the disposition of 
                such stock by such pass-thru entity.
            ``(3) Limitation based on interest originally held by 
        taxpayer.--Paragraph (1) shall not apply to any amount to the 
        extent such amount exceeds the amount to which paragraph (1) 
        would have applied if such amount were determined by reference 
        to the interest the taxpayer held in the pass-thru entity on 
        the date the qualified stock of an employee owned business was 
        acquired.
            ``(4) Pass-thru entity.--For purposes of this subsection, 
        the term `pass-thru entity' means--
                    ``(A) any partnership,
                    ``(B) any S corporation,
                    ``(C) any regulated investment company, and
                    ``(D) any common trust fund.
    ``(h) Certain Tax-Free and Other Transfers.--For purposes of this 
section--
            ``(1) In general.--In the case of a transfer described in 
        paragraph (2), the transferee shall be treated as--
                    ``(A) having acquired such stock in the same manner 
                as the transferor, and
                    ``(B) having held such stock during any continuous 
                period immediately preceding the transfer during which 
                it was held (or treated as held under this subsection) 
                by the transferor.
            ``(2) Description of transfers.--A transfer is described in 
        this subsection if such transfer is--
                    ``(A) by gift,
                    ``(B) at death, or
                    ``(C) from a partnership to a partner of stock with 
                respect to which requirements similar to the 
                requirements of subsection (g) are met at the time of 
                the transfer (without regard to the 5-year holding 
                requirement).
            ``(3) Certain rules made applicable.--Rules similar to the 
        rules of section 1244(d)(2) shall apply for purposes of this 
        section.
            ``(4) Incorporations and reorganizations involving 
        nonqualified stock.--
                    ``(A) In general.--In the case of a transaction 
                described in section 351 or a reorganization described 
                in section 368, if qualified stock of an employee owned 
                business is exchanged for other stock which would not 
                qualify as qualified stock of an employee owned 
                business but for this subparagraph, such other stock 
                shall be treated as qualified stock of an employee 
                owned business acquired on the date on which the 
                exchanged stock was acquired.
                    ``(B) Limitation.--This section shall apply to gain 
                from the sale or exchange of stock treated as qualified 
                stock of an employee owned business by reason of 
                subparagraph (A) only to the extent of the gain which 
                would have been recognized at the time of the transfer 
                described in subparagraph (A) if section 351 or 368 had 
                not applied at such time. The preceding sentence shall 
                not apply if the stock which is treated as qualified 
                stock of an employee owned business by reason of 
                subparagraph (A) is issued by a corporation which (as 
                of the time of the transfer described in subparagraph 
                (A)) is an employee owned business.
                    ``(C) Successive application.--For purposes of this 
                paragraph, stock treated as qualified stock of an 
                employee owned business under subparagraph (A) shall be 
                so treated for subsequent transactions or 
                reorganizations, except that the limitation of 
                subparagraph (B) shall be applied as of the time of the 
                first transfer to which such limitation applied 
                (determined after the application of the second 
                sentence of subparagraph (B)).
                    ``(D) Control test.--In the case of a transaction 
                described in section 351, this paragraph shall apply 
                only if, immediately after the transaction, the 
                corporation issuing the stock owns directly or 
                indirectly stock representing control (within the 
                meaning of section 368(c)) of the corporation whose 
                stock was exchanged.
    ``(i) Basis Rules.--For purposes of this section--
            ``(1) Stock exchanged for property.--In the case where the 
        taxpayer transfers property (other than money or stock) to a 
        corporation in exchange for stock in such corporation--
                    ``(A) such stock shall be treated as having been 
                acquired by the taxpayer on the date of such exchange, 
                and
                    ``(B) the basis of such stock in the hands of the 
                taxpayer shall in no event be less than the fair market 
                value of the property exchanged.
            ``(2) Basis of s corporation stock.--For purposes of this 
        section, the adjusted basis of stock in an S corporation shall 
        in no event be less than its adjusted basis determined without 
        regard to any adjustment to the basis of such stock under 
        section 1367.
            ``(3) Treatment of contributions to capital.--If the 
        adjusted basis of any qualified stock of an employee owned 
        business is adjusted by reason of any contribution to capital 
        after the date on which such stock was originally issued, in 
        determining the amount of the adjustment by reason of such 
        contribution, the basis of the contributed property shall in no 
        event be treated as less than its fair market value on the date 
        of the contribution.
    ``(j) Treatment of Certain Short Positions.--
            ``(1) In general.--If the taxpayer has an offsetting short 
        position with respect to any qualified stock of an employee 
        owned business, subsection (a) shall not apply to any gain from 
        the sale or exchange of such stock unless--
                    ``(A) such stock was held by the taxpayer for more 
                than 5 years as of the first day on which there was 
                such a short position, and
                    ``(B) the taxpayer elects to recognize gain as if 
                such stock were sold on such first day for its fair 
                market value.
            ``(2) Offsetting short position.--For purposes of paragraph 
        (1), the taxpayer shall be treated as having an offsetting 
        short position with respect to any qualified stock of an 
        employee owned business if--
                    ``(A) the taxpayer has made a short sale of 
                substantially identical property,
                    ``(B) the taxpayer has acquired an option to sell 
                substantially identical property at a fixed price, or
                    ``(C) to the extent provided in regulations, the 
                taxpayer has entered into any other transaction which 
                substantially reduces the risk of loss from holding 
                such qualified stock.
        For purposes of the preceding sentence, any reference to the 
        taxpayer shall be treated as including a reference to any 
        person who is related (within the meaning of section 267(b) or 
        707(b)) to the taxpayer.
    ``(k) Coordination with Exclusion for Gain from Certain Small 
Business Stock.--In the case of qualified stock of an employee owned 
business that is also qualified small business stock (as defined in 
section 1202(c))--
            ``(1) the taxpayer shall elect whether gain from the sale 
        of such stock is excluded under this section or section 1202, 
        and
            ``(2) the limitation under--
                    ``(A) subsection (b) shall be reduced by the amount 
                of such gain excluded under section 1202, and
                    ``(B) section 1202(b) shall be reduced by the 
                amount of such gain excluded under subsection (a).
    ``(l) Regulations.--The Secretary shall prescribe such regulations 
as may be appropriate to carry out the purposes of this section, 
including regulations to prevent the avoidance of the purposes of this 
section through split-ups, shell corporations, partnerships, or 
otherwise.''.
    (b) Exclusion Treated as Preference for Minimum Tax.--
            (1) In general.--Subsection (a) of section 57 (relating to 
        items of tax preference) is amended by adding at the end the 
        following new paragraph:
            ``(8) Exclusion for gains on sale of certain qualified 
        stock of an employee owned business.--An amount equal to the 
        amount excluded from gross income for the taxable year under 
        section 1203.''.
            (2) Conforming amendment.--Subclause (II) of section 
        53(d)(1)(B)(ii) is amended by striking ``and (7)'' and 
        inserting ``(7), and (8)''.
    (c) Conforming Amendments.--
            (1)(A) Section 172(d)(2) (relating to modifications with 
        respect to net operating loss deduction) is amended--
                    (i) by striking ``and'' at the end of subparagraph 
                (A),
                    (ii) by striking the period at the end of 
                subparagraph (B) and inserting ``; and'', and
                    (iii) by adding at the end the following new 
                subparagraph:
                    ``(C) the exclusion provided by section 1203 shall 
                not be allowed.''
            (B) Subparagraph (B) of section 172(d)(4) is amended by 
        inserting ``(2)(C),'' after ``(2)(B),''.
            (2) Paragraph (4) of section 642(c) is amended--
                    (A) by inserting ``or 1203(a)'' after ``1202(a)'', 
                and
                    (B) by inserting ``1203, respectively'' after 
                ``1202''.
            (3) Paragraph (3) of section 643(a) is amended by inserting 
        ``or 1203'' after ``1202''.
            (4) Paragraph (4) of section 691(c) is amended by striking 
        ``1202,'' and inserting ``1202, 1203,''.
            (5) The second sentence of paragraph (2) of section 871(a) 
        is amended by striking ``section 1202'' and inserting 
        ``sections 1202 and 1203''.
            (6) The table of sections for part I of subchapter P of 
        chapter 1 is amended by adding after the item relating to 
        section 1202 the following new item:

``Sec. 1203. Exclusion for gain from sale or exchange of certain stock 
                            of an employee owned business.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to stock issued on or after December 31, 1993.

SEC. 102. DEFERRAL OF CAPITAL GAINS TAX ON SALE OF EMPLOYER SECURITIES 
              MODIFIED TO INCLUDE SECURITIES OF PUBLIC COMPANIES.

    (a) In General.--Section 1042(c)(1)(A) (relating to sales of stock 
to employee stock ownership plans) is amended by striking ``that has no 
stock outstanding that are readily tradable on an established 
securities market''.
    (b) Effective Date.--The amendments made by this section shall 
apply to sales of securities occurring on or after December 31, 1993.

SEC. 103. ESOP DIVIDEND EXCEPTION TO ADJUSTMENTS BASED ON ADJUSTED 
              CURRENT EARNINGS.

    (a) In General.--Section 56(g)(4)(C) (relating to disallowance of 
items not deductible in computing earnings and profits) is amended by 
adding at the end the following new clause:
                            ``(v) Treatment of esop dividends.--Clause 
                        (i) shall not apply to any deduction allowable 
                        under section 404(k).''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 1993.

                   TITLE II--INCENTIVES TO EMPLOYEES

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

    (a) In General.--Section 4975(e)(7) (relating to the definition of 
employee stock ownership plan) is amended by adding at the end the 
following: ``An employee stock ownership plan may include a qualified 
cash or deferred arrangement under the same rules which apply to stock 
bonus plans under section 401(k), and an employee stock ownership plan 
may provide for matching contributions under the same rules which apply 
to stock bonus plans under section 401(m). Any contributions described 
in section 401(k)(2)(A), and any matching contributions described in 
section 401(m)(4)(A), which are made to an employee stock ownership 
plan may be used to make payments on a loan incurred for the purpose of 
acquiring qualifying employer securities (as described in section 
404(a)(9)).''.
    (b) Elective Deferrals.--
            (1) Increase in limit for certain contributions.--Section 
        402(g) (relating to limitation on exclusion for elective 
        deferrals) is amended by adding at the end the following new 
        paragraph:
            ``(9) Increase in limit on elective deferrals for 
        contributions to employee stock ownership plans.--The 
        limitation under paragraph (1), as increased under paragraph 
        (4), shall be increased by the lesser of--
                    ``(A) the amount of any elective deferrals for 
                contributions to an employee stock ownership plan (as 
                defined in section 4975(e)(7)), or
                    ``(B) $3,000.''.
            (2) Cost-of-living adjustment.--Section 402(g)(5) (relating 
        to cost-of-living adjustment) is amended to read as follows:
            ``(5) Cost-of-living adjustment.--The Secretary shall--
                    ``(A) adjust the $7,000 amount under paragraph (1), 
                and
                    ``(B) in the case of years beginning after 1994, 
                adjust the $3,000 amount under paragraph (9),
        at the same time and in the same manner as under section 
        415(d).''.
    (c) Effective Date.--
            (1) The amendment made by subsection (a) is effective as of 
        November 6, 1979, with respect to references to section 401(k) 
        and effective October 22, 1986, with respect to references to 
        section 401(m).
            (2) The amendments made by subsection (b) shall apply to 
        taxable years beginning after December 31, 1993.

SEC. 202. REDUCTION OF TAX RATES ON EMPLOYEE STOCK OWNERSHIP PLAN 
              RETIREMENT DISTRIBUTIONS.

    (a) In General.--Section 402(a) (relating to taxability of 
beneficiary of exempt trust) is amended to read as follows:
    ``(a) Taxability of Beneficiary Exempt Trust.--
            ``(1) In general.--Except as otherwise provided in this 
        section, any amount actually distributed to any distributee by 
        any employees' trust described in section 401(a) which is 
        exempt from tax under section 501(a) shall be taxable to the 
        distributee, in the taxable year of the distributee in which 
        distributed, under section 72 (relating to annuities).
            ``(2) Exclusion for portion of lump-sum distribution from 
        esops.--
                    ``(A) Distribution of securities.--In the case of a 
                lump-sum distribution of employer securities from an 
                employee stock ownership plan (as defined in section 
                4975(e)(7)), there shall be excluded from gross income 
                50 percent of the net appreciation in securities of the 
                employer corporation realized at the time of sale.
                    ``(B) Cash distribution.--If an employee stock 
                ownership plan (as defined in section 4975(e)(7)) 
                distributes cash in lieu of employer securities held 
                immediately before the distribution, there shall be 
                excluded from gross income an amount equal to 50 
                percent of the net appreciation of such employer 
                securities.
                    ``(C) Treatment as lump-sum distribution.--For 
                purposes of this paragraph, no distribution to any 
                taxpayer other than an individual, estate, or trust may 
                be treated as a lump-sum distribution under this 
                paragraph.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to distributions made on or after December 31, 1993.

SEC. 203. GAINS FROM THE SALE OR EXCHANGE OF CERTAIN EMPLOYER 
              SECURITIES.

    (a) In General.--Part III of subchapter B of chapter 1 (relating to 
items specifically excluded from gross income) is amended by 
redesignating section 137 as section 138 and by inserting after section 
136 the following new section:

``SEC. 137. GAINS FROM THE SALE OR EXCHANGE OF CERTAIN EMPLOYER 
              SECURITIES.

    ``(a) Treatment of Gain.--
            ``(1) General rule.--In the case of an individual, gross 
        income shall not include gain from the sale or exchange of 
        qualified employer securities but only if the sale or exchange 
        occurs--
                    ``(A) after the individual has attained the age of 
                55;
                    ``(B) after the individual has held the qualified 
                employer securities for 10 years while employed by the 
                corporation which issued the qualified employer 
                securities; and
                    ``(C) during the 1-year period following the 
                individual's separation from service as an employee of 
                the corporation which issued the qualified employer 
                securities.
            ``(2) Dollar limitation.--The aggregate amount which may be 
        excluded under paragraph (1) for all taxable years shall not 
        exceed $100,000.
    ``(b) Definitions.--For purposes of this section, the term 
`qualified employer securities' means stock in a corporation which was 
originally issued to, or purchased by, the individual while the 
individual was employed by such corporation.''.
    (b) Clerical Amendment.--The table of sections for part III of 
subchapter B of chapter 1 is amended by redesignating the item relating 
to section 137 as section 138, and by inserting after the item relating 
to section 136 the following new item:

``Sec. 137.  Gains from the sale or exchange of certain employer 
                            securities.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to sales or exchanges occurring on or after December 31, 1993.

SEC. 204. ALLOWANCE OF DEDUCTION WITH RESPECT TO CERTAIN EMPLOYEE STOCK 
              OPTIONS.

    (a) In General.--Section 421 (relating to general rules regarding 
certain stock options) is amended by adding at the end the following 
new subsection:
    ``(d) Special Rule.--
            ``(1) In general.--In the case of a transfer of a share of 
        stock in an employee owned business (as defined in section 
        1203(c))--
                    ``(A) subsection (a)(2) shall not apply, and
                    ``(B) the corporation described in subsection 
                (a)(2) shall be allowed, for the taxable year in which 
                the option is exercised, a deduction equal to the fair 
                market value of the stock at the time the option is 
                exercised, reduced by the fair market value of the 
                stock at the time the option is issued.
            ``(2) Options exercised by certain employees.--Paragraph 
        (1) shall not apply to any option exercised by an employee 
        who--
                    ``(A) during the taxable year in which the option 
                is exercised, receives compensation from the 
                corporation which exceeds $200,000, or
                    ``(B) on the date that the option is exercised, 
                owns stock representing greater than 5 percent of the 
                total value of all outstanding stock of the 
                corporation.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to options granted on or after December 31, 1993.

SEC. 205. CERTAIN CORPORATIONS ALLOWED TO SPONSOR EMPLOYEE STOCK 
              OWNERSHIP PLANS.

    (a) In General.--Subparagraph (A) of section 1361(c)(2) (relating 
to definition of S corporation) is amended by inserting after clause 
(iv) the following new clause:
                            ``(v) A trust established pursuant to an 
                        employee stock ownership plan (as defined in 
                        section 4975(e)(7)).''.
    (b) Trustee Treated as Shareholder.--Subparagraph (B) of section 
1361(c)(2) (relating to definition of S corporation) is amended by 
adding at the end the following new clause:
                            ``(v) In the case of a trust described in 
                        clause (v) of subparagraph (A), the trustee 
                        shall be treated as the shareholder.''.
    (c) Application of Unrelated Business Tax.--
            (1) In general.--Subsection (b) of section 513 (relating to 
        unrelated trade or business) is amended--
                    (A) by striking ``or'' before ``by a partnership'' 
                and inserting a comma, and
                    (B) by inserting ``, or by an S corporation of 
                which it is a shareholder'' before the end period.
            (2) Special rules.--So much of subsection (c) of section 
        512 (relating to unrelated taxable income) as precedes 
        paragraph (2) is amended to read as follows:
    ``(c) Special Rules Applicable to Partnerships and S 
Corporations.--
            ``(1) In general.--If a trade or business regularly carried 
        on by a partnership of which an organization is a member, or by 
        an S corporation of which a trust established pursuant to an 
        employee stock ownership plan (as defined in section 
        4975(e)(7)) is a shareholder, is an unrelated trade or business 
        with respect to such organization or trust, such organization 
        or trust shall, in computing its unrelated business taxable 
        income (and subject to the exceptions, additions, and 
        limitations contained in subsection (b)), include its share 
        (whether or not distributed) of the gross income of the 
        partnership or S corporation from such unrelated trade or 
        business and its share of the partnership or S corporation 
        deductions directly connected with such gross income.''.
    (d) S Corporation To Pay ESOP's Unrelated Business Tax.--
            (1) In general.--Section 1361 (relating to definition of S 
        corporation) is amended by adding at the end the following new 
        subsection:
    ``(e) Special Rule for Employee Stock Ownership Trusts.--A trust 
shall not be treated as described in clause (v) of subsection (c)(2)(A) 
unless the S corporation the stock of which is held by such trust pays, 
or guarantees the payment by such trust of, any tax imposed by section 
511. Any such payment or guarantee shall be made in such manner as the 
Secretary may prescribe and shall not be treated as a contribution to 
the trust under section 404(a).''.
            (2) Conforming amendments.--
                    (A) Section 408(b) of the Employee Retirement 
                Income Security Act of 1974 is amended by adding at the 
                end the following new paragraph:
            ``(14) Any guarantee or payment of a tax liability as 
        described in section 1361(e) of the Internal Revenue Code of 
        1986.''.
                    (B) Subsection (d) of section 4975 (relating to tax 
                on prohibited transactions) is amended by striking 
                ``or'' at the end of paragraph (14), by striking the 
                period at the end of paragraph (15) and inserting ``; 
                or'', and by inserting after paragraph (15) the 
                following new paragraph:
            ``(16) any guarantee or payment of a tax liability as 
        described in section 1361(e).''.
    (e) Computation of Tax on Unrelated Business Income.--Subsection 
(a) of section 511 (relating to imposition of tax on unrelated business 
income of charitable organizations) is amended by adding at the end the 
following new paragraph:
            ``(3) Special rule for certain trusts.--In the case of a 
        trust described in section 1361(c)(2)(A)(v), the tax imposed by 
        paragraph (1) on such trust's pro rata share of an S 
        corporation's income pursuant to section 1366 shall be computed 
        by multiplying its pro rata share of such income by the highest 
        rate of tax specified in section 11(b).''.
    (f) S Corporation Stock Distributions to ESOP Not Treated as 
Contributions.--Section 404(a) (relating to deductions for 
contributions of an employer to an employee trust) is amended by adding 
at the end the following new paragraph:
            ``(10) Distributions with respect to stock of s 
        corporation.--Distributions with respect to the stock of an S 
        corporation made to an employee stock ownership plan (as 
        defined in section 4975(e)(7)) shall not be considered 
        contributions for purposes of this section or section 
        415(c).''.
    (g) Deduction for S Corporation Stock Distributions.--Paragraph (2) 
of section 404(k) (relating to deduction for dividends paid on certain 
employer securities) is amended by adding at the end the following new 
subparagraph:
                    ``(C) Dividend.--The term `dividend' shall include 
                distributions with respect to stock of an S corporation 
                which would be treated as a dividend but for the 
                application of section 1368(a).''.
    (h) ESOP May Distribute Cash.--The second sentence of paragraph (2) 
of section 409(h) (relating to right to demand employer securities put 
option) is amended to read as follows: ``In the case of an employer 
that is an S corporation or whose charter or bylaws restrict the 
ownership of substantially all outstanding employer securities to 
employees or to a trust described in section 401(a), a plan which 
otherwise meets the requirements of this subsection or section 
4975(e)(7) shall not be considered to have failed to meet the 
requirements of this subsection or section 401(a) merely because it 
does not permit a participant to exercise the right described in 
paragraph (1)(A) if such plan provides that participants entitled to a 
distribution from the plan shall have a right to receive such 
distribution in cash, except that such plan may distribute employer 
securities subject to a requirement that such securities may be resold 
to the employer under terms which meet the requirements of paragraph 
(1)(B).''.
    (i) Effective Date.--The amendments made by this section shall 
apply to plans sponsored on or after December 31, 1993.

       TITLE III--STATE PROGRAMS TO ENCOURAGE EMPLOYEE OWNERSHIP

SEC. 301. PROGRAMS REGARDING EMPLOYEE OWNERSHIP AND PARTICIPATION.

    (a) Establishment of Program.--Not later than 180 days after the 
date of the enactment of this Act, the Secretary of Labor (referred to 
in this section as the ``Secretary'') shall establish a program to 
facilitate the establishment of State programs to foster increased 
employee ownership and greater employee participation in business 
decisionmaking throughout the United States.
    (b) Purpose of Program.--The Secretary shall establish the program 
under subsection (a) to encourage State programs which focus on the 
following:
            (1) Activities involving education and outreach to inform 
        individuals about the possibilities and benefits of employee 
        ownership, gainsharing, and participation in business 
        decisionmaking, including financial education.
            (2) Activities involving technical assistance to assist 
        employee efforts to become business owners.
            (3) Activities involving participation training to teach 
        employees and employers methods of employee participation in 
        business decisionmaking.
            (4) Activities involving training other organizations to 
        apply for funding under this section.
    (c) Program Details.--In focusing on activities referred to in 
subsection (b), the Secretary may include in the program provisions 
that would--
            (1) in the case of activities under subsection (b)(1)--
                    (A) provide for the targeting of key groups such as 
                retiring business owners, unions, managers, trade 
                associations, and community organizations;
                    (B) encourage cooperation in organizing workshops 
                and conferences; and
                    (C) provide for the preparation and distribution of 
                materials concerning employee ownership and 
                participation;
            (2) in the case of activities under subsection (b)(2)--
                    (A) provide for the performance of prefeasibility 
                assessments;
                    (B) provide assistance in the funding of objective 
                third party feasibility studies; and
                    (C) provide a data bank to help employees find 
                legal, financial, and technical advice in connection 
                with company ownership;
            (3) in the case of activities under subsection (b)(3)--
                    (A) provide for courses on employee participation; 
                and
                    (B) provide for the development and fostering of 
                networks of employee-owned companies to spread the use 
                of successful participation techniques; and
            (4) in the case of activities under subsection (b)(4)--
                    (A) provide for visits to existing programs 
                qualified under this title by staff from new programs 
                receiving funding under this title; and
                    (B) provide materials to be used by organizations 
                qualified under this title.
    (d) Regulations.--Regulations issued by the Secretary pursuant to 
this title shall include provisions assuring that any program within 
the several States established for the purposes of this title be--
            (1) proactive in encouraging actions and activities that 
        will promote and encourage employee ownership of companies and 
        participation in decisionmaking therein; and
            (2) comprehensive in emphasizing both employee ownership of 
        companies and employee participation in company decisionmaking 
        so as to boost productivity and broaden capital ownership.
    (e) Grants.--Any program established pursuant to subsection (a) 
shall provide for grants to the program within the several States in 
accordance with section 304.

SEC. 302. OFFICE OF EMPLOYEE OWNERSHIP AND PARTICIPATION.

    (a) Establishment.--The Secretary shall establish, within the 
Department of Labor, the Office of Employee Ownership and Participation 
(hereinafter referred to as the ``Office'') to promote employee 
ownership, gainsharing, and employee participation in company 
decisionmaking.
    (b) Functions.--The functions of the Office are to--
            (1) support programs within the several States approved by 
        the Secretary as being in compliance with the program 
        established pursuant to section 301; and
            (2) facilitate the formation of new programs within the 
        several States for the purpose of accomplishing the goals of 
        this title.
    (c) Duties.--In carrying out its functions under subsection (b), 
the Office shall--
            (1) in the case of activities under subsection (b)(1), 
        support those programs within the several States that are 
        designed to achieve the goals and purposes set forth in this 
        title and to provide such support by--
                    (A) making matching Federal grants under section 
                304; and
                    (B) acting as a clearinghouse on techniques 
                employed by the programs within the several States and 
                disseminating information to such programs, or funding 
                such information gathering and dissemination programs 
                by groups outside the Office; and
            (2) in the case of activities under subsection (b)(2), 
        facilitate the formation of new programs by encouraging the 
        establishment of such programs in each of the 50 States, 
        including the holding or funding of an annual conference to 
        bring together representatives from existing programs with the 
        several States and representatives from States without such 
        existing programs.

SEC. 303. ORGANIZATION OF THE OFFICE.

    (a) Director.--There shall be at the head of the Office a Director 
of Employee Ownership and Participation (hereinafter referred to as the 
``Director'') who shall be appointed by the Secretary.
    (b) Employees.--In carrying out the functions of the Office, the 
Director may select, appoint, employ, and fix the compensation of such 
employees as shall be necessary to carry out the functions of the 
Office.

SEC. 304. GRANTS.

    (a) In General.--For the purpose of making grants authorized under 
the program established pursuant to section 301, the Office is 
authorized to make grants for use in connection with programs within 
the several States for any of the following activities:
            (1) Education and outreach.
            (2) Participation training.
            (3) Technical studies, including prefeasibility and 
        feasibility studies.
            (4) Activities facilitating cooperation among employee 
        ownership firms.
            (5) Training for newly formed organizations to be provided 
        by existing organizations qualified under this title, except 
        that such funding shall not exceed 10 percent of the total 
        grants under this title and will not require matching State 
        contributions.
    (b) Matching.--Grants under this section shall be made by the 
Office on a matching basis, $1 of Federal money for every 50 cents of 
non-Federal money.
    (c) Applications.--The Office shall prescribe the form and 
information necessary for applications for grants under this section.
    (d) Amounts and Conditions.--The Office shall determine the amounts 
and the conditions for grants made under this section.
    (e) Grants on Behalf of Other Entities.--
            (1) State applications.--Each of the several States may 
        sponsor and submit applications on behalf of units of State or 
        local governments, State-supported institutions of higher 
        education, and nonprofit organization programs meeting the 
        requirements of this title, but in no case shall the aggregate 
        amounts of these grants made to any unit of State or local 
        government, State-supported institutions of higher education, 
        or nonprofit organization programs exceed the amount set forth 
        in subsection (g).
            (2) Applications by entities.--In any case in which a State 
        fails to establish a program pursuant to this title during any 
        fiscal year, the Secretary shall allow in the subsequent fiscal 
        year entities described in paragraph (1) to make applications 
        for grants on their own initiative. States would be allowed to 
        submit applications in subsequent years as well but would no 
        longer be able to screen applications first for submission to 
        this program.
    (f) Annual Report.--Each grant recipient shall submit an annual 
report to the Office setting forth how all moneys from grants pursuant 
to this title were expended during the 12-month period preceding the 
date of the submission of the report.
    (g) Limitations.--Grants to each of the recipients shall be limited 
for each fiscal year as follows:
            (1) Fiscal year 1994, not to exceed, in the aggregate 
        $200,000.
            (2) Fiscal year 1995, not to exceed, in the aggregate 
        $220,000.
            (3) Fiscal year 1996, not to exceed, in the aggregate 
        $242,000.
            (4) Fiscal year 1997, not to exceed, in the aggregate 
        $266,200.
            (5) Fiscal year 1998, not to exceed, in the aggregate 
        $292,000.

SEC. 305. AUTHORIZATIONS.

    (a) In General.--For the purpose of making grants pursuant to 
section 304, there are authorized to be appropriated the following:
            (1) For fiscal year 1994, $2,500,000.
            (2) For fiscal year 1995, $4,250,000.
            (3) For fiscal year 1996, $6,000,000.
            (4) For fiscal year 1997, $7,750,000.
            (5) For fiscal year 1998, $9,500,000.
    (b) Administrative Expenses.--For the purpose of funding the 
Office, there is authorized to be appropriated for each of the fiscal 
years 1994 through 1998 an amount not in excess of 7.5 percent of the 
maximum amount available under subsection (b), or $250,000, whichever 
is the lesser.

SEC. 306. OFFICE REPORTING.

    Prior to the expiration of the 36-month period following the date 
of enactment of this Act, the Director shall report to the Congress on 
the progress of employee ownership and participation in businesses in 
the United States. The report shall include a critical cost and benefit 
analysis of program activities.

                                 <all>

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