I

106TH CONGRESS

1ST SESSION H. R. 1462

To amend the Internal Revenue Code of 1986 to provide incentives for

the ownership and control of corporations by employees.

IN THE HOUSE OF REPRESENTATIVES

APRIL 15, 1999

Mr. ROHRABACHER (for himself, Mr. CAMPBELL, Ms. KAPTUR, Mr.

KUCINICH, Mr. BILBRAY, Mrs. BONO, Mr. BOUCHER, Mr. CALVERT, Mr.

CONDIT, Mr. COX, Mr. DOOLITTLE, Mr. DREIER, Mr. DUNCAN, Mr.

GALLEGLY, Mr. GILCHREST, Mr. GRAHAM, Mr. HORN, Mr. HUNTER, Ms.

LEE, Ms. MCKINNEY, Mr. METCALF, Mr. GARY MILLER of California,

Mr. PAUL, Mr. PETERSON of Minnesota, Mr. POMBO, Mr. RADANOVICH,

Mr. ROGAN, Mr. ROYCE, Mr. SANDERS, Mr. SOUDER, Mr. SHADEGG, Mr.

TANCREDO, Mr. WELDON of Florida, Mr. WICKER, and Mr. WALSH) introduced the following bill; which was referred to the Committee on Ways

and Means

A BILL

To amend the Internal Revenue Code of 1986 to provide

incentives for the ownership and control of corporations

by employees.

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

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Employee Ownership

5 Act of 1999’’.
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1 SEC. 2. OWNERSHIP POLICY FOR THE UNITED STATES.

2 (a) FINDINGS.—The Congress finds that—

3 (1) there is considerable evidence that em4 ployee-owned and employee-controlled corporations

5 are more productive and provide more wealth to

6 their employees than corporations not so owned, and

7 (2) the workplace experience of employee-owned

8 and employee-controlled corporations is proven to

9 foster greater appreciation of the economic system of

10 the United States that relies on ownership of private

11 property and capitalism.

12 (b) POLICY.—It is the policy of the United States

13 that by the year 2010, 30 percent of all United States

14 corporations are owned and controlled by employees of the

15 corporations.

16 SEC. 3. TAX INCENTIVES RELATING TO EMPLOYEE-OWNED

17 AND EMPLOYEE-CONTROLLED CORPORA18 TIONS.

19 (a) TRUST OF EMPLOYEE-OWNED AND EMPLOYEE20 CONTROLLED CORPORATION EXEMPT FROM TAX21 ATION.—

22 (1) IN GENERAL.—Section 501(c) of the Inter23 nal Revenue Code of 1986 (relating to list of exempt

24 organizations) is amended by adding at the end the

25 following new paragraph:
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1 ‘‘(28)(A) employee-owned and employee-con2 trolled corporation trust.

3 ‘‘(B) For purposes of subparagraph (A), the

4 term ‘employee-owned and employee-controlled cor5 poration trust’ means a trust which has as its pri6 mary assets the employer securities (within the

7 meaning of section 409(l)) of an employee-owned

8 and employee-controlled corporation.

9 (2) EMPLOYEE-OWNED AND EMPLOYEE-CON10 TROLLED CORPORATION DEFINED.—Subsection (a)

11 of section 7701 of such Code (relating to definitions)

12 is amended by adding at the end the following new

13 paragraph:

14 ‘‘(47) EMPLOYEE-OWNED AND EMPLOYEE-CON15 TROLLED CORPORATION.—The term ‘employee16 owned and employee-controlled corporation’ means a

17 corporation in which—

18 ‘‘(A) more than 50 percent of the voting

19 stock of such corporation is held by a trust for

20 the benefit of the employees of that corporation,

21 ‘‘(B) in all matters requiring the vote of

22 stock, including the election of the board of di23 rectors of the corporation, the trustee of such

24 trust is obligated to vote the stock held in trust

25 and allocated to participants in the trust in the
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1 manner in which the participants direct, on the

2 basis of 1-employee 1-vote, and to vote any

3 stock not so allocated as if it were so allocated,

4 ‘‘(C) at least 25 employees of such cor5 poration are participants in and beneficiaries of

6 such trust,

7 ‘‘(D) a minimum of 90 percent of the em8 ployees who work at least 1,000 hours annually

9 for such corporation are participants in such

10 trust, and

11 ‘‘(E) the trustee administers such trust for

12 the benefit of the employees of such corporation

13 and complies with all requirements of this title

14 relating to employee stock ownership plans (as

15 defined in section 4975(e)(7)) pertaining to

16 independent appraisal of shares not readily

17 tradable and distribution of those shares.’’.

18 (b) NO TAX ON CORPORATE INCOME OF EMPLOYEE19 OWNED AND EMPLOYEE-CONTROLLED CORPORATION.—

20 Subsection (a) of section 11 of such Code (relating to cor21 porations in general) is amended by inserting before the

22 period at the end the following: ‘‘(other than any em23 ployee-owned and employee-controlled corporation)’’.
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1 (c) EXCLUSION OF INCOME FROM SALE OF EM2 PLOYEE-OWNED AND EMPLOYEE-CONTROLLED CORPORA3 TION STOCK BY EMPLOYEE OWNER.—

4 (1) IN GENERAL.—Part III of subchapter B of

5 chapter 1 of such Code (relating to items specifically

6 excluded from gross income) is amended by redesig7 nating section 139 as section 140 and by inserting

8 after section 138 the following new section:

9 ‘‘SEC. 139. INCOME FROM EMPLOYEE OWNER SALE OF EM10 PLOYER SECURITIES DISTRIBUTED FROM

11 EMPLOYEE-OWNED AND EMPLOYEE-CON12 TROLLED CORPORATION TRUST.

13 ‘‘(a) IN GENERAL.—In the case of an individual,

14 gross income shall not include any proceeds from the

15 qualified sale of employer securities.

16 ‘‘(b) QUALIFIED SALE OF EMPLOYER SECURITIES.—

17 The term ‘qualified sale of employer securities’ means the

18 sale of employer securities (as defined in section 409(l))

19 which were distributed to a participant in the employee20 owned and employee-controlled corporation trust to—

21 ‘‘(1) an employee of the employee-owned and

22 employee-controlled corporation which issued such

23 securities,

24 ‘‘(2) such corporation, or

25 ‘‘(3) such trust.’’.
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1 (2) CLERICAL AMENDMENT.—The table of sec2 tions for part III of subchapter B of chapter 1 of

3 such Code is amended by striking the item relating

4 to section 139 and inserting after the item relating

5 to section 138 the following new items:

‘‘Sec. 139. Income from employee owner sale of employer securities distributed from employee-owned and employeecontrolled corporation trust.

‘‘Sec. 140. Cross references to other Acts.’’.

6 (d) RECEIPT OF STOCK IN AN EMPLOYEE OWNED

7 AND CONTROLLED CORPORATION DURING 3-YEAR TRAN8 SITION PERIOD.—Section 83 of such Code (relating to

9 property transferred in connection with performance of

10 services) is amended by adding at the end the following

11 new subsection:

12 ‘‘(i) RECEIPT OF STOCK IN AN EMPLOYEE OWNED

13 AND CONTROLLED CORPORATION DURING 3-YEAR TRAN14 SITION PERIOD.—

15 ‘‘(1) IN GENERAL.—In the case of an employee,

16 this section shall not apply to the transfer in lieu of

17 compensation of employer securities in an employer

18 owned and controlled corporation during the 3-year

19 period beginning on the effective date of the election

20 of a corporation to become an employee owned and

21 controlled corporation.

22 ‘‘(2) EXCEPTION.—If, on the day after the end

23 of the 3-year period referred to in paragraph (1),
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1 such corporation is not an employee owned and con2 trolled corporation, paragraph (1) shall not apply

3 and the following sum shall be included in the gross

4 income of such employee:

5 ‘‘(A) an amount equal to the fair market

6 value of all of such securities at the time of

7 transfer (determined without regard to any re8 striction other than a restriction which by its

9 terms will never lapse) to the employee in lieu

10 of compensation for such period, plus

11 ‘‘(B) an amount equal to 10 percent of the

12 amount determined under subparagraph (A).’’.

13 (e) NO TAX ON GAIN ON SALES OR TRANSFERS TO

14 EMPLOYEE-OWNED AND EMPLOYEE-CONTROLLED COR15 PORATION TRUST.—

16 (1) IN GENERAL.—Part III of subchapter O of

17 chapter 1 of such Code (relating to common non18 taxable exchanges) is amended by adding at the end

19 the following new section:

20 ‘‘SEC. 1046. SALE OF SECURITIES TO EMPLOYEE-OWNED

21 AND EMPLOYEE-CONTROLLED CORPORATION

22 TRUST.

23 ‘‘(a) NONRECOGNITION OF GAIN.—If the taxpayer

24 elects the application of this section, in the case of the

25 sale or transfer of employer securities (as defined in sec-
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1 tion 409(l)) to an employee-owned and employee-con2 trolled corporation trust, gain on such sale or transfer

3 shall not be recognized if the requirements of subsection

4 (b) are met.

5 ‘‘(b) REQUIREMENTS.—

6 ‘‘(1) IN GENERAL.—The requirements of this

7 subsection are that—

8 ‘‘(A) the employee-owned and employee9 controlled corporation trust acquiring such se10 curities from the taxpayer agrees—

11 ‘‘(i) to hold such securities for the 3-

12 year period beginning on the date of such

13 transfer or sale, and

14 ‘‘(ii) to notify the taxpayer upon the

15 transfer of such securities before the end

16 of such period, and

17 ‘‘(B) the taxpayer agrees to the provisions

18 of subsection (b).

19 ‘‘(2) EXCEPTIONS.—Paragraph (1) shall not

20 apply—

21 ‘‘(A) in a case where such securities are se22 curities of an employee-owned and employee23 controlled corporation which are distributed

24 within such 3-year period to an employee of

25 such corporation, and
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1 ‘‘(B) in the case of the sale or transfer of

2 stock of an employee-owned and employee-con3 trolled corporation in connection with the sale

4 or reorganization of such corporation, if such

5 sale or reorganization is approved by the em6 ployees of such corporation in a vote held on a

7 1-employee 1-vote basis.

8 ‘‘(c) RECAPTURE OF TAX.—If, during any year with9 in the 3-year period referred to in subsection (b)(1), secu10 rities subject to subsection (a) are sold or transferred in

11 a manner that does not meet the requirements of sub12 section (b), then gain on the sale or transfer described

13 in subsection (a) shall be recognized for the year in which

14 such requirements are not met.’’.

15 (2) CLERICAL AMENDMENT.—The table of sec16 tions for part III of subchapter O of chapter 1 of

17 such Code is amended by adding at the end the fol18 lowing new item:

‘‘Sec. 1046. Sale of securities to employee-owned and employeecontrolled corporation trust.’’.

19 (f) CREDIT FOR TRANSFER OF STOCK FROM ESTATE

20 TO EMPLOYEE-OWNED AND EMPLOYEE-CONTROLLED

21 CORPORATION.—

22 (1) IN GENERAL.—Part II of subchapter A of

23 chapter 11 of such Code (relating to credits against

24 tax) is amended by redesignating section 2016 as
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1 section 2017 and by inserting after section 2015 the

2 following new section:

3 ‘‘SEC. 2016. CREDIT FOR TRANSFER OF EMPLOYEE SECURI4 TIES FROM ESTATE TO EMPLOYEE-OWNED

5 AND EMPLOYEE-CONTROLLED CORPORATION

6 TRUST.

7 ‘‘(a) GENERAL RULE.—The tax imposed by section

8 2001 shall be credited with the amount of employer securi9 ties considered to have been acquired from or to have

10 passed from the decedent to an employee-owned and em11 ployee-controlled corporation trust.

12 ‘‘(b) LIMITATION.—Such credit may not exceed the

13 tax imposed by section 2001, reduced under this part

14 (other than by this section).

15 ‘‘(c) VALUE OF STOCK NOT READILY TRADABLE.—

16 No credit shall be allowed under subsection (a) in the case

17 of employer securities which are not readily tradable on

18 an established securities market unless the value of such

19 employer securities is established by an independent ap20 praiser. For purposes of the preceding sentence, the term

21 ‘independent appraiser’ means any appraiser meeting re22 quirements similar to the requirements of the regulations

23 prescribed under section 170(a)(1).

24 ‘‘(d) DEFINITIONS.—For purposes of subsection

25 (a)—
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1 ‘‘(1) ACQUIRED FROM OR PASSED FROM A DE2 CEDENT.—Employer securities shall be considered to

3 have been acquired from or to have passed from a

4 decedent if the basis of such property in the hands

5 of the employee-owned and employee-controlled cor6 poration trust is determined under section 1014 by

7 reference to paragraph (1), (2), (4), or (9) of sub8 section (b) of such section.

9 ‘‘(2) EMPLOYER SECURITIES.—The term ‘em10 ployer securities’ has the meaning given such term

11 by section 409(l)), except that such term shall not

12 include any security which is not voting common

13 stock.’’.

14 (2) CLERICAL AMENDMENT.—The table of sec15 tions for part II of subchapter A of chapter 11 of

16 such Code (relating to credits against tax) is amend17 ed by striking the item relating to section 2016 and

18 adding at the end the following new items:

‘‘Sec. 2016. Credit for transfer of employee securities from estate

to employee-owned and employee-controlled corporation trust.

‘‘Sec. 2017. Recovery of taxes claimed as credit.’’.

19 (g) EFFECTIVE DATE.—

20 (1) IN GENERAL.—Except as provided in para21 graph (2), the amendments made by this section

22 shall apply to taxable years beginning after the date

23 of the enactment of this Act.
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1 (2) CREDIT FOR TRANSFER OF STOCK FROM

2 ESTATE TO EMPLOYEE-OWNED AND EMPLOYEE-CON3 TROLLED CORPORATION.—The amendments made

4 subsection (f) shall apply to estates of decedents

5 dying after the date of the enactment of this Act.

6 SEC. 4. STUDY OF GOVERNMENT POLICIES AFFECTING EM7 PLOYEE-OWNED AND EMPLOYEE-CON8 TROLLED CORPORATIONS.

9 The Comptroller General of the United States shall—

10 (1) conduct a study of all Federal Government

11 regulations and policies that might impact the cre12 ation and operation of an employee-owned and em13 ployee-controlled corporation as defined in section

14 7701(a)(47) of the Internal Revenue Code of 1986,

15 (2) identify those regulations and policies that

16 are barriers to employee ownership and control of

17 such a corporation, and

18 (3) not later than one year after the date of the

19 enactment of this Act, submit a report on the find20 ings of such study, together with such recommenda21 tions as the Comptroller General determines appro22 priate, to the Congress.
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1 SEC. 5. PRESIDENTIAL COMMISSION ON EMPLOYEE OWN2 ERSHIP.

3 (a) ESTABLISHMENT.—Not later than one year after

4 the date of the enactment of this Act, the President shall

5 establish a commission to be known as the ‘‘Presidential

6 Commission on Employee Ownership’’ (hereafter in this

7 section referred to as the ‘‘Commission’’).

8 (b) DUTIES AND REPORT.—The Commission shall—

9 (1) conduct a study concerning all issues that

10 affect ownership of businesses in the United States,

11 with a primary focus on the issues that affect em12 ployee ownership of such businesses, and

13 (2) not later than two years after the date of

14 its establishment, submit a final report to the Presi15 dent and the Congress which includes the findings

16 and recommendations of the Commission.

17 (c) MEMBERSHIP.—The Commission shall be com18 posed of 15 members appointed by the President as fol19 lows:

20 (1) Three individuals, each of whom is an em21 ployee of a corporation that has at least 50 percent

22 of its voting stock in a trust for the benefit of em23 ployees and who is not an officer or senior manager

24 of that corporation.

25 (2) Three individuals, each of whom is an em26 ployee of a corporation that has at least 50 percent
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1 of its voting stock in a trust for the benefit of em2 ployees and who is an officer or senior manager of

3 that corporation.

4 (3) Three individuals, each of whom is a pro5 fessor employed by an institution of higher learning.

6 (4) Three individuals, each of whom is em7 ployed by a not-for-profit entity that has as its pri8 mary mission issues arising from employee owner9 ship of businesses.

10 (5) The Secretary of Labor, or his designee, the

11 Secretary of the Treasury, or his designee, and the

12 Director of the Office of Management and Budget,

13 or his designee.

14 (d) STAFF.—The Commission shall have such num15 ber of staff as the President shall determine, except that

16 such staff shall include not less than five full-time employ17 ees.

18 (e) GIFTS AND BEQUESTS.—The Commission may

19 accept, use, and dispose of gifts or bequests or services

20 or personal property for the purpose of aiding or facili21 tating the work of the Commission. Gifts or bequests of

22 money and proceeds from sales of other property received

23 as gifts or bequests shall be deposited in the Treasury and
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1 shall be available for disbursement upon order of the Com2 mission.

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