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[Congressional Bills 106th Congress]
[From the U.S. Government Publishing Office]
[H.R. 2124 Introduced in House (IH)]

106th CONGRESS
  1st Session
                                H. R. 2124

  To amend the Internal Revenue Code of 1986 and Employee Retirement 
 Income Security Act of 1974 in order to promote and improve employee 
                         stock ownership plans.

_______________________________________________________________________

                    IN THE HOUSE OF REPRESENTATIVES

                             June 10, 1999

Mr. Ballenger (for himself, Mrs. Johnson of Connecticut, Mrs. Thurman, 
 Mr. Ramstad, Mr. Rohrabacher, and Mr. Levin) introduced the following 
      bill; which was referred to the Committee on Ways and Means

_______________________________________________________________________

                                 A BILL

 
  To amend the Internal Revenue Code of 1986 and Employee Retirement 
 Income Security Act of 1974 in order to promote and improve employee 
                         stock ownership plans.

    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 ``ESOP Promotion Act of 1999''.

SEC. 2. ESOP DIVIDENDS MAY BE REINVESTED WITHOUT LOSS OF DIVIDEND 
              DEDUCTION.

    (a) In General.--Section 404(k)(2)(A) of the Internal Revenue Code 
of 1986 (defining applicable dividends) is amended by striking ``or'' 
at the end of clause (ii), by redesignating clause (iii) as clause 
(iv), and by inserting after clause (ii) the following new clause:
                            ``(iii) is, at the election of such 
                        participants or their beneficiaries--
                                    ``(I) payable as provided in clause 
                                (i) or (ii), or
                                    ``(II) paid to the plan and 
                                reinvested in employer securities, 
                                or''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1999.

SEC. 3. ESOP ASSUMPTION OF ESTATE TAX.

    (a) In General.--Subchapter C of chapter 11 of the Internal Revenue 
Code of 1986 (relating to miscellaneous estate tax provisions) is 
amended by adding at the end thereof the following new section:

``SEC. 2210. LIABILITY FOR PAYMENT IN CASE OF TRANSFER OF EMPLOYER 
              SECURITIES TO AN EMPLOYEE STOCK OWNERSHIP PLAN OR A 
              WORKER-OWNED COOPERATIVE.

    ``(a) In General.--If--
            ``(1) employer securities--
                    ``(A) are acquired from the decedent by an employee 
                stock ownership plan or by an eligible worker-owned 
                cooperative from any decedent,
                    ``(B) pass from the decedent to such a plan or 
                cooperative, or
                    ``(C) are transferred by the executor to such a 
                plan or cooperative, and
            ``(2) the executor of the estate of the decedent may 
        (without regard to this section) make an election under section 
        6166 with respect to that portion of the tax imposed by section 
        2001 which is attributable to employer securities; and
then the executor is relieved of liability for payment of that portion 
of the tax imposed by section 2001 which such employee stock ownership 
plan or cooperative is required to pay under subsection (b).
    ``(b) Payment of Tax by Employee Stock Ownership Plan or 
Cooperative.--
            ``(1) In general.--An employee stock ownership plan or 
        eligible worker-owned cooperative--
                    ``(A) which has acquired employer securities from 
                the decedent, or to which such securities have passed 
                from the decedent or been transferred by the executor, 
                and
                    ``(B) with respect to which an agreement described 
                in subsection (e)(1) is in effect,
        shall pay that portion of the tax imposed by section 2001 with 
        respect to the taxable estate of the decedent which is 
        described in paragraph (2).
            ``(2) Amount of tax to be paid.--The portion of the tax 
        imposed by section 2001 with respect to the taxable estate of 
        the decedent that is referred to in paragraph (1) is equal to 
        the lesser of:
                    ``(A) the value of the employer securities 
                described in subsection (a)(1) which is included in the 
                gross estate of the decedent, or
                    ``(B) the tax imposed by section 2001 with respect 
                to such taxable estate reduced by the sum of the 
                credits allowable against such tax.
    ``(c) Installment Payments.--
            ``(1) In general.--If--
                    ``(A) the executor of the estate of the decedent 
                (without regard to this section) elects to have the 
                provisions of section 6166 (relating to extensions of 
                time for payment of estate tax where estate consists 
                largely of interest in closely-held business) apply to 
                payment of that portion of the tax imposed by section 
                2001 with respect to such estate which is attributable 
                to employer securities, and
                    ``(B) the plan administrator or the cooperative 
                provides to the executor the agreement described in 
                subsection (e)(1),
        then the plan administrator or any authorized officer of the 
        cooperative may elect, before the due date (including 
        extensions) for filing the return of such tax, to pay all or 
        part of the tax described in subsection (b)(2) in installments 
        under the provisions of section 6166.
            ``(2) Interest on installments.--In determining the 4-
        percent portion for purposes of section 6601(j)--
                    ``(A) the portion of the tax imposed by section 
                2001 with respect to an estate for which the executor 
                is liable, and
                    ``(B) the portion of such tax for which an employee 
                stock ownership plan or an eligible worker-owned 
                cooperative is liable,
        shall be aggregated.
            ``(3) Special rules for application of section 6166(g).--In 
        the case of any transfer of employer securities to an employee 
        stock ownership plan or eligible worker-owned cooperative to 
which this section applies--
                    ``(A) Transfer does not trigger acceleration.--Such 
                transfer shall not be treated as a disposition of 
                withdrawal to which section 6166(g) applies.
                    ``(B) Separate application to estate and plan 
                interests.--Section 6166(g) shall be applied separately 
                to the interests held after such transfer by the estate 
                and such plan or cooperative.
                    ``(C) Required distribution not taken into 
                account.--In the case of any distribution of such 
                securities by such plan which is described in section 
                4978(d)(1)--
                            ``(i) such distribution shall not be 
                        treated as a disposition or withdrawal for 
                        purposes of section 6166(g), and
                            ``(ii) such securities shall not be taken 
                        into account in applying section 6166(g) to any 
                        subsequent disposition or withdrawal.
    ``(d) Guarantee of Payments.--Any employer--
            ``(1) whose employees are covered by an employee stock 
        ownership plan, and
            ``(2) who has entered into an agreement described in 
        subsection (e)(2) which is in effect,
and any eligible worker-owned cooperative shall guarantee (in such 
manner as the Secretary may prescribe) the payment of any amount such 
plan or cooperative, respectively, is required to pay under subsection 
(b).
    ``(e) Agreements.--The agreements described in this subsection are 
as follows:
            ``(1) A written agreement signed by the plan administrator, 
        or by any authorized officer of the eligible worker-owned 
        cooperative, consenting to the application of subsection (b) to 
        such plan or cooperative.
            ``(2) A written agreement signed by the employer whose 
        employees are covered by the plan described in subsection (b) 
        consenting to the application of subsection (d).
    ``(f) Exemption From Tax on Prohibited Transactions.--The liability 
which is assumed under this section by an employee stock ownership plan 
of any portion of the liability for any portion of the tax imposed by 
section 2001 shall be treated as a loan described in section 
4975(d)(3).
    ``(g) Definitions.--For purposes of this section--
            ``(1) Employer securities.--The term `employer securities' 
        has the meaning given such term by section 409(l).
            ``(2) Employee stock ownership plan.--The term `employee 
        stock ownership plan' has the meaning given such term by 
        section 4975(e)(7).
            ``(3) Eligible worker-owned cooperative.--The term 
        `eligible worker-owned cooperative' has the meaning given to 
        such term by section 1042(c)(2).
            ``(4) Plan administrator.--The term `plan administrator' 
        has the meaning given such term by section 414(g).
            ``(5) Tax imposed by section 2001.--The term `tax imposed 
        by section 2001' includes any interest, penalty, addition to 
        tax, or additional amount relating to any tax imposed by 
        section 2001.''
    (b) Conforming Amendment.--Section 408(b) of the Employee 
Retirement Income Security Act of 1974 (29 U.S.C. 1108(b)) is amended 
further by adding at the end the following new paragraph:
            ``(14) Any transaction described in section 2210 of the 
        Internal Revenue Code of 1986.''
    (c) Clerical Amendment.--The table of sections for subchapter C of 
chapter 11 of such Code is amended by adding at the end thereof the 
following new item:

                              ``Sec. 2210. Liability for payment in 
                                        case of transfer of employer 
                                        securities to an employee stock 
                                        ownership plan or a worker-
                                        owned cooperative.''
    (d) Effective Date.--The amendments made by this section shall 
apply to transfers of employer securities after the date of enactment 
of this Act.

SEC. 4. AMENDMENTS RELATED TO SECTION 1042.

    (a) Extension of Section 1042 Principles to Stock Received as 
Compensation for Services.--
            (1) In general.--Section 83 of the Internal Revenue Code of 
        1986 (relating to property transferred in connection with 
        performance of services) is amended by adding at the end 
        thereof the following new subsection:
    ``(i) Exception for Transfers of Qualified Securities Sold to 
Employee Stock Ownership Plans.--
            ``(1) Exclusion from income.--Subsections (a) and (b) shall 
        not apply to, and no amount shall be includible in gross income 
        with respect to, the transfer of any qualified security (as 
        defined in section 1042(c)(1)) in connection with the 
        performance of services if, and to the extent that, within 60 
        days after the event which would cause the recognition of 
        income pursuant to subsection (a) or (b) in the absence of this 
        subsection, the transferee sells such qualified security to an 
        employee stock ownership plan (as defined in section 
        4975(e)(7)) and the requirements of section 1042(a) are met 
        with respect to such sale.
            ``(2) No deduction by employer.--Notwithstanding the 
        provisions of subsection (h), the person for whom were 
        performed the services in connection with which any qualified 
        security is transferred shall not be entitled to a deduction 
        with respect to such transfer if, and to the extent that, 
        paragraph (1) applies to such transfer.''
            (2) Conforming amendments.--
                    (A) Section 424(c)(1) of such Code is amended by 
                striking ``or'' at the end of subparagraph (B), by 
                striking the period at the end of subparagraph (C) and 
                inserting ``, or'', and by adding at the end thereof 
                the following new subparagraph:
                    ``(D) a sale to which 1042 applies.''
                    (B) Section 1042(a) of such Code is amended--
                            (i) by striking ``which would be recognized 
                        as long-term capital gain'' from the first 
                        sentence thereof, and
                            (ii) by adding at the end thereof the 
                        following new sentence: ``If any gain is 
                        recognized after the application of the 
                        preceding sentence, the portion of such 
                        recognized gain (up to the whole of such 
                        recognized gain) which is equal to the amount 
                        of ordinary income, if any, that was not 
                        recognized with respect to such qualified 
                        securities by virtue of section 83(i) or 
                        424(c)(1)(D) shall be treated as ordinary 
                        income.''.
                    (C) Section 1042(b)(4) of such Code is amended by 
                adding at the end thereof the following new sentence: 
                ``The requirements of the preceding sentence shall not 
                apply to qualified securities received by the taxpayer 
                in a transfer to which section 83 or 422 applied (or to 
                which section 422 or 424 (as in effect on the day 
                before the date of enactment of the Revenue 
                Reconciliation Act of 1990) applied).''.
                    (D) Section 1042(c)(1)(B) of such Code is amended 
                to read as follows:
                    ``(B) were not received by the taxpayer in--
                            ``(i) a distribution from a plan described 
                        in section 401(a), or
                            ``(ii) a transfer pursuant to a right to 
                        acquire stock to which section 423 applied.''
                    (E) The first sentence of section 1042(d) of such 
                Code is amended to read as follows: ``The basis of the 
                taxpayer in qualified replacement property purchased by 
                the taxpayer during the replacement period shall be 
                reduced by the amount of gain or ordinary income not 
                recognized by virtue of such purchase, taking into 
                account the application of subsection (a) and, if 
                applicable, the application of section 83(i) or section 
                424(c)(1)(D).''
                    (F) Section 1042(e)(1) of such Code is amended to 
                read as follows:
            ``(1) In general.--If a taxpayer disposes of any qualified 
        replacement property, then, notwithstanding any other provision 
        of this title, gain (if any) shall be recognized to the extent 
        of the gain or ordinary income which was not recognized by 
        reason of the acquisition by such taxpayer of such qualified 
        replacement property, taking into account the application of 
        subsection (a) and, if applicable, the application of section 
        83(i) or 424(c)(1)(D). The portion of such gain (up to the 
        whole thereof) equal to the amount of ordinary income that was 
        not recognized by reason of such acquisition shall be treated 
        as ordinary income.''
            (3) Effective date.--The amendments made by this subsection 
        shall apply to sales of qualified securities on or after the 
        date of the enactment of this Act.
    (b) Modification to 25-Percent Shareholder Rule.--
            (1) In general.--Section 409(n)(1)(B) of such Code is 
        amended to read as follows:
                    ``(B) for the benefit of any other person who owns 
                (after the application of section 318(a)) more than 25 
                percent of--
                            ``(i) the total combined voting power of 
                        all classes of stock of the corporation which 
                        issued such employer securities or of any 
                        corporation which is a member of the same 
                        controlled group of corporations (within the 
                        meaning of subsection (l)(4)) as such 
                        corporation, or
                            ``(ii) the total value of all classes of 
                        stock of any such corporation.''
            (2) Effective date.--The amendment made by paragraph (1) 
        shall take effect on the date of the enactment of this Act.
    (c) Reinvestment in Certain Mutual Funds Permitted.--
            (1) In general.--Clause (ii) of section 1042(c)(4)(B) of 
        such Code is amended to read as follows:
                            ``(ii) Financial institutions, insurance 
                        companies, and mutual funds.--The term 
                        `operating corporation' shall include--
                                    ``(I) any financial institution 
                                described in section 581,
                                    ``(II) any insurance company 
                                subject to tax under subchapter L, and
                                    ``(III) any regulated investment 
                                company if substantially all of the 
                                securities held by such company are 
                                securities issued by operating 
                                corporations (determined without regard 
                                to this subclause).''
                    (2) Effective date.--The amendment made by 
                paragraph (1) shall apply to sales of qualified 
                securities after the date of the enactment of this Act.

SEC. 5. EARLY DISTRIBUTIONS FROM EMPLOYEE STOCK OWNERSHIP PLANS FOR 
              HIGHER EDUCATION EXPENSES AND FIRST-TIME HOMEBUYER 
              PURCHASES.

    (a) In General.--Paragraph (2) of section 72(t) of the Internal 
Revenue Code of 1986 (relating to 10-percent additional tax on early 
distributions from qualified retirement plans) is amended by adding at 
the end the following new subparagraph:
                    ``(G) Distributions from employee stock ownership 
                plans for higher education expenses and first-time 
                homebuyer purchases.--
                            ``(i) In general.--Distributions made to 
                        the employee from an employee stock ownership 
                        plan (within the meaning of section 
                        4975(e)(7)), the amount of which does not 
                        exceed the sum of--
                                    ``(I) qualified higher education 
                                expenses (as defined by paragraph (7)) 
                                reduced by the amount of such expenses 
taken into account under subparagraph (E), and
                                    ``(II) qualified first-time 
                                homebuyer distributions (as defined by 
                                paragraph (8)) reduced by the amount of 
                                such distributions taken into account 
                                under subparagraph (F).
                            ``(ii) Limitation.--A distribution may only 
                        be taken into account under clause (i) if--
                                    ``(I) such distribution is in the 
                                form of either employer securities 
                                (within the meaning of section 409(l)) 
                                or cash proceeds resulting from the 
                                sale of such securities made not more 
                                than 180 days before the date of such 
                                distribution for the purposes of such 
                                distribution,
                                    ``(II) such securities so 
                                distributed or sold were held by such 
                                plan for at least 5 years before the 
                                date of such distribution or, if 
                                applicable, sale, and
                                    ``(III) the number of shares in 
                                each class of such securities so 
                                distributed or sold, when added to all 
                                previous distributions and sales of 
                                each such class of such securities for 
                                such purposes on behalf of such 
                                employee, does not exceed 10 percent of 
                                the aggregate number of shares of each 
                                class of such securities allocated to 
                                the account of such employee under such 
                                plan.
                            ``(iii) Valuation of distributed 
                        securities.--For purposes of clause (ii), the 
                        value of a security shall be the value of such 
                        security on the date of distribution.''.
    (b) Conforming Amendments.--
            (1) Paragraph (7) of section 72(t) of such Code is amended 
        by striking ``paragraph (2)(E)'' and inserting ``subparagraphs 
        (E) and (G) of paragraph (2)''.
            (2) Paragraph (8) of section 72(t) of such Code is amended 
        by striking ``paragraph (2)(F)'' and inserting ``subparagraphs 
        (F) and (G) of paragraph (2)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to distributions made after December 31, 1999.
                                 <all>
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