I

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.

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 ‘‘ESOP Promotion Act

5 of 1999’’.

6 SEC. 2. ESOP DIVIDENDS MAY BE REINVESTED WITHOUT

7 LOSS OF DIVIDEND DEDUCTION.

8 (a) IN GENERAL.—Section 404(k)(2)(A) of the Inter9 nal Revenue Code of 1986 (defining applicable dividends)
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1 is amended by striking ‘‘or’’ at the end of clause (ii), by

2 redesignating clause (iii) as clause (iv), and by inserting

3 after clause (ii) the following new clause:

4 ‘‘(iii) is, at the election of such par5 ticipants or their beneficiaries—

6 ‘‘(I) payable as provided in clause

7 (i) or (ii), or

8 ‘‘(II) paid to the plan and rein9 vested in employer securities, or’’.

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

11 this section shall apply to taxable years beginning after

12 December 31, 1999.

13 SEC. 3. ESOP ASSUMPTION OF ESTATE TAX.

14 (a) IN GENERAL.—Subchapter C of chapter 11 of the

15 Internal Revenue Code of 1986 (relating to miscellaneous

16 estate tax provisions) is amended by adding at the end

17 thereof the following new section:

18 ‘‘SEC. 2210. LIABILITY FOR PAYMENT IN CASE OF TRANS19 FER OF EMPLOYER SECURITIES TO AN EM20 PLOYEE STOCK OWNERSHIP PLAN OR A

21 WORKER-OWNED COOPERATIVE.

22 ‘‘(a) IN GENERAL.—If—

23 ‘‘(1) employer securities—
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1 ‘‘(A) are acquired from the decedent by an

2 employee stock ownership plan or by an eligible

3 worker-owned cooperative from any decedent,

4 ‘‘(B) pass from the decedent to such a

5 plan or cooperative, or

6 ‘‘(C) are transferred by the executor to

7 such a plan or cooperative, and

8 ‘‘(2) the executor of the estate of the decedent

9 may (without regard to this section) make an elec10 tion under section 6166 with respect to that portion

11 of the tax imposed by section 2001 which is attrib12 utable to employer securities; and

13 then the executor is relieved of liability for payment of

14 that portion of the tax imposed by section 2001 which

15 such employee stock ownership plan or cooperative is re16 quired to pay under subsection (b).

17 ‘‘(b) PAYMENT OF TAX BY EMPLOYEE STOCK OWN18 ERSHIP PLAN OR COOPERATIVE.—

19 ‘‘(1) IN GENERAL.—An employee stock owner20 ship plan or eligible worker-owned cooperative—

21 ‘‘(A) which has acquired employer securi22 ties from the decedent, or to which such securi23 ties have passed from the decedent or been

24 transferred by the executor, and
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1 ‘‘(B) with respect to which an agreement

2 described in subsection (e)(1) is in effect,

3 shall pay that portion of the tax imposed by section

4 2001 with respect to the taxable estate of the dece5 dent which is described in paragraph (2).

6 ‘‘(2) AMOUNT OF TAX TO BE PAID.—The por7 tion of the tax imposed by section 2001 with respect

8 to the taxable estate of the decedent that is referred

9 to in paragraph (1) is equal to the lesser of:

10 ‘‘(A) the value of the employer securities

11 described in subsection (a)(1) which is included

12 in the gross estate of the decedent, or

13 ‘‘(B) the tax imposed by section 2001 with

14 respect to such taxable estate reduced by the

15 sum of the credits allowable against such tax.

16 ‘‘(c) INSTALLMENT PAYMENTS.—

17 ‘‘(1) IN GENERAL.—If—

18 ‘‘(A) the executor of the estate of the dece19 dent (without regard to this section) elects to

20 have the provisions of section 6166 (relating to

21 extensions of time for payment of estate tax

22 where estate consists largely of interest in close23 ly-held business) apply to payment of that por24 tion of the tax imposed by section 2001 with re-
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1 spect to such estate which is attributable to em2 ployer securities, and

3 ‘‘(B) the plan administrator or the cooper4 ative provides to the executor the agreement de5 scribed in subsection (e)(1),

6 then the plan administrator or any authorized officer

7 of the cooperative may elect, before the due date (in8 cluding extensions) for filing the return of such tax,

9 to pay all or part of the tax described in subsection

10 (b)(2) in installments under the provisions of section

11 6166.

12 ‘‘(2) INTEREST ON INSTALLMENTS.—In deter13 mining the 4-percent portion for purposes of section

14 6601(j)—

15 ‘‘(A) the portion of the tax imposed by sec16 tion 2001 with respect to an estate for which

17 the executor is liable, and

18 ‘‘(B) the portion of such tax for which an

19 employee stock ownership plan or an eligible

20 worker-owned cooperative is liable,

21 shall be aggregated.

22 ‘‘(3) SPECIAL RULES FOR APPLICATION OF SEC23 TION 6166(g).—In the case of any transfer of em24 ployer securities to an employee stock ownership
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1 plan or eligible worker-owned cooperative to which

2 this section applies—

3 ‘‘(A) TRANSFER DOES NOT TRIGGER AC4 CELERATION.—Such transfer shall not be treat5 ed as a disposition of withdrawal to which sec6 tion 6166(g) applies.

7 ‘‘(B) SEPARATE APPLICATION TO ESTATE

8 AND PLAN INTERESTS.—Section 6166(g) shall

9 be applied separately to the interests held after

10 such transfer by the estate and such plan or

11 cooperative.

12 ‘‘(C) REQUIRED DISTRIBUTION NOT TAKEN

13 INTO ACCOUNT.—In the case of any distribution

14 of such securities by such plan which is de15 scribed in section 4978(d)(1)—

16 ‘‘(i) such distribution shall not be

17 treated as a disposition or withdrawal for

18 purposes of section 6166(g), and

19 ‘‘(ii) such securities shall not be taken

20 into account in applying section 6166(g) to

21 any subsequent disposition or withdrawal.

22 ‘‘(d) GUARANTEE OF PAYMENTS.—Any employer—

23 ‘‘(1) whose employees are covered by an em24 ployee stock ownership plan, and
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1 ‘‘(2) who has entered into an agreement de2 scribed in subsection (e)(2) which is in effect,

3 and any eligible worker-owned cooperative shall guarantee

4 (in such manner as the Secretary may prescribe) the pay5 ment of any amount such plan or cooperative, respectively,

6 is required to pay under subsection (b).

7 ‘‘(e) AGREEMENTS.—The agreements described in

8 this subsection are as follows:

9 ‘‘(1) A written agreement signed by the plan

10 administrator, or by any authorized officer of the eli11 gible worker-owned cooperative, consenting to the

12 application of subsection (b) to such plan or cooper13 ative.

14 ‘‘(2) A written agreement signed by the em15 ployer whose employees are covered by the plan de16 scribed in subsection (b) consenting to the applica17 tion of subsection (d).

18 ‘‘(f) EXEMPTION FROM TAX ON PROHIBITED TRANS19 ACTIONS.—The liability which is assumed under this sec20 tion by an employee stock ownership plan of any portion

21 of the liability for any portion of the tax imposed by sec22 tion 2001 shall be treated as a loan described in section

23 4975(d)(3).

24 ‘‘(g) DEFINITIONS.—For purposes of this section—
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1 ‘‘(1) EMPLOYER SECURITIES.—The term ‘em2 ployer securities’ has the meaning given such term

3 by section 409(l).

4 ‘‘(2) EMPLOYEE STOCK OWNERSHIP PLAN.—

5 The term ‘employee stock ownership plan’ has the

6 meaning given such term by section 4975(e)(7).

7 ‘‘(3) ELIGIBLE WORKER-OWNED COOPERA8 TIVE.—The term ‘eligible worker-owned cooperative’

9 has the meaning given to such term by section

10 1042(c)(2).

11 ‘‘(4) PLAN ADMINISTRATOR.—The term ‘plan

12 administrator’ has the meaning given such term by

13 section 414(g).

14 ‘‘(5) TAX IMPOSED BY SECTION 2001.—The

15 term ‘tax imposed by section 2001’ includes any in16 terest, penalty, addition to tax, or additional amount

17 relating to any tax imposed by section 2001.’’

18 (b) CONFORMING AMENDMENT.—Section 408(b) of

19 the Employee Retirement Income Security Act of 1974

20 (29 U.S.C. 1108(b)) is amended further by adding at the

21 end the following new paragraph:

22 ‘‘(14) Any transaction described in section 2210

23 of the Internal Revenue Code of 1986.’’
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1 (c) CLERICAL AMENDMENT.—The table of sections

2 for subchapter C of chapter 11 of such Code is amended

3 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.’’

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

5 this section shall apply to transfers of employer securities

6 after the date of enactment of this Act.

7 SEC. 4. AMENDMENTS RELATED TO SECTION 1042.

8 (a) EXTENSION OF SECTION 1042 PRINCIPLES TO

9 STOCK RECEIVED AS COMPENSATION FOR SERVICES.—

10 (1) IN GENERAL.—Section 83 of the Internal

11 Revenue Code of 1986 (relating to property trans12 ferred in connection with performance of services) is

13 amended by adding at the end thereof the following

14 new subsection:

15 ‘‘(i) EXCEPTION FOR TRANSFERS OF QUALIFIED SE16 CURITIES SOLD TO EMPLOYEE STOCK OWNERSHIP

17 PLANS.—

18 ‘‘(1) EXCLUSION FROM INCOME.—Subsections

19 (a) and (b) shall not apply to, and no amount shall

20 be includible in gross income with respect to, the

21 transfer of any qualified security (as defined in sec22 tion 1042(c)(1)) in connection with the performance

23 of services if, and to the extent that, within 60 days

24 after the event which would cause the recognition of
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1 income pursuant to subsection (a) or (b) in the ab2 sence of this subsection, the transferee sells such

3 qualified security to an employee stock ownership

4 plan (as defined in section 4975(e)(7)) and the re5 quirements of section 1042(a) are met with respect

6 to such sale.

7 ‘‘(2) NO DEDUCTION BY EMPLOYER.—Notwith8 standing the provisions of subsection (h), the person

9 for whom were performed the services in connection

10 with which any qualified security is transferred shall

11 not be entitled to a deduction with respect to such

12 transfer if, and to the extent that, paragraph (1) ap13 plies to such transfer.’’

14 (2) CONFORMING AMENDMENTS.—

15 (A) Section 424(c)(1) of such Code is

16 amended by striking ‘‘or’’ at the end of sub17 paragraph (B), by striking the period at the

18 end of subparagraph (C) and inserting ‘‘, or’’,

19 and by adding at the end thereof the following

20 new subparagraph:

21 ‘‘(D) a sale to which 1042 applies.’’

22 (B) Section 1042(a) of such Code is

23 amended—
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1 (i) by striking ‘‘which would be recog2 nized as long-term capital gain’’ from the

3 first sentence thereof, and

4 (ii) by adding at the end thereof the

5 following new sentence: ‘‘If any gain is rec6 ognized after the application of the pre7 ceding sentence, the portion of such recog8 nized gain (up to the whole of such recog9 nized gain) which is equal to the amount

10 of ordinary income, if any, that was not

11 recognized with respect to such qualified

12 securities by virtue of section 83(i) or

13 424(c)(1)(D) shall be treated as ordinary

14 income.’’.

15 (C) Section 1042(b)(4) of such Code is

16 amended by adding at the end thereof the fol17 lowing new sentence: ‘‘The requirements of the

18 preceding sentence shall not apply to qualified

19 securities received by the taxpayer in a transfer

20 to which section 83 or 422 applied (or to which

21 section 422 or 424 (as in effect on the day be22 fore the date of enactment of the Revenue Rec23 onciliation Act of 1990) applied).’’.

24 (D) Section 1042(c)(1)(B) of such Code is

25 amended to read as follows:
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1 ‘‘(B) were not received by the taxpayer

2 in—

3 ‘‘(i) a distribution from a plan de4 scribed in section 401(a), or

5 ‘‘(ii) a transfer pursuant to a right to

6 acquire stock to which section 423 ap7 plied.’’

8 (E) The first sentence of section 1042(d)

9 of such Code is amended to read as follows:

10 ‘‘The basis of the taxpayer in qualified replace11 ment property purchased by the taxpayer dur12 ing the replacement period shall be reduced by

13 the amount of gain or ordinary income not rec14 ognized by virtue of such purchase, taking into

15 account the application of subsection (a) and, if

16 applicable, the application of section 83(i) or

17 section 424(c)(1)(D).’’

18 (F) Section 1042(e)(1) of such Code is

19 amended to read as follows:

20 ‘‘(1) IN GENERAL.—If a taxpayer disposes of

21 any qualified replacement property, then, notwith22 standing any other provision of this title, gain (if

23 any) shall be recognized to the extent of the gain or

24 ordinary income which was not recognized by reason

25 of the acquisition by such taxpayer of such qualified
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1 replacement property, taking into account the appli2 cation of subsection (a) and, if applicable, the appli3 cation of section 83(i) or 424(c)(1)(D). The portion

4 of such gain (up to the whole thereof) equal to the

5 amount of ordinary income that was not recognized

6 by reason of such acquisition shall be treated as or7 dinary income.’’

8 (3) EFFECTIVE DATE.—The amendments made

9 by this subsection shall apply to sales of qualified se10 curities on or after the date of the enactment of this

11 Act.

12 (b) MODIFICATION TO 25-PERCENT SHAREHOLDER

13 RULE.—

14 (1) IN GENERAL.—Section 409(n)(1)(B) of

15 such Code is amended to read as follows:

16 ‘‘(B) for the benefit of any other person

17 who owns (after the application of section

18 318(a)) more than 25 percent of—

19 ‘‘(i) the total combined voting power

20 of all classes of stock of the corporation

21 which issued such employer securities or of

22 any corporation which is a member of the

23 same controlled group of corporations

24 (within the meaning of subsection (l)(4))

25 as such corporation, or
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1 ‘‘(ii) the total value of all classes of

2 stock of any such corporation.’’

3 (2) EFFECTIVE DATE.—The amendment made

4 by paragraph (1) shall take effect on the date of the

5 enactment of this Act.

6 (c) REINVESTMENT IN CERTAIN MUTUAL FUNDS

7 PERMITTED.—

8 (1) IN GENERAL.—Clause (ii) of section

9 1042(c)(4)(B) of such Code is amended to read as

10 follows:

11 ‘‘(ii) FINANCIAL INSTITUTIONS, IN12 SURANCE COMPANIES, AND MUTUAL

13 FUNDS.—The term ‘operating corporation’

14 shall include—

15 ‘‘(I) any financial institution de16 scribed in section 581,

17 ‘‘(II) any insurance company

18 subject to tax under subchapter L,

19 and

20 ‘‘(III) any regulated investment

21 company if substantially all of the se22 curities held by such company are se23 curities issued by operating corpora24 tions (determined without regard to

25 this subclause).’’
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1 (2) EFFECTIVE DATE.—The amendment

2 made by paragraph (1) shall apply to sales of

3 qualified securities after the date of the enact4 ment of this Act.

5 SEC. 5. EARLY DISTRIBUTIONS FROM EMPLOYEE STOCK

6 OWNERSHIP PLANS FOR HIGHER EDUCATION

7 EXPENSES AND FIRST-TIME HOMEBUYER

8 PURCHASES.

9 (a) IN GENERAL.—Paragraph (2) of section 72(t) of

10 the Internal Revenue Code of 1986 (relating to 10-percent

11 additional tax on early distributions from qualified retire12 ment plans) is amended by adding at the end the following

13 new subparagraph:

14 ‘‘(G) DISTRIBUTIONS FROM EMPLOYEE

15 STOCK OWNERSHIP PLANS FOR HIGHER EDU16 CATION EXPENSES AND FIRST-TIME HOME17 BUYER PURCHASES.—

18 ‘‘(i) IN GENERAL.—Distributions

19 made to the employee from an employee

20 stock ownership plan (within the meaning

21 of section 4975(e)(7)), the amount of

22 which does not exceed the sum of—

23 ‘‘(I) qualified higher education

24 expenses (as defined by paragraph

25 (7)) reduced by the amount of such
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1 expenses taken into account under

2 subparagraph (E), and

3 ‘‘(II) qualified first-time home4 buyer distributions (as defined by

5 paragraph (8)) reduced by the amount

6 of such distributions taken into ac7 count under subparagraph (F).

8 ‘‘(ii) LIMITATION.—A distribution

9 may only be taken into account under

10 clause (i) if—

11 ‘‘(I) such distribution is in the

12 form of either employer securities

13 (within the meaning of section 409(l))

14 or cash proceeds resulting from the

15 sale of such securities made not more

16 than 180 days before the date of such

17 distribution for the purposes of such

18 distribution,

19 ‘‘(II) such securities so distrib20 uted or sold were held by such plan

21 for at least 5 years before the date of

22 such distribution or, if applicable,

23 sale, and

24 ‘‘(III) the number of shares in

25 each class of such securities so dis-
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1 tributed or sold, when added to all

2 previous distributions and sales of

3 each such class of such securities for

4 such purposes on behalf of such em5 ployee, does not exceed 10 percent of

6 the aggregate number of shares of

7 each class of such securities allocated

8 to the account of such employee under

9 such plan.

10 ‘‘(iii) VALUATION OF DISTRIBUTED

11 SECURITIES.—For purposes of clause (ii),

12 the value of a security shall be the value

13 of such security on the date of distribu14 tion.’’.

15 (b) CONFORMING AMENDMENTS.—

16 (1) Paragraph (7) of section 72(t) of such Code

17 is amended by striking ‘‘paragraph (2)(E)’’ and in18 serting ‘‘subparagraphs (E) and (G) of paragraph

19 (2)’’.

20 (2) Paragraph (8) of section 72(t) of such Code

21 is amended by striking ‘‘paragraph (2)(F)’’ and in22 serting ‘‘subparagraphs (F) and (G) of paragraph

23 (2)’’.
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1 (c) EFFECTIVE DATE.—The amendments made by

2 this section shall apply to distributions made after Decem3 ber 31, 1999.

Æ