I

107TH CONGRESS

1ST SESSION H. R. 1062

To amend the Internal Revenue Code of 1986 to allow a credit against

income tax to C corporations which have substantial employee ownership

and to encourage stock ownership by employees by excluding from gross

income stock paid as compensation for services, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

MARCH 15, 2001

Mr. ANDREWS 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 allow a

credit against income tax to C corporations which have

substantial employee ownership and to encourage stock

ownership by employees by excluding from gross income

stock paid as compensation for services, and for other

purposes.

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 Participa5 tion Incentive Act of 2001’’.
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1 SEC. 2. MAXIMUM RATE OF INCOME TAX FOR C CORPORA2 TIONS WITH SUBSTANTIAL EMPLOYEE OWN3 ERSHIP.

4 (a) IN GENERAL.—Section 11 of the Internal Rev5 enue Code of 1986 (relating to tax on corporations) is

6 amended by redesignating subsections (c) and (d) as sub7 sections (d) and (e), respectively, and by inserting after

8 subsection (b) the following new subsection:

9 ‘‘(c) MAXIMUM RATE OF 30 PERCENT FOR CORPORA10 TIONS WITH SUBSTANTIAL EMPLOYEE OWNERSHIP.—

11 ‘‘(1) IN GENERAL.—Except as provided in sub12 section (b)(2), the maximum rate of tax under sub13 section (b) shall be 30 percent with respect to any

14 corporation if, with respect to such corporation—

15 ‘‘(A) the employee voting percentage is at

16 least 20 percent, and

17 ‘‘(B) the employee value percentage is at

18 least 20 percent.

19 ‘‘(2) DEFINITIONS.—For purposes of this

20 subsection—

21 ‘‘(A) EMPLOYEE VOTING PERCENTAGE.—

22 The term ‘employee voting percentage’ means

23 the percentage of the total voting power of the

24 stock of such corporation which is held directly

25 by employees of such corporation.
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1 ‘‘(B) EMPLOYEE VALUE PERCENTAGE.—

2 The term ‘employee value percentage’ means

3 the percentage of the total value of the stock of

4 such corporation which is held directly by em5 ployees of such corporation.

6 ‘‘(C) STOCK.—The term ‘stock’ has the

7 meaning given such term under section 1504.

8 ‘‘(3) DETERMINATION OF OWNERSHIP AVER9 AGES.—

10 ‘‘(A) IN GENERAL.—The determination of

11 the employee voting percentage and the em12 ployee value percentage shall be made on the

13 last day of the taxable year of the corporation.

14 ‘‘(B) HOLDINGS OF 5 PERCENT-SHARE15 HOLDERS AND HIGHLY COMPENSATED EMPLOY16 EES DISREGARDED.—Each such percentage

17 shall be determined without regard to the hold18 ings of any highly compensated employee (as

19 defined in section 414(q)). Notwithstanding the

20 preceding sentence, the holdings of 5-percent

21 owners (as defined in such section) shall be

22 taken into account if the corporation has 50 or

23 fewer employees.
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1 ‘‘(C) CONTROLLED GROUPS.—In the case

2 of corporations which are treated as a single

3 employer under section 52(a)—

4 ‘‘(i) such corporations shall be treated

5 as 1 corporation for purposes of subpara6 graph (B), and

7 ‘‘(ii) the Secretary shall prescribe

8 regulations—

9 ‘‘(I) for the application of this

10 subsection in the case of corporations

11 filing a consolidated return, and

12 ‘‘(II) to prevent the abuse of the

13 purposes of this subsection.’’.

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

15 this section shall apply to taxable years beginning after

16 December 31, 2001.

17 SEC. 3. EXCLUSION FROM GROSS INCOME FOR COMPENSA18 TION PAID IN STOCK BY CERTAIN CORPORA19 TIONS.

20 (a) IN GENERAL.—Part III of subchapter B of chap21 ter 1 of the Internal Revenue Code of 1986 (relating to

22 items specifically excluded from gross income) is amended

23 by redesignating section 139 as section 140 and by insert24 ing after section 138 the following new section:
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1 ‘‘SEC. 139. COMPENSATION PAID IN STOCK BY CERTAIN

2 CORPORATIONS.

3 ‘‘(a) IN GENERAL.—In the case of an employee of

4 an eligible corporation, gross income of such employee

5 does not include remuneration received in the form of

6 stock of such corporation or of any parent or subsidiary

7 (within the meaning of section 422(b)) of such corpora8 tion.

9 ‘‘(b) LIMITATION.—The amount excluded under sub10 section (a) from the gross income of an employee for any

11 taxable year shall not exceed 20 percent of the wages (as

12 defined in section 3401(a) without regard to paragraph

13 (22)) which would (but for this section) be includible in

14 gross income for such year.

15 ‘‘(c) ELIGIBLE CORPORATION.—For purposes of this

16 section, the term ‘eligible corporation’ means, with respect

17 to any taxable year of an employee, any corporation if—

18 ‘‘(1) the corporation offers to pay remuneration

19 for services performed during the calendar year in

20 which or with which such taxable year ends in the

21 form of stock of such corporation to at least 95 per22 cent of such corporation’s full-time employees, and

23 ‘‘(2) at least 95 percent of the value of the

24 stock which is so offered during such calendar year

25 is offered to employees whose wages (as defined in

26 section 3401(a)) are among the bottom 75 percent
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1 of the employees when ranked on the basis of such

2 wages.

3 ‘‘(d) BASIS.—The amount excluded from gross in4 come under this section shall not be taken into account

5 in determining the basis of the stock.’’

6 (b) EXCLUSION FROM WITHHOLDING.—Subsection

7 (a) of section 3401 of such Code is amended by striking

8 ‘‘or’’ at the end of paragraph (20), by striking the period

9 at the end of paragraph (21) and inserting ‘‘; or’’, and

10 by adding at the end the following new paragraph:

11 ‘‘(22) in the form of stock if at the time such

12 stock is paid it is reasonable to believe that the em13 ployee will be able to exclude such stock from income

14 under section 139.’’

15 (c) CLERICAL AMENDMENT.—The table of sections

16 for such part III is amended by striking the last item and

17 inserting the following new items:

‘‘Sec. 139. Compensation paid in stock by certain corporations.

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

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

19 this section shall apply to taxable years beginning after

20 the date of the enactment of this Act.
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1 SEC. 4. DEDUCTION ALLOWED TO ELIGIBLE CORPORA2 TIONS AT TIME QUALIFIED STOCK OPTION

3 GRANTED.

4 (a) IN GENERAL.—Subsection (a) of section 421 of

5 the Internal Revenue Code of 1986 (relating to general

6 rules for certain stock options) is amended by adding at

7 the end the following flush sentence:

8 ‘‘Paragraph (2) shall not apply to options granted during

9 any calendar year for which the corporation is an eligible

10 corporation (as defined in section 139(c)).’’

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

12 subsection (a) shall apply to options granted after the date

13 of the enactment of this Act.

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