II 

108TH CONGRESS 

2D SESSION S. 2298 

To amend the Internal Revenue Code of 1986 to improve the operation 

of employee stock ownership plans, and for other purposes. 

IN THE SENATE OF THE UNITED STATES 

APRIL 7, 2004 

Mr. BREAUX 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 improve 

the operation of employee stock ownership plans, 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 Stock Own5 ership Plan Promotion and Improvement Act of 2004’’. 

6 SEC. 2. DISTRIBUTIONS BY AN S CORPORATION TO AN EM7 PLOYEE STOCK OWNERSHIP PLAN. 

8 (a) IN GENERAL.—Section 1368 of the Internal Rev9 enue Code of 1986 (relating to distributions) is amended 

10 by adding at the end the following new subsection: 
2 

•S 2298 IS 

1 ‘‘(f) DISTRIBUTIONS BY AN S CORPORATION TO AN

2 EMPLOYEE STOCK OWNERSHIP PLAN.—Any distribution 

3 described in subsection (a) to an employee stock ownership 

4 plan (as defined in section 4975(e)(7)) shall be treated 

5 as a dividend under section 404(k)(2)(A).’’. 

6 (b) TECHNICAL AMENDMENT.—Section 404(a)(9)(C) 

7 of the Internal Revenue Code of 1986 (relating to S cor8 porations) is amended to read as follows: 

9 ‘‘(C) S CORPORATIONS.—The deduction 

10 provided in this paragraph shall not apply to an 

11 S corporation.’’. 

12 (c) EFFECTIVE DATE.—The amendments made by 

13 this section shall apply to distributions received after De14 cember 31, 1998. 

15 (d) WAIVER OF LIMITATIONS.—If refund or credit of 

16 any overpayment of tax resulting from the application of 

17 the amendments made by this section is prevented at any 

18 time before the close of the 1-year period beginning on 

19 the date of the enactment of this Act by the operation 

20 of any law or rule of law (including res judicata), such 

21 refund or credit may nevertheless be made or allowed if 

22 claim therefor is filed before the close of such period. 
3 

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1 SEC. 3. ESOP DIVIDEND EXCEPTION TO ADJUSTMENTS 

2 BASED ON ADJUSTED CURRENT EARNINGS. 

3 (a) IN GENERAL.—Section 56(g)(4)(C) of the Inter4 nal Revenue Code of 1986 (relating to disallowance of 

5 items not deductible in computing earnings and profits) 

6 is amended by adding at the end the following new clause: 

7 ‘‘(v) TREATMENT OF ESOP DIVI8 DENDS.—Clause (i) shall not apply to any 

9 deduction allowable under section 404(k) if 

10 the deduction is allowed for dividends paid 

11 on employer securities held by an employee 

12 stock ownership plan established or author13 ized to be established before March 15, 

14 1991.’’. 

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

16 this section shall apply to taxable years beginning after 

17 December 31, 1989. 

18 (c) WAIVER OF LIMITATIONS.—If refund or credit of 

19 any overpayment of tax resulting from the application of 

20 the amendment made by this section is prevented at any 

21 time before the close of the 1-year period beginning on 

22 the date of the enactment of this Act by the operation 

23 of any law or rule of law (including res judicata), such 

24 refund or credit may nevertheless be made or allowed if 

25 claim therefor is filed before the close of such period. 
4 

•S 2298 IS 

1 SEC. 4. AMENDMENTS RELATED TO SECTION 1042. 

2 (a) DEFERRAL OF TAX FOR CERTAIN SALES TO EM3 PLOYEE STOCK OWNERSHIP PLAN SPONSORED BY S COR4 PORATION.— 

5 (1) IN GENERAL.—Section 1042(c)(1)(A) of the 

6 Internal Revenue Code of 1986 (defining qualified 

7 securities) is amended by striking ‘‘C’’. 

8 (2) EFFECTIVE DATE.—The amendment made 

9 by paragraph (1) shall apply to sales after the date 

10 of the enactment of this Act. 

11 (b) REINVESTMENT IN CERTAIN MUTUAL FUNDS

12 PERMITTED.— 

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

14 1042(c)(4)(B) of the Internal Revenue Code of 1986 

15 (defining operating corporation) is amended to read 

16 as follows: 

17 ‘‘(ii) FINANCIAL INSTITUTIONS, IN18 SURANCE COMPANIES, AND MUTUAL

19 FUNDS.—The term ‘operating corporation’ 

20 shall include— 

21 ‘‘(I) any financial institution de22 scribed in section 581, 

23 ‘‘(II) any insurance company 

24 subject to tax under subchapter L, 

25 and 
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1 ‘‘(III) any regulated investment 

2 company if substantially all of the se3 curities held by such company are se4 curities issued by operating corpora5 tions (determined without regard to 

6 this subclause).’’. 

7 (2) EFFECTIVE DATE.—The amendment 

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

9 qualified securities after the date of the enact10 ment of this Act. 

11 (c) MODIFICATION TO 25-PERCENT SHAREHOLDER

12 RULE.— 

13 (1) IN GENERAL.—Subparagraph (B) of section 

14 409(n)(1) of the Internal Revenue Code of 1986 (re15 lating to securities received in certain transactions) 

16 is amended to read as follows: 

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

18 who owns (after the application of section 

19 318(a)) more than 25 percent of— 

20 ‘‘(i) the total combined voting power 

21 of all classes of stock of the corporation 

22 which issued such employer securities or of 

23 any corporation which is a member of the 

24 same controlled group of corporations 
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1 (within the meaning of subsection (l)(4)) 

2 as such corporation, or 

3 ‘‘(ii) the total value of all classes of 

4 stock of any such corporation.’’. 

5 (2) EFFECTIVE DATE.—The amendment made 

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

7 enactment of this Act. 

8 SEC. 5. EARLY DISTRIBUTIONS FROM EMPLOYEE STOCK 

9 OWNERSHIP PLANS FOR HIGHER EDUCATION 

10 EXPENSES AND FIRST-TIME HOMEBUYER 

11 PURCHASES. 

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

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

14 additional tax on early distributions from qualified retire15 ment plans) is amended by adding at the end the following 

16 new subparagraph: 

17 ‘‘(G) DISTRIBUTIONS FROM EMPLOYEE

18 STOCK OWNERSHIP PLANS FOR HIGHER EDU19 CATION EXPENSES AND FIRST-TIME HOME20 BUYER PURCHASES.— 

21 ‘‘(i) IN GENERAL.—Distributions 

22 made to the employee from an employee 

23 stock ownership plan (within the meaning 

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

25 which does not exceed the sum of— 
7 

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1 ‘‘(I) qualified higher education 

2 expenses (as defined by paragraph 

3 (7)) reduced by the amount of such 

4 expenses taken into account under 

5 subparagraph (E), and 

6 ‘‘(II) qualified first-time home7 buyer distributions (as defined by 

8 paragraph (8)) reduced by the amount 

9 of such distributions taken into ac10 count under subparagraph (F). 

11 ‘‘(ii) LIMITATION.—A distribution 

12 may only be taken into account under 

13 clause (i) if— 

14 ‘‘(I) such distribution is in the 

15 form of either employer securities 

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

17 or cash proceeds resulting from the 

18 sale of such securities made not more 

19 than 180 days before the date of such 

20 distribution for the purposes of such 

21 distribution, 

22 ‘‘(II) such securities so distrib23 uted or sold were held by such plan 

24 for at least 5 years before the date of 
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1 such distribution or, if applicable, 

2 sale, and 

3 ‘‘(III) the number of shares in 

4 each class of such securities so dis5 tributed or sold, when added to all 

6 previous distributions and sales of 

7 each such class of such securities for 

8 such purposes on behalf of such em9 ployee, does not exceed 10 percent of 

10 the aggregate number of shares of 

11 each class of such securities allocated 

12 to the account of such employee under 

13 such plan. 

14 ‘‘(iii) VALUATION OF DISTRIBUTED

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

16 the value of a security shall be the value 

17 of such security on the date of distribu18 tion.’’. 

19 (b) CONFORMING AMENDMENTS.— 

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

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

23 (2)’’. 

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

25 is amended by striking ‘‘paragraph (2)(F)’’ and in-
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•S 2298 IS 

1 serting ‘‘subparagraphs (F) and (G) of paragraph 

2 (2)’’. 

3 (c) EFFECTIVE DATE.—The amendments made by 

4 this section shall apply to distributions made after the 

5 date of the enactment of this Act. 

Æ