I 

108TH CONGRESS 

2D SESSION H. R. 4796 

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

of employee stock ownership plans, and for other purposes. 

IN THE HOUSE OF REPRESENTATIVES 

JULY 9, 2004 

Mr. BALLENGER (for himself, Mrs. JOHNSON of Connecticut, Mr. CANTOR, 

Mr. ROHRABACHER, Mr. GOODE, Mr. PAUL, and Mr. PLATTS) 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 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’’. 
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1 SEC. 2. DISTRIBUTIONS BY AN S CORPORATION TO AN EM2 PLOYEE STOCK OWNERSHIP PLAN. 

3 (a) IN GENERAL.—Section 1368 of the Internal Rev4 enue Code of 1986 (relating to distributions) is amended 

5 by adding at the end the following new subsection: 

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

7 EMPLOYEE STOCK OWNERSHIP PLAN.—Any distribution 

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

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

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

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

12 of the Internal Revenue Code of 1986 (relating to S cor13 porations) is amended to read as follows: 

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

15 provided in this paragraph shall not apply to an 

16 S corporation.’’. 

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

18 this section shall apply to distributions received after De19 cember 31, 1998. 

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

21 any overpayment of tax resulting from the application of 

22 the amendments made by this section is prevented at any 

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

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

25 of any law or rule of law (including res judicata), such 
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1 refund or credit may nevertheless be made or allowed if 

2 claim therefor is filed before the close of such period. 

3 SEC. 3. ESOP DIVIDEND EXCEPTION TO ADJUSTMENTS 

4 BASED ON ADJUSTED CURRENT EARNINGS. 

5 (a) IN GENERAL.—Section 56(g)(4)(C) of the Inter6 nal Revenue Code of 1986 (relating to disallowance of 

7 items not deductible in computing earnings and profits) 

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

9 ‘‘(v) TREATMENT OF ESOP DIVI10 DENDS.—Clause (i) shall not apply to any 

11 deduction allowable under section 404(k) if 

12 the deduction is allowed for dividends paid 

13 on employer securities held by an employee 

14 stock ownership plan established or author15 ized to be established before March 15, 

16 1991.’’. 

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

18 this section shall apply to taxable years beginning after 

19 December 31, 1989. 

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

21 any overpayment of tax resulting from the application of 

22 the amendment made by this section is prevented at any 

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

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

25 of any law or rule of law (including res judicata), such 
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1 refund or credit may nevertheless be made or allowed if 

2 claim therefor is filed before the close of such period. 

3 SEC. 4. AMENDMENTS RELATED TO SECTION 1042. 

4 (a) DEFERRAL OF TAX FOR CERTAIN SALES TO EM5 PLOYEE STOCK OWNERSHIP PLAN SPONSORED BY S COR6 PORATION.— 

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

8 Internal Revenue Code of 1986 (defining qualified 

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

10 (2) EFFECTIVE DATE.—The amendment made 

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

12 of the enactment of this Act. 

13 (b) REINVESTMENT IN CERTAIN MUTUAL FUNDS

14 PERMITTED.— 

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

16 1042(c)(4)(B) of the Internal Revenue Code of 1986 

17 (defining operating corporation) is amended to read 

18 as follows: 

19 ‘‘(ii) FINANCIAL INSTITUTIONS, IN20 SURANCE COMPANIES, AND MUTUAL

21 FUNDS.—The term ‘operating corporation’ 

22 shall include— 

23 ‘‘(I) any financial institution de24 scribed in section 581, 
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1 ‘‘(II) any insurance company 

2 subject to tax under subchapter L, 

3 and 

4 ‘‘(III) any regulated investment 

5 company if substantially all of the se6 curities held by such company are se7 curities issued by operating corpora8 tions (determined without regard to 

9 this subclause).’’. 

10 (2) EFFECTIVE DATE.—The amendment made 

11 by paragraph (1) shall apply to sales of qualified se12 curities after the date of the enactment of this Act. 

13 (c) MODIFICATION TO 25-PERCENT SHAREHOLDER

14 RULE.— 

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

16 409(n)(1) of the Internal Revenue Code of 1986 (re17 lating to securities received in certain transactions) 

18 is amended to read as follows: 

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

20 who owns (after the application of section 

21 318(a)) more than 25 percent of— 

22 ‘‘(i) the total combined voting power 

23 of all classes of stock of the corporation 

24 which issued such employer securities or of 

25 any corporation which is a member of the 
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1 same controlled group of corporations 

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

3 as such corporation, or 

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

5 stock of any such corporation.’’. 

6 (2) EFFECTIVE DATE.—The amendment made 

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

8 enactment of this Act. 

9 SEC. 5. EARLY DISTRIBUTIONS FROM EMPLOYEE STOCK 

10 OWNERSHIP PLANS FOR HIGHER EDUCATION 

11 EXPENSES AND FIRST-TIME HOMEBUYER 

12 PURCHASES. 

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

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

15 additional tax on early distributions from qualified retire16 ment plans) is amended by adding at the end the following 

17 new subparagraph: 

18 ‘‘(G) DISTRIBUTIONS FROM EMPLOYEE

19 STOCK OWNERSHIP PLANS FOR HIGHER EDU20 CATION EXPENSES AND FIRST-TIME HOME21 BUYER PURCHASES.— 

22 ‘‘(i) IN GENERAL.—Distributions 

23 made to the employee from an employee 

24 stock ownership plan (within the meaning 
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1 of section 4975(e)(7)), the amount of 

2 which does not exceed the sum of— 

3 ‘‘(I) qualified higher education 

4 expenses (as defined by paragraph 

5 (7)) reduced by the amount of such 

6 expenses taken into account under 

7 subparagraph (E), and 

8 ‘‘(II) qualified first-time home9 buyer distributions (as defined by 

10 paragraph (8)) reduced by the amount 

11 of such distributions taken into ac12 count under subparagraph (F). 

13 ‘‘(ii) LIMITATION.—A distribution 

14 may only be taken into account under 

15 clause (i) if— 

16 ‘‘(I) such distribution is in the 

17 form of either employer securities 

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

19 or cash proceeds resulting from the 

20 sale of such securities made not more 

21 than 180 days before the date of such 

22 distribution for the purposes of such 

23 distribution, 

24 ‘‘(II) such securities so distrib25 uted or sold were held by such plan 
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1 for at least 5 years before the date of 

2 such distribution or, if applicable, 

3 sale, and 

4 ‘‘(III) the number of shares in 

5 each class of such securities so dis6 tributed or sold, when added to all 

7 previous distributions and sales of 

8 each such class of such securities for 

9 such purposes on behalf of such em10 ployee, does not exceed 10 percent of 

11 the aggregate number of shares of 

12 each class of such securities allocated 

13 to the account of such employee under 

14 such plan. 

15 ‘‘(iii) VALUATION OF DISTRIBUTED

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

17 the value of a security shall be the value 

18 of such security on the date of distribu19 tion.’’. 

20 (b) CONFORMING AMENDMENTS.— 

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

22 is amended by striking ‘‘paragraph (2)(E)’’ and in23 serting ‘‘subparagraphs (E) and (G) of paragraph 

24 (2)’’. 
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1 (2) Paragraph (8) of section 72(t) of such Code 

2 is amended by striking ‘‘paragraph (2)(F)’’ and in3 serting ‘‘subparagraphs (F) and (G) of paragraph 

4 (2)’’. 

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

6 this section shall apply to distributions made after the 

7 date of the enactment of this Act. 

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