I 

111TH CONGRESS 

1ST SESSION H. R. 3586 

To amend the Internal Revenue Code of 1986 to expand the availability 

of employee stock ownership plans in S corporations, and for other purposes. 

IN THE HOUSE OF REPRESENTATIVES 

SEPTEMBER 16, 2009 

Mr. KIND (for himself and Mr. BLUMENAUER) introduced the following bill; 

which was referred to the Committee on Ways and Means, and in addition to the Committee on Education and Labor, for a period to be subsequently determined by the Speaker, in each case for consideration of such 

provisions as fall within the jurisdiction of the committee concerned 

A BILL 

To amend the Internal Revenue Code of 1986 to expand 

the availability of employee stock ownership plans in 

S corporations, 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 ‘‘S Corporation ESOP 

5 Promotion and Expansion Act of 2009’’. 

6 SEC. 2. FINDINGS. 

7 Congress finds that— 


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1 (1) since January 1, 1998, employees have been 

2 permitted to be owners of subchapter S corporations 

3 through an employee stock ownership plan (hereafter 

4 in this section referred to as an ‘‘ESOP’’) pursuant 

5 to Small Business Job Protection Act of 1996 (Pub6 lic Law 104–188); 

7 (2) with the passage of the Taxpayer Relief Act 

8 of 1997 (Public Law 105–34), Congress designed in9 centives to encourage businesses to become ESOP10 owned S corporations; 

11 (3) since that time, several thousand companies 

12 have become ESOP-owned S corporations, creating 

13 an ownership interest for several million Americans 

14 in companies in every State in the country, in indus15 tries ranging from heavy manufacturing to tech16 nology development to services; 

17 (4) while estimates show that 40 percent of 

18 working Americans have no formal retirement ac19 count at all, every United States worker who is an 

20 employee-owner of an S corporation company 

21 through an ESOP has a valuable qualified retire22 ment savings account; 

23 (5) recent studies have shown that employees of 

24 ESOP-owned S corporations enjoy greater job sta25 bility than employees of comparable companies; 


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1 (6) studies also show that employee-owners of S 

2 corporation ESOP companies have amassed mean3 ingful retirement savings through their S ESOP ac4 counts that will give them the means to retire with 

5 dignity; and 

6 (7) it is the goal of Congress to both preserve 

7 and foster employee ownership of S corporations 

8 through ESOPs. 

9 SEC. 3. DEFERRAL OF TAX FOR CERTAIN SALES OF EM10 PLOYER STOCK TO EMPLOYEE STOCK OWN11 ERSHIP PLAN SPONSORED BY S CORPORA12 TION. 

13 (a) IN GENERAL.—Subparagraph (A) of section 

14 1042(c)(1) of the Internal Revenue Code of 1986 (defin15 ing qualified securities) is amended by striking ‘‘domestic 

16 C corporation’’ and inserting ‘‘domestic corporation’’. 

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

18 subsection (a) shall apply to sales after the date of the 

19 enactment of this Act. 


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1 SEC. 4. DEDUCTION FOR INTEREST ON LOAN TO FINANCE 

2 PURCHASE OF EMPLOYER SECURITIES BY AN 

3 EMPLOYEE STOCK OWNERSHIP PLAN SPON4 SORED BY AN S CORPORATION. 

5 (a) IN GENERAL.—Part VI of subchapter B of chap6 ter 1 of the Internal Revenue Code of 1986 is amended 

7 by inserting after section 199 the following new section: 

8 ‘‘SEC. 200. INTEREST ON CERTAIN LOANS FOR THE PUR9 CHASE OF EMPLOYER SECURITIES BY AN EM10 PLOYEE STOCK OWNERSHIP PLAN SPON11 SORED BY AN S CORPORATION. 

12 ‘‘(a) IN GENERAL.—There shall be allowed as a de13 duction an amount equal to 50 percent of the interest re14 ceived during the taxable year by a bank (within the mean15 ing of section 581) with respect to a securities acquisition 

16 loan. 

17 ‘‘(b) SECURITIES ACQUISITION LOAN.— 

18 ‘‘(1) IN GENERAL.—For purposes of this sec19 tion, the term ‘securities acquisition loan’ means— 

20 ‘‘(A) any loan to an employee stock owner21 ship plan sponsored by an S corporation to the 

22 extent that the proceeds are used to acquire 

23 employer securities for the plan, and 

24 ‘‘(B) any loan to an S corporation that 

25 sponsors an employee stock ownership plan to 

26 the extent that the proceeds of such loan are 


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1 loaned to the employee stock ownership plan to 

2 acquire employer securities for the plan. 

3 For purposes of this paragraph, the term ‘employer 

4 securities’ has the meaning given such term by sec5 tion 409(l). 

6 ‘‘(2) TERMS APPLICABLE TO CERTAIN SECURI7 TIES ACQUISITION LOANS.—For purposes of para8 graph (1)(B), the term ‘securities acquisition loan’ 

9 shall not include any loan to the S corporation un10 less the loan to the employee stock ownership plan 

11 has repayment terms which are substantially similar 

12 to the terms of the loan to the S corporation. 

13 ‘‘(3) TREATMENT OF REFINANCINGS.—The 

14 term ‘securities acquisition loan’ shall include any 

15 loan which is (or is part of a series of loans) used 

16 to refinance a loan described in paragraph (1) (after 

17 the application of paragraph (2)). 

18 ‘‘(4) PLAN MUST HOLD MORE THAN 50 PER19 CENT OF STOCK AFTER ACQUISITION OR TRANS20 FER.— 

21 ‘‘(A) IN GENERAL.—A loan shall not be 

22 treated as a securities acquisition loan for pur23 poses of this section unless, immediately after 

24 an acquisition of employer securities referred to 

25 in paragraph (1), the employee stock ownership 


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1 plan owns more than 50 percent of the out2 standing stock of the S corporation. 

3 ‘‘(B) FAILURE TO RETAIN MINIMUM STOCK

4 INTEREST.— 

5 ‘‘(i) IN GENERAL.—Subsection (a) 

6 shall not apply to any interest received 

7 with respect to a securities acquisition loan 

8 which is allocable to any period during 

9 which the employee stock ownership plan 

10 does not own stock meeting the require11 ments of subparagraph (A). 

12 ‘‘(ii) EXCEPTION.—To the extent pro13 vided by the Secretary, clause (i) shall not 

14 apply to any period if, within 90 days of 

15 the first date on which the failure occurred 

16 (or such longer period not in excess of 180 

17 days as the Secretary may prescribe), the 

18 plan acquires stock which results in its 

19 meeting the requirements of subparagraph 

20 (A). 

21 ‘‘(C) STOCK.—For purposes of subpara22 graph (A), the Secretary may provide that war23 rants, options, contracts to acquire stock, con24 vertible debt interests and other similar interVerDate Nov 24 2008 02:24 Sep 17, 2009 Jkt 079200 PO 00000 Frm 00006 Fmt 6652 Sfmt 6201 E:\BILLS\H3586.IH H3586

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1 ests be treated as stock for 1 or more purposes 

2 under subparagraph (A). 

3 ‘‘(c) EMPLOYEE STOCK OWNERSHIP PLAN.—For 

4 purposes of this section, the term ‘employee stock owner5 ship plan’ has the meaning given to such term by section 

6 4975(e)(7).’’. 

7 (b) CLERICAL AMENDMENT.—The table of sections 

8 for part VI of subchapter B of chapter 1 of such Code 

9 is amended by inserting after the item relating to section 

10 199 the following new item: 

‘‘Sec. 200. Interest on certain loans for the purchase of employer securities by 

an employee stock ownership plan sponsored by an S corporation.’’. 

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

12 this section shall apply to interest accrued on loans made 

13 after the date of the enactment of this Act. 

14 SEC. 5. ASSUMPTION OF ESTATE TAX LIABILITY WITH RE15 SPECT TO CERTAIN TRANSFERS OF EM16 PLOYER SECURITIES TO AN EMPLOYEE 

17 STOCK OWNERSHIP PLAN SPONSORED BY AN 

18 S CORPORATION. 

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

20 Internal Revenue Code of 1986 is amended by inserting 

21 after section 2209 the following new section: 


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1 ‘‘SEC. 2209A. LIABILITY FOR PAYMENT OF ESTATE TAX LI2 ABILITY IN CASE OF CERTAIN TRANSFERS OF 

3 EMPLOYER SECURITIES TO AN EMPLOYEE 

4 STOCK OWNERSHIP PLAN SPONSORED BY AN 

5 S CORPORATION. 

6 ‘‘(a) IN GENERAL.—If— 

7 ‘‘(1) employer securities— 

8 ‘‘(A) are transferred by gift by the dece9 dent to an employee stock ownership plan spon10 sored by an S corporation, 

11 ‘‘(B) are transferred to such a plan by rea12 son of the decedent’s death under the dece13 dent’s will or a trust created by the decedent, 

14 or 

15 ‘‘(C) are transferred by gift by the execu16 tor of the estate of the decedent to such a plan, 

17 and 

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

19 elects the application of this section and files the 

20 agreements described in subsection (e) before the 

21 due date (including extensions) for filing the return 

22 of tax imposed by section 2001, 

23 then the executor of the estate of the decedent is relieved 

24 of liability for payment of that portion of the tax imposed 

25 by section 2001 which such employee stock ownership plan 

26 is required to pay under subsection (b). 


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1 ‘‘(b) PAYMENT OF TAX BY EMPLOYEE STOCK OWN2 ERSHIP PLAN.— 

3 ‘‘(1) IN GENERAL.—An employee stock owner4 ship plan— 

5 ‘‘(A)(i) to which employer securities have 

6 been transferred by gift by the decedent, 

7 ‘‘(ii) to which such securities have been 

8 transferred by reason of the decedent’s death 

9 under the decedent’s will or a trust created by 

10 the decedent, or 

11 ‘‘(iii) to which such securities have been 

12 transferred by gift by the executor of the estate 

13 of the decedent, and 

14 ‘‘(B) with respect to which an agreement 

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

16 shall pay that portion of the tax imposed by section 

17 2001 with respect to the taxable estate of the dece18 dent which is described in paragraph (2). 

19 ‘‘(2) AMOUNT OF TAX TO BE PAID.—The por20 tion of the tax imposed by section 2001 with respect 

21 to the taxable estate of the decedent described in 

22 this paragraph is equal to the lesser of— 

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

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

25 in the gross estate of the decedent, or 


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

2 respect to such taxable estate reduced by the 

3 sum of the credits allowable against such tax. 

4 ‘‘(c) INSTALLMENT PAYMENTS.— 

5 ‘‘(1) IN GENERAL.—If— 

6 ‘‘(A) the executor of the estate of the dece7 dent (without regard to this section) elects to 

8 have the provisions of section 6166 (relating to 

9 extensions of time for payment of estate tax 

10 where the estate consists largely of interests in 

11 a closely held business) apply to payment of 

12 that portion of the tax imposed by section 2001 

13 with respect to such estate which is attributable 

14 to employer securities, and 

15 ‘‘(B) the plan administrator provides to 

16 the executor the agreement described in sub17 section (e)(1), 

18 then the plan administrator may elect, before the 

19 due date (including extensions) for filing the return 

20 of such tax, to pay all or part of the tax described 

21 in subsection (b)(2) in installments under the provi22 sions of section 6166. 

23 ‘‘(2) INTEREST ON INSTALLMENTS.—In deter24 mining the 2-percent portion for purposes of section 

25 6601(j)— 


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1 ‘‘(A) the portion of the tax imposed by sec2 tion 2001 with respect to an estate for which 

3 the executor is liable, and 

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

5 employee stock ownership plan is liable, shall be 

6 aggregated. 

7 ‘‘(3) SPECIAL RULES FOR APPLICATION OF SEC8 TION 6166(G).—In the case of any transfer of em9 ployer securities to an employee stock ownership 

10 plan to which this section applies— 

11 ‘‘(A) TRANSFER DOES NOT TRIGGER AC12 CELERATION.—Such transfer shall not be treat13 ed as a disposition or withdrawal to which sec14 tion 6166(g) applies. 

15 ‘‘(B) SEPARATE APPLICATION TO ESTATE

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

17 be applied separately to the interests held after 

18 such transfer by the estate and such plan. 

19 ‘‘(C) REQUIRED DISTRIBUTION NOT TAKEN

20 INTO ACCOUNT.—In the case of any distribution 

21 of such securities (or sale of such securities) by 

22 such plan which is described in section 

23 4978(d)(1)— 


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1 ‘‘(i) such distribution shall not be 

2 treated as a disposition or withdrawal for 

3 purposes of section 6166(g), and 

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

5 into account in applying section 6166(g) to 

6 any subsequent disposition or withdrawal. 

7 ‘‘(D) DISPOSITION TO MEET DIVERSIFICA8 TION REQUIREMENTS.—Any disposition of such 

9 securities which is made to meet the require10 ments of section 401(a)(28)— 

11 ‘‘(i) shall not treated as a disposition 

12 or withdrawal for purposes of section 

13 6166(g), and 

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

15 into account in applying section 6166(g) to 

16 any subsequent disposition or withdrawal. 

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

18 ‘‘(1) whose employees are covered by an em19 ployee stock ownership plan, and 

20 ‘‘(2) who has entered into an agreement de21 scribed in subsection (e)(2) which is in effect, 

22 shall guarantee (in such manner as the Secretary may pre23 scribe) the payment of any amount such plan is required 

24 to pay under subsection (b). 


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

2 this subsection are as follows: 

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

4 administrator consenting to the application of sub5 section (b) to such plan. 

6 ‘‘(2) A written agreement signed by the em7 ployer whose employees are covered by the plan de8 scribed in subsection (b) consenting to the applica9 tion of subsection (d). 

10 ‘‘(f) EXEMPTION FROM TAX ON PROHIBITED TRANS11 ACTIONS.—The assumption under this section by an em12 ployee stock ownership plan of any portion of the liability 

13 for the tax imposed by section 2001 shall be treated as 

14 a loan described in section 4975(d)(3). 

15 ‘‘(g) DEFINITIONS.—For purposes of this section— 

16 ‘‘(1) EMPLOYER SECURITIES.—The term ‘em17 ployer securities’ has the meaning given such term 

18 by section 409(l). 

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

20 The term ‘employee stock ownership plan’ has the 

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

22 ‘‘(3) PLAN ADMINISTRATOR.—The term ‘plan 

23 administrator’ has the meaning given such term by 

24 section 414(g). 


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1 ‘‘(4) TAX IMPOSED BY SECTION 2001.—The 

2 term ‘tax imposed by section 2001’ includes any in3 terest, penalty, addition to tax, or additional amount 

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

5 (b) CLERICAL AMENDMENT.—The table of sections 

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

7 by inserting after the item relating to section 2209 the 

8 following new item: 

‘‘Sec. 2209A. Liability for payment of estate tax liability in case of certain 

transfers of employer securities to an employee stock ownership 

plan sponsored by an S corporation.’’. 

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

10 this section shall apply to transfers of employer securities 

11 after the date of the enactment of this Act. 

12 SEC. 6. ESTATE TAX DEDUCTION FOR CERTAIN SALES OF 

13 EMPLOYER SECURITIES TO AN EMPLOYEE 

14 STOCK OWNERSHIP PLAN SPONSORED BY AN 

15 S CORPORATION. 

16 (a) IN GENERAL.—Part IV of subchapter A of chap17 ter 11 of the Internal Revenue Code of 1986 is amended 

18 by inserting after section 2057 the following new section: 

19 ‘‘SEC. 2057A. SALES OF EMPLOYER SECURITIES TO AN EM20 PLOYEE STOCK OWNERSHIP PLAN SPON21 SORED BY AN S CORPORATION. 

22 ‘‘(a) GENERAL RULE.—For purposes of the tax im23 posed by section 2001, in the case of a sale of any quali24 fied employer securities to an employee stock ownership 


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1 plan sponsored by an S corporation on or before the date 

2 on which the return of the tax imposed by section 2001 

3 is required to be filed (determined by taking into account 

4 any extension of time for filing), the value of the taxable 

5 estate shall be determined by deducting from the value 

6 of the gross estate an amount equal to 50 percent of the 

7 proceeds of such sale. 

8 ‘‘(b) QUALIFIED EMPLOYER SECURITIES.— 

9 ‘‘(1) IN GENERAL.—The term ‘qualified em10 ployer securities’ means employer securities— 

11 ‘‘(A) which are includible in the gross es12 tate of the decedent, 

13 ‘‘(B) which would have been includible in 

14 the gross estate of the decedent if the decedent 

15 had died at any time during the 5-year period 

16 ending on the date of death, and 

17 ‘‘(C) with respect to which the executor 

18 elects the application of this section in the man19 ner prescribed by the Secretary. 

20 ‘‘(2) CERTAIN ASSETS HELD BY SPOUSE.—For 

21 purposes of paragraph (1)(B), any employer security 

22 which would have been includible in the gross estate 

23 of the spouse of a decedent during the period de24 scribed in paragraph (1)(B) if the spouse had died 


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1 during such period shall be treated as includible in 

2 the gross estate of the decedent during such period. 

3 ‘‘(c) OTHER DEFINITIONS.—For purposes of this 

4 section— 

5 ‘‘(1) EMPLOYER SECURITIES.—The term ‘em6 ployer securities’ has the meaning given such term 

7 by section 409(1). 

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

9 The term ‘employee stock ownership plan’ means a 

10 plan described in section 4975(e)(7).’’. 

11 (b) CLERICAL AMENDMENT.—The table of sections 

12 for part IV of subchapter A of chapter 11 of such Code 

13 is amended by inserting after the item relating to section 

14 2057 the following new item: 

‘‘Sec. 2057A. Sales of employer securities to an employee stock ownership plan 

sponsored by an S corporation.’’. 

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

16 this section shall apply to sales of employer securities after 

17 the date of the enactment of this Act. 

18 SEC. 7. DEPARTMENT OF LABOR TECHNICAL ASSISTANCE 

19 OFFICE. 

20 (a) ESTABLISHMENT REQUIRED.—Before the end of 

21 the 90-day period beginning on the date of enactment of 

22 this Act, the Secretary of Labor shall establish the S Cor23 poration Employee Ownership Assistance Office to foster 

24 increased employee ownership of S corporations. 


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1 (b) DUTIES OF THE OFFICE.—The S Corporation 

2 Employee Ownership Assistance Office shall provide— 

3 (1) education and outreach to inform people 

4 about the possibilities and benefits of employee own5 ership of S corporations; and 

6 (2) technical assistance to assist S corporations 

7 to sponsor employee stock ownership plans. 

Æ 


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