I

103D CONGRESS

1ST SESSION H. R. 1807

To amend the Internal Revenue Code of 1986 to provide special rules for

certain gratuitous transfers of employer securities for the benefit of employees.

IN THE HOUSE OF REPRESENTATIVES

APRIL 22, 1993

Mr. ANDREWS of Texas 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 provide

special rules for certain gratuitous transfers of employer

securities for the benefit of employees.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. GRATUITOUS TRANSFERS FOR THE BENEFIT

4 OF EMPLOYEES.

5 (a) IN GENERAL.—Subparagraph (C) of section

6 664(d)(1) of the Internal Revenue Code of 1986 and sub7 paragraph (C) of section 664(d)(2) of such Code are each

8 amended by striking the period at the end thereof and in9 serting ‘‘or, to the extent the remainder interest is in

10 qualified employer securities (as defined in paragraph
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1 (3)(C)), is to be transferred to an employee stock owner2 ship plan (as defined in section 4975(e)(7)) in a qualified

3 gratuitous transfer (as defined by paragraph (3)).’’

4 (b) QUALIFIED GRATUITOUS TRANSFER DEFINED.—

5 Subsection (d) of section 664 of such Code is amended

6 by redesignating paragraph (3) as paragraph (4) and by

7 inserting after paragraph (2) the following new paragraph:

8 ‘‘(3) QUALIFIED GRATUITOUS TRANSFER OF

9 QUALIFIED EMPLOYER SECURITIES.—

10 ‘‘(A) IN GENERAL.—For purposes of this

11 section, the term ‘qualified gratuitous transfer’

12 means a transfer of qualified employer securi13 ties to an employee stock ownership plan (as

14 defined in section 4975(e)(7)) but only to the

15 extent that—

16 ‘‘(i) the securities transferred pre17 viously passed from a decedent to a trust

18 described in paragraph (1) or (2);

19 ‘‘(ii) no deduction under section 404

20 is allowable with respect to such transfer;

21 ‘‘(iii) such plan provides that the se22 curities so transferred are allocated to plan

23 participants in a manner consistent with

24 section 401(a)(4);
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1 ‘‘(iv) such plan treats such securities

2 as being attributable to employer contribu3 tions but without regard to the limitations

4 otherwise applicable to such contributions

5 under section 404;

6 ‘‘(v) such plan provides that such se7 curities are held in a suspense account

8 under the plan to be allocated each year,

9 up to the limitations under section 415(c),

10 after first allocating all other annual addi11 tions for the limitation year, up to the lim12 itations under sections 415(c) and (e);

13 ‘‘(vi) such plan provides that no por14 tion of the assets of the plan attributable

15 to securities acquired by the plan in such

16 transfer may at any time accrue for the

17 benefit of any person who is related to the

18 decedent (within the meaning of section

19 267(b)) or any person who owns (after ap20 plication of section 318(a)) more than 5

21 percent of—

22 ‘‘(I) any class of outstanding

23 stock of the corporation which issued

24 such qualified employer securities or

25 of any corporation which is a member
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1 of the same controlled group of cor2 porations (within the meaning of sec3 tion 409(l)(4)) as such corporation, or

4 ‘‘(II) the total value of any class

5 of outstanding stock of any such cor6 poration; and

7 ‘‘(vii) the employer whose employees

8 are covered by the plan described in this

9 subparagraph files with the Secretary a

10 verified written statement consenting to

11 the application of sections 4978 and

12 4979A with respect to such employer.

13 For purposes of clause (vi), section 318(a) shall

14 be applied without regard to the exception in

15 paragraph (2)(B)(i) thereof.

16 ‘‘(B) 5-PERCENT SHAREHOLDERS.—A per17 son shall be treated as failing to meet the more

18 than 5 percent ownership limitation of subpara19 graph (A)(vi) if such person fails such limita20 tion—

21 ‘‘(i) at any time during the 1-year pe22 riod ending on the date of the acquisition

23 of qualified employer securities by the

24 plan, or
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1 ‘‘(ii) on any date as of which qualified

2 employer securities are allocated to partici3 pants in the plan.

4 ‘‘(C) QUALIFIED EMPLOYER SECURI5 TIES.—For purposes of this section, the term

6 ‘qualified employer securities’ means employer

7 securities (as defined in section 409(l)) which

8 are issued by a domestic corporation which has

9 no outstanding stock which is readily tradable

10 on an established securities market.

11 ‘‘(D) FAILURE TO MEET REQUIRE12 MENTS.—If a plan fails to meet the require13 ments of subparagraph (A)(vi)—

14 ‘‘(i) the plan shall be treated as hav15 ing distributed to the person described in

16 subparagraph (A)(vi) the amount allocated

17 to the account of such person in violation

18 of subparagraph (A)(vi) at the time of

19 such allocation,

20 ‘‘(ii) the provisions of section 4979A

21 shall apply, and

22 ‘‘(iii) the statutory period for the as23 sessment of any tax imposed by section

24 4979A shall not expire before the date

25 which is 3 years from the later of—
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1 ‘‘(I) the 1st allocation of em2 ployer securities in connection with a

3 qualified gratuitous transfer to which

4 this section applies, or

5 ‘‘(II) the date on which the Sec6 retary is notified of such failure.’’

7 (c) CONFORMING AMENDMENTS.—

8 (1) Section 415(e) of such Code is amended—

9 (A) by redesignating paragraph (6) as

10 paragraph (7), and

11 (B) by inserting after paragraph (5) the

12 following new paragraph:

13 ‘‘(6) SPECIAL RULE FOR QUALIFIED GRATU14 ITOUS TRANSFERS.—Any qualified gratuitous trans15 fer of qualified employer securities (as defined by

16 section 664(d)(3)) shall not be taken into account in

17 calculating, and shall not be subject to, the limita18 tions provided in this subsection.’’

19 (2) Section 415(c)(6) of such Code is amended

20 by adding at the end thereof the following new sen21 tence:

22 ‘‘The amount of any qualified gratuitous transfer

23 (as defined in section 664(d)(3)(A)) allocated to a

24 participant for any limitation year shall not exceed

25 the limitations imposed by this section, but such
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1 amount shall not be taken into account in determin2 ing whether any other amount exceeds the limita3 tions imposed by this section.’’

4 (3) Section 4979A(b) of such Code is amended

5 by striking ‘‘and’’ at the end of paragraph (1), by

6 redesignating paragraph (2) as paragraph (3), and

7 by inserting after paragraph (1) the following new

8 paragraph:

9 ‘‘(2) any allocation of qualified employer securi10 ties acquired by an employee stock ownership plan

11 pursuant to a qualified gratuitous transfer, as de12 scribed in section 664(d)(3), which fails to meet the

13 requirements of section 664(d)(3)(A)(vi), and’’.

14 (4) Section 664(d) of such Code is amended by

15 adding at the end thereof the following new para16 graph:

17 ‘‘(5) Notwithstanding subsections (d)(1)(B) and

18 (d)(2)(B), a qualified gratuitous transfer of qualified

19 employer securities to an employee stock ownership

20 plan shall be permitted.’’

21 (5) Section 2055(a) of such Code is amended—

22 (A) by striking ‘‘or’’ at the end of para23 graph (3),

24 (B) by striking the period at the end of

25 paragraph (4) and inserting ‘‘; or’’, and
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1 (C) by inserting after paragraph (4) the

2 following new paragraph:

3 ‘‘(5) to an employee stock ownership plan if

4 such transfer qualifies as a qualified gratuitous

5 transfer of qualified employer securities within the

6 meaning of section 664(d)(3).’’

7 (6) Section 4947(b) of such Code is amended

8 by inserting after paragraph (3) the following new

9 paragraph:

10 ‘‘(4) SECTION 507.—The provisions of section

11 507(a) shall not apply to a trust which is described

12 in subsection (a)(2) by reason of a distribution of

13 qualified employer securities (as defined in section

14 664(d)(3)(C)) to an employee stock ownership plan

15 (as defined in section 4975(e)(7)) in a qualified gra16 tuitous transfer (as defined by section 664(d)(3)).’’

17 (7) Section 404(a)(9) of such Code is amended

18 by inserting after subparagraph (B) the following

19 new subparagraph:

20 ‘‘(C) A qualified gratuitous transfer (as de21 fined in section 664(d)(3)(A)) shall have no ef22 fect on the amount or amounts otherwise de23 ductible under paragraph (3) or (7) or under

24 this paragraph.’’
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1 (8) Paragraph (3) of section 644(e) of such

2 Code is amended to read as follows:

3 ‘‘(3) acquired by a charitable remainder annuity

4 trust (as defined in section 664(d)(1)) or a chari5 table remainder unitrust (as defined in sections

6 664(d)(2) and (4)), or’’.

7 (9) Paragraph (4) of section 674(b) of such

8 Code is amended to read as follows:

9 ‘‘(4) POWER TO ALLOCATE AMONG CHARITABLE

10 BENEFICIARIES.—A power to determine the bene11 ficial enjoyment of the corpus or the income there12 from if the corpus or income is irrevocably payable

13 for a purpose specified in section 170(c) (relating to

14 definition of charitable contributions) or to an em15 ployee stock ownership plan (as defined in section

16 4975(e)(7)) in a qualified gratuitous transfer (as de17 fined in section 664(d)(3)).’’

18 (10) Paragraph (8) of section 2056(b) of such

19 Code is amended to read as follows:

20 ‘‘(8) SPECIAL RULE FOR CHARITABLE REMAIN21 DER TRUSTS.—

22 ‘‘(A) IN GENERAL.—If the surviving

23 spouse of the decedent is the only noncharitable

24 or nonqualified ESOP beneficiary of a qualified

25 charitable remainder trust, paragraph (1) shall
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1 not apply to any interest in such trust which

2 passes or has passed from the decedent to such

3 surviving spouse.

4 ‘‘(B) DEFINITIONS.—For purposes of sub5 paragraph (A)—

6 ‘‘(i) NONCHARITABLE BENE7 FICIARY.—The term ‘noncharitable bene8 ficiary’ means any beneficiary of the quali9 fied charitable remainder trust other than

10 an organization described in section

11 170(c).

12 ‘‘(ii) NONQUALIFIED ESOP BENE13 FICIARY.—The term ‘nonqualified ESOP

14 beneficiary’ means any beneficiary of the

15 qualified charitable remainder trust other

16 than an employee stock ownership plan (as

17 defined in section 4975(e)(7)) that holds a

18 remainder interest in qualified employer

19 securities (as defined in section

20 664(d)(3)(C)) to be transferred to such

21 plan in a qualified gratuitous transfer (as

22 defined in section 664(d)(3)).

23 ‘‘(iii) QUALIFIED CHARITABLE RE24 MAINDER TRUST.—The term ‘qualified

25 charitable remainder trust’ means a chari-
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1 table remainder annuity trust or a chari2 table remainder unitrust (described in sec3 tion 664).’’

4 (11) Paragraph (7) of section 4975(e) of such

5 Code is amended to read as follows:

6 ‘‘(7) EMPLOYEE STOCK OWNERSHIP PLAN.—

7 The term ‘employee stock ownership plan’ means a

8 defined contribution plan—

9 ‘‘(A) which is a stock bonus plan which is

10 qualified, or a stock bonus and a money pur11 chase plan both of which are qualified under

12 section 401(a) and which are designed to invest

13 primarily in qualifying employer securities; and

14 ‘‘(B) which is otherwise defined in regula15 tions prescribed by the Secretary.

16 A plan shall not be treated as an employee stock

17 ownership plan unless it meets the requirements of

18 section 409(h), section 409(o), and, if applicable,

19 section 409(n) and section 664(d)(3), and, if the em20 ployer has a registration-type class of securities (as

21 defined in section 409(e)(4)), it meets the require22 ments of section 409(e).’’

23 (12) Subsection (a) of section 4978 of such

24 Code is amended to read as follows:
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1 ‘‘(a) TAX ON DISPOSITIONS OF SECURITIES TO

2 WHICH SECTION 664(d)(3) OR SECTION 1042 APPLIES

3 BEFORE CLOSE OF MINIMUM HOLDING PERIOD.—If,

4 during the 3-year period after the date on which the em5 ployee stock ownership plan or eligible worker-owned coop6 erative acquired any qualified securities in a sale to which

7 section 1042 applied or in a qualified gratuitous transfer

8 to which section 664(d)(3) applied, such plan or coopera9 tive disposes of any qualified securities and—

10 ‘‘(1) the total number of shares held by such

11 plan or cooperative after such disposition is less

12 than the total number of employer securities held

13 immediately after such sale or such qualified gratu14 itous transfer, or

15 ‘‘(2) except to the extent provided in regula16 tions, the value of qualified securities held by such

17 plan or cooperative after such disposition is less

18 than 30 percent of the total value of all employer se19 curities as of such disposition,

20 there is hereby imposed a tax on the disposition equal to

21 the amount determined under subsection (b).’’

22 (13) Paragraph (2) of section 4978(b) of such

23 Code is amended to read as follows:

24 ‘‘(2) LIMITATION.—The amount realized taken

25 into account under paragraph (1) shall not exceed
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1 that portion allocable to qualified securities acquired

2 in the sale to which section 1042 applied or in the

3 qualified gratuitous transfer to which section

4 664(d)(3) applied determined as if such securities

5 were disposed of—

6 ‘‘(A) first, from section 133 securities (as

7 defined in section 4978B(e)(2)) acquired during

8 the 3-year period ending on the date of such

9 disposition, beginning with the securities first

10 so acquired,

11 ‘‘(B) second, from section 133 securities

12 (as so defined) acquired before such 3-year pe13 riod unless such securities (or proceeds from

14 the disposition) have been allocated to accounts

15 of participants or beneficiaries,

16 ‘‘(C) third, from qualified securities to

17 which section 1042 applied or to which section

18 664(d)(3) applied during the 3-year period end19 ing on the date of such disposition, beginning

20 with the securities first so acquired, and

21 ‘‘(D) then, from any other employer securi22 ties.

23 If subsection (d) or section 4978B(d) applies to a

24 disposition, the disposition shall be treated as made
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1 from employer securities in the opposite order of the

2 preceding sentence.’’

3 (14) Subsection (c) of section 4978 of such

4 Code is amended to read as follows:

5 ‘‘(c) LIABILITY FOR PAYMENT OF TAXES.—The tax

6 imposed by this section shall be paid by—

7 ‘‘(1) the employer, or

8 ‘‘(2) the eligible worker-owned cooperative,

9 that made the written statement described in section

10 664(d)(3) or in section 1042(b)(3).’’

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

12 this section shall apply to transfers made by trusts to, or

13 for the use of, an employee stock ownership plan after the

14 date of the enactment of this Act.

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