I

103D CONGRESS

1ST SESSION H. R. 2088

To amend the Internal Revenue Code of 1986 in order to promote and

improve employee stock ownership plans.

IN THE HOUSE OF REPRESENTATIVES

MAY 12, 1993

Mr. BALLENGER (for himself, Mr. ROHRABACHER, Mr. PICKLE, Mr. ARMEY,

Mr. BARCIA, Mr. BOEHNER, Mr. BUNNING, Mr. BURTON of Indiana,

Mrs. CLAYTON, Mr. COBLE, Mr. CONDIT, Mr. COX, Mr. DOOLITTLE, Mr.

DUNCAN, Mr. EWING, Mr. FAWELL, Mr. GEREN of Texas, Mr. GINGRICH, Mr. GRAMS, Mr. GUNDERSON, Mr. HANCOCK, Mrs. JOHNSON of

Connecticut, Mr. SAM JOHNSON of Texas, Mr. KOLBE, Mr. KYL, Mr.

LANCASTER, Mr. LINDER, Mr. MCCRERY, Mr. MCMILLAN, Mrs.

MORELLA, Mr. PACKARD, Mr. PAXON, Mr. PETRI, Mr. POSHARD, Mr.

SHAYS, Mr. SOLOMON, Mr. STENHOLM, Mr. TAUZIN, Mr. THOMAS of

Wyoming, Mr. TRAFICANT, Mr. TAYLOR of North Carolina, and Mr.

WOLF) introduced the following bill; which was referred to the Committee

on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 in order to

promote and improve employee stock ownership plans.

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 ‘‘ESOP Promotion and

5 Improvement Act of 1993’’.
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1 SEC. 2. CERTAIN CORPORATIONS ALLOWED TO SPONSOR

2 EMPLOYEE STOCK OWNERSHIP PLANS.

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

4 1361(c)(2) of the Internal Revenue Code of 1986 (defin5 ing S corporation) is amended by adding at the end the

6 following new clause:

7 ‘‘(v) A trust established pursuant to

8 an employee stock ownership plan (as de9 fined in section 4975(e)(7)).’’

10 (b) TRUSTEE TREATED AS SHAREHOLDER.—Sub11 paragraph (B) of section 1361(c)(2) of such Code is

12 amended by adding at the end the following new clause:

13 ‘‘(v) In the case of a trust described

14 in clause (v) of subparagraph (A), the

15 trustee shall be treated as the share16 holder.’’

17 (c) S CORPORATION TO PAY ESOP’S UNRELATED

18 BUSINESS TAX.—

19 (1) IN GENERAL.—Section 1361 of such Code

20 is amended by adding at the end the following new

21 subsection:

22 ‘‘(e) SPECIAL RULE FOR EMPLOYEE STOCK OWNER23 SHIP TRUSTS.—A trust shall not be treated as described

24 in clause (v) of subsection (c)(2)(A) unless the S corpora25 tion sponsoring such trust pays, or guarantees the pay26 ment by such trust of, any tax imposed by section 511,
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1 in such manner as the Secretary may prescribe, and pay2 ment by the corporation shall not be treated as a contribu3 tion to the trust under section 404(a).’’

4 (2) CONFORMING AMENDMENTS.—

5 (A) Section 408(b) of the Employee Retire6 ment Income Security Act of 1974 is amended

7 by adding at the end the following new para8 graph:

9 ‘‘(14) any guarantee or payment of a tax liabil10 ity as described in section 1361(e) of the Internal

11 Revenue Code of 1986.’’

12 (B) Subsection (d) of section 4975 of such

13 Code is amended by striking ‘‘or’’ at the end of

14 paragraph (14), by striking the period at the

15 end of paragraph (15) and inserting ‘‘; or’’, and

16 by inserting after paragraph (15) the following:

17 ‘‘(16) any guarantee or payment of a tax liabil18 ity as described in section 1361(e).’’

19 (d) S CORPORATION STOCK DISTRIBUTIONS TO

20 ESOP NOT TREATED AS CONTRIBUTIONS.—Section

21 404(a) of such Code is amended by adding at the end the

22 following new paragraph:

23 ‘‘(10) DISTRIBUTIONS WITH RESPECT TO

24 STOCK OF S CORPORATION.—Distributions with re25 spect to the stock of an S corporation made to an
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1 employee stock ownership plan (as defined in section

2 4975(e)(7)) shall not be considered contributions for

3 purposes of this section or under section 415(c).’’

4 (e) DEDUCTION FOR S CORPORATION STOCK DIS5 TRIBUTIONS.—Paragraph (6) of section 404(k) of such

6 Code is amended by adding at the end the following new

7 subparagraph:

8 ‘‘(C) DIVIDEND.—The term ‘dividend’

9 shall include distributions with respect to stock

10 of an S corporation which would be treated as

11 a dividend but for the application of section

12 1368(a).’’

13 (f) RULES RELATING TO UNRELATED BUSINESS

14 TAX.—

15 (1) Subsection (b) of section 513 of such Code

16 is amended by inserting before the period ‘‘or by an

17 S corporation of which it is a shareholder’’.

18 (2) Subsection (c) of section 512 of such Code

19 is amended by striking the subsection heading and

20 paragraph (1) and inserting the following:

21 ‘‘(c) SPECIAL RULES APPLICABLE TO PARTNER22 SHIPS AND S CORPORATIONS.—

23 ‘‘(1) IN GENERAL.—If a trade or business regu24 larly carried on by a partnership of which an organi25 zation is a member or an S corporation of which an
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1 employee stock ownership trust is a shareholder is

2 an unrelated trade or business with respect to such

3 organization or trust, such organization or trust, in

4 computing its unrelated business taxable income

5 shall, subject to the exceptions, additions, and limi6 tations contained in subsection (b), include its share

7 (whether or not distributed) of the gross income of

8 the partnership or S corporation from such unre9 lated trade or business and its share of the partner10 ship or S corporation deductions directly connected

11 with such gross income.’’

12 (g) ESOP MAY DISTRIBUTE CASH.—The second sen13 tence of paragraph (2) of section 409(h) of such Code is

14 amended to read as follows: ‘‘In the case of an employer

15 that is an S corporation or whose charter or bylaws re16 strict the ownership of substantially all outstanding em17 ployer securities to employees or to a trust described in

18 section 401(a), a plan which otherwise meets the require19 ments of this subsection or section 4975(e)(7) shall not

20 be considered to have failed to meet the requirements of

21 this subsection or section 401(a) merely because it does

22 not permit a participant to exercise the right described

23 in paragraph (1)(A) if such plan provides that participants

24 entitled to a distribution from the plan shall have a right

25 to receive such distribution in cash, except that such plan
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1 may distribute employer securities subject to a require2 ment that such securities may be resold to the employer

3 under terms which meet the requirements of paragraph

4 (1)(B).’’

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

6 this section shall take effect on the date of the enactment

7 of this Act.

8 SEC. 3. DOUBLING THE LIMITATIONS FOR CERTAIN ESOP

9 CONTRIBUTIONS.

10 (a) IN GENERAL.—Paragraph (6) of section 415(c)

11 of the Internal Revenue Code of 1986 is amended by add12 ing at the end the following new sentence:

13 ‘‘In the case of a participant in an employee stock

14 ownership plan (as so defined) who is not a highly

15 compensated employee and whose compensation for

16 the year does not exceed the amount referred to in

17 paragraph (1)(A), ‘50 percent’ shall be substituted

18 for ‘25 percent’ in applying paragraph (1)(B) to

19 such plan.’’

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

21 subsection (a) shall apply to years beginning after the date

22 of enactment of this Act.

23 SEC. 4. ESOP ASSUMPTION OF ESTATE TAX.

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

25 Internal Revenue Code of 1986 (relating to miscellaneous
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1 estate tax provisions) is amended by adding at the end

2 thereof the following new section:

3 ‘‘SEC. 2210. LIABILITY FOR PAYMENT IN CASE OF TRANS4 FER OF EMPLOYER SECURITIES TO AN EM5 PLOYEE STOCK OWNERSHIP PLAN OR A

6 WORKER-OWNED COOPERATIVE.

7 ‘‘(a) IN GENERAL.—If—

8 ‘‘(1) employer securities—

9 ‘‘(A) are acquired from the decedent by an

10 employee stock ownership plan or by an eligible

11 worker-owned cooperative from any decedent,

12 ‘‘(B) pass from the decedent to such a

13 plan or cooperative, or

14 ‘‘(C) are transferred by the executor to

15 such a plan or cooperative, and

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

17 may (without regard to this section) make an elec18 tion under section 6166 with respect to that portion

19 of the tax imposed by section 2001 which is attrib20 utable to employer securities; and

21 then the executor is relieved of liability for payment of

22 that portion of the tax imposed by section 2001 which

23 such employee stock ownership plan or cooperative is re24 quired to pay under subsection (b).
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1 ‘‘(b) PAYMENT OF TAX BY EMPLOYEE STOCK OWN2 ERSHIP PLAN OR COOPERATIVE.—

3 ‘‘(1) IN GENERAL.—An employee stock owner4 ship plan or eligible worker-owned cooperative—

5 ‘‘(A) which has acquired employer securi6 ties from the decedent, or to which such securi7 ties have passed from the decedent or been

8 transferred by the executor, and

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

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

11 shall pay that portion of the tax imposed by section

12 2001 with respect to the taxable estate of the dece13 dent which is described in paragraph (2).

14 ‘‘(2) AMOUNT OF TAX TO BE PAID.—The por15 tion of the tax imposed by section 2001 with respect

16 to the taxable estate of the decedent that is referred

17 to in paragraph (1) is equal to the lesser of:

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

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

20 in the gross estate of the decedent, or

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

22 respect to such taxable estate reduced by the

23 sum of the credits allowable against such tax.

24 ‘‘(c) INSTALLMENT PAYMENTS.—

25 ‘‘(1) IN GENERAL.—If—
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1 ‘‘(A) the executor of the estate of the dece2 dent (without regard to this section) elects to

3 have the provisions of section 6166 (relating to

4 extensions of time for payment of estate tax

5 where estate consists largely of interest in close6 ly-held business) apply to payment of that por7 tion of the tax imposed by section 2001 with re8 spect to such estate which is attributable to em9 ployer securities, and

10 ‘‘(B) the plan administrator or the cooper11 ative provides to the executor the agreement de12 scribed in subsection (e)(1),

13 then the plan administrator or any authorized officer

14 of the cooperative may elect, before the due date (in15 cluding extensions) for filing the return of such tax,

16 to pay all or part of the tax described in subsection

17 (b)(2) in installments under the provisions of section

18 6166.

19 ‘‘(2) INTEREST ON INSTALLMENTS.—In deter20 mining the 4-percent portion for purposes of section

21 6601(j)—

22 ‘‘(A) the portion of the tax imposed by sec23 tion 2001 with respect to an estate for which

24 the executor is liable, and
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1 ‘‘(B) the portion of such tax for which an

2 employee stock ownership plan or an eligible

3 worker-owned cooperative is liable,

4 shall be aggregated.

5 ‘‘(3) SPECIAL RULES FOR APPLICATION OF SEC6 TION 6166(g).—In the case of any transfer of em7 ployer securities to an employee stock ownership

8 plan or eligible worker-owned cooperative to which

9 this section applies—

10 ‘‘(A) TRANSFER DOES NOT TRIGGER AC11 CELERATION.—Such transfer shall not be treat12 ed as a disposition of withdrawal to which sec13 tion 6166(g) applies.

14 ‘‘(B) SEPARATE APPLICATION TO ESTATE

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

16 be applied separately to the interests held after

17 such transfer by the estate and such plan or

18 cooperative.

19 ‘‘(C) REQUIRED DISTRIBUTION NOT TAKEN

20 INTO ACCOUNT.—In the case of any distribution

21 of such securities by such plan which is de22 scribed in section 4978(d)(1)—

23 ‘‘(i) such distribution shall not be

24 treated as a disposition or withdrawal for

25 purposes of section 6166(g), and
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1 ‘‘(ii) such securities shall not be taken

2 into account in applying section 6166(g) to

3 any subsequent disposition or withdrawal.

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

5 ‘‘(1) whose employees are covered by an em6 ployee stock ownership plan, and

7 ‘‘(2) who has entered into an agreement de8 scribed in subsection (e)(2) which is in effect,

9 and any eligible worker-owned cooperative shall guarantee

10 (in such manner as the Secretary may prescribe) the pay11 ment of any amount such plan or cooperative, respectively,

12 is required to pay under subsection (b).

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

14 this subsection are as follows:

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

16 administrator, or by any authorized officer of the eli17 gible worker-owned cooperative, consenting to the

18 application of subsection (b) to such plan or cooper19 ative.

20 ‘‘(2) A written agreement signed by the em21 ployer whose employees are covered by the plan de22 scribed in subsection (b) consenting to the applica23 tion of subsection (d).

24 ‘‘(f) EXEMPTION FROM TAX ON PROHIBITED TRANS25 ACTIONS.—The liability which is assumed under this sec-
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1 tion by an employee stock ownership plan of any portion

2 of the liability for any portion of the tax imposed by sec3 tion 2001 shall be treated as a loan described in section

4 4975(d)(3).

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

6 ‘‘(1) EMPLOYER SECURITIES.—The term ‘em7 ployer securities’ has the meaning given such term

8 by section 409(1).

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

10 The term ‘employee stock ownership plan’ has the

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

12 ‘‘(3) ELIGIBLE WORKER-OWNED COOPERA13 TIVE.—The term ‘eligible worker-owned cooperative’

14 has the meaning given to such term by section

15 1042(c)(2).

16 ‘‘(4) PLAN ADMINISTRATOR.—The term ‘plan

17 administrator’ has the meaning given such term by

18 section 414(g).

19 ‘‘(5) TAX IMPOSED BY SECTION 2001.—The

20 term ‘tax imposed by section 2001’ includes any in21 terest, penalty, addition to tax, or additional amount

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

23 (b) CONFORMING AMENDMENT.—Section 408(b) of

24 the Employee Retirement Income Security Act of 1974 is
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1 amended by adding at the end the following new para2 graph:

3 ‘‘(15) Any transaction described in section 2210

4 of the Internal Revenue Code of 1986.’’

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

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

7 by adding at the end thereof the following new item:

‘‘Sec. 2210. Liability for payment in case of transfer of employer

securities to an employee stock ownership plan or

a worker-owned cooperative.’’

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

9 this section shall apply to transfers of employer securities

10 after the date of enactment of this Act.

11 SEC. 5. ESOP DIVIDEND EXCEPTION TO ADJUSTMENTS

12 BASED ON ADJUSTED CURRENT EARNINGS.

13 (a) IN GENERAL.—Section 56(g)(4)(C) of the Inter14 nal Revenue Code of 1986 (relating to disallowance of

15 items not deductible in computing earnings and profits)

16 is amended by adding at the end thereof the following:

17 ‘‘(v) TREATMENT OF ESOP DIVI18 DENDS.—Clause (i) shall not apply to any

19 deduction allowable under section 404(k).’’

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

21 subsection (a) shall apply to taxable years beginning after

22 December 31, 1989.
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1 SEC. 6. AMENDMENTS RELATED TO SECTION 1042.

2 (a) EXTENSION OF SECTION 1042 PRINCIPLES TO

3 STOCK RECEIVED AS COMPENSATION FOR SERVICES.—

4 (1) IN GENERAL.—Section 83 (relating to prop5 erty transferred in connection with performance of

6 services) of the Internal Revenue Code of 1986 is

7 amended by adding at the end thereof the following

8 new subsection:

9 ‘‘(i) EXCEPTION FOR TRANSFERS OF QUALIFIED SE10 CURITIES SOLD TO EMPLOYEE STOCK OWNERSHIP

11 PLANS.—

12 ‘‘(1) EXCLUSION FROM INCOME.—Subsections

13 (a) and (b) shall not apply to, and no amount shall

14 be includible in gross income with respect to, the

15 transfer of any qualified security (as defined in sec16 tion 1042(c)(1)) in connection with the performance

17 of services if, and to the extent that, within 60 days

18 after the event which would cause the recognition of

19 income pursuant to subsection (a) or (b) in the ab20 sence of this subsection, the transferee sells such

21 qualified security to an employee stock ownership

22 plan (as defined in section 4975(e)(7)) and the re23 quirements of section 1042(a) are met with respect

24 to such sale.

25 ‘‘(2) NO DEDUCTION BY EMPLOYER.—Notwith26 standing the provisions of subsection (h), the person
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1 for whom were performed the services in connection

2 with which any qualified security is transferred shall

3 not be entitled to a deduction with respect to such

4 transfer if, and to the extent that, paragraph (1) ap5 plies to such transfer.’’

6 (2) CONFORMING AMENDMENTS.—

7 (A) Section 424(c)(1) of such Code is

8 amended by striking ‘‘or’’ at the end of sub9 paragraph (B), by striking the period at the

10 end of subparagraph (C) and inserting ‘‘, or’’,

11 and by adding at the end thereof the following

12 new subparagraph:

13 ‘‘(D) a sale to which 1042 applies.’’

14 (B) Section 1042(a) of such Code is

15 amended—

16 (i) by striking ‘‘which would be recog17 nized as long-term capital gain’’ from the

18 first sentence thereof, and

19 (ii) by adding at the end thereof the

20 following new sentence: ‘‘If any gain is rec21 ognized after the application of the preced22 ing sentence, the portion of such recog23 nized gain (up to the whole of such recog24 nized gain) which is equal to the amount

25 of ordinary income, if any, that was not
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1 recognized with respect to such qualified

2 securities by virtue of section 83(i) or

3 424(c)(1)(D) shall be treated as ordinary

4 income.’’.

5 (C) Section 1042(b)(4) of such Code is

6 amended by adding at the end thereof the fol7 lowing new sentence: ‘‘The requirements of the

8 preceding sentence shall not apply to qualified

9 securities received by the taxpayer in a transfer

10 to which section 83 or 422 applied (or to which

11 section 422 or 424 (as in effect on the day be12 fore the date of enactment of the Revenue Rec13 onciliation Act of 1990) applied).’’.

14 (D) Section 1042(c)(1)(B) of such Code is

15 amended to read as follows:

16 ‘‘(B) were not received by the taxpayer

17 in—

18 ‘‘(i) a distribution from a plan de19 scribed in section 401(a), or

20 ‘‘(ii) a transfer pursuant to a right to

21 acquire stock to which section 423 ap22 plied.’’

23 (E) The first sentence of section 1042(d)

24 of such Code is amended to read as follows:

25 ‘‘The basis of the taxpayer in qualified replace-
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1 ment property purchased by the taxpayer dur2 ing the replacement period shall be reduced by

3 the amount of gain or ordinary income not rec4 ognized by virtue of such purchase, taking into

5 account the application of subsection (a) and, if

6 applicable, the application of section 83(i) or

7 section 424(c)(1)(D).’’

8 (F) Section 1042(e)(1) of such Code is

9 amended to read as follows:

10 ‘‘(1) IN GENERAL.—If a taxpayer disposes of

11 any qualified replacement property, then, notwith12 standing any other provision of this title, gain (if

13 any) shall be recognized to the extent of the gain or

14 ordinary income which was not recognized by reason

15 of the acquisition by such taxpayer of such qualified

16 replacement property, taking into account the appli17 cation of subsection (a) and, if applicable, the appli18 cation of section 83(i) or 424(c)(1)(D). The portion

19 of such gain (up to the whole thereof) equal to the

20 amount of ordinary income that was not recognized

21 by reason of such acquisition shall be treated as or22 dinary income.’’

23 (3) EFFECTIVE DATE.—The amendments made

24 by this subsection shall apply to sales of qualified se-
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1 curities on or after the date of the enactment of this

2 Act.

3 (b) MODIFICATION TO 25-PERCENT SHAREHOLDER

4 RULE.—

5 (1) IN GENERAL.—Section 409(n)(1)(B) of

6 such Code is amended to read as follows:

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

8 who owns (after the application of section

9 318(a)) more than 25 percent of—

10 ‘‘(i) the total combined voting power

11 of all classes of stock of the corporation

12 which issued such employer securities or of

13 any corporation which is a member of the

14 same controlled group of corporations

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

16 as such corporation, or

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

18 stock of any such corporation.’’

19 (2) EFFECTIVE DATE.—The amendment made

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

21 enactment of this Act.

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