I 
109TH CONGRESS 
1ST SESSION H. R. 3111
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 
JUNE 29, 2005
Mrs. JOHNSON of Connecticut (for herself, Mr. JEFFERSON, and Mr. 
MCCRERY) introduced the following bill; which was referred to the Com-
mittee 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.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled, 
SECTION 1. SHORT TITLE. 
This Act may be cited as the ‘‘Employee Stock Own-
ership Plan Promotion and Improvement Act of 2005’’.
SEC. 2. 10 PERCENT PENALTY TAX NOT TO APPLY TO CER-
TAIN S CORPORATION DISTRIBUTIONS MADE 
ON STOCK HELD BY EMPLOYEE STOCK OWN-
ERSHIP PLAN. 
(a) IN GENERAL.—Clause (vi) of section 72(t)(2)(A) 
of the Internal Revenue Code of 1986 (relating to general 
rule that subsection not to apply to certain distributions) 
is amended by inserting before the comma at the end the 
following: ‘‘or any distribution (as described in section 
1368(a)) with respect to S corporation stock that con-
stitutes qualifying employer securities (as defined by sec-
tion 409(l)) to the extent that such distributions are paid 
to a participant in the manner described in clause (i) or 
(ii) of section 404(k)(2)(A)’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to distributions made after the 
date of the enactment of this Act. 
SEC. 3. ESOP DIVIDEND EXCEPTION TO ADJUSTMENTS 
BASED ON ADJUSTED CURRENT EARNINGS. 
(a) IN GENERAL.—Section 56(g)(4)(C) of the Inter-
nal Revenue Code of 1986 (relating to disallowance of 
items not deductible in computing earnings and profits) 
is amended by adding at the end the following new clause: 
‘‘(v) TREATMENT
OF
ESOP
DIVI-
DENDS.—Clause (i) shall not apply to any 
deduction allowable under section 404(k) if
the deduction is allowed for dividends paid 
on employer securities held by an employee 
stock ownership plan established or author-
ized to be established before March 15, 
1991.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
December 31, 1989. 
(c) WAIVER OF LIMITATIONS.—If refund or credit of 
any overpayment of tax resulting from the application of 
the amendment made by this section is prevented at any 
time before the close of the 1-year period beginning on 
the date of the enactment of this Act by the operation 
of any law or rule of law (including res judicata), such 
refund or credit may nevertheless be made or allowed if 
claim therefor is filed before the close of such period. 
SEC. 4. AMENDMENTS RELATED TO SECTION 1042. 
(a) DEFERRAL OF TAX FOR CERTAIN SALES TO EM-
PLOYEE STOCK OWNERSHIP PLAN SPONSORED BY S COR-
PORATION.—
(1) IN GENERAL.—Section 1042(c)(1)(A) of the 
Internal Revenue Code of 1986 (defining qualified 
securities) is amended by striking ‘‘C’’.
(2) EFFECTIVE DATE.—The amendment made 
by paragraph (1) shall apply to sales after the date 
of the enactment of this Act. 
(b) REINVESTMENT IN CERTAIN MUTUAL FUNDS 
PERMITTED.—
(1) IN
GENERAL.—Clause (ii) of section 
1042(c)(4)(B) of the Internal Revenue Code of 1986 
(defining operating corporation) is amended to read 
as follows: 
‘‘(ii) FINANCIAL
INSTITUTIONS, IN-
SURANCE
COMPANIES, 
AND
MUTUAL 
FUNDS.—The term ‘operating corporation’ 
shall include—
‘‘(I) any financial institution de-
scribed in section 581, 
‘‘(II) any insurance company 
subject to tax under subchapter L, 
and 
‘‘(III) any regulated investment 
company if substantially all of the se-
curities held by such company are se-
curities issued by operating corpora-
tions (determined without regard to 
this subclause).’’.
(2) EFFECTIVE DATE.—The amendment made 
by paragraph (1) shall apply to sales of qualified se-
curities after the date of the enactment of this Act. 
(c) MODIFICATION TO 25-PERCENT SHAREHOLDER 
RULE.—
(1) IN GENERAL.—Subparagraph (B) of section 
409(n)(1) of the Internal Revenue Code of 1986 (re-
lating to securities received in certain transactions) 
is amended to read as follows: 
‘‘(B) for the benefit of any other person 
who owns (after the application of section 
318(a)) more than 25 percent of—
‘‘(i) the total combined voting power 
of all classes of stock of the corporation 
which issued such employer securities or of 
any corporation which is a member of the 
same controlled group of corporations 
(within the meaning of subsection (l)(4)) 
as such corporation, or 
‘‘(ii) the total value of all classes of 
stock of any such corporation.’’. 
(2) EFFECTIVE DATE.—The amendment made 
by paragraph (1) shall take effect on the date of the 
enactment of this Act.
SEC. 5. EARLY DISTRIBUTIONS FROM EMPLOYEE STOCK 
OWNERSHIP PLANS FOR HIGHER EDUCATION 
EXPENSES 
AND 
FIRST-TIME 
HOMEBUYER 
PURCHASES. 
(a) IN GENERAL.—Paragraph (2) of section 72(t) of 
the Internal Revenue Code of 1986 (relating to 10-percent 
additional tax on early distributions from qualified retire-
ment plans) is amended by adding at the end the following 
new subparagraph: 
‘‘(G) DISTRIBUTIONS
FROM
EMPLOYEE 
STOCK OWNERSHIP PLANS FOR HIGHER EDU-
CATION
EXPENSES
AND
FIRST-TIME
HOME-
BUYER PURCHASES.—
‘‘(i) 
IN
GENERAL.—Distributions 
made to the employee from an employee 
stock ownership plan (within the meaning 
of section 4975(e)(7)), the amount of 
which does not exceed the sum of—
‘‘(I) qualified higher education 
expenses (as defined by paragraph 
(7)) reduced by the amount of such 
expenses taken into account under 
subparagraph (E), and 
‘‘(II) qualified first-time home-
buyer distributions (as defined by 
paragraph (8)) reduced by the amount
of such distributions taken into ac-
count under subparagraph (F). 
‘‘(ii) 
LIMITATION.—A 
distribution 
may only be taken into account under 
clause (i) if—
‘‘(I) such distribution is in the 
form of either employer securities 
(within the meaning of section 409(l)) 
or cash proceeds resulting from the 
sale of such securities made not more 
than 180 days before the date of such 
distribution for the purposes of such 
distribution, 
‘‘(II) such securities so distrib-
uted or sold were held by such plan 
for at least 5 years before the date of 
such distribution or, if applicable, 
sale, and 
‘‘(III) the number of shares in 
each class of such securities so dis-
tributed or sold, when added to all 
previous distributions and sales of 
each such class of such securities for 
such purposes on behalf of such em-
ployee, does not exceed 10 percent of
the aggregate number of shares of 
each class of such securities allocated 
to the account of such employee under 
such plan. 
‘‘(iii) VALUATION
OF
DISTRIBUTED 
SECURITIES.—For purposes of clause (ii), 
the value of a security shall be the value 
of such security on the date of distribu-
tion.’’. 
(b) CONFORMING AMENDMENTS.—
(1) Paragraph (7) of section 72(t) of such Code 
is amended by striking ‘‘paragraph (2)(E)’’ and in-
serting ‘‘subparagraphs (E) and (G) of paragraph 
(2)’’. 
(2) Paragraph (8) of section 72(t) of such Code 
is amended by striking ‘‘paragraph (2)(F)’’ and in-
serting ‘‘subparagraphs (F) and (G) of paragraph 
(2)’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to distributions made after the 
date of the enactment of this Act. 
SEC. 6. DE MINIMIS EXCEPTION TO DIVERSIFICATION OF 
INVESTMENT REQUIREMENT. 
(a) IN GENERAL.—Paragraph (28) of section 401(a) 
of the Internal Revenue Code of 1986 (relating to addi-
tional requirements relating to employee stock ownership 
plans) is amended by adding at the end the following new 
subparagraph: 
‘‘(D) EXCEPTION
FOR
DE
MINIMIS
AC-
COUNT BALANCE.—A plan shall not fail to meet 
the requirements of this subparagraph for a 
plan year solely because the plan provides that 
clause (i) does not apply to any participant’s 
account in the plan which, as of the close of the 
preceding plan year, has an account balance 
which does not exceed $2,500.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to plan years beginning after the 
date of the enactment of this Act.
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