ing sentence, the portion of such recog-
nized gain (up to the whole of such recog-
nized gain) which is equal to the amount
of ordinary income, if any, that was not
recognized with respect to such qualified
securities by virtue of section 83(i) or
424(c)(1)(D) shall be treated as ordinary
income.’’.
(C) Section 1042(b)(4) of such Code is
amended by adding at the end thereof the fol-
lowing new sentence: ‘‘The requirements of the
preceding sentence shall not apply to qualified
securities received by the taxpayer in a transfer
to which section 83 or 422 applied (or to which
section 422 or 424 (as in effect on the day be-
fore the date of enactment of the Revenue Rec-
onciliation Act of 1990) applied).’’.
(D) Section 1042(c)(1)(B) of such Code is
amended to read as follows:
‘‘(B) were not received by the taxpayer
in—
‘‘(i) a distribution from a plan de-
scribed in section 401(a), or
‘‘(ii) a transfer pursuant to a right to
acquire stock to which section 423 ap-
plied.’’
(E) The first sentence of section 1042(d)
of such Code is amended to read as follows:
‘‘The basis of the taxpayer in qualified replace-
ment property purchased by the taxpayer dur-
ing the replacement period shall be reduced by
the amount of gain or ordinary income not rec-
ognized by virtue of such purchase, taking into
account the application of subsection (a) and, if
applicable, the application of section 83(i) or
section 424(c)(1)(D).’’
(F) Section 1042(e)(1) of such Code is
amended to read as follows:
‘‘(1) IN GENERAL.—If a taxpayer disposes of
any qualified replacement property, then, notwith-
standing any other provision of this title, gain (if
any) shall be recognized to the extent of the gain or
ordinary income which was not recognized by reason
of the acquisition by such taxpayer of such qualified
replacement property, taking into account the appli-
cation of subsection (a) and, if applicable, the appli-
cation of section 83(i) or 424(c)(1)(D). The portion
of such gain (up to the whole thereof) equal to the
amount of ordinary income that was not recognized
by reason of such acquisition shall be treated as or-
dinary income.’’
(3) EFFECTIVE DATE.—The amendments made
by this subsection shall apply to sales of qualified se-
curities on or after the date of the enactment of this
Act.
(b) MODIFICATION TO 25-PERCENT SHAREHOLDER
RULE.—
(1) IN
GENERAL.—Section 409(n)(1)(B) of
such Code 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. 6. GRATUITOUS TRANSFERS FOR THE BENEFIT OF EM-
PLOYEES.
(a) IN GENERAL.—Subparagraph (C) of section
664(d)(1) of the Internal Revenue Code of 1986 and sub-
paragraph (C) of section 664(d)(2) of such Code are each
amended by striking the period at the end thereof and in-
serting ‘‘or, to the extent the remainder interest is in
qualified employer securities (as defined in paragraph
(3)(C)), is to be transferred to an employee stock owner-
ship plan (as defined in section 4975(e)(7)) in a qualified
gratuitous transfer (as defined by paragraph (3)).’’
(b) QUALIFIED GRATUITOUS TRANSFER DEFINED.—
Subsection (d) of section 664 of such Code is amended
by redesignating paragraph (3) as paragraph (4) and by
inserting after paragraph (2) the following new paragraph:
‘‘(3) QUALIFIED
GRATUITOUS
TRANSFER
OF
QUALIFIED EMPLOYER SECURITIES.—
‘‘(A) IN GENERAL.—For purposes of this
section, the term ‘qualified gratuitous transfer’
means a transfer of qualified employer securi-
ties to an employee stock ownership plan (as
defined in section 4975(e)(7)) but only to the
extent that—
‘‘(i) the securities transferred pre-
viously passed from a decedent to a trust
described in paragraph (1) or (2);
‘‘(ii) no deduction under section 404
is allowable with respect to such transfer;
‘‘(iii) such plan provides that the se-
curities so transferred are allocated to plan
participants in a manner consistent with
section 401(a)(4);
‘‘(iv) such plan treats such securities
as being attributable to employer contribu-
tions but without regard to the limitations
otherwise applicable to such contributions
under section 404;
‘‘(v) such plan provides that such se-
curities are held in a suspense account
under the plan to be allocated each year,
up to the limitations under section 415(c),
after first allocating all other annual addi-
tions for the limitation year, up to the lim-
itations under sections 415(c) and (e); and
‘‘(vi) the employer whose employees
are covered by the plan described in this
subparagraph files with the Secretary a
verified written statement consenting to
the application of sections 4978 and
4979A with respect to such employer.
‘‘(B) 
QUALIFIED
EMPLOYER
SECURI-
TIES.—For purposes of this section, the term
‘qualified employer securities’ means employer
securities (as defined in section 409(l)) which
are issued by a domestic corporation which has
no outstanding stock which is readily tradable
on an established securities market.
‘‘(C) TREATMENT
OF
SECURITIES
ALLO-
CATED BY EMPLOYEE STOCK OWNERSHIP PLAN
TO PERSONS RELATED TO DECEDENT OR 5-PER-
CENT SHAREHOLDERS.—
‘‘(i) IN GENERAL.—If any portion of
the assets of the plan attributable to secu-
rities acquired by the plan in a qualified
gratuitous transfer are allocated to the ac-
count of—
‘‘(I) any person who is related to
the decedent (within the meaning of
section 267(b)), or
‘‘(II) any person who, at the time
of such allocation or at any time dur-