I 
109TH CONGRESS 
1ST SESSION H. R. 3653 
To amend the Internal Revenue Code of 1986 to allow a credit against 
income tax to C corporations which have substantial employee ownership 
and to encourage stock ownership by employees by excluding from gross 
income stock paid as compensation for services, and for other purposes. 
IN THE HOUSE OF REPRESENTATIVES 
SEPTEMBER 6, 2005 
Mr. ANDREWS 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 allow a 
credit against income tax to C corporations which have 
substantial employee ownership and to encourage stock 
ownership by employees by excluding from gross income 
stock paid as compensation for services, 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 Participa-
tion Incentive Act of 2005’’.
SEC. 2. MAXIMUM RATE OF INCOME TAX FOR C CORPORA-
TIONS WITH SUBSTANTIAL EMPLOYEE OWN-
ERSHIP. 
(a) IN GENERAL.—Section 11 of the Internal Rev-
enue Code of 1986 (relating to tax on corporations) is 
amended by redesignating subsections (c) and (d) as sub-
sections (d) and (e), respectively, and by inserting after 
subsection (b) the following new subsection: 
‘‘(c) MAXIMUM RATE OF 30 PERCENT FOR CORPORA-
TIONS WITH SUBSTANTIAL EMPLOYEE OWNERSHIP.— 
‘‘(1) IN GENERAL.—Except as provided in sub-
section (b)(2), the maximum rate of tax under sub-
section (b) shall be 30 percent with respect to any 
corporation if, with respect to such corporation— 
‘‘(A) the employee voting percentage is at 
least 20 percent, and 
‘‘(B) the employee value percentage is at 
least 20 percent. 
‘‘(2) DEFINITIONS.—For purposes of this sub-
section— 
‘‘(A) EMPLOYEE VOTING PERCENTAGE.— 
The term ‘employee voting percentage’ means 
the percentage of the total voting power of the 
stock of such corporation which is held directly 
by employees of such corporation.
‘‘(B) EMPLOYEE
VALUE
PERCENTAGE.— 
The term ‘employee value percentage’ means 
the percentage of the total value of the stock of 
such corporation which is held directly by em-
ployees of such corporation. 
‘‘(C) STOCK.—The term ‘stock’ has the 
meaning given such term under section 1504. 
‘‘(3) DETERMINATION
OF
OWNERSHIP
AVER-
AGES.— 
‘‘(A) IN GENERAL.—The determination of 
the employee voting percentage and the em-
ployee value percentage shall be made on the 
last day of the taxable year of the corporation. 
‘‘(B) HOLDINGS
OF
PERCENT-SHARE-
HOLDERS AND HIGHLY COMPENSATED EMPLOY-
EES
DISREGARDED.—Each such percentage 
shall be determined without regard to the hold-
ings of any highly compensated employee (as 
defined in section 414(q)). Notwithstanding the 
preceding sentence, the holdings of 5-percent 
owners (as defined in such section) shall be 
taken into account if the corporation has 50 or 
fewer employees.
‘‘(C) CONTROLLED GROUPS.—In the case 
of corporations which are treated as a single 
employer under section 52(a)— 
‘‘(i) such corporations shall be treated 
as 1 corporation for purposes of subpara-
graph (B), and 
‘‘(ii) the Secretary shall prescribe reg-
ulations— 
‘‘(I) for the application of this 
subsection in the case of corporations 
filing a consolidated return, and 
‘‘(II) to prevent the abuse of the 
purposes of this subsection.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2005. 
SEC. 3. EXCLUSION FROM GROSS INCOME FOR COMPENSA-
TION PAID IN STOCK BY CERTAIN CORPORA-
TIONS. 
(a) IN GENERAL.—Part III of subchapter B of chap-
ter 1 of the Internal Revenue Code of 1986 (relating to 
items specifically excluded from gross income) is amended 
by inserting after section 139A the following new section:
‘‘SEC. 139B. COMPENSATION PAID IN STOCK BY CERTAIN 
CORPORATIONS. 
‘‘(a) IN GENERAL.—In the case of an employee of 
an eligible corporation, gross income of such employee 
does not include remuneration received in the form of 
stock of such corporation or of any parent or subsidiary 
(within the meaning of section 422(b)) of such corpora-
tion. 
‘‘(b) LIMITATION.—The amount excluded under sub-
section (a) from the gross income of an employee for any 
taxable year shall not exceed 20 percent of the wages (as 
defined in section 3401(a) without regard to paragraph 
(23)) which would (but for this section) be includible in 
gross income for such year. 
‘‘(c) ELIGIBLE CORPORATION.—For purposes of this 
section, the term ‘eligible corporation’ means, with respect 
to any taxable year of an employee, any corporation if— 
‘‘(1) the corporation offers to pay remuneration 
for services performed during the calendar year in 
which or with which such taxable year ends in the 
form of stock of such corporation to at least 95 per-
cent of such corporation’s full-time employees, and 
‘‘(2) at least 95 percent of the value of the 
stock which is so offered during such calendar year 
is offered to employees whose wages (as defined in 
section 3401(a)) are among the bottom 75 percent
of the employees when ranked on the basis of such 
wages. 
‘‘(d) BASIS.—The amount excluded from gross in-
come under this section shall not be taken into account 
in determining the basis of the stock.’’. 
(b) EXCLUSION FROM WITHHOLDING.—Subsection 
(a) of section 3401 of such Code is amended by striking 
‘‘or’’ at the end of paragraph (21), by striking the period 
at the end of paragraph (22) and inserting ‘‘; or’’, and 
by adding at the end the following new paragraph: 
‘‘(23) in the form of stock if at the time such 
stock is paid it is reasonable to believe that the em-
ployee will be able to exclude such stock from income 
under section 139B.’’. 
(c) CLERICAL AMENDMENT.—The table of sections 
for such part III is amended by inserting after the item 
relating to section 139A the following new item: 
‘‘139B. Compensation paid in stock by certain corporations.’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2005. 
SEC. 4. DEDUCTION ALLOWED TO ELIGIBLE CORPORA-
TIONS AT TIME QUALIFIED STOCK OPTION 
GRANTED. 
(a) IN GENERAL.—Subsection (a) of section 421 of 
the Internal Revenue Code of 1986 (relating to general
rules for certain stock options) is amended by adding at 
the end the following flush sentence: 
‘‘Paragraph (2) shall not apply to options granted during 
any calendar year for which the corporation is an eligible 
corporation (as defined in section 139B(c)).’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to options granted after the date 
of the enactment of this Act. 
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