SEC. 2. FINDINGS. 
Congress finds that— 
(1) on January 1, 1998—nearly 25 years after 
the Employee Retirement Income Security Act of 
1974 was enacted and the employee stock ownership 
plan (hereafter in this section referred to as an 
‘‘ESOP’’) was created—employees were first per-
mitted to be owners of subchapter S corporations 
pursuant to the Small Business Job Protection Act 
of 1996 (Public Law 104–188); 
(2) with the passage of the Taxpayer Relief Act 
of 1997 (Public Law 105–34), Congress designed in-
centives to encourage businesses to become ESOP- 
owned S corporations; 
(3) since that time, several thousand companies 
have become ESOP-owned S corporations, creating 
an ownership interest for several million Americans 
in companies in every State in the country, in indus-
tries ranging from heavy manufacturing to tech-
nology development to services; 
(4) while estimates show that 40 percent of 
working Americans have no formal retirement ac-
count at all, every United States worker who is an 
employee-owner of an S corporation company 
through an ESOP has a valuable qualified retire-
ment savings account; 
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(5) recent studies have shown that employees of 
ESOP-owned S corporations enjoy greater job sta-
bility than employees of comparable companies; 
(6) studies also show that employee-owners of S 
corporation ESOP companies have amassed mean-
ingful retirement savings through their S ESOP ac-
counts that will give them the means to retire with 
dignity; 
(7) under the Small Business Act (15 U.S.C. 
631 et seq.) and the regulations promulgated by the 
Administrator of the Small Business Administration, 
a small business concern that was eligible under the 
Small Business Act for the numerous preferences of 
the Act is denied treatment as a small business con-
cern after an ESOP acquires more than 49 percent 
of the business, even if the number of employees, the 
revenue of the small business concern, and the ra-
cial, gender, or other criteria used under the Act to 
determine whether the small business concern is eli-
gible for benefits under the Act remain the same, 
solely because of the acquisition by the ESOP; and 
(8) it is the goal of Congress to both preserve 
and foster employee ownership of S corporations 
through ESOPs. 
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SEC. 3. DEFERRAL OF TAX FOR CERTAIN SALES OF EM-
PLOYER STOCK TO EMPLOYEE STOCK OWN-
ERSHIP PLAN SPONSORED BY S CORPORA-
TION. 
(a) IN GENERAL.—Section 1042(c)(1)(A) of the In-
ternal Revenue Code of 1986 is amended by striking ‘‘do-
mestic C corporation’’ and inserting ‘‘domestic corpora-
tion’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to sales after the date of the 
enactment of this Act. 
SEC. 4. DEDUCTION FOR INTEREST ON LOAN TO FINANCE 
PURCHASE OF EMPLOYER SECURITIES BY AN 
EMPLOYEE STOCK OWNERSHIP PLAN SPON-
SORED BY AN S CORPORATION. 
(a) IN GENERAL.—Part VI of subchapter B of chap-
ter 1 of the Internal Revenue Code of 1986 is amended 
by adding at the end following new section: 
‘‘SEC. 200. INTEREST ON CERTAIN LOANS FOR THE PUR-
CHASE OF EMPLOYER SECURITIES BY AN EM-
PLOYEE STOCK OWNERSHIP PLAN SPON-
SORED BY AN S CORPORATION. 
‘‘(a) IN GENERAL.—There shall be allowed as a de-
duction an amount equal to 50 percent of the interest re-
ceived during the taxable year by a bank (within the mean-
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ing of section 581) with respect to a qualified securities 
acquisition loan. 
‘‘(b) QUALIFIED SECURITIES ACQUISITION LOAN.— 
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the term ‘qualified securities acquisition loan’ 
means— 
‘‘(A) any loan to an employee stock owner-
ship plan sponsored by an S corporation to the 
extent that the proceeds are used to acquire 
employer securities for the plan, and 
‘‘(B) any loan to an S corporation that 
sponsors an employee stock ownership plan to 
the extent that the proceeds of such loan are 
loaned to the employee stock ownership plan to 
acquire employer securities for the plan. 
For purposes of this paragraph, the term ‘employer 
securities’ has the meaning given such term by sec-
tion 409(l). 
‘‘(2) TERMS APPLICABLE TO CERTAIN QUALI-
FIED
SECURITIES
ACQUISITION
LOANS.—For pur-
poses of paragraph (1)(B), the term ‘qualified secu-
rities acquisition loan’ shall not include any loan to 
the S corporation unless the loan to the employee 
stock ownership plan has repayment terms which are 
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substantially similar to the terms of the loan to the 
S corporation. 
‘‘(3) TREATMENT
OF
REFINANCINGS.—The 
term ‘qualified securities acquisition loan’ shall in-
clude any loan which is (or is part of a series of 
loans) used to refinance a loan described in para-
graph (1) (after the application of paragraph (2)). 
‘‘(4) PLAN MUST HOLD MORE THAN 50 PER-
CENT
OF
STOCK
AFTER
ACQUISITION
OR
TRANS-
FER.— 
‘‘(A) IN GENERAL.—A loan shall not be 
treated as a qualified securities acquisition loan 
for purposes of this section unless, immediately 
after an acquisition of employer securities re-
ferred to in paragraph (1), the employee stock 
ownership plan owns more than 50 percent of 
the outstanding stock of the S corporation. 
‘‘(B) FAILURE TO RETAIN MINIMUM STOCK 
INTEREST.— 
‘‘(i) IN
GENERAL.—Subsection (a) 
shall not apply to any interest received 
with respect to a qualified securities acqui-
sition loan which is allocable to any period 
during which the employee stock ownership 
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