I
107TH CONGRESS
1ST SESSION
H. R. 2416
To amend the Internal Revenue Code of 1986 to provide incentives for
the ownership and control of corporations by employees.
IN THE HOUSE OF REPRESENTATIVES
JUNE 28, 2001
Mr. ROHRABACHER (for himself, Mrs. BONO, Ms. MCKINNEY, Mr. CALVERT,
Mr. EVANS, Mr. WELDON of Florida, Mr. PAUL, Ms. HART, Mr. COX,
Mr. HORN, Mr. CONDIT, Ms. KAPTUR, Mr. ROYCE, Mr. SOUDER, and
Mr. SANDERS) 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 provide
incentives for the ownership and control of corporations
by employees.
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 Ownership
Act of 2001’’.
SEC. 2. OWNERSHIP POLICY FOR THE UNITED STATES.
(a) FINDINGS.—The Congress finds that—
(1) there is considerable evidence that em-
ployee-owned and employee-controlled corporations
are more productive and provide more wealth to
their employees than corporations not so owned, and
(2) the workplace experience of employee-owned
and employee-controlled corporations is proven to
foster greater appreciation of the economic system of
the United States that relies on ownership of private
property and capitalism.
(b) POLICY.—It is the policy of the United States
that by the year 2010, 30 percent of all United States
corporations are owned and controlled by employees of the
corporations.
SEC. 3. TAX INCENTIVES RELATING TO EMPLOYEE-OWNED
AND 
EMPLOYEE-CONTROLLED 
CORPORA-
TIONS.
(a) TRUST OF EMPLOYEE-OWNED AND EMPLOYEE-
CONTROLLED
CORPORATION
EXEMPT
FROM
TAX-
ATION.—
(1) IN GENERAL.—Section 501(c) of the Inter-
nal Revenue Code of 1986 (relating to list of exempt
organizations) is amended by adding at the end the
following new paragraph:
‘‘(28)(A) employee-owned and employee-con-
trolled corporation trust.
‘‘(B) For purposes of subparagraph (A), the
term ‘employee-owned and employee-controlled cor-
poration trust’ means a trust which has as its pri-
mary assets the employer securities (within the
meaning of section 409(l)) of an employee-owned
and employee-controlled corporation.’’.
(2) EMPLOYEE-OWNED
AND
EMPLOYEE-CON-
TROLLED CORPORATION DEFINED.—Subsection (a)
of section 7701 of such Code (relating to definitions)
is amended by adding at the end the following new
paragraph:
‘‘(47) EMPLOYEE-OWNED AND EMPLOYEE-CON-
TROLLED
CORPORATION.—The 
term 
‘employee-
owned and employee-controlled corporation’ means a
corporation in which—
‘‘(A) more than 50 percent of the voting
stock of such corporation is held by a trust for
the benefit of the employees of that corporation,
‘‘(B) in all matters requiring the vote of
stock, including the election of the board of di-
rectors of the corporation, the trustee of such
trust is obligated to vote the stock held in trust
and allocated to participants in the trust in the
manner in which the participants direct, on the
basis of 1-employee 1-vote, and to vote any
stock not so allocated as if it were so allocated,
‘‘(C) at least 25 employees of such cor-
poration are participants in and beneficiaries of
such trust,
‘‘(D) a minimum of 90 percent of the em-
ployees who work at least 1,000 hours annually
for such corporation are participants in such
trust, and
‘‘(E) the trustee administers such trust for
the benefit of the employees of such corporation
and complies with all requirements of this title
relating to employee stock ownership plans (as
defined in section 4975(e)(7)) pertaining to
independent appraisal of shares not readily
tradable and distribution of those shares.’’.
(b) NO TAX ON CORPORATE INCOME OF EMPLOYEE-
OWNED AND EMPLOYEE-CONTROLLED CORPORATION.—
Subsection (a) of section 11 of such Code (relating to cor-
porations in general) is amended by inserting before the
period at the end the following: ‘‘(other than any em-
ployee-owned and employee-controlled corporation)’’.
(c) EXCLUSION OF INCOME FROM SALE OF EM-
PLOYEE-OWNED AND EMPLOYEE-CONTROLLED CORPORA-
TION STOCK BY EMPLOYEE OWNER.—
(1) IN GENERAL.—Part III of subchapter B of
chapter 1 of such Code (relating to items specifically
excluded from gross income) is amended by redesig-
nating section 139 as section 140 and by inserting
after section 138 the following new section:
‘‘SEC. 139. INCOME FROM EMPLOYEE OWNER SALE OF EM-
PLOYER 
SECURITIES 
DISTRIBUTED 
FROM
EMPLOYEE-OWNED 
AND 
EMPLOYEE-CON-
TROLLED CORPORATION TRUST.
‘‘(a) IN GENERAL.—In the case of an individual,
gross income shall not include any proceeds from the
qualified sale of employer securities.
‘‘(b) QUALIFIED SALE OF EMPLOYER SECURITIES.—
The term ‘qualified sale of employer securities’ means the
sale of employer securities (as defined in section 409(l))
which were distributed to a participant in the employee-
owned and employee-controlled corporation trust to—
‘‘(1) an employee of the employee-owned and
employee-controlled corporation which issued such
securities,
‘‘(2) such corporation, or
‘‘(3) such trust.’’.
(2) CLERICAL AMENDMENT.—The table of sec-
tions for part III of subchapter B of chapter 1 of
such Code is amended by striking the item relating
to section 139 and inserting after the item relating
to section 138 the following new items:
‘‘Sec. 139. Income from employee owner sale of employer securi-
ties distributed from employee-owned and employee-
controlled corporation trust.
‘‘Sec. 140. Cross references to other Acts.’’.
(d) RECEIPT OF STOCK IN AN EMPLOYEE OWNED
AND CONTROLLED CORPORATION DURING 3-YEAR TRAN-
SITION PERIOD.—Section 83 of such Code (relating to
property transferred in connection with performance of
services) is amended by adding at the end the following
new subsection:
‘‘(i) RECEIPT OF STOCK IN AN EMPLOYEE OWNED
AND CONTROLLED CORPORATION DURING 3-YEAR TRAN-
SITION PERIOD.—
‘‘(1) IN GENERAL.—In the case of an employee,
this section shall not apply to the transfer in lieu of
compensation of employer securities in an employer
owned and controlled corporation during the 3-year
period beginning on the effective date of the election
of a corporation to become an employee owned and
controlled corporation.
‘‘(2) EXCEPTION.—If, on the day after the end
of the 3-year period referred to in paragraph (1),
such corporation is not an employee owned and con-
trolled corporation, paragraph (1) shall not apply
and the following sum shall be included in the gross
income of such employee:
‘‘(A) an amount equal to the fair market
value of all of such securities at the time of
transfer (determined without regard to any re-
striction other than a restriction which by its
terms will never lapse) to the employee in lieu
of compensation for such period, plus
‘‘(B) an amount equal to 10 percent of the
amount determined under subparagraph (A).’’.
(e) NO TAX ON GAIN ON SALES OR TRANSFERS TO
EMPLOYEE-OWNED AND EMPLOYEE-CONTROLLED COR-
PORATION TRUST.—
(1) IN GENERAL.—Part III of subchapter O of
chapter 1 of such Code (relating to common non-
taxable exchanges) is amended by adding at the end
the following new section:
‘‘SEC. 1046. SALE OF SECURITIES TO EMPLOYEE-OWNED
AND EMPLOYEE-CONTROLLED CORPORATION
TRUST.
‘‘(a) NONRECOGNITION OF GAIN.—If the taxpayer
elects the application of this section, in the case of the
sale or transfer of employer securities (as defined in sec-
tion 409(l)) to an employee-owned and employee-con-
trolled corporation trust, gain on such sale or transfer
shall not be recognized if the requirements of subsection
(b) are met.
‘‘(b) REQUIREMENTS.—
‘‘(1) IN GENERAL.—The requirements of this
subsection are that—
‘‘(A) the employee-owned and employee-
controlled corporation trust acquiring such se-
curities from the taxpayer agrees—
‘‘(i) to hold such securities for the 3-
year period beginning on the date of such
transfer or sale, and
‘‘(ii) to notify the taxpayer upon the
transfer of such securities before the end
of such period, and
‘‘(B) the taxpayer agrees to the provisions
of subsection (b).
‘‘(2) EXCEPTIONS.—Paragraph (1) shall not
apply—
‘‘(A) in a case where such securities are se-
curities of an employee-owned and employee-
controlled corporation which are distributed
within such 3-year period to an employee of
such corporation, and
‘‘(B) in the case of the sale or transfer of
stock of an employee-owned and employee-con-
trolled corporation in connection with the sale
or reorganization of such corporation, if such
sale or reorganization is approved by the em-
ployees of such corporation in a vote held on a
1-employee 1-vote basis.
‘‘(c) RECAPTURE OF TAX.—If, during any year with-
in the 3-year period referred to in subsection (b)(1), secu-
rities subject to subsection (a) are sold or transferred in
a manner that does not meet the requirements of sub-
section (b), then gain on the sale or transfer described
in subsection (a) shall be recognized for the year in which
such requirements are not met.’’.
(2) CLERICAL AMENDMENT.—The table of sec-
tions for part III of subchapter O of chapter 1 of
such Code is amended by adding at the end the fol-
lowing new item:
‘‘Sec. 1046. Sale of securities to employee-owned and employee-
controlled corporation trust.’’.
(f) CREDIT FOR TRANSFER OF STOCK FROM ESTATE
TO
EMPLOYEE-OWNED
AND
EMPLOYEE-CONTROLLED
CORPORATION.—
(1) IN GENERAL.—Part II of subchapter A of
chapter 11 of such Code (relating to credits against
tax) is amended by redesignating section 2016 as
section 2017 and by inserting after section 2015 the
following new section:
‘‘SEC. 2016. CREDIT FOR TRANSFER OF EMPLOYEE SECURI-
TIES FROM ESTATE TO EMPLOYEE-OWNED
AND EMPLOYEE-CONTROLLED CORPORATION
TRUST.
‘‘(a) GENERAL RULE.—The tax imposed by section
2001 shall be credited with the amount of employer securi-
ties considered to have been acquired from or to have
passed from the decedent to an employee-owned and em-
ployee-controlled corporation trust.
‘‘(b) LIMITATION.—Such credit may not exceed the
tax imposed by section 2001, reduced under this part
(other than by this section).
‘‘(c) VALUE OF STOCK NOT READILY TRADABLE.—
No credit shall be allowed under subsection (a) in the case
of employer securities which are not readily tradable on
an established securities market unless the value of such
employer securities is established by an independent ap-
praiser. For purposes of the preceding sentence, the term
‘independent appraiser’ means any appraiser meeting re-
quirements similar to the requirements of the regulations
prescribed under section 170(a)(1).
‘‘(d) DEFINITIONS.—For purposes of subsection
(a)—
‘‘(1) ACQUIRED FROM OR PASSED FROM A DE-
CEDENT.—Employer securities shall be considered to
have been acquired from or to have passed from a
decedent if the basis of such property in the hands
of the employee-owned and employee-controlled cor-
poration trust is determined under section 1014 by
reference to paragraph (1), (2), (4), or (9) of sub-
section (b) of such section.
‘‘(2) EMPLOYER SECURITIES.—The term ‘em-
ployer securities’ has the meaning given such term
by section 409(l)), except that such term shall not
include any security which is not voting common
stock.’’.
(2) CLERICAL AMENDMENT.—The table of sec-
tions for part II of subchapter A of chapter 11 of
such Code (relating to credits against tax) is amend-
ed by striking the item relating to section 2016 and
adding at the end the following new items:
‘‘Sec. 2016. Credit for transfer of employee securities from estate
to employee-owned and employee-controlled cor-
poration trust.
‘‘Sec. 2017. Recovery of taxes claimed as credit.’’.
(g) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section
shall apply to taxable years beginning after the date
of the enactment of this Act.
(2) CREDIT FOR TRANSFER OF STOCK FROM
ESTATE TO EMPLOYEE-OWNED AND EMPLOYEE-CON-
TROLLED
CORPORATION.—The amendments made