‘‘(B) the portion of such tax for which an
employee stock ownership plan or an eligible
worker-owned cooperative is liable,
shall be aggregated.
‘‘(3) SPECIAL RULES FOR APPLICATION OF SEC-
TION 6166(g).—In the case of any transfer of em-
ployer securities to an employee stock ownership
plan or eligible worker-owned cooperative to which
this section applies—
‘‘(A) TRANSFER DOES NOT TRIGGER AC-
CELERATION.—Such transfer shall not be treat-
ed as a disposition of withdrawal to which sec-
tion 6166(g) applies.
‘‘(B) SEPARATE APPLICATION TO ESTATE
AND PLAN INTERESTS.—Section 6166(g) shall
be applied separately to the interests held after
such transfer by the estate and such plan or
cooperative.
‘‘(C) REQUIRED DISTRIBUTION NOT TAKEN
INTO ACCOUNT.—In the case of any distribution
of such securities by such plan which is de-
scribed in section 4978(d)(1)—
‘‘(i) such distribution shall not be
treated as a disposition or withdrawal for
purposes of section 6166(g), and
‘‘(ii) such securities shall not be taken
into account in applying section 6166(g) to
any subsequent disposition or withdrawal.
‘‘(d) GUARANTEE OF PAYMENTS.—Any employer—
‘‘(1) whose employees are covered by an em-
ployee stock ownership plan, and
‘‘(2) who has entered into an agreement de-
scribed in subsection (e)(2) which is in effect,
and any eligible worker-owned cooperative shall guarantee
(in such manner as the Secretary may prescribe) the pay-
ment of any amount such plan or cooperative, respectively,
is required to pay under subsection (b).
‘‘(e) AGREEMENTS.—The agreements described in
this subsection are as follows:
‘‘(1) A written agreement signed by the plan
administrator, or by any authorized officer of the eli-
gible worker-owned cooperative, consenting to the
application of subsection (b) to such plan or cooper-
ative.
‘‘(2) A written agreement signed by the em-
ployer whose employees are covered by the plan de-
scribed in subsection (b) consenting to the applica-
tion of subsection (d).
‘‘(f) EXEMPTION FROM TAX ON PROHIBITED TRANS-
ACTIONS.—The liability which is assumed under this sec-
tion by an employee stock ownership plan of any portion
of the liability for any portion of the tax imposed by sec-
tion 2001 shall be treated as a loan described in section
4975(d)(3).
‘‘(g) DEFINITIONS.—For purposes of this section—
‘‘(1) EMPLOYER SECURITIES.—The term ‘em-
ployer securities’ has the meaning given such term
by section 409(l).
‘‘(2) EMPLOYEE
STOCK
OWNERSHIP
PLAN.—
The term ‘employee stock ownership plan’ has the
meaning given such term by section 4975(e)(7).
‘‘(3) 
ELIGIBLE
WORKER-OWNED
COOPERA-
TIVE.—The term ‘eligible worker-owned cooperative’
has the meaning given to such term by section
1042(c)(2).
‘‘(4) PLAN ADMINISTRATOR.—The term ‘plan
administrator’ has the meaning given such term by
section 414(g).
‘‘(5) TAX
IMPOSED
BY
SECTION
2001.—The
term ‘tax imposed by section 2001’ includes any in-
terest, penalty, addition to tax, or additional amount
relating to any tax imposed by section 2001.’’
(b) CONFORMING AMENDMENT.—Section 408(b) of
the Employee Retirement Income Security Act of 1974
(29 U.S.C. 1108(b)) is amended further by adding at the
end the following new paragraph:
‘‘(14) Any transaction described in section 2210
of the Internal Revenue Code of 1986.’’
(c) CLERICAL AMENDMENT.—The table of sections
for subchapter C of chapter 11 of such Code is amended
by adding at the end thereof the following new item:
‘‘Sec. 2210. Liability for payment in case of transfer of employer
securities to an employee stock ownership plan or
a worker-owned cooperative.’’
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to transfers of employer securities
after the date of enactment of this Act.
SEC. 4. ESOP DIVIDENDS MAY BE REINVESTED WITHOUT
LOSS OF DIVIDEND DEDUCTION.
(a) IN GENERAL.—Section 404(k)(2)(A) of the Inter-
nal Revenue Code of 1986 (defining applicable dividends)
is amended by striking ‘‘or’’ at the end of clause (ii), by
redesignating clause (iii) as clause (iv), and by inserting
after clause (ii) the following new clause:
‘‘(iii) is, at the election of such par-
ticipants or their beneficiaries—
‘‘(I) payable as provided in clause
(i) or (ii), or
‘‘(II) paid to the plan and rein-
vested in employer securities, or’’.
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
SEC. 5. AMENDMENTS RELATED TO SECTION 1042.
(a) EXTENSION OF SECTION 1042 PRINCIPLES TO
STOCK RECEIVED AS COMPENSATION FOR SERVICES.—
(1) IN GENERAL.—Section 83 of the Internal
Revenue Code of 1986 (relating to property trans-
ferred in connection with performance of services) is
amended by adding at the end thereof the following
new subsection:
‘‘(i) EXCEPTION FOR TRANSFERS OF QUALIFIED SE-
CURITIES
SOLD
TO
EMPLOYEE
STOCK
OWNERSHIP
PLANS.—
‘‘(1) EXCLUSION FROM INCOME.—Subsections
(a) and (b) shall not apply to, and no amount shall
be includible in gross income with respect to, the
transfer of any qualified security (as defined in sec-
tion 1042(c)(1)) in connection with the performance
of services if, and to the extent that, within 60 days
after the event which would cause the recognition of
income pursuant to subsection (a) or (b) in the ab-
sence of this subsection, the transferee sells such
qualified security to an employee stock ownership
plan (as defined in section 4975(e)(7)) and the re-
quirements of section 1042(a) are met with respect
to such sale.
‘‘(2) NO DEDUCTION BY EMPLOYER.—Notwith-
standing the provisions of subsection (h), the person
for whom were performed the services in connection
with which any qualified security is transferred shall
not be entitled to a deduction with respect to such
transfer if, and to the extent that, paragraph (1) ap-
plies to such transfer.’’
(2) CONFORMING AMENDMENTS.—
(A) Section 424(c)(1) of such Code is
amended by striking ‘‘or’’ at the end of sub-
paragraph (B), by striking the period at the
end of subparagraph (C) and inserting ‘‘, or’’,
and by adding at the end thereof the following
new subparagraph:
‘‘(D) a sale to which 1042 applies.’’
(B) Section 1042(a) of such Code is
amended—
(i) by striking ‘‘which would be recog-
nized as long-term capital gain’’ from the
first sentence thereof, and
(ii) by adding at the end thereof the
following new sentence: ‘‘If any gain is rec-
ognized after the application of the preced-