I 
111TH CONGRESS 
2D SESSION 
H. R. 5207 
To amend the Internal Revenue Code of 1986 to improve the operation 
of employee stock ownership plans, and for other purposes. 
IN THE HOUSE OF REPRESENTATIVES 
MAY 5, 2010 
Mr. BOUSTANY (for himself and Mr. POMEROY) introduced the following bill; 
which was referred to the Committee on Ways and Means, and in addi-
tion to the Committee on Small Business, for a period to be subsequently 
determined by the Speaker, in each case for consideration of such provi-
sions as fall within the jurisdiction of the committee concerned 
A BILL 
To amend the Internal Revenue Code of 1986 to improve 
the operation of employee stock ownership plans, 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 Stock Own-
ership Plan Promotion and Improvement Act of 2010’’. 
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SEC. 2. 10 PERCENT PENALTY TAX NOT TO APPLY TO CER-
TAIN S CORPORATION DISTRIBUTIONS MADE 
ON STOCK HELD BY EMPLOYEE STOCK OWN-
ERSHIP PLAN. 
(a) IN GENERAL.—Clause (vi) of section 72(t)(2)(A) 
of the Internal Revenue Code of 1986 (relating to general 
rule that subsection not to apply to certain distributions) 
is amended by inserting before the comma at the end the 
following: ‘‘or any distribution (as described in section 
1368(a)) with respect to S corporation stock that con-
stitutes qualifying employer securities (as defined by sec-
tion 409(l)) to the extent that such distributions are paid 
to a participant in the manner described in clause (i) or 
(ii) of section 404(k)(2)(A)’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to distributions made after the 
date of the enactment of this Act. 
SEC. 3. ESOP DIVIDEND EXCEPTION TO ADJUSTMENTS 
BASED ON ADJUSTED CURRENT EARNINGS. 
(a) IN GENERAL.—Section 56(g)(4)(C) of the Inter-
nal Revenue Code of 1986 (relating to disallowance of 
items not deductible in computing earnings and profits) 
is amended by adding at the end the following new clause: 
‘‘(vii) TREATMENT
OF
ESOP
DIVI-
DENDS.—Clause (i) shall not apply to any 
deduction allowable under section 404(k) if 
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the deduction is allowed for dividends paid 
on employer securities held by an employee 
stock ownership plan established or author-
ized to be established before March 15, 
1991.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
December 31, 1989. 
(c) WAIVER OF LIMITATIONS.—If refund or credit of 
any overpayment of tax resulting from the application of 
the amendment made by this section is prevented at any 
time before the close of the 1-year period beginning on 
the date of the enactment of this Act by the operation 
of any law or rule of law (including res judicata), such 
refund or credit may nevertheless be made or allowed if 
claim therefor is filed before the close of such period. 
SEC. 4. AMENDMENTS RELATED TO SECTION 1042. 
(a) DEFERRAL OF TAX FOR CERTAIN SALES TO EM-
PLOYEE STOCK OWNERSHIP PLAN SPONSORED BY S COR-
PORATION.— 
(1) IN GENERAL.—Section 1042(c)(1)(A) of the 
Internal Revenue Code of 1986 (defining qualified 
securities) is amended by striking ‘‘C’’. 
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(2) EFFECTIVE DATE.—The amendment made 
by paragraph (1) shall apply to sales after the date 
of the enactment of this Act. 
(b) REINVESTMENT IN CERTAIN MUTUAL FUNDS 
PERMITTED.— 
(1) IN
GENERAL.—Clause (ii) of section 
1042(c)(4)(B) of such Code (defining operating cor-
poration) is amended to read as follows: 
‘‘(ii) FINANCIAL
INSTITUTIONS, IN-
SURANCE
COMPANIES, 
AND
MUTUAL 
FUNDS.—The term ‘operating corporation’ 
shall include— 
‘‘(I) any financial institution de-
scribed in section 581, 
‘‘(II) any insurance company 
subject to tax under subchapter L, 
and 
‘‘(III) any regulated investment 
company if substantially all of the se-
curities held by such company are se-
curities issued by operating corpora-
tions (determined without regard to 
this subclause).’’. 
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(2) EFFECTIVE DATE.—The amendment made 
by paragraph (1) shall apply to sales of qualified se-
curities after the date of the enactment of this Act. 
(c) MODIFICATION TO 25-PERCENT SHAREHOLDER 
RULE.— 
(1) IN GENERAL.—Subparagraph (B) of section 
409(n)(1) of such Code (relating to securities re-
ceived in certain transactions) 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. 
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SEC. 5. SMALL BUSINESS AND EMPLOYEE STOCK OWNER-
SHIP. 
(a) FINDINGS.—Congress finds that— 
(1) since 1974, the ownership of many small 
business concerns (as defined under section 3 of the 
Small Business Act (15 U.S.C. 632)) in the United 
States has transitioned from the original owner, or 
owners, to an employee stock ownership plan (re-
ferred to in this section as an ‘‘ESOP’’), as defined 
in section 4975(e)(7) of the Internal Revenue Code 
of 1986; 
(2) data collected on the performance of these 
small business concerns owned 50 percent or more 
by an ESOP evidences that more often than not 
these ESOP-owned small business concerns provide 
significant benefit to the employees of the small 
business concerns and the communities in which the 
small business concerns are located; 
(3) 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 business concern that qualifies as a small business 
concern for the numerous preferences of the Act, is 
denied treatment as a small business concern once 
50 percent or more of the business is acquired on 
behalf of the employees by an ESOP; and 
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(4) a small business concern that was eligible 
under the Small Business Act before being so ac-
quired on behalf of the employees by an ESOP, will 
no longer be treated as eligible, even if the number 
of employees, the revenue of the small business con-
cern, and the racial, gender, or other criteria used 
under the Act to determine whether the small busi-
ness concern is eligible for benefits under the Act re-
main the same, solely because of the acquisition by 
the ESOP. 
(b) EMPLOYEE STOCK OWNERSHIP PLANS.—The 
Small Business Act (15 U.S.C. 631 et seq.) is amended— 
(1) by redesignating section 44 as section 45; 
and 
(2) by inserting after section 43 the following: 
‘‘SEC. 44. EMPLOYEE STOCK OWNERSHIP PLANS. 
‘‘(a) DEFINITIONS.—In this section— 
‘‘(1) the term ‘ESOP’ means an employee stock 
ownership plan, as defined in section 4975(e)(7) of 
the Internal Revenue Code of 1986; and 
‘‘(2) the term ‘ESOP business concern’ means 
a business concern that was a small business con-
cern eligible for a loan or to participate in a con-
tracting assistance or business development program 
under this Act before the date on which 50 percent 
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or more of the business concern was acquired by an 
ESOP. 
‘‘(b) CONTINUED ELIGIBILITY.—An ESOP business 
concern shall be deemed a small business concern for pur-
poses of a loan, preference, or other program under this 
Act if— 
‘‘(1) on a continuing basis a majority of the 
shares of and control of the ESOP that owns the 
business concern are held by individuals who would 
otherwise meet criteria necessary to be eligible for 
the loan, preference, or other program (as the case 
may be); 
‘‘(2) control of the ESOP business concern is 
vested in the shareholders of the ESOP; and 
‘‘(3) the ESOP that owns the business concern 
complies with all requirements of a tax qualified de-
ferred compensation arrangement under the Internal 
Revenue Code of 1986.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall take effect on January 1 of the first cal-
endar year beginning after the date of the enactment of 
this Act. 
Æ 
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