computing its unrelated business taxable income
shall, subject to the exceptions, additions, and limi-
tations contained in subsection (b), include its share
(whether or not distributed) of the gross income of
the partnership or S corporation from such unre-
lated trade or business and its share of the partner-
ship or S corporation deductions directly connected
with such gross income.’’
(g) ESOP MAY DISTRIBUTE CASH.—The second sen-
tence of paragraph (2) of section 409(h) of such Code is
amended to read as follows: ‘‘In the case of an employer
that is an S corporation or whose charter or bylaws re-
strict the ownership of substantially all outstanding em-
ployer securities to employees or to a trust described in
section 401(a), a plan which otherwise meets the require-
ments of this subsection or section 4975(e)(7) shall not
be considered to have failed to meet the requirements of
this subsection or section 401(a) merely because it does
not permit a participant to exercise the right described
in paragraph (1)(A) if such plan provides that participants
entitled to a distribution from the plan shall have a right
to receive such distribution in cash, except that such plan
may distribute employer securities subject to a require-
ment that such securities may be resold to the employer
under terms which meet the requirements of paragraph
(1)(B).’’
(h) EFFECTIVE DATE.—The amendments made by
this section shall take effect on the date of the enactment
of this Act.
SEC. 3. ESOP ASSUMPTION OF ESTATE TAX.
(a) IN GENERAL.—Subchapter C of chapter 11 of the
Internal Revenue Code of 1986 (relating to miscellaneous
estate tax provisions) is amended by adding at the end
thereof the following new section:
‘‘SEC. 2210. LIABILITY FOR PAYMENT IN CASE OF TRANS-
FER OF EMPLOYER SECURITIES TO AN EM-
PLOYEE STOCK OWNERSHIP PLAN OR A
WORKER-OWNED COOPERATIVE.
‘‘(a) IN GENERAL.—If—
‘‘(1) employer securities—
‘‘(A) are acquired from the decedent by an
employee stock ownership plan or by an eligible
worker-owned cooperative from any decedent,
‘‘(B) pass from the decedent to such a
plan or cooperative, or
‘‘(C) are transferred by the executor to
such a plan or cooperative, and
‘‘(2) the executor of the estate of the decedent
may (without regard to this section) make an elec-
tion under section 6166 with respect to that portion
of the tax imposed by section 2001 which is attrib-
utable to employer securities; and
then the executor is relieved of liability for payment of
that portion of the tax imposed by section 2001 which
such employee stock ownership plan or cooperative is re-
quired to pay under subsection (b).
‘‘(b) PAYMENT OF TAX BY EMPLOYEE STOCK OWN-
ERSHIP PLAN OR COOPERATIVE.—
‘‘(1) IN GENERAL.—An employee stock owner-
ship plan or eligible worker-owned cooperative—
‘‘(A) which has acquired employer securi-
ties from the decedent, or to which such securi-
ties have passed from the decedent or been
transferred by the executor, and
‘‘(B) with respect to which an agreement
described in subsection (e)(1) is in effect,
shall pay that portion of the tax imposed by section
2001 with respect to the taxable estate of the dece-
dent which is described in paragraph (2).
‘‘(2) AMOUNT OF TAX TO BE PAID.—The por-
tion of the tax imposed by section 2001 with respect
to the taxable estate of the decedent that is referred
to in paragraph (1) is equal to the lesser of:
‘‘(A) the value of the employer securities
described in subsection (a)(1) which is included
in the gross estate of the decedent, or
‘‘(B) the tax imposed by section 2001 with
respect to such taxable estate reduced by the
sum of the credits allowable against such tax.
‘‘(c) INSTALLMENT PAYMENTS.—
‘‘(1) IN GENERAL.—If—
‘‘(A) the executor of the estate of the dece-
dent (without regard to this section) elects to
have the provisions of section 6166 (relating to
extensions of time for payment of estate tax
where estate consists largely of interest in close-
ly-held business) apply to payment of that por-
tion of the tax imposed by section 2001 with re-
spect to such estate which is attributable to em-
ployer securities, and
‘‘(B) the plan administrator or the cooper-
ative provides to the executor the agreement de-
scribed in subsection (e)(1),
then the plan administrator or any authorized officer
of the cooperative may elect, before the due date (in-
cluding extensions) for filing the return of such tax,
to pay all or part of the tax described in subsection
(b)(2) in installments under the provisions of section
6166.
‘‘(2) INTEREST ON INSTALLMENTS.—In deter-
mining the 4-percent portion for purposes of section
6601(j)—
‘‘(A) the portion of the tax imposed by sec-
tion 2001 with respect to an estate for which
the executor is liable, and
‘‘(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-
‘‘(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)) (as amended by section 2(c)(2)(A))
is amended further by adding at the end the following new
paragraph:
‘‘(15) 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 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 thereof the following:
‘‘(v) TREATMENT
OF
ESOP
DIVI-
DENDS.—Clause (i) shall not apply to any
deduction allowable under section 404(k) if
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
subsection (a) shall apply to taxable years beginning after
December 31, 1989.
(c) STATUTE OF LIMITATIONS.—If refund or credit
of any overpayment of tax resulting from the application
of subsection (a) is prevented at any time before the close
of the 1-year period beginning on the date of the enact-
ment of this Act by the operation of any law or rule of
law (including res judicata), refund or credit of such over-
payment (to the extent attributable to the application of
subsection (a)) may, nevertheless, be made or allowed if
claim therefor is filed before the close of such 1-year pe-
riod.
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) of
the Internal Revenue Code of 1986 is amended by
adding at the end thereof the following new sub-
section:
‘‘(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-
ing sentence, the portion of such recog-
nized gain (up to the whole of such recog-
nized gain) which is equal to the amount
of ordinary income, if any, that was not
recognized with respect to such qualified
securities by virtue of section 83(i) or
424(c)(1)(D) shall be treated as ordinary
income.’’.
(C) Section 1042(b)(4) of such Code is
amended by adding at the end thereof the fol-
lowing new sentence: ‘‘The requirements of the
preceding sentence shall not apply to qualified
securities received by the taxpayer in a transfer
to which section 83 or 422 applied (or to which
section 422 or 424 (as in effect on the day be-
fore the date of enactment of the Revenue Rec-
onciliation Act of 1990) applied).’’.
(D) Section 1042(c)(1)(B) of such Code is
amended to read as follows:
‘‘(B) were not received by the taxpayer
in—
‘‘(i) a distribution from a plan de-
scribed in section 401(a), or
‘‘(ii) a transfer pursuant to a right to
acquire stock to which section 423 ap-
plied.’’
(E) The first sentence of section 1042(d)
of such Code is amended to read as follows:
‘‘The basis of the taxpayer in qualified replace-
ment property purchased by the taxpayer dur-
ing the replacement period shall be reduced by
the amount of gain or ordinary income not rec-
ognized by virtue of such purchase, taking into
account the application of subsection (a) and, if
applicable, the application of section 83(i) or
section 424(c)(1)(D).’’
(F) Section 1042(e)(1) of such Code is
amended to read as follows:
‘‘(1) IN GENERAL.—If a taxpayer disposes of
any qualified replacement property, then, notwith-
standing any other provision of this title, gain (if
any) shall be recognized to the extent of the gain or
ordinary income which was not recognized by reason
of the acquisition by such taxpayer of such qualified
replacement property, taking into account the appli-
cation of subsection (a) and, if applicable, the appli-
cation of section 83(i) or 424(c)(1)(D). The portion
of such gain (up to the whole thereof) equal to the
amount of ordinary income that was not recognized
by reason of such acquisition shall be treated as or-
dinary income.’’
(3) EFFECTIVE DATE.—The amendments made
by this subsection shall apply to sales of qualified se-
curities on or after the date of the enactment of this
Act.
(b) MODIFICATION TO 25-PERCENT SHAREHOLDER
RULE.—
(1) IN
GENERAL.—Section 409(n)(1)(B) of
such Code 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.
SEC. 6. CLARIFICATION OF VOTING RIGHTS REQUIREMENT
UNDER EXCLUSION FOR INTEREST ON LOANS
USED TO ACQUIRE EMPLOYER SECURITIES.
(a) IN GENERAL.—Subparagraph (A) of section
133(b)(7) of the Internal Revenue Code of 1986 (relating
to voting rights of employer securities) is amended by
striking ‘‘section 409(e)(2)’’ and inserting ‘‘paragraph (2)
or (5) of section 409(e)’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to loans made after July 10,
1989.
(c) STATUTE OF LIMITATIONS.—If refund or credit
of any overpayment of tax resulting from the application
of subsection (a) is prevented at any time before the close
of the 1-year period beginning on the date of the enact-
ment of this Act by the operation of any law or rule of
law (including res judicata), refund or credit of such over-
payment (to the extent attributable to the application of
subsection (a)) may, nevertheless, be made or allowed if
claim therefor is filed before the close of such 1-year pe-
riod.
SEC. 7. GRATUITOUS TRANSFERS FOR THE BENEFIT OF EM-
PLOYEES.
(a) IN GENERAL.—Subparagraph (C) of section
664(d)(1) of the Internal Revenue Code of 1986 and sub-
paragraph (C) of section 664(d)(2) of such Code are each
amended by striking the period at the end thereof and in-
serting ‘‘or, to the extent the remainder interest is in
qualified employer securities (as defined in paragraph
(3)(C)), is to be transferred to an employee stock owner-
ship plan (as defined in section 4975(e)(7)) in a qualified
gratuitous transfer (as defined by paragraph (3)).’’
(b) QUALIFIED GRATUITOUS TRANSFER DEFINED.—
Subsection (d) of section 664 of such Code is amended
by redesignating paragraph (3) as paragraph (4) and by
inserting after paragraph (2) the following new paragraph:
‘‘(3) QUALIFIED
GRATUITOUS
TRANSFER
OF
QUALIFIED EMPLOYER SECURITIES.—
‘‘(A) IN GENERAL.—For purposes of this
section, the term ‘qualified gratuitous transfer’
means a transfer of qualified employer securi-
ties to an employee stock ownership plan (as
defined in section 4975(e)(7)) but only to the
extent that—
‘‘(i) the securities transferred pre-
viously passed from a decedent to a trust
described in paragraph (1) or (2);
‘‘(ii) no deduction under section 404
is allowable with respect to such transfer;
‘‘(iii) such plan provides that the se-
curities so transferred are allocated to plan
participants in a manner consistent with
section 401(a)(4);
‘‘(iv) such plan treats such securities
as being attributable to employer contribu-
tions but without regard to the limitations
otherwise applicable to such contributions
under section 404;
‘‘(v) such plan provides that such se-
curities are held in a suspense account
under the plan to be allocated each year,
up to the limitations under section 415(c),
after first allocating all other annual addi-
tions for the limitation year, up to the lim-
itations under sections 415(c) and (e); and
‘‘(vi) the employer whose employees
are covered by the plan described in this
subparagraph files with the Secretary a
verified written statement consenting to
the application of sections 4978 and
4979A with respect to such employer.
‘‘(B) 
QUALIFIED
EMPLOYER
SECURI-
TIES.—For purposes of this section, the term
‘qualified employer securities’ means employer
securities (as defined in section 409(l)) which
are issued by a domestic corporation which has
no outstanding stock which is readily tradable
on an established securities market.
‘‘(C) TREATMENT
OF
SECURITIES
ALLO-
CATED BY EMPLOYEE STOCK OWNERSHIP PLAN
TO PERSONS RELATED TO DECEDENT OR 5-PER-
CENT SHAREHOLDERS.—
‘‘(i) IN GENERAL.—If any portion of
the assets of the plan attributable to secu-
rities acquired by the plan in a qualified
gratuitous transfer are allocated to the ac-
count of—
‘‘(I) any person who is related to
the decedent (within the meaning of
section 267(b)), or
‘‘(II) any person who, at the time
of such allocation or at any time dur-
ing the 1-year period ending on the
date of the acquisition of qualified
employer securities by the plan, is a
5-percent shareholder of the employer
maintaining the plan,
the plan shall be treated as having distrib-
uted (at the time of such allocation) to
such person or shareholder the amount so
allocated.
‘‘(ii) 
5-PERCENT
SHAREHOLDER.—
For purposes of clause (i), the term ‘5-per-
cent shareholder’ means any person who
owns (directly or through the application
of section 318(a)) more than 5 percent
of—
‘‘(I) any class of outstanding
stock of the corporation which issued
such qualified employer securities or
of any corporation which is a member
of the same controlled group of cor-
porations (within the meaning of sec-
tion 409(l)(4)) as such corporation, or
‘‘(II) the total value of any class
of outstanding stock of any such cor-
poration; and
For purposes of the preceding sentence,
section 318(a) shall be applied without re-
gard to the exception in paragraph
(2)(B)(i) thereof.
‘‘(iii) CROSS REFERENCE.—
‘‘For excise tax on allocations described in clause
(i), see section 4979A.’’
(c) CONFORMING AMENDMENTS.—
(1) Section 401(a)(1) of such Code is amended
by inserting ‘‘or by a charitable remainder trust pur-