I 
114TH CONGRESS 
2D SESSION 
H. R. 5719 
To amend the Internal Revenue Code of 1986 to modify the tax treatment 
of certain equity grants. 
IN THE HOUSE OF REPRESENTATIVES 
JULY 11, 2016 
Mr. PAULSEN 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 modify 
the tax treatment of certain equity grants. 
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 ‘‘Empowering Employ-
ees through Stock Ownership Act’’. 
SEC. 2. TREATMENT OF QUALIFIED EQUITY GRANTS. 
(a) IN GENERAL.— 
(1) ELECTION TO DEFER INCOME.—Section 83 
of the Internal Revenue Code of 1986 is amended by 
adding at the end the following new subsection: 
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‘‘(i) QUALIFIED EQUITY GRANTS.— 
‘‘(1) IN GENERAL.—For purposes of this sub-
title, if qualified stock is transferred to a qualified 
employee who makes an election under this sub-
section— 
‘‘(A) no amount shall be included in in-
come under subsection (a) in the first taxable 
year in which the rights of the employee in such 
stock are transferable or are not subject to a 
substantial risk of forfeiture, whichever is appli-
cable, and 
‘‘(B) an amount equal to the amount 
which would be included in income of the em-
ployee under subsection (a) (determined without 
regard to this subsection) shall be included in 
income in the taxable year of the employee 
which includes the earliest of— 
‘‘(i) the date such qualified stock is 
sold, exchanged, or otherwise transferred, 
‘‘(ii) the date the employee first be-
comes an excluded employee, 
‘‘(iii) the first date on which any stock 
of the corporation which issued the quali-
fied stock becomes readily tradable on an 
established securities market, 
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‘‘(iv) the date that is 7 years after the 
first date the rights of the employee in 
such stock are transferable or are not sub-
ject to a substantial risk of forfeiture, 
whichever occurs earlier, or 
‘‘(v) the date on which the employee 
elects under this clause to include the 
amount in income. 
‘‘(2) QUALIFIED STOCK.— 
‘‘(A) IN GENERAL.—For purposes of this 
subsection, the term ‘qualified stock’ means any 
stock in a corporation if— 
‘‘(i) the right to receive such stock 
was provided by the corporation— 
‘‘(I) in connection with the per-
formance of services as an employee, 
and 
‘‘(II) such right was received in 
year in which such corporation was an 
eligible corporation, and 
‘‘(ii) such stock is received— 
‘‘(I) in connection with the exer-
cise of an option, or 
‘‘(II) in settlement of a restricted 
stock unit. 
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‘‘(B) LIMITATION.—The term ‘qualified 
stock’ shall not include any stock if the em-
ployee may sell to, or otherwise receive cash in 
lieu of stock from, the corporation at the time 
that the rights of the employee are transferable 
or are not subject to a substantial risk of for-
feiture. 
‘‘(C) ELIGIBLE CORPORATION.—For pur-
poses of subparagraph (A)(i)(II)— 
‘‘(i) IN GENERAL.—The term ‘eligible 
corporation’ means, with respect to any 
calendar year, any corporation if— 
‘‘(I) no stock of such corporation 
is readily tradable on an established 
securities market during such cal-
endar year or any preceding calendar 
year, and 
‘‘(II) such corporation has a writ-
ten plan under which not less than 80 
percent of all employees have the 
same rights and privileges to receive 
qualified stock for such calendar year. 
‘‘(ii) 
SAME
RIGHTS
AND
PRIVI-
LEGES.—For purposes of clause (i)(II)— 
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‘‘(I) except as provided in sub-
clauses (II) and (III), the determina-
tion of rights and privileges with re-
spect to stock shall be determined in 
a similar manner as provided under 
section 423(b)(5), 
‘‘(II) employees shall not fail to 
be treated as having the same rights 
and privileges to receive qualified 
stock solely because the number of 
shares available to all employees are 
not equal in amount, so long as the 
number of shares available to each 
employee is more than a de minimis 
amount, and 
‘‘(III) the right to receive quali-
fied stock described subparagraph 
(A)(ii)(I) shall not be treated as the 
same right or privilege as the right to 
receive qualified stock described in 
subparagraph (A)(ii)(II). 
‘‘(iii) EMPLOYEE.—For purposes of 
clause (i)(II), the term ‘employee’ shall not 
include any employee described in section 
4980E(d)(4) or any excluded employee. 
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‘‘(iv) SPECIAL RULE FOR CALENDAR 
YEARS BEFORE 2017.—In the case of any 
calendar year beginning before January 1, 
2017, clause (i)(II) shall be applied with-
out regard to whether the rights and privi-
leges with respect to the qualified stock are 
the same. 
‘‘(3) QUALIFIED
EMPLOYEE; EXCLUDED
EM-
PLOYEE.—For purposes of this subsection— 
‘‘(A) IN
GENERAL.—The term ‘qualified 
employee’ means any individual who— 
‘‘(i) is not an excluded employee, and 
‘‘(ii) agrees to meet such requirements 
as determined by the Secretary to be nec-
essary to ensure that the withholding re-
quirements of the corporation under chap-
ter 24 with respect to the qualified stock 
are met. 
‘‘(B) EXCLUDED
EMPLOYEE.—The term 
‘excluded employee’ means, with respect to any 
corporation, any individual— 
‘‘(i) who is or has been at any prior 
time a 1-percent owner (within the mean-
ing of section 416(i)(1)(B)(ii)), 
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‘‘(ii) who is or has been at any prior 
time— 
‘‘(I) the chief executive officer of 
such corporation or an individual act-
ing in such a capacity, or 
‘‘(II) the chief financial officer of 
such corporation or an individual act-
ing in such a capacity, 
‘‘(iii) who bears a relationship de-
scribed in section 318(a)(1) to any indi-
vidual described in subclause (I) or (II) of 
clause (ii), or 
‘‘(iv) who is or has been for any prior 
taxable year one of the 4 highest com-
pensated officers of such corporation deter-
mined on the basis of the shareholder dis-
closure rules for compensation under the 
Securities Exchange Act of 1934 (as if 
such rules applied to such corporation). 
‘‘(4) ELECTION.— 
‘‘(A) TIME FOR MAKING ELECTION.—An 
election with respect to qualified stock shall be 
made under this subsection no later than 30 
days after the first time the rights of the em-
ployee in such stock are transferable or are not 
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subject to a substantial risk of forfeiture, 
whichever occurs earlier. 
‘‘(B) LIMITATIONS.—No election may be 
made under this section with respect to any 
qualified stock if— 
‘‘(i) the qualified employee has made 
an election under subsection (b) with re-
spect to such qualified stock, or 
‘‘(ii) any stock of the corporation 
which issued the qualified stock is readily 
tradable on an established securities mar-
ket at any time before the election is made. 
‘‘(5) OTHER RULES.— 
‘‘(A) CONTROLLED
GROUPS.—For pur-
poses of this subsection, all corporations which 
are members of the same controlled group of 
corporations (as defined in section 1563(a)) 
shall be treated as one corporation. 
‘‘(B) NOTICE
REQUIREMENT.—Any cor-
poration that transfers qualified stock to an 
employee shall notify such employee that— 
‘‘(i) the employee may elect to defer 
income on such stock under this sub-
section, and 
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‘‘(ii) if the employee makes such an 
election, the amount of income recognized 
at the end of the deferral period will be 
based on the value of the stock at the time 
at which the rights of the employee in such 
stock are transferable or are not subject to 
substantial risk of forfeiture, notwith-
standing whether the value of the stock 
has declined during the deferral period.’’. 
(2) DEDUCTION BY EMPLOYER.—Subsection (h) 
of section 83 of the Internal Revenue Code of 1986 
is amended by striking ‘‘or (d)(2)’’ and inserting 
‘‘(d)(2), or (i)’’. 
(b) WITHHOLDING.— 
(1) TIME OF WITHHOLDING.—Section 3401 of 
the Internal Revenue Code of 1986 is amended by 
adding at the end the following new subsection: 
‘‘(i) QUALIFIED STOCK FOR WHICH AN ELECTION IS 
IN EFFECT UNDER SECTION 83(i).—For purposes of sub-
section (a), qualified stock (as defined in section 83(i)) 
with respect to which an election is made under section 
83(i) shall be treated as wages— 
‘‘(1) received on the earliest date described in 
section 83(i)(1)(B), and 
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‘‘(2) in an amount equal to the amount in-
cluded in income under section 83 for the taxable 
year which includes such date.’’. 
(2) AMOUNT OF WITHHOLDING.—Section 3402 
of such Code is amended by adding at the end the 
following new subsection: 
‘‘(t) 
RATE
OF
WITHHOLDING
FOR
CERTAIN 
STOCK.—In the case of any qualified stock (as defined in 
section 83(i)) with respect to which an election is made 
under section 83(i), the rate of tax under subsection (a) 
shall not be less than the maximum rate of tax in effect 
under section 1.’’. 
(c) COORDINATION WITH OTHER DEFERRED COM-
PENSATION RULES.— 
(1) ELECTION TO APPLY DEFERRAL TO STATU-
TORY OPTIONS.— 
(A) INCENTIVE STOCK OPTIONS.—Section 
422(b) of the Internal Revenue Code of 1986 is 
amended by inserting ‘‘or any option with re-
spect to which an election is made under section 
83(i)’’ after ‘‘as an incentive stock option’’. 
(B) 
EMPLOYEE
STOCK
PURCHASE 
PLANS.—Section 423(a) of such Code is amend-
ed by adding at the end the following flush sen-
tence: 
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‘‘The preceding sentence shall not apply to any share of 
stock or option with respect to which an election is made 
under section 83(i).’’. 
(2) EXCLUSION
FROM
DEFINITION
OF
NON-
QUALIFIED DEFERRED COMPENSATION PLAN.—Sub-
section (d) of section 409A of the Internal Revenue 
Code of 1986 is amended by adding at the end the 
following new paragraph: 
‘‘(7) TREATMENT OF QUALIFIED STOCK.—Re-
ceipt of stock shall not be treated as a nonqualified 
deferred compensation plan solely because of an elec-
tion under 83(i).’’. 
(d) INFORMATION REPORTING.—Section 6051 of the 
Internal Revenue Code of 1986 is amended by inserting 
after paragraph (6) the following new paragraph: 
‘‘(7) the amounts subject to subparagraphs (A) 
and (B) of section 83(i)(1),’’. 
(e) PENALTY FOR FAILURE OF EMPLOYER TO PRO-
VIDE NOTICE OF TAX CONSEQUENCES.—Section 6652 of 
the Internal Revenue Code of 1986 is amended by adding 
at the end the following new subsection: 
‘‘(o) FAILURE TO PROVIDE NOTICE UNDER SECTION 
83(i).—In the case of each failure to provide a notice as 
required by section 83(i)(5)(B), at the time prescribed 
therefor, unless it is shown that such failure is due to rea-
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sonable cause and not to willful neglect, there shall be 
paid, on notice and demand of the Secretary and in the 
same manner as tax, by the person failing to provide such 
notice, an amount equal to $100 for each such failure, 
but the total amount imposed on such person for all such 
failures during any calendar year shall not exceed 
$50,000.’’. 
(f) EFFECTIVE DATES.— 
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section 
shall apply to any property— 
(A) in which the rights of the person who 
has the beneficial interest in such property are 
not transferable before January 1, 2017, and 
(B) which is subject to a substantial risk 
of forfeiture before such date. 
(2) REQUIREMENT TO PROVIDE NOTICE.—The 
amendments made by subsection (e) shall apply to 
failures after December 31, 2016. 
Æ 
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