I
105TH CONGRESS
2D SESSION
H. R. 3562
To amend the Internal Revenue Code of 1986 to allow a credit against
income tax to C corporations which have substantial employee ownership
and to encourage stock ownership by employees by excluding from gross
income stock paid as compensation for services, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
MARCH 26, 1998
Mr. ANDREWS 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 allow a
credit against income tax to C corporations which have
substantial employee ownership and to encourage stock
ownership by employees by excluding from gross income
stock paid as compensation for services, 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 Participa-
tion Incentive Act of 1998’’.
SEC. 2. MAXIMUM RATE OF INCOME TAX FOR C CORPORA-
TIONS WITH SUBSTANTIAL EMPLOYEE OWN-
ERSHIP.
(a) IN GENERAL.—Section 11 of the Internal Reve-
nue Code of 1986 (relating to tax on corporations) is
amended by redesignating subsections (c) and (d) as sub-
sections (d) and (e), respectively, and by inserting after
subsection (b) the following new subsection:
‘‘(c) MAXIMUM RATE OF 30 PERCENT FOR CORPORA-
TIONS WITH SUBSTANTIAL EMPLOYEE OWNERSHIP.—
‘‘(1) IN GENERAL.—Except as provided in sub-
section (b)(2), the maximum rate of tax under sub-
section (b) shall be 30 percent with respect to any
corporation if, with respect to such corporation—
‘‘(A) the employee voting percentage is at
least 20 percent, and
‘‘(B) the employee value percentage is at
least 20 percent.
‘‘(2) DEFINITIONS.—For purposes of this sub-
section—
‘‘(A) EMPLOYEE
OWNERSHIP
PERCENT-
AGE.—The term ‘employee ownership percent-
age’ means, with respect to a corporation, the
lesser of the employee voting percentage or the
employee value percentage.
‘‘(B) EMPLOYEE VOTING PERCENTAGE.—
The term ‘employee voting percentage’ means
the percentage of the total voting power of the
stock of such corporation which is held directly
by employees of such corporation.
‘‘(C) EMPLOYEE
VALUE
PERCENTAGE.—
The term ‘employee value percentage’ means
the percentage of the total value of the stock of
such corporation which is held directly by em-
ployees of such corporation.
‘‘(D) STOCK.—The term ‘stock’ has the
meaning given such term under section 1504.
‘‘(3) DETERMINATION
OF
OWNERSHIP
AVER-
AGES.—
‘‘(A) IN GENERAL.—The determination of
the employee voting percentage and the em-
ployee value percentage shall be made on the
last day of the taxable year of the corporation.
‘‘(B) HOLDINGS
OF
PERCENT
SHARE-
HOLDERS AND HIGHLY COMPENSATED EMPLOY-
EES
DISREGARDED.—Each such percentage
shall be determined without regard the holdings
of any highly compensated employee (as defined
in section 414(q)). Notwithstanding the preced-
ing sentence, the holdings of 5-percent owners
(as defined in such section) shall be taken into
account if the corporation has ll or fewer
employees.
‘‘(C) CONTROLLED GROUPS.—In the case
of corporations which are treated as a single
employer under section 52(a)—
‘‘(i) such corporations shall be treated
as 1 corporation for purposes of subpara-
graph (B), and
‘‘(ii) the Secretary shall prescribe reg-
ulations—
‘‘(I) for the application of this
subsection in the case of corporations
filing a consolidated return, and
‘‘(II) to prevent the abuse of the
purposes of this subsection.’’.
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1998.
SEC. 3. EXCLUSION FROM GROSS INCOME FOR COMPENSA-
TION PAID IN STOCK BY CERTAIN CORPORA-
TIONS.
(a) IN GENERAL.—Part III of subchapter B of chap-
ter 1 of the Internal Revenue Code of 1986 (relating to
items specifically excluded from gross income) is amended
by redesignating section 139 as section 140 and by insert-
ing after section 138 the following new section:
‘‘SEC. 139. COMPENSATION PAID IN STOCK BY CERTAIN
CORPORATIONS.
‘‘(a) IN GENERAL.—In the case of an employee of
an eligible corporation, gross income of such employee
does not include remuneration received in the form of
stock of such corporation or of any parent or subsidiary
(within the meaning of section 422(b)) of such corpora-
tion.
‘‘(b) LIMITATION.—The amount excluded under sub-
section (a) from the gross income of an employee for any
taxable year shall not exceed 20 percent of the wages (as
defined in section 3401(a) without regard to paragraph
(22)) which would (but for this section) be includible in
gross income for such year.
‘‘(c) ELIGIBLE CORPORATION.—For purposes of this
section, the term ‘eligible corporation’ means, with respect
to any taxable year of an employee, any corporation if—
‘‘(1) the corporation offers to pay remuneration
for services performed during the calendar year in
which or with which such taxable year ends in the
form of stock of such corporation to at least 95 per-
cent of such corporation’s full-time employees, and
SEC. 4. DEDUCTION ALLOWED TO ELIGIBLE CORPORA-
TIONS AT TIME QUALIFIED STOCK OPTION
GRANTED.
(a) IN GENERAL.—Subsection (a) of section 421 of
the Internal Revenue Code of 1986 (relating to general
rules for certain stock options) is amended by adding at
the end the following flush sentence:
‘‘Paragraph (2) shall not apply to options granted during
any calendar year for which the corporation is an eligible
corporation (as defined in section 139(c)).’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to options granted after the date
of the enactment of this Act.
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