I
106TH CONGRESS
1ST SESSION
H. R. 2124
To amend the Internal Revenue Code of 1986 and Employee Retirement
Income Security Act of 1974 in order to promote and improve employee
stock ownership plans.
IN THE HOUSE OF REPRESENTATIVES
JUNE 10, 1999
Mr. BALLENGER (for himself, Mrs. JOHNSON of Connecticut, Mrs. THURMAN,
Mr. RAMSTAD, Mr. ROHRABACHER, and Mr. LEVIN) introduced the fol-
lowing bill; which was referred to the Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 and Employee
Retirement Income Security Act of 1974 in order to
promote and improve employee stock ownership plans.
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 ‘‘ESOP Promotion Act
of 1999’’.
SEC. 2. 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, 1999.
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-
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. 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 pre-
ceding 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.
(c) REINVESTMENT
IN CERTAIN MUTUAL FUNDS
PERMITTED.—
(1) IN
GENERAL.—Clause (ii) of section
1042(c)(4)(B) of such Code 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).’’
(2) EFFECTIVE
DATE.—The amendment
made by paragraph (1) shall apply to sales of
qualified securities after the date of the enact-
ment of this Act.
SEC. 5. EARLY DISTRIBUTIONS FROM EMPLOYEE STOCK
OWNERSHIP PLANS FOR HIGHER EDUCATION
EXPENSES 
AND 
FIRST-TIME 
HOMEBUYER
PURCHASES.
(a) IN GENERAL.—Paragraph (2) of section 72(t) of
the Internal Revenue Code of 1986 (relating to 10-percent
additional tax on early distributions from qualified retire-
ment plans) is amended by adding at the end the following
new subparagraph:
‘‘(G) DISTRIBUTIONS
FROM
EMPLOYEE
STOCK OWNERSHIP PLANS FOR HIGHER EDU-
CATION
EXPENSES
AND
FIRST-TIME
HOME-
BUYER PURCHASES.—
‘‘(i) 
IN
GENERAL.—Distributions
made to the employee from an employee
stock ownership plan (within the meaning
of section 4975(e)(7)), the amount of
which does not exceed the sum of—
‘‘(I) qualified higher education
expenses (as defined by paragraph
(7)) reduced by the amount of such
expenses taken into account under
subparagraph (E), and
‘‘(II) qualified first-time home-
buyer distributions (as defined by
paragraph (8)) reduced by the amount
of such distributions taken into ac-
count under subparagraph (F).
‘‘(ii) 
LIMITATION.—A 
distribution
may only be taken into account under
clause (i) if—
‘‘(I) such distribution is in the
form of either employer securities
(within the meaning of section 409(l))
or cash proceeds resulting from the
sale of such securities made not more
than 180 days before the date of such
distribution for the purposes of such
distribution,
‘‘(II) such securities so distrib-
uted or sold were held by such plan
for at least 5 years before the date of
such distribution or, if applicable,
sale, and
‘‘(III) the number of shares in
each class of such securities so dis-
tributed or sold, when added to all
previous distributions and sales of
each such class of such securities for
such purposes on behalf of such em-
ployee, does not exceed 10 percent of
the aggregate number of shares of
each class of such securities allocated
to the account of such employee under
such plan.
‘‘(iii) VALUATION
OF
DISTRIBUTED
SECURITIES.—For purposes of clause (ii),
the value of a security shall be the value
of such security on the date of distribu-
tion.’’.
(b) CONFORMING AMENDMENTS.—
(1) Paragraph (7) of section 72(t) of such Code
is amended by striking ‘‘paragraph (2)(E)’’ and in-
serting ‘‘subparagraphs (E) and (G) of paragraph
(2)’’.
(2) Paragraph (8) of section 72(t) of such Code
is amended by striking ‘‘paragraph (2)(F)’’ and in-
serting ‘‘subparagraphs (F) and (G) of paragraph
(2)’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to distributions made after Decem-
ber 31, 1999.
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