I
103D CONGRESS
1ST SESSION
H. R. 2088
To amend the Internal Revenue Code of 1986 in order to promote and
improve employee stock ownership plans.
IN THE HOUSE OF REPRESENTATIVES
MAY 12, 1993
Mr. BALLENGER (for himself, Mr. ROHRABACHER, Mr. PICKLE, Mr. ARMEY,
Mr. BARCIA, Mr. BOEHNER, Mr. BUNNING, Mr. BURTON of Indiana,
Mrs. CLAYTON, Mr. COBLE, Mr. CONDIT, Mr. COX, Mr. DOOLITTLE, Mr.
DUNCAN, Mr. EWING, Mr. FAWELL, Mr. GEREN of Texas, Mr. GING-
RICH, Mr. GRAMS, Mr. GUNDERSON, Mr. HANCOCK, Mrs. JOHNSON of
Connecticut, Mr. SAM JOHNSON of Texas, Mr. KOLBE, Mr. KYL, Mr.
LANCASTER, Mr. LINDER, Mr. MCCRERY, Mr. MCMILLAN, Mrs.
MORELLA, Mr. PACKARD, Mr. PAXON, Mr. PETRI, Mr. POSHARD, Mr.
SHAYS, Mr. SOLOMON, Mr. STENHOLM, Mr. TAUZIN, Mr. THOMAS of
Wyoming, Mr. TRAFICANT, Mr. TAYLOR of North Carolina, and Mr.
WOLF) introduced the following bill; which was referred to the Committee
on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 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 and
Improvement Act of 1993’’.
SEC. 2. CERTAIN CORPORATIONS ALLOWED TO SPONSOR
EMPLOYEE STOCK OWNERSHIP PLANS.
(a) IN GENERAL.—Subparagraph (A) of section
1361(c)(2) of the Internal Revenue Code of 1986 (defin-
ing S corporation) is amended by adding at the end the
following new clause:
‘‘(v) A trust established pursuant to
an employee stock ownership plan (as de-
fined in section 4975(e)(7)).’’
(b) TRUSTEE TREATED AS SHAREHOLDER.—Sub-
paragraph (B) of section 1361(c)(2) of such Code is
amended by adding at the end the following new clause:
‘‘(v) In the case of a trust described
in clause (v) of subparagraph (A), the
trustee shall be treated as the share-
holder.’’
(c) S CORPORATION TO PAY ESOP’S UNRELATED
BUSINESS TAX.—
(1) IN GENERAL.—Section 1361 of such Code
is amended by adding at the end the following new
subsection:
‘‘(e) SPECIAL RULE FOR EMPLOYEE STOCK OWNER-
SHIP TRUSTS.—A trust shall not be treated as described
in clause (v) of subsection (c)(2)(A) unless the S corpora-
tion sponsoring such trust pays, or guarantees the pay-
ment by such trust of, any tax imposed by section 511,
in such manner as the Secretary may prescribe, and pay-
ment by the corporation shall not be treated as a contribu-
tion to the trust under section 404(a).’’
(2) CONFORMING AMENDMENTS.—
(A) Section 408(b) of the Employee Retire-
ment Income Security Act of 1974 is amended
by adding at the end the following new para-
graph:
‘‘(14) any guarantee or payment of a tax liabil-
ity as described in section 1361(e) of the Internal
Revenue Code of 1986.’’
(B) Subsection (d) of section 4975 of such
Code is amended by striking ‘‘or’’ at the end of
paragraph (14), by striking the period at the
end of paragraph (15) and inserting ‘‘; or’’, and
by inserting after paragraph (15) the following:
‘‘(16) any guarantee or payment of a tax liabil-
ity as described in section 1361(e).’’
(d) S CORPORATION STOCK DISTRIBUTIONS
TO
ESOP NOT
TREATED
AS
CONTRIBUTIONS.—Section
404(a) of such Code is amended by adding at the end the
following new paragraph:
‘‘(10) 
DISTRIBUTIONS
WITH
RESPECT
TO
STOCK OF S CORPORATION.—Distributions with re-
spect to the stock of an S corporation made to an
employee stock ownership plan (as defined in section
4975(e)(7)) shall not be considered contributions for
purposes of this section or under section 415(c).’’
(e) DEDUCTION FOR S CORPORATION STOCK DIS-
TRIBUTIONS.—Paragraph (6) of section 404(k) of such
Code is amended by adding at the end the following new
subparagraph:
‘‘(C) DIVIDEND.—The term ‘dividend’
shall include distributions with respect to stock
of an S corporation which would be treated as
a dividend but for the application of section
1368(a).’’
(f) RULES RELATING
TO UNRELATED BUSINESS
TAX.—
(1) Subsection (b) of section 513 of such Code
is amended by inserting before the period ‘‘or by an
S corporation of which it is a shareholder’’.
(2) Subsection (c) of section 512 of such Code
is amended by striking the subsection heading and
paragraph (1) and inserting the following:
‘‘(c) SPECIAL RULES APPLICABLE
TO PARTNER-
SHIPS AND S CORPORATIONS.—
‘‘(1) IN GENERAL.—If a trade or business regu-
larly carried on by a partnership of which an organi-
zation is a member or an S corporation of which an
employee stock ownership trust is a shareholder is
an unrelated trade or business with respect to such
organization or trust, such organization or trust, in
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. DOUBLING THE LIMITATIONS FOR CERTAIN ESOP
CONTRIBUTIONS.
(a) IN GENERAL.—Paragraph (6) of section 415(c)
of the Internal Revenue Code of 1986 is amended by add-
ing at the end the following new sentence:
‘‘In the case of a participant in an employee stock
ownership plan (as so defined) who is not a highly
compensated employee and whose compensation for
the year does not exceed the amount referred to in
paragraph (1)(A), ‘50 percent’ shall be substituted
for ‘25 percent’ in applying paragraph (1)(B) to
such plan.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to years beginning after the date
of enactment of this Act.
SEC. 4. 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—
‘‘(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(1).
‘‘(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 is
amended by adding at the end the following new para-
graph:
‘‘(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. 5. 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).’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
December 31, 1989.
SEC. 6. AMENDMENTS RELATED TO SECTION 1042.
(a) EXTENSION OF SECTION 1042 PRINCIPLES TO
STOCK RECEIVED AS COMPENSATION FOR SERVICES.—
(1) IN GENERAL.—Section 83 (relating to prop-
erty transferred in connection with performance of
services) of the Internal Revenue Code of 1986 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