[Congressional Bills 103th Congress]
[From the U.S. Government Publishing Office]
[S. 1175 Introduced in Senate (IS)]

103d CONGRESS
  1st Session
                                S. 1175

  To amend the Internal Revenue Code of 1986 to allow corporations to 
 issue performance stock options to employees, and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                June 29 (legislative day, June 22), 1993

 Mr. Lieberman (for himself, Mr. Mack, Mrs. Feinstein, and Mrs. Boxer) 
introduced the following bill; which was read twice and referred to the 
                          Committee on Finance

_______________________________________________________________________

                                 A BILL


 
  To amend the Internal Revenue Code of 1986 to allow corporations to 
 issue performance stock options to employees, and for other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Equity Expansion Act of 1993''.

SEC. 2. PERFORMANCE STOCK OPTIONS.

    (a) In General.--Part II of subchapter D of chapter 1 of the 
Internal Revenue Code of 1986 (relating to certain stock options) is 
amended by redesignating section 424 as section 425 and by inserting 
after section 423 the following new section:

``SEC. 424. PERFORMANCE STOCK OPTIONS.

    ``(a) In General.--Section 421(a) shall apply with respect to the 
transfer of a share of stock to any person pursuant to the exercise of 
a performance stock option if no disposition of such share is made by 
such person within 1 year after the transfer of such share to such 
person.
    ``(b) Performance Stock Option.--For purposes of this part--
            ``(1) In general.--The term `performance stock option' 
        means an option granted to any person for any reason in 
        connection with the performance of services for an entity 
        described in paragraph (4) to purchase stock of any corporation 
        described in paragraph (4).
            ``(2) Additional requirements.--An option shall not be 
        treated as a performance stock option unless the following 
        requirements are met:
                    ``(A) Nondiscrimination.--Either--
                            ``(i) the option is granted to an employee 
                        who, at the time of the grant, is not a highly 
                        compensated employee, or
                            ``(ii) immediately after the grant of the 
                        option, employees who are not highly 
                        compensated employees hold performance share 
                        options which permit the acquisition of at 
                        least 50 percent of all shares which may be 
                        acquired pursuant to all performance stock 
                        options outstanding (whether or not 
                        exercisable) as of such time.
                For purposes of clause (ii), only that portion of the 
                options held by persons other than nonhighly 
                compensated employees which results in the requirements 
                of clause (ii) not being met shall be treated as 
                options which are not performance stock options, and 
                such portion shall be allocated among options held by 
                such persons in such manner as the Secretary may 
                prescribe.
                    ``(B) Specific number of options.--The option is 
                granted pursuant to a plan that includes either--
                            ``(i) the aggregate number of shares that 
                        may be issued under options granted under the 
                        plan, or
                            ``(ii) a method by which the aggregate 
                        number of shares that may be issued under 
                        options granted under the plan can be 
                        determined (without regard to whether such 
                        aggregate number may change under such method),
                and which is approved by the stockholders of the 
                granting corporation within 12 months before or after 
                the date such plan is adopted.
                    ``(C) Time when option granted.--The option is 
                granted within 10 years after the date the plan 
                described in subparagraph (B) is adopted, or the date 
                such plan is approved by the stockholders, whichever is 
                earlier.
                    ``(D) Time for exercising option.--The option by 
                its terms is not exercisable after the expiration of 10 
                years from the date such option is granted.
                    ``(E) Option price.--Except as provided in 
                paragraph (6) of subsection (c), the option price is 
                not less than the fair market value of the stock at the 
                time the option is granted.
                    ``(F) Transferability.--The option by its terms is 
                not transferable by the person holding the option, 
                other than--
                            ``(i) in the case of an individual, by will 
                        or the laws of descent and distribution, or 
                        pursuant to a qualified domestic relations 
                        order (as defined in subsection (p) of section 
                        414), and
                            ``(ii) in the case of any other person, by 
                        any transaction in which gain or loss is not 
                        recognized in whole or in part.
            ``(3) Election not to treat option as performance stock 
        option.--An option shall not be treated as a performance stock 
        option if--
                    ``(A) as of the time the option is granted the 
                terms of such option provide that it will not be 
                treated as a performance stock option, or
                    ``(B) as of the time such option is exercised the 
                grantor and holder agree that such option will not be 
                treated as a performance stock option.
            ``(4) Entities to which section applies.--This section 
        shall apply to an option granted to a person who performs 
        services for--
                    ``(A) the corporation issuing the option, or its 
                parent or subsidiary corporation,
                    ``(B) a partnership in which the corporation 
                issuing the option holds (at the time of the grant) a 
                capital or profits interest representing at least 20 
                percent of the total capital or profits interest of the 
                partnership, or
                    ``(C) a corporation or a parent or subsidiary 
                corporation of such corporation issuing or assuming a 
                stock option in a transaction to which section 425(a) 
                applies.
            ``(5) Highly compensated employee.--For purposes of this 
        subsection, the term `highly compensated employee' has the 
        meaning given such term by section 414(q).
    ``(c) Special Rules.--
            ``(1) Good faith efforts to value stock.--If a share of 
        stock is acquired pursuant to the exercise by any person of an 
        option which would fail to qualify as a performance stock 
        option under subsection (b) because there was a failure in an 
        attempt, made in good faith, to meet the requirement of 
        subparagraph (E) of subsection (b)(2), the requirement of 
        subparagraph (E) of subsection (b)(2) shall be considered to 
        have been met.
            ``(2) Permissible provisions.--An option that meets the 
        requirements of subsection (b) shall be treated as a 
        performance stock option even if--
                    ``(A) the option holder may pay for the stock with 
                stock of the corporation granting the option,
                    ``(B) the option holder has the right to receive 
                property at the time of the exercise of the option,
                    ``(C) the right to exercise all or any portion of a 
                performance stock option may be subject to any 
                condition, contingency or other criteria (including, 
                without limitation, the continued performance of 
                services, achievement of performance objectives, or the 
                occurrence of any event) which are determined in 
                accordance with the provisions of the plan or the terms 
                of such option, or
                    ``(D) the option is subject to any condition not 
                inconsistent with the provisions of subsection (b).
            ``(3) Fair market value.--For purposes of this section, the 
        fair market value of stock shall be determined without regard 
        to any restriction other than a restriction that, by its terms, 
        will never lapse.
            ``(4) Definition of parent and subsidiary corporations.--
        For purposes of this section, the terms `parent corporation' 
        and `subsidiary corporation' have the meanings given such terms 
        by subsections (e) and (f) of section 425 except that such 
        subsections shall be applied by substituting `20 percent' for 
        `50 percent' each place it appears.
            ``(5) Performance criteria.--In the case of a performance 
        stock option that provides that its exercise is subject to any 
        conditions or criteria described in subparagraph (C) of 
        paragraph (2), the date or time the option is granted with 
        respect to each share that may be acquired shall be the date or 
        time the original performance share option is granted and 
        subject to the provisions of section 425(h), no portion of the 
        option shall be treated as granted at any other time.
            ``(6) Conversion of options.--If--
                    ``(A) there is a transfer of an incentive stock 
                option in exchange for a performance stock option, and
                    ``(B) the number of shares that may be acquired 
                pursuant to such performance stock option and the 
                transferred incentive stock option are the same,
        then the option acquired shall qualify as a performance stock 
        option if the option price pursuant to the performance share 
        option is no less than the option price under the transferred 
        incentive stock option.''
    (b) Conforming Amendments.--
            (1) Section 421(a) of such Code is amended by striking ``or 
        423(a)'' and inserting ``, 423(a), or 424(a)''.
            (2) Section 421(b) of such Code is amended--
                    (A) by striking ``or 423(a)'' and inserting ``, 
                423(a), or 424(a)'', and
                    (B) by striking ``or 423(a)(1)'' and inserting 
                ``423(a)(1), or 424(a)''.
            (3) Section 421(c)(1)(A) of such Code is amended by 
        inserting ``and the holding period requirement of section 
        424(a)'' after ``423(a)''.
            (4)(A) Sections 421(a)(2), 422(a)(2), and 423(a)(2) of such 
        Code are each amended by striking ``424(a)'' and inserting 
        ``425(a)''.
            (B) Clause (ii) of section 402(e)(4)(E) of such Code is 
        amended by striking ``424'' and inserting ``425''.
            (5) Section 423(b)(3) of such Code is amended by striking 
        ``424(d)'' and inserting ``425(d)''.
            (6) Section 425(a) of such Code, as redesignated by 
        subsection (a), is amended by striking ``424(a)'' and inserting 
        ``425(a)''.
            (7) Section 425(c)(3)(A)(ii) of such Code, as redesignated 
        by subsection (a), is amended by striking ``or 423(a)(1)'' and 
        inserting ``, 423(a)(1), or 424(a)''.
            (8) Section 425(g) of such Code, as redesignated by 
        subsection (a), is amended by striking ``and 423(a)(2)'' and 
        inserting ``, 423(a)(2) and 424(b)(4) (as modified by section 
        424(c)(4))''.
            (9) Section 425(j) of such Code, as redesignated by 
        subsection (a) (relating to cross-references), is amended by 
        inserting ``performance stock option'' after ``employee stock 
        purchase plans,''.
            (10) Section 1042(c)(1)(B)(ii) of such Code is amended by 
        striking ``or 423'' and inserting ``423, or 424''.
            (11)(A) Section 6039(a)(1) of such Code is amended by 
        inserting ``or performance stock option'' after ``incentive 
        stock option''.
            (B) Section 6039(b)(1) is amended by inserting ``, 
        performance share option,'' after ``incentive stock option''.
            (C) Section 6039(c) is amended by striking ``and'' at the 
        end of paragraph (1), by striking the period at the end of 
        paragraph (2) and inserting ``, and'' and by adding at the end 
        the following new paragraph:
            ``(3) the term `performance share option', see 424(b).''
            (12) The table of sections for part II of subchapter D of 
        chapter 1 of such Code is amended by striking the item relating 
        to section 424 and inserting the following new items:

                              ``Sec. 424. Performance stock options.
                              ``Sec. 425. Definitions and special 
                                        rules.''

SEC. 3. TAX TREATMENT OF GAIN ON PERFORMANCE SHARE OPTIONS.

    (a) Exclusion.--
            (1) In general.--Part I of subchapter P of chapter 1 of the 
        Internal Revenue Code of 1986 (relating to capital gains and 
        losses) is amended by adding at the end the following new 
        section:

``SEC. 1202. 50-PERCENT EXCLUSION FOR GAIN FROM STOCK ACQUIRED THROUGH 
              PERFORMANCE STOCK OPTIONS.

    ``(a) General Rule.--Gross income shall not include 50 percent of 
the gain from the disposition of any stock acquired pursuant to the 
exercise of a performance stock option if such disposition occurs more 
than 2 years after the date on which such option was exercised with 
respect to such stock.
    ``(b) Definitions and Rules.--For purposes of this section--
            ``(1) Performance stock option.--The term `performance 
        stock option' has the meaning given such term by section 
        424(b).
            ``(2) Certain acquisitions disregarded.--If stock described 
        in subsection (a) is disposed of and the basis of the person 
        acquiring the stock is determined by reference to the basis of 
        the stock in the hands of the person who acquired it through 
        exercise of the performance stock option, such person shall be 
        treated as acquiring such stock pursuant to such option on the 
        date such stock was acquired pursuant to the exercise of such 
        option.
            ``(3) Exercise by estate.--If a performance stock option is 
        exercised after the death of an individual holder by the estate 
        of the decedent, or by a person who acquired the right to 
        exercise such option by bequest or inheritance or by reason of 
        the death of the decedent, the 2-year holding requirement of 
        subsection (a) shall not apply to the disposition by such 
        estate or person.''
            (2) Conforming amendments.--
                    (A)(i) Section 172(d)(2) of such Code (relating to 
                modifications with respect to net operating loss 
                deduction) is amended to read as follows:
            ``(2) Capital gains and losses of taxpayers other than 
        corporations.--In the case of a taxpayer other than a 
        corporation--
                    ``(A) the amount deductible on account of losses 
                from sales or exchanges of capital assets shall not 
                exceed the amount includable on account of gains from 
                sales or exchanges of capital assets, and
                    ``(B) the exclusion provided by section 1202 shall 
                not be allowed.''
                    (ii) Subparagraph (B) of section 172(d)(4) of such 
                Code is amended by inserting ``, (2)(B),'' after 
                ``paragraph (1)''.
                    (B) Paragraph (4) of section 642(c) is amended to 
                read as follows:
            ``(4) Adjustments.--To the extent that the amount otherwise 
        allowable as a deduction under this subsection consists of gain 
        described in section 1202(a), proper adjustment shall be made 
        for any exclusion allowable to the estate or trust under 
        section 1202. In the case of a trust, the deduction allowed by 
        this subsection shall be subject to section 681 (relating to 
        unrelated business income).''
                    (C) Paragraph (3) of section 643(a) of such Code is 
                amended by adding at the end thereof the following new 
                sentence: ``The exclusion under section 1202 shall not 
                be taken into account.''
                    (D) Paragraph (4) of section 691(c) of such Code is 
                amended by striking ``1201, and 1211'' and inserting 
                ``1201, 1202, and 1211''.
                    (E) The second sentence of paragraph (2) of section 
                871(a) of such Code is amended by inserting ``such 
                gains and losses shall be determined without regard to 
                section 1202 and'' after ``except that''.
                    (F) The table of sections for part I of subchapter 
                P of chapter 1 is amended by adding after the item 
                relating to section 1201 the following new item:

                              ``Sec. 1202. 50-percent exclusion for 
                                        gain from stock acquired 
                                        through performance stock 
                                        options.''
    (b) Treatment for Wage Withholding and Employment Taxes.--
            (1) FICA taxes.--Section 3121(a) of the Internal Revenue 
        Code of 1986 (defining wages) is amended by striking ``or'' at 
        the end of paragraph (20), by striking the period at the end of 
        paragraph (21) and inserting ``, or'', and by adding after 
        paragraph (21) the following new paragraph:
            ``(22) any gain from the exercise of a performance stock 
        option (as defined in section 424(b)) or from the disposition 
        of stock acquired pursuant to the exercise of such a 
        performance stock option.''
            (2) FUTA taxes.--Section 3306(b) of such Code (defining 
        wages) is amended by striking ``or'' at the end of paragraph 
        (15), by striking the period at the end of paragraph (16) and 
        inserting ``, or'', and by adding after paragraph (16) the 
        following new paragraph:
            ``(17) any gain described in section 3121(a)(22).''
            (3) Wage withholding.--
                    (A) Section 3401(a) of such Code (defining wages) 
                is amended by striking ``or'' at the end of paragraph 
                (19), by striking the period at the end of paragraph 
                (20) and inserting ``, or'', and by adding at the end 
                the following new paragraph:
            ``(21) any gain from the exercise of a performance stock 
        option (as defined in section 424(b)) or from the disposition 
        of stock acquired pursuant to such a performance stock option 
        .''
                    (B) Section 421(b) of such Code (relating to effect 
                of disqualifying disposition) is amended by adding at 
                the end the following new sentence: ``A deduction to 
                the employer corporation in the case of a transfer 
                pursuant to an option described in section 422, 423, or 
                424 shall not be disallowed by reason of a failure to 
                withhold tax under chapter 24 with respect to gain on 
                stock acquired in the transfer.''

SEC. 4. STOCK OPTION COMPENSATION.

    Section 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78n) 
is amended by adding at the end the following new subsection:
    ``(h) Stock Option Compensation.--The Commission shall not require 
or permit an issuer to recognize any expense or other charge in 
financial statements furnished to its security holders resulting from, 
or attributable to, either the grant, vesting, or exercise of any 
option or other right to acquire any equity security of such issuer 
(even if the right to exercise such option or right is subject to any 
conditions, contingencies or other criteria, including, without 
limitation, the continued performance of services, achievement of 
performance objectives, or the occurrence of any event) which is 
granted to its directors, officers, employees, or other persons in 
connection with the performance of services, where the exercise price 
of such option or right is not less than the fair market value of the 
underlying security at the time such option or right is granted.''

SEC. 5. EFFECTIVE DATE.

    The amendments made by this Act shall apply to options granted 
after the date of the enactment of this Act.

                                 <all>

S 1175 IS----2