[Congressional Bills 104th Congress]
[From the U.S. Government Publishing Office]
[H.R. 2741 Introduced in House (IH)]


104th CONGRESS
  1st Session
                                H. R. 2741

  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

                            December 7, 1995

Mr. Ballenger (for himself, Mr. Rohrabacher, and Mr. Payne of Virginia) 
 introduced the following 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 Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``ESOP Promotion Act of 1995''.

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 (defining 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 defined in 
                        section 4975(e)(7)).''
    (b) Trustee Treated as Shareholder.--Subparagraph (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 shareholder.''
    (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 Ownership Trusts.--A trust 
shall not be treated as described in clause (v) of subsection (c)(2)(A) 
unless the S corporation sponsoring such trust pays, or guarantees the 
payment by such trust of, any tax imposed by section 511, in such 
manner as the Secretary may prescribe, and payment by the corporation 
shall not be treated as a contribution to the trust under section 
404(a).''
            (2) Conforming amendments.--
                    (A) Section 408(b) of the Employee Retirement 
                Income Security Act of 1974 (29 U.S.C. 1108(b)) is 
                amended by adding at the end the following new 
                paragraph:
            ``(14) Any guarantee or payment of a tax liability 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 liability 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 respect 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 Distributions.--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 Partnerships and S 
Corporations.--
            ``(1) In general.--If a trade or business regularly carried 
        on by a partnership of which an organization 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 limitations contained in 
        subsection (b), include its share (whether or not distributed) 
        of the gross income of the partnership or S corporation from 
        such unrelated trade or business and its share of the 
        partnership or S corporation deductions directly connected with 
        such gross income.''
    (g) ESOP May Distribute Cash.--The second sentence 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 
restrict the ownership of substantially all outstanding employer 
securities to employees or to a trust described in section 401(a), a 
plan which otherwise meets the requirements 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 requirement 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. 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 TRANSFER OF EMPLOYER 
              SECURITIES TO AN EMPLOYEE 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 election under section 
        6166 with respect to that portion of the tax imposed by section 
        2001 which is attributable 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 required to pay under subsection (b).
    ``(b) Payment of Tax by Employee Stock Ownership Plan or 
Cooperative.--
            ``(1) In general.--An employee stock ownership plan or 
        eligible worker-owned cooperative--
                    ``(A) which has acquired employer securities from 
                the decedent, or to which such securities 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 decedent which is 
        described in paragraph (2).
            ``(2) Amount of tax to be paid.--The portion 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 decedent 
                (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 closely-held business) apply to 
                payment of that portion of the tax imposed by section 
                2001 with respect to such estate which is attributable 
                to employer securities, and
                    ``(B) the plan administrator or the cooperative 
                provides to the executor the agreement described in 
                subsection (e)(1),
        then the plan administrator or any authorized officer of the 
        cooperative may elect, before the due date (including 
        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 determining the 4-
        percent portion for purposes of section 6601(j)--
                    ``(A) the portion of the tax imposed by section 
                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 section 6166(g).--In 
        the case of any transfer of employer securities to an employee 
        stock ownership plan or eligible worker-owned cooperative to 
        which this section applies--
                    ``(A) Transfer does not trigger acceleration.--Such 
                transfer shall not be treated as a disposition of 
                withdrawal to which section 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 described 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 employee stock 
        ownership plan, and
            ``(2) who has entered into an agreement described 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 payment 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 eligible worker-owned 
        cooperative, consenting to the application of subsection (b) to 
        such plan or cooperative.
            ``(2) A written agreement signed by the employer whose 
        employees are covered by the plan described in subsection (b) 
        consenting to the application of subsection (d).
    ``(f) Exemption From Tax on Prohibited Transactions.--The liability 
which is assumed under this section by an employee stock ownership plan 
of any portion of the liability for any portion of the tax imposed by 
section 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 `employer 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 cooperative.--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 interest, 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)) (as amended 
by section 2(c)(2)(A)) is amended further by adding at the end the 
following new paragraph:
            ``(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. 4. ESOP DIVIDEND EXCEPTION TO ADJUSTMENTS BASED ON ADJUSTED 
              CURRENT EARNINGS.

    (a) In General.--Section 56(g)(4)(C) of the Internal 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 dividends.--Clause 
                        (i) shall not apply to any deduction allowable 
                        under section 404(k) if the deduction is 
                        allowed for dividends paid on employer 
                        securities held by an employee stock ownership 
                        plan established or authorized to be 
                        established before March 15, 1991.''
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 1989.
    (c) Statute of limitations.--If refund or credit of any overpayment 
of tax resulting from the application of subsection (a) is prevented at 
any time before the close of the 1-year period beginning on the date of 
the enactment of this Act by the operation of any law or rule of law 
(including res judicata), refund or credit of such overpayment (to the 
extent attributable to the application of subsection (a)) may, 
nevertheless, be made or allowed if claim therefor is filed before the 
close of such 1-year period.

SEC. 5. 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 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 Securities 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 section 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 absence of this 
        subsection, the transferee sells such qualified security to an 
        employee stock ownership plan (as defined in section 
        4975(e)(7)) and the requirements of section 1042(a) are met 
        with respect to such sale.
            ``(2) No deduction by employer.--Notwithstanding 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) applies to such transfer.''
            (2) Conforming amendments.--
                    (A) Section 424(c)(1) of such Code is amended by 
                striking ``or'' at the end of subparagraph (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 recognized 
                        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 
                        recognized after the application of the 
                        preceding sentence, the portion of such 
                        recognized gain (up to the whole of such 
                        recognized 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 following 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 
                before the date of enactment of the Revenue 
                Reconciliation 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 described 
                        in section 401(a), or
                            ``(ii) a transfer pursuant to a right to 
                        acquire stock to which section 423 applied.''
                    (E) The first sentence of section 1042(d) of such 
                Code is amended to read as follows: ``The basis of the 
                taxpayer in qualified replacement property purchased by 
                the taxpayer during the replacement period shall be 
                reduced by the amount of gain or ordinary income not 
                recognized 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, notwithstanding 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 application of 
        subsection (a) and, if applicable, the application 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 ordinary income.''
            (3) Effective date.--The amendments made by this subsection 
        shall apply to sales of qualified securities 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.

SEC. 6. CLARIFICATION OF VOTING RIGHTS REQUIREMENT UNDER EXCLUSION FOR 
              INTEREST ON LOANS USED TO ACQUIRE EMPLOYER SECURITIES.

    (a) In General.--Subparagraph (A) of section 133(b)(7) of the 
Internal Revenue Code of 1986 (relating to voting rights of employer 
securities) is amended by striking ``section 409(e)(2)'' and inserting 
``paragraph (2) or (5) of section 409(e)''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to loans made after July 10, 1989.
    (c) Statute of limitations.--If refund or credit of any overpayment 
of tax resulting from the application of subsection (a) is prevented at 
any time before the close of the 1-year period beginning on the date of 
the enactment of this Act by the operation of any law or rule of law 
(including res judicata), refund or credit of such overpayment (to the 
extent attributable to the application of subsection (a)) may, 
nevertheless, be made or allowed if claim therefor is filed before the 
close of such 1-year period.

SEC. 7. GRATUITOUS TRANSFERS FOR THE BENEFIT OF EMPLOYEES.

    (a) In General.--Subparagraph (C) of section 664(d)(1) of the 
Internal Revenue Code of 1986 and subparagraph (C) of section 664(d)(2) 
of such Code are each amended by striking the period at the end thereof 
and inserting ``or, to the extent the remainder interest is in 
qualified employer securities (as defined in paragraph (3)(C)), is to 
be transferred to an employee stock ownership plan (as defined in 
section 4975(e)(7)) in a qualified gratuitous transfer (as defined by 
paragraph (3)).''
    (b) Qualified Gratuitous Transfer Defined.--Subsection (d) of 
section 664 of such Code is amended by redesignating paragraph (3) as 
paragraph (4) and by inserting after paragraph (2) the following new 
paragraph:
            ``(3) Qualified gratuitous transfer of qualified employer 
        securities.--
                    ``(A) In general.--For purposes of this section, 
                the term `qualified gratuitous transfer' means a 
                transfer of qualified employer securities to an 
                employee stock ownership plan (as defined in section 
                4975(e)(7)) but only to the extent that--
                            ``(i) the securities transferred previously 
                        passed from a decedent to a trust described in 
                        paragraph (1) or (2);
                            ``(ii) no deduction under section 404 is 
                        allowable with respect to such transfer;
                            ``(iii) such plan provides that the 
                        securities so transferred are allocated to plan 
                        participants in a manner consistent with 
                        section 401(a)(4);
                            ``(iv) such plan treats such securities as 
                        being attributable to employer contributions 
                        but without regard to the limitations otherwise 
                        applicable to such contributions under section 
                        404;
                            ``(v) such plan provides that such 
                        securities are held in a suspense account under 
                        the plan to be allocated each year, up to the 
                        limitations under section 415(c), after first 
                        allocating all other annual additions for the 
                        limitation year, up to the limitations under 
                        sections 415(c) and (e); and
                            ``(vi) the employer whose employees are 
                        covered by the plan described in this 
                        subparagraph files with the Secretary a 
                        verified written statement consenting to the 
                        application of sections 4978 and 4979A with 
                        respect to such employer.
                    ``(B) Qualified employer securities.--For purposes 
                of this section, the term `qualified employer 
                securities' means employer securities (as defined in 
                section 409(l)) which are issued by a domestic 
                corporation which has no outstanding stock which is 
                readily tradable on an established securities market.
                    ``(C) Treatment of securities allocated by employee 
                stock ownership plan to persons related to decedent or 
                5-percent shareholders.--
                            ``(i) In general.--If any portion of the 
                        assets of the plan attributable to securities 
                        acquired by the plan in a qualified gratuitous 
                        transfer are allocated to the account of--
                                    ``(I) any person who is related to 
                                the decedent (within the meaning of 
                                section 267(b)), or
                                    ``(II) any person who, at the time 
                                of such allocation or at any time 
                                during the 1-year period ending on the 
                                date of the acquisition of qualified 
                                employer securities by the plan, is a 
                                5-percent shareholder of the employer 
                                maintaining the plan,
                        the plan shall be treated as having distributed 
                        (at the time of such allocation) to such person 
                        or shareholder the amount so allocated.
                            ``(ii) 5-percent shareholder.--For purposes 
                        of clause (i), the term `5-percent shareholder' 
                        means any person who owns (directly or through 
                        the application of section 318(a)) more than 5 
                        percent of--
                                    ``(I) any class of outstanding 
                                stock of the corporation which issued 
                                such qualified employer securities or 
                                of any corporation which is a member of 
                                the same controlled group of 
                                corporations (within the meaning of 
                                section 409(l)(4)) as such corporation, 
                                or
                                    ``(II) the total value of any class 
                                of outstanding stock of any such 
                                corporation; and
                        For purposes of the preceding sentence, section 
                        318(a) shall be applied without regard to the 
                        exception in paragraph (2)(B)(i) thereof.
                            ``(iii) Cross reference.--

                                ``For excise tax on allocations 
described in clause (i), see section 4979A.''
    (c) Conforming Amendments.--
            (1) Section 401(a)(1) of such Code is amended by inserting 
        ``or by a charitable remainder trust pursuant to a qualified 
        gratuitous transfer (as defined in section 664(d)(3)(A)),'' 
        after ``stock bonus plans),''.
            (2) Section 404(a)(9) of such Code is amended by inserting 
        after subparagraph (B) the following new subparagraph:
                    ``(C) A qualified gratuitous transfer (as defined 
                in section 664(d)(3)(A)) shall have no effect on the 
                amount or amounts otherwise deductible under paragraph 
                (3) or (7) or under this paragraph.''
            (3) Section 415(c)(6) of such Code is amended by adding at 
        the end thereof the following new sentence:
        ``The amount of any qualified gratuitous transfer (as defined 
        in section 664(d)(3)(A)) allocated to a participant for any 
        limitation year shall not exceed the limitations imposed by 
        this section, but such amount shall not be taken into account 
        in determining whether any other amount exceeds the limitations 
        imposed by this section.''
            (4) Section 415(e) of such Code is amended--
                    (A) by redesignating paragraph (6) as paragraph 
                (7), and
                    (B) by inserting after paragraph (5) the following 
                new paragraph:
            ``(6) Special rule for qualified gratuitous transfers.--Any 
        qualified gratuitous transfer of qualified employer securities 
        (as defined by section 664(d)(3)) shall not be taken into 
        account in calculating, and shall not be subject to, the 
        limitations provided in this subsection.''
            (5) Paragraph (3) of section 644(e) of such Code is amended 
        to read as follows:
            ``(3) acquired by a charitable remainder annuity trust (as 
        defined in section 664(d)(1)) or a charitable remainder 
        unitrust (as defined in sections 664(d)(2) and (4)), or''.
            (6) Subparagraph (B) of section 664(d)(1) of such Code and 
        subparagraph (B) of section 664(d)(2) of such Code are each 
        amended by inserting ``and other than qualified gratuitous 
        transfers described in subparagraph (C)'' after ``subparagraph 
        (A)''.
            (7) Paragraph (4) of section 674(b) of such Code is amended 
        by inserting before the period ``or to an employee stock 
        ownership plan (as defined in section 4975(e)(7)) in a 
        qualified gratuitous transfer (as defined in section 
        664(d)(3))''.
            (8)(A) Section 2055(a) of such Code is amended--
                    (i) by striking ``or'' at the end of paragraph (3),
                    (ii) by striking the period at the end of paragraph 
                (4) and inserting ``; or'', and
                    (iii) by inserting after paragraph (4) the 
                following new paragraph:
            ``(5) to an employee stock ownership plan if such transfer 
        qualifies as a qualified gratuitous transfer of qualified 
        employer securities within the meaning of section 664(d)(3).''
            (B) Clause (ii) of section 2055(e)(3)(C) of such Code is 
        amended by striking ``section 664(d)(3)'' and inserting 
        ``section 664(d)(4)''.
            (9) Paragraph (8) of section 2056(b) of such Code is 
        amended to read as follows:
            ``(8) Special rule for charitable remainder trusts.--
                    ``(A) In general.--If the surviving spouse of the 
                decedent is the only beneficiary of a qualified 
                charitable remainder trust who is not a charitable 
                beneficiary nor an ESOP beneficiary, paragraph (1) 
                shall not apply to any interest in such trust which 
                passes or has passed from the decedent to such 
                surviving spouse.
                    ``(B) Definitions.--For purposes of subparagraph 
                (A)--
                            ``(i) Charitable beneficiary.--The term 
                        `charitable beneficiary' means any beneficiary 
                        which is an organization described in section 
                        170(c).
                            ``(ii) Esop beneficiary.--The term `ESOP 
                        beneficiary' means any beneficiary which is an 
                        employee stock ownership plan (as defined in 
                        section 4975(e)(7)) that holds a remainder 
                        interest in qualified employer securities (as 
                        defined in section 664(d)(3)) to be transferred 
                        to such plan in a qualified gratuitous transfer 
                        (as defined in section 664(d)(3)).
                            ``(iii) Qualified charitable remainder 
                        trust.--The term `qualified charitable 
                        remainder trust' means a charitable remainder 
                        annuity trust or a charitable remainder 
                        unitrust (described in section 664).''
            (10) Section 4947(b) of such Code is amended by inserting 
        after paragraph (3) the following new paragraph:
            ``(4) Section 507.--The provisions of section 507(a) shall 
        not apply to a trust which is described in subsection (a)(2) by 
        reason of a distribution of qualified employer securities (as 
        defined in section 664(d)(3)) to an employee stock ownership 
        plan (as defined in section 4975(e)(7)) in a qualified 
        gratuitous transfer (as defined by section 664(d)(3)).''
            (11) The last sentence of section 4975(e)(7) of such Code 
        is amended by inserting ``and section 664(d)(3)'' after 
        ``section 409(n)''
            (12) Subsection (a) of section 4978 of such Code is amended 
        by inserting ``or acquired any qualified employer securities in 
        a qualified gratuitous transfer to which section 664(d)(3) 
        applied'' after ``section 1042 applied''.
            (13) Paragraph (2) of section 4978(b) of such Code is 
        amended--
                    (A) by inserting ``or acquired in the qualified 
                gratuitous transfer to which section 664(d)(3) 
                applied'' after ``section 1042 applied'', and
                    (B) by inserting ``or to which section 664(d)(3) 
                applied'' after ``section 1042 applied'' in 
                subparagraph (C) thereof.
            (14) Subsection (c) of section 4978 of such Code is amended 
        by striking ``written statement'' and all that follows and 
        inserting ``written statement described in section 
        664(d)(3)(A)(vi) or in section 1042(b)(3) (as the case may 
        be).''
            (15) Paragraph (2) of section 4978(e) of such Code is 
        amended by striking the period and inserting ``; except that 
        such section shall be applied without regard to subparagraph 
        (B) thereof for purposes of applying this section and section 
        4979A with respect to securities acquired in a qualified 
        gratuitous transfer (as defined in section 664(d)(3)(A)).''
            (16) Subsection (a) of section 4979A of such Code is 
        amended to read as follows:
    ``(a) Imposition of Tax.--If--
            ``(1) there is a prohibited allocation of qualified 
        securities by any employee stock ownership plan or eligible 
        worker-owned cooperative, or
            ``(2) there is an allocation described in section 
        663(d)(3)(C)(i),
there is hereby imposed a tax on such allocation equal to 50 percent of 
the amount involved.''
            (17) Subsection (c) of section 4979A of such Code is 
        amended to read as follows:
    ``(c) Liability for Tax.--The tax imposed by this section shall be 
paid by--
            ``(1) the employer sponsoring such plan, or
            ``(2) the eligible worker-owned cooperative,
which made the written statement described in section 664(d)(3)(A)(vi) 
or in section 1042(b)(3)(B) (as the case may be).''
    (18) Section 4979A of such Code is amended by redesignating 
subsection (d) as subsection (e) and by inserting after subsection (c) 
the following new subsection:
    ``(d) Special Statute of Limitations for Tax Attributable to 
Certain Allocations.--The statutory period for the assessment of any 
tax imposed by this section on an allocation described in subsection 
(a)(2) of qualified employer securities shall not expire before the 
date which is 3 years from the later of--
            ``(1) the 1st allocation of such securities in connection 
        with a qualified gratuitous transfer (as defined in section 
        664(d)(3)(A)), or
            ``(2) the date on which the Secretary is notified of the 
        allocation described in subsection (a)(2).''
    (d) Effective Date.--The amendments made by this section shall 
apply to transfers made by trusts to, or for the use of, an employee 
stock ownership plan after the date of the enactment of this Act.
                                 <all>
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