Short title

This Act may be cited as the

Employee Participation Incentive Act of 2005

Maximum rate of income tax for c corporations with substantial employee ownership

(a)

In general

Section 11 of the Internal Revenue Code of 1986 (relating to tax on corporations) is amended by redesignating subsections (c) and (d) as subsections (d) and (e), respectively, and by inserting after subsection (b) the following new subsection:

(c)

Maximum rate of 30 percent for corporations with substantial employee ownership

(1)

In general

Except as provided in subsection (b)(2), the maximum rate of tax under subsection (b) shall be 30 percent with respect to any corporation if, with respect to such corporation— (A)the employee voting percentage is at least 20 percent, and (B)the employee value percentage is at least 20 percent. (2)

Definitions

For purposes of this subsection— (A)

Employee voting percentage

The term employee voting percentage means the percentage of the total voting power of the stock of such corporation which is held directly by employees of such corporation. (B)

Employee value percentage

The term employee value percentage means the percentage of the total value of the stock of such corporation which is held directly by employees of such corporation. (C)

Stock

The term stock has the meaning given such term under section 1504. (3)

Determination of ownership averages

(A)

In general

The determination of the employee voting percentage and the employee value percentage shall be made on the last day of the taxable year of the corporation. (B)

Holdings of 5 percent-shareholders and highly compensated employees disregarded

Each such percentage shall be determined without regard to the holdings of any highly compensated employee (as defined in section 414(q)). Notwithstanding the preceding sentence, the holdings of 5-percent owners (as defined in such section) shall be taken into account if the corporation has 50 or fewer employees. (C)

Controlled groups

In the case of corporations which are treated as a single employer under section 52(a)— (i)such corporations shall be treated as 1 corporation for purposes of subparagraph (B), and (ii)the Secretary shall prescribe regulations— (I)for the application of this subsection in the case of corporations filing a consolidated return, and (II)to prevent the abuse of the purposes of this subsection.

(b)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2005.

Exclusion from gross income for compensation paid in stock by certain corporations

(a)

In general

Part III of subchapter B of chapter 1 of the Internal Revenue Code of 1986 (relating to items specifically excluded from gross income) is amended by inserting after section 139A the following new section:

139B.

Compensation paid in stock by certain corporations

(a)

In general

In the case of an employee of an eligible corporation, gross income of such employee does not include remuneration received in the form of stock of such corporation or of any parent or subsidiary (within the meaning of section 422(b)) of such corporation. (b)

Limitation

The amount excluded under subsection (a) from the gross income of an employee for any taxable year shall not exceed 20 percent of the wages (as defined in section 3401(a) without regard to paragraph (23)) which would (but for this section) be includible in gross income for such year. (c)

Eligible corporation

For purposes of this section, the term eligible corporation means, with respect to any taxable year of an employee, any corporation if— (1)the corporation offers to pay remuneration for services performed during the calendar year in which or with which such taxable year ends in the form of stock of such corporation to at least 95 percent of such corporation’s full-time employees, and (2)at least 95 percent of the value of the stock which is so offered during such calendar year is offered to employees whose wages (as defined in section 3401(a)) are among the bottom 75 percent of the employees when ranked on the basis of such wages. (d)

Basis

The amount excluded from gross income under this section shall not be taken into account in determining the basis of the stock.

(b)

Exclusion from withholding

Subsection (a) of section 3401 of such Code is amended by striking or at the end of paragraph (21), by striking the period at the end of paragraph (22) and inserting ; or, and by adding at the end the following new paragraph:

(23)in the form of stock if at the time such stock is paid it is reasonable to believe that the employee will be able to exclude such stock from income under section 139B.

(c)

Clerical amendment

The table of sections for such part III is amended by inserting after the item relating to section 139A the following new item:

Sec. 139B. Compensation paid in stock by certain corporations

(d)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2005.

Deduction allowed to eligible corporations at time qualified stock option granted

(a)

In general

Subsection (a) of section 421 of the Internal Revenue Code of 1986 (relating to general rules for certain stock options) is amended by adding at the end the following flush sentence:

Paragraph (2) shall not apply to options granted during any calendar year for which the corporation is an eligible corporation (as defined in section 139B(c)).

(b)

Effective date

The amendment made by subsection (a) shall apply to options granted after the date of the enactment of this Act.