II 110th CONGRESS 1st Session S. 1322 IN THE SENATE OF THE UNITED STATES May 7, 2007 Mrs. Lincoln 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 improve the operation of employee stock ownership plans, and for other purposes.

1.

Short title

This Act may be cited as the Employee Stock Ownership Plan Promotion and Improvement Act of 2007.

2.

10 percent penalty tax not to apply to certain S corporation distributions made on stock held by employee stock ownership plan

(a)

In general

Clause (vi) of section 72(t)(2)(A) of the Internal Revenue Code of 1986 (relating to general rule that subsection not to apply to certain distributions) is amended by inserting before the comma at the end the following: or any distribution (as described in section 1368(a)) with respect to S corporation stock that constitutes qualifying employer securities (as defined by section 409(l)) to the extent that such distributions are paid to a participant in the manner described in clause (i) or (ii) of section 404(k)(2)(A). (b)

Effective date

The amendments made by this section shall apply to distributions made after the date of the enactment of this Act.

3.

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 the following new clause: (vii)

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 this section shall apply to taxable years beginning after December 31, 1989. (c)

Waiver of limitations

If refund or credit of any overpayment of tax resulting from the application of the amendment made by this section 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), such refund or credit may nevertheless be made or allowed if claim therefor is filed before the close of such period.

4.

Amendments related to section 1042

(a)

Deferral of tax for certain sales to employee stock ownership plan sponsored by s corporation

(1)

In general

Section 1042(c)(1)(A) of the Internal Revenue Code of 1986 (defining qualified securities) is amended by striking C. (2)

Effective date

The amendment made by paragraph (1) shall apply to sales after the date of the enactment of this Act. (b)

Reinvestment in certain mutual funds permitted

(1)

In general

Clause (ii) of section 1042(c)(4)(B) of the Internal Revenue Code of 1986 (defining operating corporation) is amended to read as follows: (ii)

Financial institutions, insurance companies, and mutual funds

The term operating corporation shall include— (I)any financial institution described in section 581, (II)any insurance company subject to tax under subchapter L, and (III)any regulated investment company if substantially all of the securities held by such company are securities issued by operating corporations (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 enactment of this Act. (c)

Modification to 25-percent shareholder rule

(1)

In general

Subparagraph (B) of section 409(n)(1) of the Internal Revenue Code of 1986 (relating to securities received in certain transactions) 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.

5.

De minimis exception to diversification of investment requirement

(a)

In general

Paragraph (28) of section 401(a) of the Internal Revenue Code of 1986 (relating to additional requirements relating to employee stock ownership plans) is amended by adding at the end the following new subparagraph: (D)

Exception for de minimis account balance

A plan shall not fail to meet the requirements of this subparagraph for a plan year solely because the plan provides that clause (i) does not apply to any participant’s account in the plan which, as of the close of the preceding plan year, has an account balance which does not exceed $2,500. . (b)

Effective date

The amendment made by this section shall apply to plan years beginning after the date of the enactment of this Act.