Short title

This Act may be cited as the

S Corporation ESOP Promotion and Expansion Act of 2010

Findings

Congress finds that— (1)since January 1, 1998, employees have been permitted to be owners of subchapter S corporations through an employee stock ownership plan (hereafter in this section referred to as an ESOP) pursuant to Small Business Job Protection Act of 1996 (Public Law 104–188); (2)with the passage of the Taxpayer Relief Act of 1997 (Public Law 105–34), Congress designed incentives to encourage businesses to become ESOP-owned S corporations; (3)since that time, several thousand companies have become ESOP-owned S corporations, creating an ownership interest for several million Americans in companies in every State in the country, in industries ranging from heavy manufacturing to technology development to services; (4)every United States worker who is an employee-owner of an S corporation company through an ESOP has a valuable qualified retirement savings account; (5)studies also show that employee-owners of S corporation ESOP companies have amassed meaningful retirement savings through their S ESOP accounts that will give them the means to retire with dignity; and (6)it is the goal of Congress to both preserve and foster employee ownership of S corporations through ESOPs.

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

(a)

In general

Subparagraph (A) of section 1042(c)(1) of the Internal Revenue Code of 1986 (defining qualified securities) is amended by striking domestic C corporation and inserting domestic corporation. (b)

Effective date

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

Deduction for interest on loan to finance purchase of employer securities by an employee stock ownership plan sponsored by an S corporation

(a)

In general

Part VI of subchapter B of chapter 1 of the Internal Revenue Code of 1986 is amended by inserting after section 199 the following new section:

200.

Interest on certain loans for the purchase of employer securities by an employee stock ownership plan sponsored by an S corporation

(a)

In general

There shall be allowed as a deduction an amount equal to 50 percent of the interest received during the taxable year by a bank (within the meaning of section 581) with respect to a securities acquisition loan. (b)

Securities acquisition loan

(1)

In general

For purposes of this section, the term securities acquisition loan means— (A)any loan to an employee stock ownership plan sponsored by an S corporation to the extent that the proceeds are used to acquire employer securities for the plan, and (B)any loan to an S corporation that sponsors an employee stock ownership plan to the extent that the proceeds of such loan are loaned to the employee stock ownership plan to acquire employer securities for the plan.

For purposes of this paragraph, the term employer securities has the meaning given such term by section 409(l).

(2)

Terms applicable to certain securities acquisition loans

For purposes of paragraph (1)(B), the term securities acquisition loan shall not include any loan to the S corporation unless the loan to the employee stock ownership plan has repayment terms which are substantially similar to the terms of the loan to the S corporation. (3)

Treatment of refinancings

The term securities acquisition loan shall include any loan which is (or is part of a series of loans) used to refinance a loan described in paragraph (1) (after the application of paragraph (2)). (4)

Plan must hold more than 50 percent of stock after acquisition or transfer

(A)

In general

A loan shall not be treated as a securities acquisition loan for purposes of this section unless, immediately after an acquisition of employer securities referred to in paragraph (1), the employee stock ownership plan owns more than 50 percent of the outstanding stock of the S corporation. (B)

Failure to retain minimum stock interest

(i)

In general

Subsection (a) shall not apply to any interest received with respect to a securities acquisition loan which is allocable to any period during which the employee stock ownership plan does not own stock meeting the requirements of subparagraph (A). (ii)

Exception

To the extent provided by the Secretary, clause (i) shall not apply to any period if, within 90 days of the first date on which the failure occurred (or such longer period not in excess of 180 days as the Secretary may prescribe), the plan acquires stock which results in its meeting the requirements of subparagraph (A). (C)

Stock

For purposes of subparagraph (A), the Secretary may provide that warrants, options, contracts to acquire stock, convertible debt interests and other similar interests be treated as stock for 1 or more purposes under subparagraph (A). (c)

Employee stock ownership plan

For purposes of this section, the term employee stock ownership plan has the meaning given to such term by section 4975(e)(7).

(b)

Clerical amendment

The table of sections for part VI of subchapter B of chapter 1 of such Code is amended by inserting after the item relating to section 199 the following new item:

Sec. 200. Interest on certain loans for the purchase of employer securities by an employee stock ownership plan sponsored by an S corporation.

(c)

Effective date

The amendments made by this section shall apply to interest accrued on loans made after the date of the enactment of this Act.

Assumption of estate tax liability with respect to certain transfers of employer securities to an employee stock ownership plan sponsored by an S corporation

(a)

In General

Subchapter C of chapter 11 of the Internal Revenue Code of 1986 is amended by inserting after section 2209 the following new section:

2209A.

Liability for payment of estate tax liability in case of certain transfers of employer securities to an employee stock ownership plan sponsored by an S corporation

(a)

In general

If— (1)employer securities— (A)are transferred by gift by the decedent to an employee stock ownership plan sponsored by an S corporation, (B)are transferred to such a plan by reason of the decedent’s death under the decedent’s will or a trust created by the decedent, or (C)are transferred by gift by the executor of the estate of the decedent to such a plan, and (2)the executor of the estate of the decedent elects the application of this section and files the agreements described in subsection (e) before the due date (including extensions) for filing the return of tax imposed by section 2001,

then the executor of the estate of the decedent is relieved of liability for payment of that portion of the tax imposed by section 2001 which such employee stock ownership plan is required to pay under subsection (b).

(b)

Payment of tax by employee stock ownership plan

(1)

In general

An employee stock ownership plan— (A)(i)to which employer securities have been transferred by gift by the decedent, (ii)to which such securities have been transferred by reason of the decedent’s death under the decedent’s will or a trust created by the decedent, or (iii)to which such securities have been transferred by gift by the executor of the estate of the decedent, 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 described in this paragraph 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 the estate consists largely of interests in a 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 provides to the executor the agreement described in subsection (e)(1),

then the plan administrator 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 2-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 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 to which this section applies— (A)

Transfer does not trigger acceleration

Such transfer shall not be treated as a disposition or 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. (C)

Required distribution not taken into account

In the case of any distribution of such securities (or sale 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)

Disposition to meet diversification requirements

Any disposition of such securities which is made to meet the requirements of section 401(a)(28)— (i)shall not 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,

shall guarantee (in such manner as the Secretary may prescribe) the payment of any amount such plan 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 consenting to the application of subsection (b) to such plan. (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 assumption under this section by an employee stock ownership plan of any portion of the liability for 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)

Plan administrator

The term plan administrator has the meaning given such term by section 414(g). (4)

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)

Clerical Amendment

The table of sections for subchapter C of chapter 11 of such Code is amended by inserting after the item relating to section 2209 the following new item:

Sec. 2209A. Liability for payment of estate tax liability in case of certain transfers of employer securities to an employee stock ownership plan sponsored by an S corporation.

(c)

Effective Date

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

Department of the Treasury technical assistance office

(a)

Establishment required

Before the end of the 90-day period beginning on the date of enactment of this Act, the Secretary of the Treasury shall establish the S Corporation Employee Ownership Assistance Office to foster increased employee ownership of S corporations. (b)

Duties of the office

The S Corporation Employee Ownership Assistance Office shall provide— (1)education and outreach to inform people about the possibilities and benefits of employee ownership of S corporations; and (2)technical assistance to assist S corporations to sponsor employee stock ownership plans.