[Congressional Bills 114th Congress]
[From the U.S. Government Publishing Office]
[H.R. 5719 Engrossed in House (EH)]

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114th CONGRESS
  2d Session
                                H. R. 5719

_______________________________________________________________________

                                 AN ACT


 
To amend the Internal Revenue Code of 1986 to modify the tax treatment 
                       of certain equity grants.

    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 ``Empowering Employees through Stock 
Ownership Act''.

SEC. 2. TREATMENT OF QUALIFIED EQUITY GRANTS.

    (a) In General.--
            (1) Election to defer income.--Section 83 of the Internal 
        Revenue Code of 1986 is amended by adding at the end the 
        following new subsection:
    ``(i) Qualified Equity Grants.--
            ``(1) In general.--For purposes of this subtitle, if 
        qualified stock is transferred to a qualified employee who 
        makes an election with respect to such stock under this 
        subsection--
                    ``(A) except as provided in subparagraph (B), no 
                amount shall be included in income under subsection (a) 
                for the first taxable year in which the rights of the 
                employee in such stock are transferable or are not 
                subject to a substantial risk of forfeiture, whichever 
                is applicable, and
                    ``(B) an amount equal to the amount which would be 
                included in income of the employee under subsection (a) 
                (determined without regard to this subsection) shall be 
                included in income for the taxable year of the employee 
                which includes the earliest of--
                            ``(i) the first date such qualified stock 
                        becomes transferable (including transferable to 
                        the employer),
                            ``(ii) the date the employee first becomes 
                        an excluded employee,
                            ``(iii) the first date on which any stock 
                        of the corporation which issued the qualified 
                        stock becomes readily tradable on an 
                        established securities market (as determined by 
                        the Secretary, but not including any market 
                        unless such market is recognized as an 
                        established securities market by the Secretary 
                        for purposes of a provision of this title other 
                        than this subsection),
                            ``(iv) the date that is 7 years after the 
                        first date the rights of the employee in such 
                        stock are transferable or are not subject to a 
                        substantial risk of forfeiture, whichever 
                        occurs earlier, or
                            ``(v) the date on which the employee 
                        revokes (at such time and in such manner as the 
                        Secretary may provide) the election under this 
                        subsection with respect to such stock.
            ``(2) Qualified stock.--
                    ``(A) In general.--For purposes of this subsection, 
                the term `qualified stock' means, with respect to any 
                qualified employee, any stock in a corporation which is 
                the employer of such employee, if--
                            ``(i) such stock is received--
                                    ``(I) in connection with the 
                                exercise of an option, or
                                    ``(II) in settlement of a 
                                restricted stock unit, and
                            ``(ii) such option or restricted stock unit 
                        was provided by the corporation--
                                    ``(I) in connection with the 
                                performance of services as an employee, 
                                and
                                    ``(II) during a calendar year in 
                                which such corporation was an eligible 
                                corporation.
                    ``(B) Limitation.--The term `qualified stock' shall 
                not include any stock if the employee may sell such 
                stock to, or otherwise receive cash in lieu of stock 
                from, the corporation at the time that the rights of 
                the employee in such stock first become transferable or 
                not subject to a substantial risk of forfeiture.
                    ``(C) Eligible corporation.--For purposes of 
                subparagraph (A)(ii)(II)--
                            ``(i) In general.--The term `eligible 
                        corporation' means, with respect to any 
                        calendar year, any corporation if--
                                    ``(I) no stock of such corporation 
                                (or any predecessor of such 
                                corporation) is readily tradable on an 
                                established securities market (as 
                                determined under paragraph (1)(B)(iii)) 
                                during any preceding calendar year, and
                                    ``(II) such corporation has a 
                                written plan under which, in such 
                                calendar year, not less than 80 percent 
                                of all employees who provide services 
                                to such corporation in the United 
                                States (or any possession of the United 
                                States) are granted stock options, or 
                                restricted stock units, with the same 
                                rights and privileges to receive 
                                qualified stock.
                            ``(ii) Same rights and privileges.--For 
                        purposes of clause (i)(II)--
                                    ``(I) except as provided in 
                                subclauses (II) and (III), the 
                                determination of rights and privileges 
                                with respect to stock shall be 
                                determined in a similar manner as 
                                provided under section 423(b)(5),
                                    ``(II) employees shall not fail to 
                                be treated as having the same rights 
                                and privileges to receive qualified 
                                stock solely because the number of 
                                shares available to all employees is 
                                not equal in amount, so long as the 
                                number of shares available to each 
                                employee is more than a de minimis 
                                amount, and
                                    ``(III) rights and privileges with 
                                respect to the exercise of an option 
                                shall not be treated as the same as 
                                rights and privileges with respect to 
                                the settlement of a restricted stock 
                                unit.
                            ``(iii) Employee.--For purposes of clause 
                        (i)(II), the term `employee' shall not include 
                        any employee described in section 4980E(d)(4) 
                        or any excluded employee.
                            ``(iv) Special rule for calendar years 
                        before 2017.--In the case of any calendar year 
                        beginning before January 1, 2017, clause 
                        (i)(II) shall be applied without regard to 
                        whether the rights and privileges with respect 
                        to the qualified stock are the same.
            ``(3) Qualified employee; excluded employee.--For purposes 
        of this subsection--
                    ``(A) In general.--The term `qualified employee' 
                means any individual who--
                            ``(i) is not an excluded employee, and
                            ``(ii) agrees in the election made under 
                        this subsection to meet such requirements as 
                        determined by the Secretary to be necessary to 
                        ensure that the withholding requirements of the 
                        corporation under chapter 24 with respect to 
                        the qualified stock are met.
                    ``(B) Excluded employee.--The term `excluded 
                employee' means, with respect to any corporation, any 
                individual--
                            ``(i) who was a 1-percent owner (within the 
                        meaning of section 416(i)(1)(B)(ii)) at any 
                        time during the 10 preceding calendar years,
                            ``(ii) who is or has been at any prior 
                        time--
                                    ``(I) the chief executive officer 
                                of such corporation or an individual 
                                acting in such a capacity, or
                                    ``(II) the chief financial officer 
                                of such corporation or an individual 
                                acting in such a capacity,
                            ``(iii) who bears a relationship described 
                        in section 318(a)(1) to any individual 
                        described in subclause (I) or (II) of clause 
                        (ii), or
                            ``(iv) who has been for any of the 10 
                        preceding taxable years one of the 4 highest 
                        compensated officers of such corporation 
                        determined with respect to each such taxable 
                        year on the basis of the shareholder disclosure 
                        rules for compensation under the Securities 
                        Exchange Act of 1934 (as if such rules applied 
                        to such corporation).
            ``(4) Election.--
                    ``(A) Time for making election.--An election with 
                respect to qualified stock shall be made under this 
                subsection no later than 30 days after the first time 
                the rights of the employee in such stock are 
                transferable or are not subject to a substantial risk 
                of forfeiture, whichever occurs earlier, and shall be 
                made in a manner similar to the manner in which an 
                election is made under subsection (b).
                    ``(B) Limitations.--No election may be made under 
                this section with respect to any qualified stock if--
                            ``(i) the qualified employee has made an 
                        election under subsection (b) with respect to 
                        such qualified stock,
                            ``(ii) any stock of the corporation which 
                        issued the qualified stock is readily tradable 
                        on an established securities market (as 
                        determined under paragraph (1)(B)(iii)) at any 
                        time before the election is made, or
                            ``(iii) such corporation purchased any of 
                        its outstanding stock in the calendar year 
                        preceding the calendar year which includes the 
                        first time the rights of the employee in such 
                        stock are transferable or are not subject to a 
                        substantial risk of forfeiture, unless--
                                    ``(I) not less than 25 percent of 
                                the total dollar amount of the stock so 
                                purchased is deferral stock, and
                                    ``(II) the determination of which 
                                individuals from whom deferral stock is 
                                purchased is made on a reasonable 
                                basis.
                    ``(C) Definitions and special rules related to 
                limitation on stock redemptions.--
                            ``(i) Deferral stock.--For purposes of this 
                        paragraph, the term `deferral stock' means 
                        stock with respect to which an election is in 
                        effect under this subsection.
                            ``(ii) Deferral stock with respect to any 
                        individual not taken into account if individual 
                        holds deferral stock with longer deferral 
                        period.--Stock purchased by a corporation from 
                        any individual shall not be treated as deferral 
                        stock for purposes of clause (iii) if such 
                        individual (immediately after such purchase) 
                        holds any deferral stock with respect to which 
                        an election has been in effect under this 
                        subsection for a longer period than the 
                        election with respect to the stock so 
                        purchased.
                            ``(iii) Purchase of all outstanding 
                        deferral stock.--The requirements of subclauses 
                        (I) and (II) of subparagraph (B)(iii) shall be 
                        treated as met if the stock so purchased 
                        includes all of the corporation's outstanding 
                        deferral stock.
                            ``(iv) Reporting.--Any corporation which 
                        has outstanding deferral stock as of the 
                        beginning of any calendar year and which 
                        purchases any of its outstanding stock during 
                        such calendar year shall include on its return 
                        of tax for the taxable year in which, or with 
                        which, such calendar year ends the total dollar 
                        amount of its outstanding stock so purchased 
                        during such calendar year and such other 
                        information as the Secretary may require for 
                        purposes of administering this paragraph.
            ``(5) Controlled groups.--For purposes of this subsection, 
        all corporations which are members of the same controlled group 
        of corporations (as defined in section 1563(a)) shall be 
        treated as one corporation.
            ``(6) Notice requirement.--Any corporation that transfers 
        qualified stock to a qualified employee shall, at the time that 
        (or a reasonable period before) an amount attributable to such 
        stock would (but for this subsection) first be includible in 
        the gross income of such employee--
                    ``(A) certify to such employee that such stock is 
                qualified stock, and
                    ``(B) notify such employee--
                            ``(i) that the employee may elect to defer 
                        income on such stock under this subsection, and
                            ``(ii) that, if the employee makes such an 
                        election--
                                    ``(I) the amount of income 
                                recognized at the end of the deferral 
                                period will be based on the value of 
                                the stock at the time at which the 
                                rights of the employee in such stock 
                                first become transferable or not 
                                subject to substantial risk of 
                                forfeiture, notwithstanding whether the 
                                value of the stock has declined during 
                                the deferral period,
                                    ``(II) the amount of such income 
                                recognized at the end of the deferral 
                                period will be subject to withholding 
                                under section 3401(i) at the rate 
                                determined under section 3402(t), and
                                    ``(III) the responsibilities of the 
                                employee (as determined by the 
                                Secretary under paragraph (3)(A)(ii)) 
                                with respect to such withholding.''.
            (2) Deduction by employer.--Subsection (h) of section 83 of 
        the Internal Revenue Code of 1986 is amended by striking ``or 
        (d)(2)'' and inserting ``(d)(2), or (i)''.
    (b) Withholding.--
            (1) Time of withholding.--Section 3401 of the Internal 
        Revenue Code of 1986 is amended by adding at the end the 
        following new subsection:
    ``(i) Qualified Stock for Which an Election Is in Effect Under 
Section 83(i).--For purposes of subsection (a), qualified stock (as 
defined in section 83(i)) with respect to which an election is made 
under section 83(i) shall be treated as wages--
            ``(1) received on the earliest date described in section 
        83(i)(1)(B), and
            ``(2) in an amount equal to the amount included in income 
        under section 83 for the taxable year which includes such 
        date.''.
            (2) Amount of withholding.--Section 3402 of such Code is 
        amended by adding at the end the following new subsection:
    ``(t) Rate of Withholding for Certain Stock.--In the case of any 
qualified stock (as defined in section 83(i)) with respect to which an 
election is made under section 83(i)--
            ``(1) the rate of tax under subsection (a) shall not be 
        less than the maximum rate of tax in effect under section 1, 
        and
            ``(2) such stock shall be treated for purposes of section 
        3501(b) in the same manner as a non-cash fringe benefit.''.
    (c) Coordination With Other Deferred Compensation Rules.--
            (1) Election to apply deferral to statutory options.--
                    (A) Incentive stock options.--Section 422(b) of the 
                Internal Revenue Code of 1986 is amended by adding at 
                the end the following: ``Such term shall not include 
                any option if an election is made under section 83(i) 
                with respect to the stock received in connection with 
                the exercise of such option.''.
                    (B) Employee stock purchase plans.--Section 423(a) 
                of such Code is amended by adding at the end the 
                following flush sentence:
``The preceding sentence shall not apply to any share of stock with 
respect to which an election is made under section 83(i).''.
            (2) Exclusion from definition of nonqualified deferred 
        compensation plan.--Subsection (d) of section 409A of the 
        Internal Revenue Code of 1986 is amended by adding at the end 
        the following new paragraph:
            ``(7) Treatment of qualified stock.--An arrangement under 
        which an employee may receive qualified stock (as defined in 
        section 83(i)(2)) shall not be treated as a nonqualified 
        deferred compensation plan solely because of an employee's 
        ability to defer recognition of income pursuant to an election 
        under section 83(i).''.
    (d) Information Reporting.--Section 6051(a) of the Internal Revenue 
Code of 1986 is amended by striking ``and'' at the end of paragraph 
(13), by striking the period at the end of paragraph (14) and inserting 
a comma, and by inserting after paragraph (14) the following new 
paragraphs:
            ``(15) the amount excludable from gross income under 
        subparagraph (A) of section 83(i)(1),
            ``(16) the amount includible in gross income under 
        subparagraph (B) of section 83(i)(1) with respect to an event 
        described in such subparagraph which occurs in such calendar 
        year, and
            ``(17) the aggregate amount of income which is being 
        deferred pursuant to elections under section 83(i), determined 
        as of the close of the calendar year.''.
    (e) Penalty for Failure of Employer To Provide Notice of Tax 
Consequences.--Section 6652 of the Internal Revenue Code of 1986 is 
amended by adding at the end the following new subsection:
    ``(o) Failure to Provide Notice Under Section 83(i).--In the case 
of each failure to provide a notice as required by section 83(i)(6), at 
the time prescribed therefor, unless it is shown that such failure is 
due to reasonable cause and not to willful neglect, there shall be 
paid, on notice and demand of the Secretary and in the same manner as 
tax, by the person failing to provide such notice, an amount equal to 
$100 for each such failure, but the total amount imposed on such person 
for all such failures during any calendar year shall not exceed 
$50,000.''.
    (f) Effective Dates.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to stock 
        attributable to options exercised, or restricted stock units 
        settled, after December 31, 2016.
            (2) Requirement to provide notice.--The amendments made by 
        subsection (e) shall apply to failures after December 31, 2016.
    (g) Transition Rule.--Until such time as the Secretary (or the 
Secretary's delegate) issue regulations or other guidance for purposes 
of implementing the requirements of paragraph (2)(C)(i)(II) of section 
83(i) of the Internal Revenue Code of 1986 (as added by this section), 
or the requirements of paragraph (6) of such section, a corporation 
shall be treated as being in compliance with such requirements 
(respectively) if such corporation complies with a reasonable good 
faith interpretation of such requirements.

            Passed the House of Representatives September 22, 2016.

            Attest:

                                                                 Clerk.
114th CONGRESS

  2d Session

                               H. R. 5719

_______________________________________________________________________

                                 AN ACT

To amend the Internal Revenue Code of 1986 to modify the tax treatment 
                       of certain equity grants.