[Congressional Bills 115th Congress]
[From the U.S. Government Publishing Office]
[S. 1444 Introduced in Senate (IS)]

<DOC>






115th CONGRESS
  1st Session
                                S. 1444

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


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                             June 27, 2017

Mr. Warner (for himself and Mr. Heller) 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 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.--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--
                    ``(A) Timing of inclusion.--If qualified stock is 
                transferred to a qualified employee who makes an 
                election with respect to such stock under this 
                subsection, subsection (a) shall be applied by 
                including the amount determined under such subsection 
                with respect to such stock in income of the employee in 
                the taxable year determined under subparagraph (B) in 
                lieu of the taxable year described in subsection (a).
                    ``(B) Taxable year determined.--The taxable year 
                determined under this subparagraph is the taxable year 
                of the employee which includes the earliest of--
                            ``(i) except as provided in subparagraph 
                        (C), the first date such qualified stock 
                        becomes transferable (including, solely for 
                        purposes of this clause, becoming transferable 
                        to the employer),
                            ``(ii) the date the employee first becomes 
                        an excluded employee,
                            ``(iii) except as provided in subparagraph 
                        (C), 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.
                    ``(C) Special rule for stock subject to lock-up 
                periods.--
                            ``(i) In general.--In the case of any 
                        qualified stock which is subject to a lock-up 
                        period--
                                    ``(I) such stock shall not be 
                                treated as transferable under 
                                subparagraph (B)(i), and
                                    ``(II) such stock shall not be 
                                treated as readily tradable on an 
                                established securities market under 
                                subparagraph (B)(iii),
                        before the end of the lock-up period.
                            ``(ii) Lock-up period.--For purposes of 
                        this subparagraph, the term `lock-up period' 
                        means any period (not to exceed 180 days)--
                                    ``(I) which begins on the date of 
                                an initial public offering, and
                                    ``(II) during which the qualified 
                                employee agrees, pursuant to an 
                                underwriting agreement entered into 
                                pursuant to such initial public 
                                offering, not to sell, otherwise 
                                dispose of, or hedge any qualified 
                                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 granted 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 for such calendar year 
                                which meets the requirements of clause 
                                (ii).
                            ``(ii) Plan requirements.--A written plan 
                        meets the requirements of this clause with 
                        respect to any calendar year if--
                                    ``(I) not less than 80 percent of 
                                all employees who first become 
                                employees of such corporation during 
                                such calendar year are granted stock 
                                options, or restricted stock units, 
                                with the same rights and privileges to 
                                receive qualified stock, and
                                    ``(II) not less than 80 percent of 
                                all employees who were employees of 
                                such corporation during the preceding 
                                calendar year hold stock options, or 
                                restricted stock units, with the same 
                                rights and privileges to receive 
                                qualified stock.
                            ``(iii) Same rights and privileges.--For 
                        purposes of clause (ii)--
                                    ``(I) except as provided in 
                                subclauses (II) and (III), the 
                                determination of rights and privileges 
                                with respect to stock shall be made in 
                                a similar manner as 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.
                            ``(iv) Employee.--For purposes of clause 
                        (ii), the term `employee' shall not include--
                                    ``(I) any employee described in 
                                section 4980E(d)(4),
                                    ``(II) any excluded employee, and
                                    ``(III) with respect to any 
                                corporation for any calendar year, any 
                                individual who provides services for 
                                such corporation in the United States 
                                (or any possession of the United 
                                States) for a period of less than 90 
                                days during such calendar year.
                            ``(v) Special rule for calendar years 
                        before 2020.--In the case of any calendar year 
                        beginning before January 1, 2020, clause (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 
                        are 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 was 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 date 
                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 date 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 subparagraph (B)(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 treated as a single employer under 
        section 414(b) shall be treated as one corporation.
            ``(6) Notice requirement.--Any corporation which 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.''.
    (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)(2)) 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 of 
                such Code is amended--
                            (i) by adding at the end of subsection (a) 
                        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).''; and
                            (ii) in subsection (b)(5), by striking 
                        ``and'' before ``the plan'' and by inserting 
                        ``, and the rules of section 83(i) shall apply 
                        in determining which employees have a right to 
                        make an election under such section'' before 
                        the semicolon at the end.
                    (C) Conforming amendments.--
                            (i) Section 3121(a)(22)(A) of the Internal 
                        Revenue Code of 1986 is amended by inserting 
                        ``(other than qualified stock (as defined in 
                        section 83(i)(2)) with respect to which an 
                        election is in effect under section 83(i))'' 
                        after ``a share of stock''.
                            (ii) Section 209(a)(19)(A) of the Social 
                        Security Act (42 U.S.C. 409) is amended by 
                        ``(other than qualified stock (as defined in 
                        section 83(i)(2) of the Internal Revenue Code 
                        of 1986) with respect to which an election is 
                        in effect under section 83(i) of such Code)'' 
                        after ``a share of stock''.
                            (iii) Section 3231(e)(12)(A) of the 
                        Internal Revenue Code of 1986 is amended by 
                        inserting ``(other than qualified stock (as 
                        defined in section 83(i)(2)) with respect to 
                        which an election is in effect under section 
                        83(i))'' after ``a share of stock''.
                            (iv) Section 3306(b)(19)(A) of the Internal 
                        Revenue Code of 1986 is amended by inserting 
                        ``(other than qualified stock (as defined in 
                        section 83(i)(2)) with respect to which an 
                        election is in effect under section 83(i))'' 
                        after ``a share of stock''.
            (2) Treatment under nonqualified deferred compensation 
        plan.--Subsection (d) of section 409A of such Code 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, or as failing to meet the 
        requirements of this section, solely because of an employee's 
        election, or ability to make an election, to defer recognition 
        of income 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 
(14), by striking the period at the end of paragraph (15) and inserting 
a comma, and by inserting after paragraph (15) the following new 
paragraphs:
            ``(16) the amount includible in gross income under 
        subparagraph (A) of section 83(i)(1) with respect to an event 
        described in subparagraph (B) of such section 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:
    ``(p) 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) Guidance.--Not later than December 31, 2018, the Secretary of 
the Treasury (or the Secretary's delegate) shall issue guidance with 
respect to section 83(i) of the Internal Revenue Code of 1986 (as added 
by this section), including guidance relating to--
            (1) the determination the time stock first becomes 
        transferable under such section;
            (2) the determination of rights and privileges with respect 
        to stock under paragraph (2)(C)(iii) of such section; and
            (3) the requirements of paragraphs (2)(C)(i)(II) and (6) of 
        such section.
    (g) 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, 2019.
            (2) Requirement to provide notice.--The amendments made by 
        subsection (e) shall apply to failures after December 31, 2019.
                                 <all>