Stock of certain corporations eligible for capital gains rates only if corporation maintains plan for distributing equity to employees

(a)

In general

Part III of subchapter P of chapter 1 of the Internal Revenue Code of 1986 is amended by adding at the end the following new section:

1224.

SHARE plans

(a)

In general

For purposes of section 1222, stock of any corporation which is sold or exchanged during any calendar year shall not be treated as held for more than 1 year (regardless of the holding period of such stock determined without regard to this section) unless—(1)such corporation is not a covered employer for the preceding calendar year, or(2)such corporation is a SHARE corporation for the preceding calendar year.(b)

Covered employer

For purposes of this section, the term covered employer means, with respect to any calendar year—(1)any domestic corporation any class of stock of which is regularly traded on an established securities market as of the last day of such calendar year, and(2)any other domestic corporation which employed on average more than 500 eligible employees on business days during such calendar year.

Such term shall not include any S corporation.

(c)

SHARE corporation

For purposes of this section—(1)

In general

The term SHARE corporation means, with respect to any calendar year, any corporation which demonstrates to the satisfaction of the Secretary that such corporation (as of the close of such calendar year) has—(A)a SHARE ratio of not less than 10 percent,(B)made distributions of common stock of such corporation to employees of such corporation pursuant to a SHARE plan during such calendar year which in the aggregate equals or exceeds 2 percent of the aggregate outstanding shares of common stock of such corporation (other than shares held by such corporation), or(C)made distributions of common stock of such corporation to employees of such corporation pursuant to a SHARE plan with a fair market value (determined as of the date of distribution of each such share) which equals or exceeds the applicable dollar amount per employee when aggregated with all such distributions made during such calendar year and all prior calendar years to such employee.(2)

Applicable dollar amount

The term applicable dollar amount means—(A)in the case of the calendar year preceding the first calendar year to which subsection (a) applies, $50,000, and(B)in the case of any subsequent calendar year, the applicable dollar amount in effect for the preceding calendar year increased by $50,000 (but not in excess of $250,000).(d)

SHARE ratio

For purposes of this section—(1)

In general

The term SHARE ratio means, with respect to any corporation for any calendar year, the ratio (expressed as a percentage) of—(A)the aggregate shares of common stock of such corporation which have been granted to participating employees of such corporation pursuant to a SHARE plan during such calendar year or any prior calendar year, divided by(B)the aggregate outstanding shares of common stock of such corporation (other than shares held by such corporation).(2)

Treatment of certain prior grants

If such corporation demonstrates to the satisfaction of the Secretary that, during the 10 years preceding the date of the enactment of this section, such corporation made grants of common stock to eligible employees of such corporation which were not in exchange for compensation (other than service as an employee), such stock shall be taken into account under paragraph (1)(A).(3)

Treatment of convertible stock

In the case of any class of stock of any corporation which may be converted to common stock, such stock shall be taken into account as common stock under paragraphs (1)(B) and (2) on a fully diluted basis.(4)

Exclusion of incentive equity

(A)

In general

Incentive equity shall not be taken into account under subparagraph (A) or (B) of paragraph (1) (including any stock which would otherwise be so taken into account by reason of paragraph (2) or (3)).(B)

Incentive equity

For purposes of this paragraph, the term incentive equity means any restricted stock granted to an employee of the corporation, any stock acquired pursuant to an incentive stock option granted to an employee of the corporation, or any similar grant of stock or convertible equity.(5)

Treatment of forfeited stock

In the case of any stock which is forfeited (by reason of a failure to vest or otherwise), such stock shall not be taken into account under paragraph (1) after the second calendar year following the calendar year in which such stock is so forfeited.(e)

SHARE plan

For purposes of this section—(1)

In general

The term SHARE plan means, with respect to any corporation, a plan which provides for making periodic distributions of common stock of such corporation to each participating employee of such corporation (determined as the date of each such periodic distribution).(2)

Participating employees

(A)

In general

The term participating employee means, with respect to any corporation, any eligible employee of such corporation who is treated as a participating employee under the terms of the plan.(B)

80-percent requirement

A plan shall not be treated as a SHARE plan unless, with respect to each periodic distribution made under such plan, at least 80 percent of the eligible employees of such corporation are participating employees with respect to such distribution.(3)

Eligible employee

The term eligible employee means, with respect to any corporation, any full-time employee who is based in the United States and who is not one of the 1 percent of employees receiving the highest annual compensation from such corporation.(4)

Distribution requirements

(A)

In general

A plan shall not be treated as a SHARE plan unless the distributions made under such plan—(i)are made without compensation (other than service as an employee),(ii)may be sold or transferred without restriction—(I)after a holding period of not to exceed 3 years, and(II)during any period described in subclause (I), during any hardship of the employee (within the meaning of section 401(k)(2)(B)(i)(IV)),(iii)except as provided in subparagraph (B), are made in equal amounts to each participating employee (determined in the aggregate with respect to any calendar year and properly adjusted with respect any employee not employed at all times during such calendar year), and(iv)except in the case of a distribution made to an employee described in subparagraph (C), vest immediately in the recipient.(B)

Adjustments for period of service

The requirement of subparagraph (A)(iii) shall be treated as met if such requirement is met when applied separately to groups of participating employees divided (under the terms of the corporation’s SHARE plan) on the basis of the period for which such employees have been employed by the distributing corporation.(C)

Permissible restriction on vesting

In the case of any employee employed by the distributing corporation for a period of less than 5 years, such employee’s interest in any distribution of stock under a SHARE plan shall vest not later than the earlier of—(i)the date on which such employee has been so employed for a period of 5 years, or(ii)the first date after such distribution on which there is a change in the control of such distributing corporation.(f)

Application to partnerships

(1)

In general

Rules similar to the rules of this section and section 139I shall apply with respect to any partnership.(2)

Exception

Paragraph (1) shall not apply to any partnership if the principal business of such partnership is the provision of legal, accounting, or medical services and such partnership is majority owned by licensed lawyers, accountants, or medical doctors, respectively.(3)

Regulations

As soon as practicable after the date of the enactment of this Act, the Secretary shall issue such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this subsection.(g)

Publication by Treasury

The Secretary shall make publicly available with respect to each calendar year—(1)a list of corporations which the Secretary has identified as covered corporations, (2)a list of corporations which the Secretary has identified as SHARE corporations, and(3)a list of corporations described in paragraph (1) which are not described in paragraph (2).(h)

Determination of corporate earnings and profits

Distributions of stock under a SHARE plan shall not be taken into account in determining the earnings and profits of the distributing corporation.(i)

Aggregation rules

In the case of any controlled group (within the meaning of section 1563(a))—(1)such group shall be treated as a single corporation for purposes of applying subsection (b)(2), and(2)the Secretary may issue such regulations or other guidance as the Secretary determines to be appropriate for purposes of applying the provisions of this section to such group, including regulations or other guidance that coordinates or consolidates the SHARE plans of the corporations in such group or allows or requires employees of any corporation in such group to receive stock of another corporation in such group pursuant to such SHARE plans.

(b)

Clerical amendment

The table of sections for part III of subchapter P of chapter 1 of the Internal Revenue Code of 1986 is amended by adding at the end the following new item:

Sec. 1224. SHARE plans.

(c)

Effective date

The amendments made by this section shall apply to stock sold or exchanged in calendar years beginning more than 1 year after the date of the enactment of this Act.

Distributions of stock issued under SHARE plans excluded from gross income

(a)

In general

Part III of subchapter B of chapter 1 of the Internal Revenue Code of 1986 is amended by inserting after section 139H the following new section:

139I.

SHARE plan distributions

(a)

In general

Gross income shall not include any SHARE plan stock received by an employee under a SHARE plan.(b)

Exclusion of certain gain

(1)

In general

In the case of the disposition during any taxable year by any employee or former employee of SHARE plan stock received by such employee under a SHARE plan, so much of the taxpayer’s net SHARE plan stock gain as does not exceed the taxpayer’s eligible expenses shall not be recognized.(2)

Net SHARE plan stock gain

For purposes of this subsection, the term net SHARE plan stock gain means, with respect to any taxpayer for any taxable year, the excess of—(A)the aggregate gains from the disposition of SHARE plan stock during such taxable year, over(B)the aggregate losses from such dispositions.(3)

Eligible expenses

For purposes of this section—(A)

In general

The term eligible expenses means, with respect to any taxpayer for any taxable year, amounts paid by such taxpayer during such taxable year for—(i)principal or interest on any qualified education loan (within the meaning of section 221),(ii)medical care, not compensated for by insurance or otherwise, for the taxpayer, the taxpayer’s spouse, or dependents (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), and(iii)principal or interest on indebtedness secured by the principal residence (within the meaning of section 121) of the taxpayer.(B)

Denial of double benefit

No deduction or credit shall be allowed under this title with respect to any expense taken into account in determining the amount excluded from gross income under this subsection.(c)

Definitions related to SHARE plans

For purposes of this section—(1)

SHARE plan

The term SHARE plan has the meaning given such term in section 1224.(2)

SHARE plan stock

The term SHARE plan stock means, with respect to any employee, stock received by such employee under a SHARE plan.

(b)

Clerical amendment

The table of sections for part III of subchapter B of chapter 1 of the Internal Revenue Code of 1986 is amended by inserting after the item relating to section 139H the following new item:

Sec. 139I. SHARE plan distributions.

(c)

Effective date

The amendments made by this section shall apply to stock received in calendar years beginning after the date of the enactment of this Act, in taxable years ending after the beginning of the first such calendar year.