[Congressional Record Volume 142, Number 133 (Tuesday, September 24, 1996)]
[Senate]
[Pages S11178-S11179]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. DASCHLE:
  S. 2110. A bill to amend the Internal Revenue Code of 1986 to provide 
special rules for certain gratuitous transfers of employer securities 
for the benefit of employees; to the Committee on Finance.


               EMPLOYEE STOCK OWNERSHIP PLANS LEGISLATION

  Mr. DASCHLE. Mr. President, I today am introducing legislation that 
would take a small but significant step toward improving the 
productivity of American businesses and workers. My bill would permit 
certain employee stock ownership plans [ESOP's] to be beneficiaries of 
charitable remainder trusts under estate tax law.
  We have all heard stories about closely held companies being sold and 
broken up in order to raise cash to pay a large estate tax bill to the 
Internal Revenue Service. Not infrequently, a company that has been 
built over a period of decades is dismantled, cutting adrift employees 
with years of service.
  My bill would provide a way for an owner of a nonpublicly traded 
company to benefit company employees without having the estate tax 
stand in the way. It would permit the owner under certain circumstances 
to donate his or her shares to the company's ESOP through the use of a 
charitable/ESOP remainder trust. If carried out in accordance with the 
restrictions set forth in the bill, the transfer would be eligible for 
an estate tax deduction. By being transferred to an ESOP, the stock 
would be allocated directly to company employees.
  The legislation includes a number of safeguards against abuse. First, 
stock transferred to an ESOP in this fashion could not be used to 
benefit any ESOP participant who was related to the decedent or who 
owned more than 5 percent of the company. This safeguard is aimed at 
ensuring that no estate tax deduction would be available where the 
transfer benefited the decedent's family members or the company's major 
stockholders. Second, the bill would require that the transferred stock 
be allocated to ESOP participants over time. This would provide an 
incentive for employees to continue to build the business. It would 
also prevent the creation of instant windfalls for employees that could 
encourage them to terminate employment.
  Any owner of a non-publicly traded company would be free to take 
advantage of this legislation to preserve a business beyond his or her 
death. I believe that quite a few family and closely held businesses 
will find the legislation of interest, as these firms tend to be run by 
people who take an interest in their employees and would like to see 
their companies make a continuing contribution to their communities. I 
salute these entrepreneurs and propose this modest legislation in an 
effort to help them realize that goal.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 2110

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. GRATUITOUS TRANSFERS FOR THE BENEFIT OF EMPLOYEES.

       (a) In General.--Subparagraph (C) of section 664(d)(1) of 
     the Internal Revenue Code of 1986 and subparagraph (C) of 
     section 664(d)(2) of such Code are each amended by striking 
     the period at the end and inserting ``or, to the extent the 
     remainder interest is in qualified employer securities (as 
     defined in paragraph (3)(B)), is to be transferred to an 
     employee stock ownership plan (as defined in section 
     4975(e)(7)) in a qualified gratuitous transfer (as defined by 
     paragraph (3)).''
       (b) Qualified Gratuitous Transfer Defined.--Subsection (d) 
     of section 664 of such Code is amended by redesignating 
     paragraph (3) as paragraph (4) and by inserting after 
     paragraph (2) the following new paragraph:
       ``(3) Qualified gratuitous transfer of qualified employer 
     securities.--
       ``(A) In general.--For purposes of this section, the term 
     `qualified gratuitous transfer' means a transfer of qualified 
     employer securities to an employee stock ownership plan (as 
     defined in section 4975(e)(7)) but only to the extent that--
       ``(i) the securities transferred previously passed from a 
     decedent to a trust described in paragraph (1) or (2);
       ``(ii) no deduction under section 404 is allowable with 
     respect to such transfer;
       ``(iii) such plan provides that the securities so 
     transferred are allocated to plan participants in a manner 
     consistent with section 401(a)(4);
       ``(iv) such plan treats such securities as being 
     attributable to employer contributions but without regard to 
     the limitations otherwise applicable to such contributions 
     under section 404;
       ``(v) such plan provides that such securities are held in a 
     suspense account under the plan to be allocated each year, up 
     to the limitations under section 415(c), after first 
     allocating all other annual additions for the limitation 
     year, up to the limitations under sections 415 (c) and (e); 
     and
       ``(vi) the employer whose employees are covered by the plan 
     described in this subparagraph files with the Secretary a 
     verified written statement consenting to the application of 
     sections 4978 and 4979A with respect to such employer.
       ``(B) Qualified employer securities.--For purposes of this 
     section, the term `qualified employer securities' means 
     employer securities (as defined in section 409(l)) which are 
     issued by a domestic corporation which has no outstanding 
     stock which is readily tradable on an established securities 
     market.
       ``(C) Treatment of securities allocated by employee stock 
     ownership plan to persons related to decedent or 5-percent 
     shareholders.--
       ``(i) In general.--If any portion of the assets of the plan 
     attributable to securities acquired by the plan in a 
     qualified gratuitous transfer are allocated to the account 
     of--

       ``(I) any person who is related to the decedent (within the 
     meaning of section 267(b)), or
       ``(II) any person who, at the time of such allocation or at 
     any time during the 1-year period ending on the date of the 
     acquisition of qualified employer securities by the plan, is 
     a 5-percent shareholder of the employer maintaining the plan,

     the plan shall be treated as having distributed (at the time 
     of such allocation) to such person or shareholder the amount 
     so allocated.
       ``(ii) 5-percent shareholder.--For purposes of clause (i), 
     the term `5-percent shareholder' means any person who owns 
     (directly or through the application of section 318(a)) more 
     than 5 percent of--

       ``(I) any class of outstanding stock of the corporation 
     which issued such qualified employer securities or of any 
     corporation which is a member of the same controlled group of 
     corporations (within the meaning of section 409(l)(4)) as 
     such corporation, or
       ``(II) the total value of any class of outstanding stock of 
     any such corporation; and

     For purposes of the preceding sentence, section 318(a) shall 
     be applied without regard to the exception in paragraph 
     (2)(B)(i) thereof.
       ``(iii) Cross reference.--

  ``For excise tax on allocations described in clause (i), see section 
4979A.''

       (c) Conforming Amendments.--

[[Page S11179]]

       (1) Section 401(a)(1) of such Code is amended by inserting 
     ``or by a charitable remainder trust pursuant to a qualified 
     gratuitous transfer (as defined in section 664(d)(3)(A)),'' 
     after ``stock bonus plans),''.
       (2) Section 404(a)(9) of such Code is amended by inserting 
     after subparagraph (B) the following new subparagraph:
       ``(C) A qualified gratuitous transfer (as defined in 
     section 664(d)(3)(A)) shall have no effect on the amount or 
     amounts otherwise deductible under paragraph (3) or (7) or 
     under this paragraph.''
       (3) Section 415(c)(6) of such Code is amended by adding at 
     the end the following new sentence:
     ``The amount of any qualified gratuitous transfer (as defined 
     in section 664(d)(3)(A)) allocated to a participant for any 
     limitation year shall not exceed the limitations imposed by 
     this section, but such amount shall not be taken into account 
     in determining whether any other amount exceeds the 
     limitations imposed by this section.''
       (4) Section 415(e) of such Code is amended--
       (A) by redesignating paragraph (6) as paragraph (7), and
       (B) by inserting after paragraph (5) the following new 
     paragraph:
       ``(6) Special rule for qualified gratuitous transfers.--Any 
     qualified gratuitous transfer of qualified employer 
     securities (as defined by section 664(d)(3)) shall not be 
     taken into account in calculating, and shall not be subject 
     to, the limitations provided in this subsection.''
       (5) Paragraph (3) of section 644(e) of such Code is amended 
     to read as follows:
       ``(3) acquired by a charitable remainder annuity trust (as 
     defined in section 664(d)(1)) or a charitable remainder 
     unitrust (as defined in sections 664(d) (2) and (4)), or''.
       (6) Subparagraph (B) of section 664(d)(1) of such Code and 
     subparagraph (B) of section 664(d)(2) of such Code are each 
     amended by inserting ``and other than qualified gratuitous 
     transfers described in subparagraph (C)'' after 
     ``subparagraph (A)''.
       (7) Paragraph (4) of section 674(b) of such Code is amended 
     by inserting before the period ``or to an employee stock 
     ownership plan (as defined in section 4975(e)(7)) in a 
     qualified gratuitous transfer (as defined in section 
     664(d)(3))''.
       (8)(A) Section 2055(a) of such Code is amended--
       (i) by striking ``or'' at the end of paragraph (3),
       (ii) by striking the period at the end of paragraph (4) and 
     inserting ``; or'', and
       (iii) by inserting after paragraph (4) the following new 
     paragraph:
       ``(5) to an employee stock ownership plan if such transfer 
     qualifies as a qualified gratuitous transfer of qualified 
     employer securities within the meaning of section 
     664(d)(3).''
       (B) Clause (ii) of section 2055(e)(3)(C) of such Code is 
     amended by striking ``section 664(d)(3)'' and inserting 
     ``section 664(d)(4)''.
       (9) Paragraph (8) of section 2056(b) of such Code is 
     amended to read as follows:
       ``(8) Special rule for charitable remainder trusts.--
       ``(A) In general.--If the surviving spouse of the decedent 
     is the only beneficiary of a qualified charitable remainder 
     trust who is not a charitable beneficiary nor an ESOP 
     beneficiary, paragraph (1) shall not apply to any interest in 
     such trust which passes or has passed from the decedent to 
     such surviving spouse.
       ``(B) Definitions.--For purposes of subparagraph (A)--
       ``(i) Charitable beneficiary.--The term `charitable 
     beneficiary' means any beneficiary which is an organization 
     described in section 170(c).
       ``(ii) Esop beneficiary.--The term `ESOP beneficiary' means 
     any beneficiary which is an employee stock ownership plan (as 
     defined in section 4975(e)(7)) that holds a remainder 
     interest in qualified employer securities (as defined in 
     section 664(d)(3)) to be transferred to such plan in a 
     qualified gratuitous transfer (as defined in section 
     664(d)(3)).
       ``(iii) Qualified charitable remainder trust.--The term 
     `qualified charitable remainder trust' means a charitable 
     remainder annuity trust or a charitable remainder unitrust 
     (described in section 664).''
       (10) Section 4947(b) of such Code is amended by inserting 
     after paragraph (3) the following new paragraph:
       ``(4) Section 507.--The provisions of section 507(a) shall 
     not apply to a trust which is described in subsection (a)(2) 
     by reason of a distribution of qualified employer securities 
     (as defined in section 664(d)(3)) to an employee stock 
     ownership plan (as defined in section 4975(e)(7)) in a 
     qualified gratuitous transfer (as defined by section 
     664(d)(3)).''
       (11) The last sentence of section 4975(e)(7) of such Code 
     is amended by inserting ``and section 664(d)(3)'' after 
     ``section 409(n)''
       (12) Subsection (a) of section 4978 of such Code is amended 
     by inserting ``or acquired any qualified employer securities 
     in a qualified gratuitous transfer to which section 664(d)(3) 
     applied'' after ``section 1042 applied''.
       (13) Paragraph (2) of section 4978(b) of such Code is 
     amended--
       (A) by inserting ``or acquired in the qualified gratuitous 
     transfer to which section 664(d)(3) applied'' after ``section 
     1042 applied'', and
       (B) by inserting ``or to which section 664(d)(3) applied'' 
     after ``section 1042 applied'' in subparagraph (C) thereof.
       (14) Subsection (c) of section 4978 of such Code is amended 
     by striking ``written statement'' and all that follows and 
     inserting ``written statement described in section 
     664(d)(3)(A)(vi) or in section 1042(b)(3) (as the case may 
     be).''
       (15) Paragraph (2) of section 4978(e) of such Code is 
     amended by striking the period and inserting ``; except that 
     such section shall be applied without regard to subparagraph 
     (B) thereof for purposes of applying this section and section 
     4979A with respect to securities acquired in a qualified 
     gratuitous transfer (as defined in section 664(d)(3)(A)).''
       (16) Subsection (a) of section 4979A of such Code is 
     amended to read as follows:
       ``(a) Imposition of Tax.--If--
       ``(1) there is a prohibited allocation of qualified 
     securities by any employee stock ownership plan or eligible 
     worker-owned cooperative, or
       ``(2) there is an allocation described in section 
     663(d)(3)(C)(i),

     there is hereby imposed a tax on such allocation equal to 50 
     percent of the amount involved.''
       (17) Subsection (c) of section 4979A of such Code is 
     amended to read as follows:
       ``(c) Liability for Tax.--The tax imposed by this section 
     shall be paid by--
       ``(1) the employer sponsoring such plan, or
       ``(2) the eligible worker-owned cooperative,

     which made the written statement described in section 
     664(d)(3)(A)(vi) or in section 1042(b)(3)(B) (as the case may 
     be).''
       (18) Section 4979A of such Code is amended by redesignating 
     subsection (d) as subsection (e) and by inserting after 
     subsection (c) the following new subsection:
       ``(d) Special Statute of Limitations for Tax Attributable 
     to Certain Allocations.--The statutory period for the 
     assessment of any tax imposed by this section on an 
     allocation described in subsection (a)(2) of qualified 
     employer securities shall not expire before the date which is 
     3 years from the later of--
       ``(1) the 1st allocation of such securities in connection 
     with a qualified gratuitous transfer (as defined in section 
     664(d)(3)(A)), or
       ``(2) the date on which the Secretary is notified of the 
     allocation described in subsection (a)(2).''
       (d) Effective Date.--The amendments made by this section 
     shall apply to transfers made by trusts to, or for the use 
     of, an employee stock ownership plan after the date of the 
     enactment of this Act.
                                 ______