[Congressional Record Volume 145, Number 139 (Thursday, October 14, 1999)]
[Senate]
[Pages S12642-S12643]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. BREAUX (for himself, Mr. Jeffords, Mr. Grassley, Mr. 
        Kerry, and Mr. Hatch):
  S. 1732. A bill to amend the Internal Revenue Code of 1986 to 
prohibit certain allocations of S corporation stock held by an employee 
stock ownership plan; to the Committee on Finance.


     prohibited allocations of s corporations stock held by an esop

 Mr. BREAUX. Mr. President, I ask that the text of the bill be 
printed in the Record.
  The bill follows:

                                S. 1732

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

     SECTION 1. PROHIBITED ALLOCATIONS OF S CORPORATIONS STOCK 
                   HELD BY AN ESOP.

       (a) In General.--Section 409 of the Internal Revenue Code 
     of 1986 (relating to qualifications for tax credit employee 
     stock ownership plans) is amended by redesignating subsection 
     (p) as subsection (q) and by inserting after subsection (o) 
     the following new subsection:
       ``(p) Prohibited Allocations of Securities in an S 
     Corporation.--
       ``(1) In general.--An employee stock ownership plan holding 
     employer securities consisting of stock in an S corporation 
     shall provide that no portion of the assets of the plan 
     attributable to (or allocable in lieu of) such employer 
     securities may, during a nonallocation year, accrue (or be 
     allocated directly or indirectly under any plan of the 
     employer meeting the requirements of section 401(a)) for the 
     benefit of any disqualified person.
       ``(2) Failure to meet requirements.--
       ``(A) In general.--If a plan fails to meet the requirements 
     of paragraph (1), the plan shall be treated as having 
     distributed to any disqualified person the amount allocated 
     to the account of such person in violation of paragraph (1) 
     at the time of such allocation.
       ``(B) Cross reference.--

  ``For excise tax relating to violations of paragraph (1) and 
ownership of synthetic equity, see section 4979A.

       ``(3) Nonallocation year.--For purposes of this 
     subsection--
       ``(A) In general.--The term `nonallocation year' means any 
     plan year of an employee stock ownership plan if, at any time 
     during such plan year--
       ``(i) such plan holds employer securities consisting of 
     stock in an S corporation, and
       ``(ii) disqualified persons own at least 50 percent of the 
     number of shares of stock in the S corporation.
       ``(B) Attribution rules.--For purposes of subparagraph 
     (A)--
       ``(i) In general.--The rules of section 318(a) shall apply 
     for purposes of determining ownership, except that--

       ``(I) in applying paragraph (1) thereof, the members of an 
     individual's family shall include members of the family 
     described in paragraph (4)(D), and
       ``(II) paragraph (4) thereof shall not apply.

       ``(ii) Deemed-owned shares.--Notwithstanding the employee 
     trust exception in section 318(a)(2)(B)(i), for purposes of 
     determining whether an individual is a disqualified person, 
     such individual shall be treated as owning deemed-owned 
     shares.
       ``(4) Disqualified person.--For purposes of this 
     subsection--
       ``(A) In general.--The term `disqualified person' means any 
     person if--
       ``(i) the aggregate number of deemed-owned shares of such 
     person and the members of such person's family is at least 20 
     percent of the number of deemed-owned shares of stock in the 
     S corporation, or
       ``(ii) in the case of a person not described in clause (i), 
     the number of deemed-owned shares of such person is at least 
     10 percent of the number of deemed-owned shares of stock in 
     such corporation.
       ``(B) Treatment of family members.--In the case of a 
     disqualified person described in subparagraph (A)(i), any 
     member of such person's family with deemed-owned shares shall 
     be treated as a disqualified person if not otherwise treated 
     as a disqualified person under subparagraph (A).
       ``(C) Deemed-owned shares.--For purposes of this 
     paragraph--
       ``(i) In general.--The term `deemed-owned shares' means, 
     with respect to any person--

       ``(I) the stock in the S corporation constituting employer 
     securities of an employee stock ownership plan which is 
     allocated to such person under the plan, and
       ``(II) such person's share of the stock in such corporation 
     which is held by such plan but which is not allocated under 
     the plan to participants.

       ``(ii) Person's share of unallocated stock.--For purposes 
     of clause (i)(II), a person's share of unallocated S 
     corporation stock held by such plan is the amount of the 
     unallocated stock which would be allocated to such person if 
     the unallocated stock were allocated to all participants in 
     the same proportions as the most recent stock allocation 
     under the plan.
       ``(D) Member of family.--For purposes of this paragraph, 
     the term `member of the family' means, with respect to any 
     individual--
       ``(i) the spouse of the individual,

[[Page S12643]]

       ``(ii) an ancestor or lineal descendant of the individual 
     or the individual's spouse,
       ``(iii) a brother or sister of the individual or the 
     individual's spouse and any lineal descendant of the brother 
     or sister, and
       ``(iv) the spouse of any individual described in clause 
     (ii) or (iii).

     A spouse of an individual who is legally separated from such 
     individual under a decree of divorce or separate maintenance 
     shall not be treated as such individual's spouse for purposes 
     of this subparagraph.
       ``(5) Treatment of synthetic equity.--For purposes of 
     paragraphs (3) and (4), in the case of a person who owns 
     synthetic equity in the S corporation, except to the extent 
     provided in regulations, the shares of stock in such 
     corporation on which such synthetic equity is based shall be 
     treated as outstanding stock in such corporation and deemed-
     owned shares of such person if such treatment of synthetic 
     equity of 1 or more such persons results in--
       ``(A) the treatment of any person as a disqualified person, 
     or
       ``(B) the treatment of any year as a nonallocation year.

     For purposes of this paragraph, synthetic equity shall be 
     treated as owned by a person in the same manner as stock is 
     treated as owned by a person under the rules of paragraphs 
     (2) and (3) of section 318(a).
       ``(6) Definitions.--For purposes of this subsection--
       ``(A) Employee stock ownership plan.--The term `employee 
     stock ownership plan' has the meaning given such term by 
     section 4975(e)(7).
       ``(B) Employer securities.--The term `employer security' 
     has the meaning given such term by section 409(l).
       ``(C) Synthetic equity.--The term `synthetic equity' means 
     any stock option, warrant, restricted stock, deferred 
     issuance stock right, or similar interest or right that gives 
     the holder the right to acquire or receive stock of the S 
     corporation in the future. Except to the extent provided in 
     regulations, synthetic equity also includes a stock 
     appreciation right, phantom stock unit, or similar right to a 
     future cash payment based on the value of such stock or 
     appreciation in such value.
       ``(7) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary to carry out the purposes of 
     this subsection.''
       (b) Coordination With Section 4975(e)(7).--The last 
     sentence of section 4975(e)(7) of such Code (defining 
     employee stock ownership plan) is amended by inserting ``, 
     section 409(p),'' after ``409(n)''.
       (c) Excise Tax.--
       (1) Application of tax.--Subsection (a) of section 4979A of 
     such Code (relating to tax on certain prohibited allocations 
     of employer securities) is amended--
       (A) by striking ``or'' at the end of paragraph (1),
       (B) by striking the period at the end of paragraph (2) and 
     inserting a comma, and
       (C) by striking all that follows paragraph (2) and 
     inserting the following:
       ``(3) there is any allocation of employer securities which 
     violates the provisions of section 409(p), or
       ``(4) any synthetic equity is owned by a disqualified 
     person in any nonallocation year,

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

     which made the written statement described in section 
     664(g)(1)(E) or in section 1042(b)(3)(B) (as the case may 
     be), and
       ``(2) in the case of an allocation or ownership referred to 
     in paragraph (3) or (4) of subsection (a), by the S 
     corporation the stock in which was so allocated or owned.''
       (3) Definitions.--Section 4979A(e) of such Code (relating 
     to definitions) is amended to read as follows:
       ``(e) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) Definitions.--Except as provided in paragraph (2), 
     terms used in this section have the same respective meanings 
     as when used in sections 409 and 4978.
       ``(2) Special rules relating to tax imposed by reason of 
     paragraph (3) or (4) of subsection (a).--
       ``(A) Prohibited allocations.--The amount involved with 
     respect to any tax imposed by reason of subsection (a)(3) is 
     the amount allocated to the account of any person in 
     violation of section 408(p)(1).
       ``(B) Synthetic equity.--The amount involved with respect 
     to any tax imposed by reason of subsection (a)(4) is the 
     value of the shares on which the synthetic equity is based.
       ``(C) Special rule for prohibited allocation during first 
     nonallocation year.--For purposes of subparagraph (A), the 
     amount involved for the first nonallocation year of any 
     employee stock ownership plan shall be determined by taking 
     into account the total value of all the deemed-owned shares 
     of all disqualified persons with respect to such plan.
       ``(D) Statute of limitations.--The statutory period for the 
     assessment of any tax imposed by this section by reason of 
     paragraph (3) or (4) of subsection (a) shall not expire 
     before the date which is 3 years from the later of--
       ``(i) the allocation or ownership referred to in such 
     paragraph giving rise to such tax, or
       ``(ii) the date on which the Secretary is notified of such 
     allocation or ownership.''
       (d) Effective Dates.--
       (1) In general.--The amendments made by this section shall 
     apply to plan years beginning after December 31, 2000.
       (2) Exception for certain plans.--In the case of any--
       (A) employee stock ownership plan established after July 
     14, 1999, or
       (B) employee stock ownership plan established on or before 
     such date if employer securities held by the plan consist of 
     stock in a corporation with respect to which an election 
     under section 1362(a) of the Internal Revenue Code of 1986 is 
     not in effect on such date,

     the amendments made by this section shall apply to plan years 
     ending after July 14, 1999.
                                 ______