[Congressional Record Volume 146, Number 141 (Tuesday, October 31, 2000)]
[Senate]
[Pages S11423-S11424]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




          STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS

      Mr. CRAIG:
  S. 3265. A bill to amend the Internal Revenue Code of 1986 to clarify 
treatment of employee stock purchase plans; to the Committee on 
Finance.


                    worker investment protection act

  Mr. CRAIG. Mr. President, I rise to introduce important legislation 
designed to clarify the tax treatment of employee stock purchase plans 
(ESPPs). The Worker Investment Protection Act provides this needed 
clarification.
  Employee stock purchase plans are a common tool used by employers to 
allow rank-and-file employees to set aside part of their paychecks to 
purchase the company's stock. The tax code provides incentives for 
employees to participate in ESPPs to encourage employee ownership. This 
legislation is necessary because in selected cases around the country, 
the Internal Revenue Service (IRS) has begun to act contrary to almost 
30 years of published policy, and is attempting to collect income taxes 
and payroll taxes on

[[Page S11424]]

ESPPs. For three decades, the published IRS ruling position (Rev. Rul. 
71-52) has been that transactions under qualified stock option plans do 
not give rise to income that is subject to employment taxes. In Notice 
87-49, the IRS extended the principles of this ruling to incentive 
stock options (ISOs). In a series of private letter rulings, the IRS 
applied the same position to ESPP transactions, which are generally 
governed by the same Code provisions as qualified and incentive stock 
options. The IRS has periodically indicated that it may reconsider the 
positions in Rev. Rul. 71-52 and Notice 87-49, but no further official 
guidance has been forthcoming.
  Rev. Rul. 71-52 and Notice 87-49 remain the best statements of 
current law and represent the only publicly published IRS position on 
current law. Nevertheless, IRS agents have selectively begun seeking to 
collect retroactive assessments of employment taxes, including 
withholdings, from employers who reasonably relied on these rulings and 
did not subject transactions under ESPPs to such taxes.
  The IRS's actions in this area are inconsistent with long-standing 
published IRS positions. This legislation would clarify that any income 
arising from transactions under ISOs and ESPPs, either upon grant or 
exercise, or qualifying and disqualifying disposition, is not subject 
to employment taxes or federal income tax withholding.
  ESPPs are the primary vehicle through which rank and file workers 
purchase stock in their companies. However, additional tax liabilities 
on employees and high administrative costs for plan administration will 
discourage employers from offering these programs that encourage broad-
based employee stock ownership. Imposing employment taxes on otherwise 
nontaxable transactions will weaken incentives for employees to 
participate. The taxes involved are very modest when compared with the 
compliance costs and the unfair burdens on rank-and-file workers 
generally.
  This legislation will clarify what is sensible tax policy regarding 
ESPPs. More important, it will empower workers during their working 
years because they will be both employees and owners of the company as 
well as additional providers of their own retirement security. 
Furthermore, it will thwart the arbitrary and selective IRS actions, 
contrary to all previously published Treasury and IRS policies.
  I am introducing the Worker Investment Protection Act in the closing 
days of the 106th Congress with the hope that the Secretary of the 
Treasury, Lawrence Summers, will clarify longstanding IRS policy, and 
therefore preclude the need for this legislation. If not, I intend to 
pursue this legislation aggressively during the next session of 
Congress. I urge my colleagues to support the Worker Investment 
Protection Act.
  Mr. President, I ask unanimous consent the attached letters from the 
American Electronic Association, Micron Technology, and the National 
Association of Manufacturers in support of my efforts regarding 
employee stock purchase plans be made a part of the Record, immediately 
following my remarks.
  There being no objection, the letters were ordered to be printed in 
the Record, as follows:

                             American Electronics Association,

                               Washington, DC, September 20, 2000.

     Re tax withholding on employee stock purchase plans.

     Hon. Larry Craig,
     U.S. Senate,
     Washington, DC.
       Dear Senator Craig: On behalf of the more than 3,000 small, 
     medium and large company members of the American Electronics 
     Association (AEA), I am writing to express our serious 
     concern over the issue of payroll tax withholding on stock 
     obtained from an employee stock purchase plan (ESPP) 
     qualified under section 423 of the Internal Revenue Code. 
     Many of our member companies' ESPPs have been an important 
     part of their overall compensation packages, benefiting over 
     hundreds of thousands high-tech employees.
       We are writing to express our strong support of your effort 
     to amend the Community Renewal and New Markets Act of 2000 to 
     ensure that purchases from Employee Stock Purchase Plans 
     (``ESPP'') continue to enjoy the favorable tax treatment that 
     was intended.
       AeA understands that the favorable tax treatment of equity 
     ownership by employees is in jeopardy. The Treasury is 
     working on guidance that could reverse 30 years of IRS 
     precedent and business practice in this area by imposing 
     employment taxes when employees exercise ESPP options. There 
     simply is no reason to impose employment taxes on amounts 
     that are not subject to current income tax, and no law has 
     changed that validates the IRS' change in position. Sound tax 
     policy supports rules that encourage companies to continue 
     these plans and does not weaken the incentives for rank-and-
     file employees to participate in them.
       We support your amendment to the Community Renewal and New 
     Markets Act of 2000 legislation that would reaffirm the 
     positions that taxpayers have been following in good faith in 
     this area, consistent with Congressional intent. Please feel 
     free to contact me or AEA's Tax Counsel, Caroline Graves 
     Hurley, if we can provide you any additional information on 
     this matter. We appreciate your attention to this important 
     issue.
           Sincerely,
                                               John P. Palafoutas,
     Sr. Vice President.
                                  ____



                                      Micron Technology, Inc.,

                                    Boise, ID, September 20, 2000.
     Hon. Larry Craig,
     U.S. Senate,
     Washington, DC.
       Dear Mr. Craig: Micron Technology is writing to seek your 
     support of legislation that would confirm the long-standing 
     treatment under the tax code of Employee Stock Purchase Plans 
     (``ESPPs''). This issue is very important to companies like 
     ours who encourage employee-ownership.
       To provide some background, an employer is generally 
     required to withhold income and employment taxes on ``wages'' 
     paid to an employee. However, the IRS ruled in 1971 that the 
     acquisition of stock by an employee pursuant to a qualified 
     stock option does not result in the payment of ``wages'' and, 
     therefore, is not subject to income tax withholding and 
     employment taxes. Employers and the IRS have followed this 
     principles for almost 30 years.
       Recently, and without proper notification to taxpayers, the 
     IRS changed its position and instructed its auditors to 
     retroactively impose deficiency assessments on companies that 
     failed to withhold income and employment taxes on the 
     benefits afforded by qualified ESPPs.
       There are compelling legal and policy reasons to support 
     the position that ESPP transactions are exempt from 
     employment taxes and Federal income tax withholding. The 
     IRS's change of position will discourage broad-based employee 
     stock ownership; will weaken the incentives for workers to 
     participate in these programs; and will increase corporate 
     compliance costs far in excess of the potential tax amounts 
     involved.
           Sincerely,
                                                 Roderic W. Lewis,
     Vice President and General Counsel.
                                  ____

                                              National Association


                                             of Manufacturers,

                               Washington, DC, September 20, 2000.
     Hon. William V. Roth,
     Chairman, Committee on Finance,
     U.S. Senate, Washington, DC.
       Dear Mr. Chairman: On behalf of the National Association of 
     Manufacturers (NAM), the ``18 million people who make things 
     in America'' and our 14,000 small, mid-sized and large member 
     companies, I urge you to take action this year on a proposal 
     to clarify the tax treatment of employee stock purchase plans 
     (ESPPs). Specifically, I encourage you to include in your 
     Chairman's Mark of the Community Renewal and New Markets Act 
     of 2000 an ESPP amendment officer by committee member Larry 
     Craig.
       The tax code currently includes incentives for ESPPs that 
     employees to purchase company stock at a discount of up of 
     15%. For nearly 30 years, IRS has taken the position in 
     published guidance that ESPP transactions are exempt from 
     employment taxes and federal income tax withholding. However, 
     over the past two years, IRS agents have sought to collect 
     employment taxes from employers who did not subject these 
     transactions to such taxes. The amendment offered by Sen. 
     Craig confirms that any income from ESPP transactions is not 
     subject to employment taxes or federal income tax 
     withholding.
       Based on our experience, ESPPs motivate employees and 
     create entrepreneurial zeal by giving workers a stake in 
     their company's future. In contrast, the additional tax 
     liabilities and administrative costs of IRS' change in 
     position will discourage employers from offering these 
     programs. At the same time, imposing employment taxes on ESPP 
     transactions will confuse employees and weaken incentives for 
     them to participate. The Craig amendment will ensure that 
     employers continue to offer ESPPs and that employees continue 
     to benefit from company ownership. Thank you in advance for 
     supporting this important initiative.
           Sincerely,
                                                  Dorothy Coleman,
     Vice President, Tax Policy.

                          ____________________