S 101

112th CONGRESS
1st Session

S. 101

To amend the Internal Revenue Code of 1986 to improve the operation of employee stock ownership plans, and for other purposes.

IN THE SENATE OF THE UNITED STATES

January 25 (legislative day, January 5), 2011

Mr. ENSIGN 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 improve the operation of employee stock ownership plans, and for other purposes.

    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 `Employee Stock Ownership Plan Promotion and Improvement Act of 2011'.

SEC. 2. 10 PERCENT PENALTY TAX NOT TO APPLY TO CERTAIN S CORPORATION DISTRIBUTIONS MADE ON STOCK HELD BY EMPLOYEE STOCK OWNERSHIP PLAN.

    (a) In General- Clause (vi) of section 72(t)(2)(A) of the Internal Revenue Code of 1986 is amended by inserting before the comma at the end the following: `or any distribution (as described in section 1368(a)) with respect to S corporation stock that constitutes qualifying employer securities (as defined by section 409(l)) to the extent that such distributions are paid to a participant in the manner described in clause (i) or (ii) of section 404(k)(2)(A)'.

    (b) Effective Date- The amendment made by this section shall apply to distributions made after the date of the enactment of this Act.

SEC. 3. ESOP DIVIDEND EXCEPTION TO ADJUSTMENTS BASED ON ADJUSTED CURRENT EARNINGS.

    (a) In General- Section 56(g)(4)(C) of the Internal Revenue Code of 1986 is amended by adding at the end the following new clause:

          `(vii) TREATMENT OF ESOP DIVIDENDS- Clause (i) shall not apply to any deduction allowable under section 404(k) if the deduction is allowed for dividends paid on employer securities held by an employee stock ownership plan established or authorized to be established before March 15, 1991.'.

    (b) Effective Date- The amendment made by this section shall apply to taxable years beginning after December 31, 1989.

    (c) Waiver of Limitations- If refund or credit of any overpayment of tax resulting from the application of the amendment made by this section is prevented at any time before the close of the 1-year period beginning on the date of the enactment of this Act by the operation of any law or rule of law (including res judicata), such refund or credit may nevertheless be made or allowed if claim therefor is filed before the close of such period.

SEC. 4. AMENDMENTS RELATED TO SECTION 1042.

    (a) Deferral of Tax for Certain Sales to Employee Stock Ownership Plan Sponsored by S Corporation-

      (1) IN GENERAL- Section 1042(c)(1)(A) of the Internal Revenue Code of 1986 is amended by striking `C'.

      (2) EFFECTIVE DATE- The amendment made by paragraph (1) shall apply to sales after the date of the enactment of this Act.

    (b) Reinvestment in Certain Mutual Funds Permitted-

      (1) IN GENERAL- Clause (ii) of section 1042(c)(4)(B) of the Internal Revenue Code of 1986 is amended to read as follows:

          `(ii) FINANCIAL INSTITUTIONS, INSURANCE COMPANIES, AND MUTUAL FUNDS- The term `operating corporation' shall include--

            `(I) any financial institution described in section 581,

            `(II) any insurance company subject to tax under subchapter L, and

            `(III) any regulated investment company if substantially all of the securities held by such company are securities issued by operating corporations (determined without regard to this subclause).'.

      (2) EFFECTIVE DATE- The amendment made by paragraph (1) shall apply to sales of qualified securities after the date of the enactment of this Act.

    (c) Modification to 25-Percent Shareholder Rule-

      (1) IN GENERAL- Subparagraph (B) of section 409(n)(1) of the Internal Revenue Code of 1986 is amended to read as follows:

        `(B) for the benefit of any other person who owns (after the application of section 318(a)) more than 25 percent of--

          `(i) the total combined voting power of all classes of stock of the corporation which issued such employer securities or of any corporation which is a member of the same controlled group of corporations (within the meaning of subsection (l)(4)) as such corporation, or

          `(ii) the total value of all classes of stock of any such corporation.'.

      (2) EFFECTIVE DATE- The amendment made by paragraph (1) shall take effect on the date of the enactment of this Act.

SEC. 5. SMALL BUSINESS AND EMPLOYEE STOCK OWNERSHIP.

    (a) Findings- Congress finds that--

      (1) since 1974, the ownership of many small business concerns (as defined under section 3 of the Small Business Act (15 U.S.C. 632)) in the United States has transitioned from the original owner, or owners, to an employee stock ownership plan (referred to in this section as an `ESOP'), as defined in section 4975(e)(7) of the Internal Revenue Code of 1986;

      (2) data collected on the performance of these small business concerns owned 50 percent or more by an ESOP evidences that more often than not these ESOP-owned small business concerns provide significant benefit to the employees of the small business concerns and the communities in which the small business concerns are located;

      (3) under the Small Business Act (15 U.S.C. 631 et seq.) and the regulations promulgated by the Administrator of the Small Business Administration, a business concern that qualifies as a small business concern for the numerous preferences of the Act, is denied treatment as a small business concern once 50 percent or more of the business is acquired on behalf of the employees by an ESOP; and

      (4) a small business concern that was eligible under the Small Business Act before being so acquired on behalf of the employees by an ESOP, will no longer be treated as eligible, even if the number of employees, the revenue of the small business concern, and the racial, gender, or other criteria used under the Act to determine whether the small business concern is eligible for benefits under the Act remain the same, solely because of the acquisition by the ESOP.

    (b) Employee Stock Ownership Plans- The Small Business Act (15 U.S.C. 631 et seq.) is amended--

      (1) by redesignating section 44 as section 45; and

      (2) by inserting after section 43 the following:

`SEC. 44. EMPLOYEE STOCK OWNERSHIP PLANS.

    `(a) Definitions- In this section--

      `(1) the term `ESOP' means an employee stock ownership plan, as defined in section 4975(e)(7) of the Internal Revenue Code of 1986; and

      `(2) the term `ESOP business concern' means a business concern that was a small business concern eligible for a loan or to participate in a contracting assistance or business development program under this Act before the date on which 50 percent or more of the business concern was acquired by an ESOP.

    `(b) Continued Eligibility- An ESOP business concern shall be deemed a small business concern for purposes of a loan, preference, or other program under this Act if--

      `(1) on a continuing basis a majority of the shares of and control of the ESOP that owns the business concern are held by individuals who would otherwise meet criteria necessary to be eligible for the loan, preference, or other program (as the case may be);

      `(2) control of the ESOP business concern is vested in the shareholders of the ESOP; and

      `(3) the ESOP that owns the business concern complies with all requirements of a tax qualified deferred compensation arrangement under the Internal Revenue Code of 1986.'.

    (c) Effective Date- The amendments made by this section shall take effect on January 1 of the first calendar year beginning after the date of the enactment of this Act.

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