To amend the Internal Revenue Code of 1986 to provide incentives for the ownership and control of corporations by employees.

February 25, 2003

Mr. ROHRABACHER introduced the following bill; which was referred to the Committee on Ways and Means

To amend the Internal Revenue Code of 1986 to provide incentives for the ownership and control of corporations by employees.

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 Ownership Act of 2003'.

SEC. 2. OWNERSHIP POLICY FOR THE UNITED STATES.

(a) FINDINGS- The Congress finds that--

(1) there is considerable evidence that employee-owned and employee-controlled corporations are more productive and provide more wealth to their employees than corporations not so owned, and

(2) the workplace experience of employee-owned and employee-controlled corporations is proven to foster greater appreciation of the economic system of the United States that relies on ownership of private property and capitalism.

(b) POLICY- It is the policy of the United States that by the year 2010, 30 percent of all United States corporations are owned and controlled by employees of the corporations.

SEC. 3. TAX INCENTIVES RELATING TO EMPLOYEE-OWNED AND EMPLOYEE-CONTROLLED CORPORATIONS.

(a) TRUST OF EMPLOYEE-OWNED AND EMPLOYEE-CONTROLLED CORPORATION EXEMPT FROM TAXATION-

(1) IN GENERAL- Section 501(c) of the Internal Revenue Code of 1986 (relating to list of exempt organizations) is amended by adding at the end the following new paragraph:

`(29)(A) employee-owned and employee-controlled corporation trust.

`(B) For purposes of subparagraph (A), the term `employee-owned and employee-controlled corporation trust' means a trust which has as its primary assets the employer securities (within the meaning of section 409(l)) of an employee-owned and employee-controlled corporation.'.

(2) EMPLOYEE-OWNED AND EMPLOYEE-CONTROLLED CORPORATION DEFINED- Subsection (a) of section 7701 of such Code (relating to definitions) is amended by adding at the end the following new paragraph:

`(48) EMPLOYEE-OWNED AND EMPLOYEE-CONTROLLED CORPORATION- The term `employee-owned and employee-controlled corporation' means a corporation in which--

`(A) more than 50 percent of the voting stock of such corporation is held by a trust for the benefit of the employees of that corporation,

`(B) in all matters requiring the vote of stock, including the election of the board of directors of the corporation, the trustee of such trust is obligated to vote the stock held in trust and allocated to participants in the trust in the manner in which the participants direct, on the basis of 1-employee 1-vote, and to vote any stock not so allocated as if it were so allocated,

`(C) at least 25 employees of such corporation are participants in and beneficiaries of such trust,

`(D) a minimum of 90 percent of the employees who work at least 1,000 hours annually for such corporation are participants in such trust, and

`(E) the trustee administers such trust for the benefit of the employees of such corporation and complies with all requirements of this title relating to employee stock ownership plans (as defined in section 4975(e)(7)) pertaining to independent appraisal of shares not readily tradable and distribution of those shares.'.

(b) NO TAX ON CORPORATE INCOME OF EMPLOYEE-OWNED AND EMPLOYEE-CONTROLLED CORPORATION- Subsection (a) of section 11 of such Code (relating to corporations in general) is amended by inserting before the period at the end the following: `(other than any employee-owned and employee-controlled corporation)'.

(c) EXCLUSION OF INCOME FROM SALE OF EMPLOYEE-OWNED AND EMPLOYEE-CONTROLLED CORPORATION STOCK BY EMPLOYEE OWNER-

(1) IN GENERAL- Part III of subchapter B of chapter 1 of such Code (relating to items specifically excluded from gross income) is amended by redesignating section 140 as section 140A and by inserting after section 139 the following new section:

`SEC. 140. INCOME FROM EMPLOYEE OWNER SALE OF EMPLOYER SECURITIES DISTRIBUTED FROM EMPLOYEE-OWNED AND EMPLOYEE-CONTROLLED CORPORATION TRUST.

`(a) IN GENERAL- In the case of an individual, gross income shall not include any proceeds from the qualified sale of employer securities.

`(b) QUALIFIED SALE OF EMPLOYER SECURITIES- The term `qualified sale of employer securities' means the sale of employer securities (as defined in section 409(l)) which were distributed to a participant in the employee-owned and employee-controlled corporation trust to--

`(1) an employee of the employee-owned and employee-controlled corporation which issued such securities,

`(2) such corporation, or

`(3) such trust.'.

(2) CLERICAL AMENDMENT- The table of sections for part III of subchapter B of chapter 1 of such Code is amended by striking the item relating to section 140 and inserting after the item relating to section 139 the following new items:

`Sec. 140. Income from employee owner sale of employer securities distributed from employee-owned and employee-controlled corporation trust.

`Sec. 140A. Cross references to other Acts.'.

(d) RECEIPT OF STOCK IN AN EMPLOYEE OWNED AND CONTROLLED CORPORATION DURING 3-YEAR TRANSITION PERIOD- Section 83 of such Code (relating to property transferred in connection with performance of services) is amended by adding at the end the following new subsection:

`(i) RECEIPT OF STOCK IN AN EMPLOYEE OWNED AND CONTROLLED CORPORATION DURING 3-YEAR TRANSITION PERIOD-

`(1) IN GENERAL- In the case of an employee, this section shall not apply to the transfer in lieu of compensation of employer securities in an employer owned and controlled corporation during the 3-year period beginning on the effective date of the election of a corporation to become an employee owned and controlled corporation.

`(2) EXCEPTION- If, on the day after the end of the 3-year period referred to in paragraph (1), such corporation is not an employee owned and controlled corporation, paragraph (1) shall not apply and the following sum shall be included in the gross income of such employee:

`(A) an amount equal to the fair market value of all of such securities at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse) to the employee in lieu of compensation for such period, plus

`(B) an amount equal to 10 percent of the amount determined under subparagraph (A).'.

(e) NO TAX ON GAIN ON SALES OR TRANSFERS TO EMPLOYEE-OWNED AND EMPLOYEE-CONTROLLED CORPORATION TRUST-

(1) IN GENERAL- Part III of subchapter O of chapter 1 of such Code (relating to common nontaxable exchanges) is amended by adding at the end the following new section:

`SEC. 1046. SALE OF SECURITIES TO EMPLOYEE-OWNED AND EMPLOYEE-CONTROLLED CORPORATION TRUST.

`(a) NONRECOGNITION OF GAIN- If the taxpayer elects the application of this section, in the case of the sale or transfer of employer securities (as defined in section 409(l)) to an employee-owned and employee-controlled corporation trust, gain on such sale or transfer shall not be recognized if the requirements of subsection (b) are met.

`(b) REQUIREMENTS-

`(1) IN GENERAL- The requirements of this subsection are that--

`(A) the employee-owned and employee-controlled corporation trust acquiring such securities from the taxpayer agrees--

`(i) to hold such securities for the 3-year period beginning on the date of such transfer or sale, and

`(ii) to notify the taxpayer upon the transfer of such securities before the end of such period, and

`(B) the taxpayer agrees to the provisions of subsection (b).

`(2) EXCEPTIONS- Paragraph (1) shall not apply--

`(A) in a case where such securities are securities of an employee-owned and employee-controlled corporation which are distributed within such 3-year period to an employee of such corporation, and

`(B) in the case of the sale or transfer of stock of an employee-owned and employee-controlled corporation in connection with the sale or reorganization of such corporation, if such sale or reorganization is approved by the employees of such corporation in a vote held on a 1-employee 1-vote basis.

`(c) RECAPTURE OF TAX- If, during any year within the 3-year period referred to in subsection (b)(1), securities subject to subsection (a) are sold or transferred in a manner that does not meet the requirements of subsection (b), then gain on the sale or transfer described in subsection (a) shall be recognized for the year in which such requirements are not met.'.

(2) CLERICAL AMENDMENT- The table of sections for part III of subchapter O of chapter 1 of such Code is amended by adding at the end the following new item:

`Sec. 1046. Sale of securities to employee-owned and employee-controlled corporation trust.'.

(f) Credit for Transfer of Stock From Estate to Employee-Owned and Employee-Controlled Corporation-

(1) IN GENERAL- Part II of subchapter A of chapter 11 of such Code (relating to credits against tax) is amended by redesignating section 2016 as section 2017 and by inserting after section 2015 the following new section:

`SEC. 2016. CREDIT FOR TRANSFER OF EMPLOYEE SECURITIES FROM ESTATE TO EMPLOYEE-OWNED AND EMPLOYEE-CONTROLLED CORPORATION TRUST.

`(a) GENERAL RULE- The tax imposed by section 2001 shall be credited with the amount of employer securities considered to have been acquired from or to have passed from the decedent to an employee-owned and employee-controlled corporation trust.

`(b) LIMITATION- Such credit may not exceed the tax imposed by section 2001, reduced under this part (other than by this section).

`(c) VALUE OF STOCK NOT READILY TRADABLE- No credit shall be allowed under subsection (a) in the case of employer securities which are not readily tradable on an established securities market unless the value of such employer securities is established by an independent appraiser. For purposes of the preceding sentence, the term `independent appraiser' means any appraiser meeting requirements similar to the requirements of the regulations prescribed under section 170(a)(1).

`(d) DEFINITIONS- For purposes of subsection (a)--

`(1) ACQUIRED FROM OR PASSED FROM A DECEDENT- Employer securities shall be considered to have been acquired from or to have passed from a decedent if the basis of such property in the hands of the employee-owned and employee-controlled corporation trust is determined under section 1014 by reference to paragraph (1), (2), (4), or (9) of subsection (b) of such section.

`(2) EMPLOYER SECURITIES- The term `employer securities' has the meaning given such term by section 409(l)), except that such term shall not include any security which is not voting common stock.'.

(2) CLERICAL AMENDMENT- The table of sections for part II of subchapter A of chapter 11 of such Code (relating to credits against tax) is amended by striking the item relating to section 2016 and adding at the end the following new items:

`Sec. 2016. Credit for transfer of employee securities from estate to employee-owned and employee-controlled corporation trust.

`Sec. 2017. Recovery of taxes claimed as credit.'.

(g) EFFECTIVE DATE-

(1) IN GENERAL- Except as provided in paragraph (2), the amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

(2) CREDIT FOR TRANSFER OF STOCK FROM ESTATE TO EMPLOYEE-OWNED AND EMPLOYEE-CONTROLLED CORPORATION- The amendments made by subsection (f) shall apply to estates of decedents dying after the date of the enactment of this Act.

SEC. 4. STUDY OF GOVERNMENT POLICIES AFFECTING EMPLOYEE-OWNED AND EMPLOYEE-CONTROLLED CORPORATIONS.

The Comptroller General of the United States shall--

(1) conduct a study of all Federal Government regulations and policies that might impact the creation and operation of an employee-owned and employee-controlled corporation as defined in section 7701(a)(47) of the Internal Revenue Code of 1986,

(2) identify those regulations and policies that are barriers to employee ownership and control of such a corporation, and

(3) not later than one year after the date of the enactment of this Act, submit a report on the findings of such study, together with such recommendations as the Comptroller General determines appropriate, to the Congress.

SEC. 5. PRESIDENTIAL COMMISSION ON EMPLOYEE OWNERSHIP.

(a) ESTABLISHMENT- Not later than one year after the date of the enactment of this Act, the President shall establish a commission to be known as the `Presidential Commission on Employee Ownership' (hereafter in this section referred to as the `Commission').

(b) DUTIES AND REPORT- The Commission shall--

(1) conduct a study concerning all issues that affect ownership of businesses in the United States, with a primary focus on the issues that affect employee ownership of such businesses, and

(2) not later than two years after the date of its establishment, submit a final report to the President and the Congress which includes the findings and recommendations of the Commission.

(c) MEMBERSHIP- The Commission shall be composed of 15 members appointed by the President as follows:

(1) Three individuals, each of whom is an employee of a corporation that has at least 50 percent of its voting stock in a trust for the benefit of employees and who is not an officer or senior manager of that corporation.

(2) Three individuals, each of whom is an employee of a corporation that has at least 50 percent of its voting stock in a trust for the benefit of employees and who is an officer or senior manager of that corporation.

(3) Three individuals, each of whom is a professor employed by an institution of higher learning.

(4) Three individuals, each of whom is employed by a not-for-profit entity that has as its primary mission issues arising from employee ownership of businesses.

(5) The Secretary of Labor, or his designee, the Secretary of the Treasury, or his designee, and the Director of the Office of Management and Budget, or his designee.

(d) STAFF- The Commission shall have such number of staff as the President shall determine, except that such staff shall include not less than five full-time employees.

(e) GIFTS AND BEQUESTS- The Commission may accept, use, and dispose of gifts or bequests or services or personal property for the purpose of aiding or facilitating the work of the Commission. Gifts or bequests of money and proceeds from sales of other property received as gifts or bequests shall be deposited in the Treasury and shall be available for disbursement upon order of the Commission.

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