[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[H.R. 3111 Introduced in House (IH)]






109th CONGRESS
  1st Session
                                H. R. 3111

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


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                             June 29, 2005

   Mrs. Johnson of Connecticut (for herself, Mr. Jefferson, and Mr. 
   McCrery) introduced the following bill; which was referred to the 
                      Committee on Ways and Means

_______________________________________________________________________

                                 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 2005''.

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 (relating to general rule that subsection not to 
apply to certain distributions) 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 amendments 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 (relating to disallowance of items not deductible in computing 
earnings and profits) is amended by adding at the end the following new 
clause:
                            ``(v) 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 (defining qualified securities) 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 (defining operating 
        corporation) 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 (relating to securities 
        received in certain transactions) 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. EARLY DISTRIBUTIONS FROM EMPLOYEE STOCK OWNERSHIP PLANS FOR 
              HIGHER EDUCATION EXPENSES AND FIRST-TIME HOMEBUYER 
              PURCHASES.

    (a) In General.--Paragraph (2) of section 72(t) of the Internal 
Revenue Code of 1986 (relating to 10-percent additional tax on early 
distributions from qualified retirement plans) is amended by adding at 
the end the following new subparagraph:
                    ``(G) Distributions from employee stock ownership 
                plans for higher education expenses and first-time 
                homebuyer purchases.--
                            ``(i) In general.--Distributions made to 
                        the employee from an employee stock ownership 
                        plan (within the meaning of section 
                        4975(e)(7)), the amount of which does not 
                        exceed the sum of--
                                    ``(I) qualified higher education 
                                expenses (as defined by paragraph (7)) 
                                reduced by the amount of such expenses 
                                taken into account under subparagraph 
                                (E), and
                                    ``(II) qualified first-time 
                                homebuyer distributions (as defined by 
                                paragraph (8)) reduced by the amount of 
                                such distributions taken into account 
                                under subparagraph (F).
                            ``(ii) Limitation.--A distribution may only 
                        be taken into account under clause (i) if--
                                    ``(I) such distribution is in the 
                                form of either employer securities 
                                (within the meaning of section 409(l)) 
                                or cash proceeds resulting from the 
                                sale of such securities made not more 
                                than 180 days before the date of such 
                                distribution for the purposes of such 
                                distribution,
                                    ``(II) such securities so 
                                distributed or sold were held by such 
                                plan for at least 5 years before the 
                                date of such distribution or, if 
                                applicable, sale, and
                                    ``(III) the number of shares in 
                                each class of such securities so 
                                distributed or sold, when added to all 
                                previous distributions and sales of 
                                each such class of such securities for 
                                such purposes on behalf of such 
                                employee, does not exceed 10 percent of 
                                the aggregate number of shares of each 
                                class of such securities allocated to 
                                the account of such employee under such 
                                plan.
                            ``(iii) Valuation of distributed 
                        securities.--For purposes of clause (ii), the 
                        value of a security shall be the value of such 
                        security on the date of distribution.''.
    (b) Conforming Amendments.--
            (1) Paragraph (7) of section 72(t) of such Code is amended 
        by striking ``paragraph (2)(E)'' and inserting ``subparagraphs 
        (E) and (G) of paragraph (2)''.
            (2) Paragraph (8) of section 72(t) of such Code is amended 
        by striking ``paragraph (2)(F)'' and inserting ``subparagraphs 
        (F) and (G) of paragraph (2)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to distributions made after the date of the enactment of this 
Act.

SEC. 6. DE MINIMIS EXCEPTION TO DIVERSIFICATION OF INVESTMENT 
              REQUIREMENT.

    (a) In General.--Paragraph (28) of section 401(a) of the Internal 
Revenue Code of 1986 (relating to additional requirements relating to 
employee stock ownership plans) is amended by adding at the end the 
following new subparagraph:
                    ``(D) Exception for de minimis account balance.--A 
                plan shall not fail to meet the requirements of this 
                subparagraph for a plan year solely because the plan 
                provides that clause (i) does not apply to any 
                participant's account in the plan which, as of the 
                close of the preceding plan year, has an account 
                balance which does not exceed $2,500.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to plan years beginning after the date of the enactment of this Act.
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