LIMITATIONS ON PARTIAL EXCLUSION OF INTEREST ON LOANS USED TO ACQUIRE EMPLOYER SECURITIES.

SEC. 7301. LIMITATIONS ON PARTIAL EXCLUSION OF INTEREST ON LOANS USED TO ACQUIRE EMPLOYER SECURITIES. (a) Exclusion Available Only Where Employees Receive Significant Ownership Interest.—Subsection (b) of section 133 (defining securities acquisition loans) is amended by adding at the end thereof the following new paragraph: “(6) Plan must hold more than 50 percent of stock after acquisition or transfer.— “(A) In general.—A loan shall not be treated as a securities acquisition loan for purposes of this section unless, immediately after the acquisition or transfer referred to in subparagraph (A) or (B) of paragraph (1), respectively, the employee stock ownership plan owns more than 50 percent of— “(i) each class of outstanding stock of the corporation issuing the employer securities, or “(ii) the total value of all outstanding stock of the corporation. “(B) Failure to retain minimum stock interest.— “(i) In general.—Subsection (a) shall not apply to any interest received with respect to a securities acquisition loan which is allocable to any period during which the employee stock ownership plan does not own stock meeting the requirements of subparagraph (A). “(ii) Exception.—To the extent provided by the Secretary, clause (i) shall not apply to any period if, within 90 days of the first date on which the failure occurred (or such longer period not in excess of 180 days as the Secretary may prescribe), the plan acquires stock which results in its meeting the requirements of subparagraph (A). “(C) Stock.—For purposes of subparagraph (A)— “(i) In general.—The term ‘stock’ means stock other than stock described in section 1504(a)(4). “(ii) Treatment of certain rights.—The Secretary may provide that warrants, options, contracts to acquire stock, convertible debt interests and other similar interests be treated as stock for 1 or more purposes under subparagraph (A). “(D) Aggregation rule.—For purposes of determining whether the requirements of subparagraph (A) are met, an employee stock ownership plan shall be treated as owning stock in the corporation issuing the employer securities which is held 103 STAT. 2347by any other employee stock ownership plan which is maintained by— “(i) the employer maintaining the plan, or “(ii) any member of a controlled group of corporations (within the meaning of section 409(l)(4)) of which the employer described in clause (i) is a member.” (b) Term of Loan May Not Exceed 15 Years.—Paragraph (1) of section 133(b) is amended by adding at the end thereof the following new sentence: “The term ‘securities acquisition loan’ shall not include a loan with a term greater than 15 years.” (c) Voting Rights.—Subsection (b) of section 133, as amended by subsection (a), is amended by adding at the end thereof the following new paragraph: “(7) Voting rights of employer securities.—A loan shall not be treated as a securities acquisition loan for purposes of this section unless— “(A) the employee stock ownership plan meets the requirements of section 409(e)(2) with respect to all employer securities acquired by, or transferred to, the plan in connection with such loan (without regard to whether or not the employer has a registration-type class of securities), and “(B) no stock described in section 409(l)(3) is acquired by, or transferred to, the plan in connection with such loan unless— “(i) such stock has voting rights equivalent to the stock to which it may be converted, and “(ii) the requirements of subparagraph (A) are met with respect to such voting rights.”. (d) Tax on Disposition of Securities by Employee Stock Owner ship Plans.— (1) In general.—Chapter 43 is amended by inserting after section 4978A the following new section: “SEC. 4978B. TAX ON DISPOSITION OF EMPLOYER SECURITIES TO WHICH SECTION 133 APPLIED. “(a) Imposition of Tax.—In the case of an employee stock ownership plan which has acquired section 133 securities, there is hereby imposed a tax on each taxable event in an amount equal to the amount determined under subsection (b). “(b) Amount of Tax.— “(1) In general.—The amount of the tax imposed by subsection (a) shall be equal to 10 percent of the amount realized on the disposition to the extent allocable to section 133 securities under section 4978(b)(2). “(2) Dispositions other than sales or exchanges.—For purposes of paragraph (1), in the case of a disposition of employer securities which is not a sale or exchange, the amount realized on such disposition shall be the fair market value of such securities at the time of disposition. “(c) Taxable Event.—For purposes of this section, the term ‘taxable event’ means any of the following dispositions: “(1) Dispositions within 3 years.—Any disposition of any employer securities by an employee stock ownership plan within 3 years after such plan acquired section 133 securities if— 103 STAT. 2348 “(A) the total number of employer securities held by such plan after such disposition is less than the total number of employer securities held after such acquisition, or “(B) except to the extent provided in regulations, the value of employer securities held by such plan after the disposition is 50 percent or less of the total value of all employer securities as of the time of the disposition. For purposes of subparagraph (B), the aggregation rule of section 133(b)(6)(D) shall apply. “(2) Stock disposed of before allocation.—Any disposition of section 133 securities to which paragraph (1) does not apply if— “(A) such disposition occurs before such securities are allocated to accounts of participants or their beneficiaries, and “(B) the proceeds from such disposition are not so allocated. “(d) Section Not to Apply to Certain Dispositions.— “(1) In general.—This section shall not apply to any disposition described in paragraph (1), (3), or (4) of section 4978(d). “(2) Certain reorganizations.—For purposes of this section, any exchange of section 133 securities for employer securities of another corporation in any reorganization described in section 368(a)(1) shall not be treated as a disposition, but the employer securities received shall be treated as section 133 securities and as having been held by the plan during the period the securities which were exchanged were held. “(3) Forced disposition occurring by operation of state law.—Any forced disposition of section 133 securities by an employee stock ownership plan occurring by operation of a State law shall not be treated as a disposition. This paragraph shall only apply to securities which, at the time the securities were acquired by the plan, were regularly traded on an established securities market. “(e) Definitions and Special Rules.—For purposes of this section— “(1) Liability for payment of taxes.—The tax imposed by this section shall be paid by the employer. “(2) Section 133 securities.—The term ‘section 133 securities’ means employer securities acquired by an employee stock ownership plan in a transaction to which section 133 applied, except that such term shall not include— “(A) qualified securities (as defined in section 4978(e)(2)), or “(B) qualified employer securities (as defined in section 4978A(f)(2), as in effect on the day before the date of the enactment of this section). “(3) Disposition.—The term ‘disposition’ includes any distribution. “(4) Ordering rules.—For ordering rules for dispositions of employer securities, see section 4978(b)(2).” (2) Conforming amendment.—The table of sections for chapter 43 is amended by inserting after the item relating to section 4978A the following new item: “Sec. 49780. Tax on disposition of employer securities to which section 133 applied.”. 103 STAT. 2349 (e) Reporting Requirements.—Section 6047 (relating to information reports relating to certain trusts or annuity plans) is amended by redesignating subsection (e) as subsection (f) and by inserting after subsection (d) the following new subsection: “(e) Employee Stock Ownership Plans.—The Secretary shall require— “(1) any employer maintaining, or the plan administrator (within the meaning of section 414(g)) of, an employee stock ownership plan— “(A) which acquired stock in a transaction to which section 133 applies, or “(B) which holds stock with respect to which section 404(k) applies to dividends paid on such stock, “(2) any person making or holding a loan to which section 133 applies, or “(3) both such employer or plan administrator and such person, to make returns and reports regarding such plan, transaction, or loan to the Secretary and to such other persons as the Secretary may prescribe. Such returns and reports shall be made in such form, shall be made at such time, and shall contain such information as the Secretary may prescribe.” (f) Effective Dates.— (1) In general.—Except as provided in this subsection, the amendments made by this section shall apply to loans made after July 10, 1989. (2) Binding commitment exceptions.— (A) The amendments made by this section shall not apply to any loan— (i) which is made pursuant to a binding written commitment in effect on June 6, 1989, and at all times thereafter before such loan is made, or (ii) to the extent that the proceeds of such loan are used to acquire employer securities pursuant to a written binding contract (or tender offer registered with the Securities and Exchange Commission) in effect on June 6, 1989, and at all times thereafter before such securities are acquired. (B) The amendments made by this section shall not apply to any loan to which subparagraph (A) does not apply which is made pursuant to a binding written commitment in effect on July 10, 1989, and at all times thereafter before such loan is made. The preceding sentence shall only apply to the extent that the proceeds of such loan are used to acquire employer securities pursuant to a written binding contract (or tender offer registered with the Securities and Exchange Commission) in effect on July 10, 1989, and at all times thereafter before such securities are acquired. (C) The amendments made by this section shall not apply to any loan made on or before July 10, 1992, pursuant to a written agreement entered into on or before July 10, 1989, if such agreement evidences the intent of the borrower on a periodic basis to enter into securities acquisition loans described in section 133(b)(1)(B) of the Internal Revenue Code of 1986 (as in effect on the day before the date of the enactment of this Act). The preceding sentence shall apply 103 STAT. 2350only if one or more securities acquisition loans were made to the borrower on or before July 10, 1989. (3) Refinancings.—The amendments made by this section shall not apply to loans made after July 10, 1989, to refinance securities acquisition loans (determined without regard to section 133(b)(2) of the Internal Revenue Code of 1986) made on or before such date or to refinance loans described in this paragraph or paragraph (2), (4), or (5) if— (A) such refinancing loans meet the requirements of such section 133 of such Code (as in effect before such amendments) applicable to such loans, (B) immediately after the refinancing the principal amount of the loan resulting from the refinancing does not exceed the principal amount of the refinanced loan (immediately before the refinancing), and (C) the term of such refinancing loan does not extend beyond the later of— (i) the last day of the term of the original securities acquisition loan, or (ii) the last day of the 7-year period beginning on the date the original securities acquisition loan was made. For purposes of this paragraph, the term “securities acquisition loan” shall include a loan from a corporation to an employee stock ownership plan described in section 133(b)(3) of such Code. (4) Collective bargaining agreements.—The amendments made by this section shall not apply to any loan to the extent such loan is used to acquire employer securities for an employee stock ownership plan pursuant to a collective bargaining agreement which sets forth the material terms of such employee stock ownership plan and which was agreed to on or before June 6, 1989, by one or more employers and employee representatives (and ratified on or before such date or within a reasonable period thereafter). (5) Filings with united states.—The amendments made by this section shall not apply to any loan the aggregate principal amount of which was specified in a filing with an agency of the United States on or before June 6, 1989, if— (A) such filing specifies such loan is to be a securities acquisition loan for purposes of section 133 of the Internal Revenue Code of 1986 and such filing is for the registration required to permit the offering of such loan, or (B) such filing is for the approval required in order for the employee stock ownership plan to acquire more than a certain percentage of the stock of the employer. (6) 30-percent test substituted for 50-percent test in case of certain loans.—In the case of a loan to which the amendments made by this section apply— (A) which is made before November 18, 1989, or (B) with respect to which such amendments would not apply if paragraph (2)(A) were applied by substituting “November 17, 1989” for “June 6, 1989” each place it appears, section 133(b)(6)(A) of the Internal Revenue Code of 1986 (as added by subsection (a)) shall be applied by substituting “at least 30 percent” for “more than 50 percent” and section 4978B(c)(1)(B) of such Code (as added by subsection (d)) shall be 103 STAT. 2351applied by substituting “less than 30 percent” for “50 percent or less”. The preceding sentence shall apply to any loan which is used to refinance a loan described in such sentence if the requirements of subparagraphs (A), (B), and (C) of paragraph (3) are met with respect to the refinancing loan.