LIMITATIONS ON DEDUCTIONS FOR DIVIDENDS PAID ON EMPLOYER SECURITIES.

SEC. 7302. LIMITATIONS ON DEDUCTIONS FOR DIVIDENDS PAID ON EMPLOYER SECURITIES. (a) In General.—Subsection (k) of section 404 is amended to read as follows: “(k) Deduction for Dividends Paid on Certain Employer Securities.— “(1) General rule.—In the case of a corporation, there shall be allowed as a deduction for a taxable year the amount of any applicable dividend paid in cash by such corporation during the taxable year with respect to applicable employer securities. Such deduction shall be in addition to the deductions allowed under subsection (a). “(2) Applicable dividend.—For purposes of this subsection— “(A) In general.—The term ‘applicable dividend’ means any dividend which, in accordance with the plan provisions— “(i) is paid in cash to the participants in the plan or their beneficiaries, “(ii) is paid to the plan and is distributed in cash to participants in the plan or their beneficiaries not later than 90 days after the close of the plan year in which paid, or “(iii) is used to make payments on a loan described in subsection (a)(9) the proceeds of which were used to acquire the employer securities (whether or not allocated to participants) with respect to which the dividend is paid. “(B) Limitation on certain dividends.—A dividend described in subparagraph (A)(iii) which is paid with respect to any employer security which is allocated to a participant shall not be treated as an applicable dividend unless the plan provides that employer securities with a fair market value of not less than the amount of such dividend are allocated to such participant for the year which (but for subparagraph (A)) such dividend would have been allocated to such participant. “(3) Applicable employer securities.—For purposes of this subsection, the term ‘applicable employer securities’ means, with respect to any dividend, employer securities which are held on the record date for such dividend by an employee stock ownership plan which is maintained by— “(A) the corporation paying such dividend, or “(B) any other corporation which is a member of a controlled group of corporations (within the meaning of section 409(l)(4)) which includes such corporation. “(4) Time for deduction.— “(A) In general.—The deduction under paragraph (1) shall be allowable in the taxable year of the corporation in which the dividend is paid or distributed to a participant or his beneficiary. 103 STAT. 2352 “(B) Repayment of loans.—In the case of an applicable dividend described in clause (iii) of paragraph (2)(A), the deduction under paragraph (1) shall be allowable in the taxable year of the corporation in which such dividend is used to repay the loan described in such clause. “(5) Other rules.—For purposes of this subsection— “(A) Disallowance of deduction.—The Secretary may disallow the deduction under paragraph (1) for any dividend if the Secretary determines that such dividend constitutes, in substance, an evasion of taxation. “(B) Plan qualification.—A plan shall not be treated as violating the requirements of section 401, 409, or 4975(e)(7), or as engaging in a prohibited transaction for purposes of section 4975(d)(3), merely by reason of any payment or distribution described in paragraph (2)(A). “(6) Definitions.—For purposes of this subsection— “(A) Employer securities.—The term ‘employer securities’ has the meaning given such term by section 409(1). “(B) Employee stock ownership plan.—The term ‘employee stock ownership plan’ has the meaning given such term by section 4975(e)(7). Such term includes a tax credit employee stock ownership plan (as defined in section 409).” (b) Effective Date.— (1) In general.—The amendment made by this section shall apply to employer securities acquired after August 4, 1989. (2) Securities acquired with certain loans.—The amendment made by this section shall not apply to employer securities acquired after August 4, 1989, which are acquired— (A) with the proceeds of any loan which was made pursuant to a binding written commitment in effect on August 4, 1989, and at all times thereafter before such loan is made, and (B) pursuant to a written binding contract (or tender offer registered with the Securities and Exchange Commission) in effect on August 4, 1989, and at all times thereafter before such securities are acquired.