PROHIBITED TRANSACTIONS.

SEC. 2003. PROHIBITED TRANSACTIONS. (a) Excise Tax on Prohibited Transactions.—Chapter 43 (relating to qualified pension, etc., plans) is amended by adding after section 4974 the following new section: “SEC. 4975. TAX ON PROHIBITED TRANSACTIONS. “(a) Initial Taxes on Disqualified Person.—There is hereby imposed a tax on each prohibited transaction. The rate of tax shall be equal to 5 percent of the amount involved with respect to the prohibited transaction for each year (or part thereof) in the taxable period. The tax imposed by this subsection shall be paid by any disqualified person who participates in the prohibited transaction (other than a fiduciary acting only as such). “(b) Additional Taxes on Disqualified Person.—In any case in which an initial tax is imposed by subsection (a) on a prohibited transaction and the transaction is not corrected within the correction period, there is hereby imposed a tax equal to 100 percent of the amount involved. The tax imposed by this subsection shall be paid by any disqualified person who participated in the prohibited transaction (other than a fiduciary acting only as such). “(c) Prohibited Transaction.— “(1) General rule.—For purposes of this section, the term ‘prohibited transaction’ means any direct or indirect— “(A) sale or exchange, or leasing, of any property between a plan and a disqualified person; “(B) lending of money or other extension of credit between a plan and a disqualified person; “(C) furnishing of goods, services, or facilities between a plan and a disqualified person; “(D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan; “(E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest or for his own account; or “(F) receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan. “(2) Special exemption.—The Secretary or his delegate shall establish an exemption procedure for purposes of this subsection. Pursuant to such procedure, he may grant a conditional or unconditional exemption of any disqualified person or transaction, 88 Stat. 972 orders of disqualified persons or transactions, from all or part of the restrictions imposed by paragraph (1) of this subsection. Action under this subparagraph may be taken only after consultation and coordination with the Secretary of Labor. The Secretary or his delegate may not grant an exemption under this paragraph unless he finds that such exemption is— “(A) administratively feasible, “(B) in the interests of the plan and of its participants and beneficiaries, and “(C) protective of the rights of participants and beneficiaries of the plan. Before granting an exemption under this paragraph, the Secretary or his delegate shall require adequate notice to be given to interested persons and shall publish notice in the Federal Register of the pendency of such exemption and shall afford interested persons an opportunity to present views. No exemption may be granted under this paragraph with respect to a transaction described in subparagraph (E) or (F) of paragraph (1) unless the Secretary or his delegate affords an opportunity for a hearing and makes a determination on the record with respect to the findings required under subparagraphs (A), (B), and (C) of this paragraph, except that in lieu of such hearing the Secretary or his delegate may accept any record made by the Secretary of Labor with respect to an application for exemption under section 408(a) of title I of the Employee Retirement Income Security Act of 1974. “(3) Special rule for individual retirement accounts.—An individual for whose benefit an individual retirement account is established and his beneficiaries shall be exempt for the tax imposed by this section with respect to any transaction concerning such account (which would otherwise be taxable under this section) if, with respect to such transaction, the account ceases to be an individual retirement account by reason of the application of section 408(e)(2)(A) or if section 408(e)(4) applies to such account. “(d) Exemptions.—The prohibitions provided in subsection (c) shall not apply to— “(1) any loan made by the plan to a disqualified person who is a participant or beneficiary of the plan if such loan— “(A) is available to all such participants or beneficiaries on a reasonably equivalent basis, “(B) is not made available to highly compensated employees, officers, or shareholders in an amount greater than the amount made available to other employees, “(C) is made in accordance with specific provisions regarding such loans set forth in the plan, “(D) bears a reasonable rate of interest, and “(E) is adequately secured; “(2) any contract, or reasonable arrangement, made with a disqualified person for office space, or legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor; “(3) any loan to an employee stock ownership plan (as defined in subsection (e)(7)), if— “(A) such loan is primarily for the benefit of participants and beneficiaries of the plan, and “(B) such loan is at a reasonable rate of interest, and any collateral which is given to a disqualified person by the plan consists only of qualifying employer securities (as defined in subsection (e)(8)); 88 Stat. 973 “(4) the investment of all or part of a plan’s assets in deposits which bear a reasonable interest rate in a bank or similar financial institution supervised by the United States or a State, if such bank or other institution is a fiduciary of such plan and if— “(A) the plan covers only employees of such bank or other institution and employees of affiliates of such bank or other institution, or “(B) such investment is expressly authorized by a provision of the plan or by a fiduciary (other than such bank or institution or affiliates thereof) who is expressly empowered by the plan to so instruct the trustee with respect to such investment; “(5) any contract for life insurance, health insurance, or annuities with one or more insurers which are qualified to do business in a State if the plan pays no more than adequate consideration, and if each such insurer or insurers is— “(A) the employer maintaining the plan, or “(B) a disqualified person which is wholly owned (directly or indirectly) by the employer establishing the plan, or by any person which is a disqualified person with respect to the plan, but only if the total premiums and annuity considerations written by such insurers for life insurance, health insurance, or annuities for all plans (and their employers) with respect to which such insurers are disqualified persons (not including premiums or annuity considerations written by the employer maintaining the plan) do not exceed 5 percent of the total premiums and annuity considerations written for all lines of insurance in that year by such insurers (not including premiums or annuity considerations written by the employer maintaining the plan); “(6) the provision of any ancillary service by a bank or similar financial institution supervised by the United States or a State, if such service is provided at not more than reasonable compensation, if such bank or other institution is a fiduciary of such plan, and if— “(A) such bank or similar financial institution has adopted adequate internal safeguards which assure that the provision of such ancillary service is consistent with sound banking and financial practice, as determined by Federal or State supervisory authority, and “(B) the extent to which such ancillary service is provided is subject to specific guidelines issued by such bank or similar financial institution (as determined by the Secretary or his delegate after consultation with Federal and State supervisory authority), and under such guidelines the bank or similar financial institution does not provide such ancillary service— “(i) in an excessive or unreasonable manner, and “(ii) in a manner that would be inconsistent with the best interests of participants and beneficiaries of employee benefit plans; “(7) the exercise of a privilege to convert securities, to the extent provided in regulations of the Secretary or his delegate, but only if the plan receives no less than adequate consideration pursuant to such conversion; “(8) any transaction between a plan and a common or collective trust fund or pooled investment fund maintained by a disqualified person which is a bank or trust company supervised by a State or 88 Stat. 974 Federal agency or between a plan and a pooled investment fund of an insurance company qualified to do business in a State if— “(A) the transaction is a sale or purchase of an interest in the fund, “(B) the bank, trust company, or insurance company receives not more than reasonable compensation, and “(C) such transaction is expressly permitted by the instrument under which the plan is maintained, or by a fiduciary (other than the bank, trust company, or insurance company, or an affiliate thereof) who has authority to manage and control the assets of the plan; “(9) receipt by a disqualified person of any benefit to which he may be entitled as a participant or beneficiary in the plan, so long as the benefit is computed and paid on a basis which is consistent with the terms of the plan as applied to all other participants and beneficiaries; “(10) receipt by a disqualified person of any reasonable compensation for services rendered, or for the reimbursement of expenses properly and actually incurred, in the performance of his duties with the plan, but no person so serving who already receives full-time pay from an employer or an association of employers, whose employees are participants in the plan, or from an employee organization whose members are participants in the plan shall receive compensation from such plan, except for reimbursement of expenses properly and actually incurred; “(11) service by a disqualified person as a fiduciary in addition to being an officer, employee, agent, or other representative of a disqualified person; “(12) the making by a fiduciary of a distribution of the assets of the trust in accordance with the terms of the plan if such assets are distributed in the same manner as provided under section 4044 of title IV of the Employee Retirement Income Security Act of 1974 (relating to allocation of assets); or “(13) any transaction which is exempt from section 406 of such Act by reason of section 408(e) of such Act (or which would be so exempt if such section 406 applied to such transaction). The exemptions provided by this subsection (other than paragraphs (9) and (12) shall not apply to any transaction with respect to a trust described in section 401(a) which is part of a plan providing contributions or benefits for employees some or all of whom are owner-employees (as defined in section 401(c) (3)) in which a plan directly or indirectly lends any part of the corpus or income of the plan to, pays any compensation for personal services rendered to the plan to, or acquires for the plan any property from or sells any property to, any such owner-employee, a member of the family (as defined in section 267(c) (4)) of any such owner-employee, or a corporation controlled by any such owner-employee through the ownership, directly or indirectly, of 50 percent or more of the total combined voting power of all classes of stock entitled to vote or 50 percent or more of the total value of shares of all classes of stock of the corporation. For purposes of the preceding sentence, a shareholder-employee (as defined in section 1379), a participant or beneficiary of an individual retirement account, individual retirement annuity, on an individual retirement bond (as defined in section 408 or 409), and an employer or association of employees which establishes such an account or annuity under section 408(c) shall be deemed to be an owner-employee. “(e) Definitions.— “(1) Plan.—For purposes of this section, the term ‘plan’ means a trust described in section 401(a) which forms a part of a plan, 88 Stat. 975 or a plan described in section 403(a), or 405(a), which trust or plan is exempt from tax under section 501(a), an individual retirement account described in section 408(a), or an individual retirement annuity described in section 408(b) or a retirement bond described in section 409 (or a trust, plan, account, annuity, or bond which, at any time, has been determined by the Secretary or his delegate to be such a trust, plan, account, or bond). “(2) Disqualified person.—For purposes of this section, the term ‘disqualified person’ means a person who is— “(A) a fiduciary; “(B) a person providing services to the plan; “(C) an employer any of whose employees are covered by the plan; “(D) an employee organization any of whose members are covered by the plan; “(E) an owner, direct or indirect, of 50 percent or more of— “(i) the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of a corporation, “(ii) the capital interest or the profits interest of a partnership, or “(iii) the beneficial interest of a trust or unincorporated enterprise, which is an employer or an employee organization described in subparagraph (C) or (D); “(F) a member of the family (as defined in paragraph (6)) of any individual described in subparagraph (A), (B), (C), or (E); “(G) a corporation, partnership, or trust or estate of which (or in which) 50 percent or more of— “(i) the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of such corporation, “(ii) the capital interest or profits interest of such partnership, or “(iii) the beneficial interest of such trust or estate, is owned directly or indirectly, or held by persons described in subparagraph (A), (B), (C), (D), or (E); “(H) an officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a 10 percent or more shareholder, or a highly compensated employee (earning 10 percent or more of the yearly wages of an employer) of a person described in subparagraph (C), (D), (E), or (G); or “(I) a 10 percent or more (in capital or profits) partner or joint venturer of a person described in subparagraph (C), (D), (E), or (G). The Secretary, after consultation and coordination with the Secretary of Labor or his delegate, may by regulation prescribe a percentage lower than 50 percent for subparagraphs (E) and (G) and lower than 10 percent for subparagraphs (H) and (I). “(3) Fiduciary.—For purposes of this section, the term ‘fiduciary’ means any person who— “(A) exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, 88 Stat. 976 “(B) renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or “(C) has any discretionary authority or discretionary responsibility in the administration of such plan. Such term includes any person designated under section 405(c)(1)(B) of the Employee Retirement Income Security Act of 1974. “(4) Stockholdings.—For purposes of paragraphs (2)(E)(i) and (G)(i) there shall be taken into account indirect stockholdings which would be taken into account under section 267(c), except that, for purposes of this paragraph, section 267(c)(4) shall be treated as providing that the members of the family of an individual are the members within the meaning of paragraph (6). “(5) Partnerships; trusts.—For purposes of paragraphs (2)(E)(ii) and (iii), (G)(ii) and (iii), and (I) the ownership of profits or beneficial interest shall be determined in accordance with the rules for constructive ownership of stock provided in section 267(c) (other than paragraph (3) thereof), except that section 267(c)(4) shall be treated as providing that the members of the family of an individual are the members within the meaning of paragraph (6). “(6) Member of family.—For purposes of paragraph (2)(F), the family of any individual shall include his spouse, ancestor, lineal descendant, and any spouse of a lineal descendant. “(7) Employee stock ownership plan.—The term ‘employee stock ownership plan’ means a defined contribution plan— “(A) which is a stock bonus plan which is qualified, or a stock bonus plan and money purchase plan both of which are qualified under section 401(a), and which are designed to invest primarily in qualifying employer securities; and “(B) which is otherwise defined in regulations prescribed by the Secretary or his delegate. “(8) Qualifying employer security.—The term ‘qualifying employer security’ means an employer security which is— “(A) stock or otherwise an equity security, or “(B) a bond, debenture, note, or certificate or other evidence of indebtedness which is described in paragraphs (1), (2), and (3) of section 503(e). If any moneys or other property of a plan are invested in shares of an investment company registered under the Investment Company Act of 1940, the investment shall not cause that investment company or that investment company’s investment adviser or principal underwriter to be treated as a fiduciary or a disqualified person for purposes of this section, except when an investment company or its investment adviser or principal underwriter acts in connection with a plan covering employees of the investment company, its investment adviser, or its principal underwriter. “(f) Other Definitions and Special Rules.—For purposes of this section— “(1) Joint and several liability.—If more than one person is liable under subsection (a) or (b) with respect to any one prohibited transaction, all such persons shall be jointly and severally liable under such subsection with respect to such transaction. “(2) Taxable Period.—The term ‘taxable period’ means, with respect to any prohibited transaction, the period beginning with 88 Stat. 977 the date on which the prohibited transaction occurs and ending on the earlier of— “(A) the date of mailing of a notice of deficiency pursuant to section 6212, with respect to the tax imposed by subsection (a), or “(B) the date on which correction of the prohibited transaction is completed. “(3) Sale or exchange; encumbered property.—A transfer of real or personal property by a disqualified person to a plan shall be treated as a sale or exchange if the property is subject to a mortgage or similar lien which the plan assumes or if it is subject to a mortgage or similar lien which a disqualified person placed on the property within the 10-year period ending on the date of the transfer. “(4) Amount Involved.—The term ‘amount involved’ means, with respect to a prohibited transaction, the greater of the amount of money and the fair market value of the other property given or the amount of money and the fair market value of the other property received; except that, in the case of services described in paragraphs (2) and (10) of subsection (d) the amount involved shall be only the excess compensation. For purposes of the preceding sentence, the fair market value— “(A) in the case of the tax imposed by subsection (a), shall be determined as of the date on which the prohibited transaction occurs; and “(B) in the case of the tax imposed by subsection (b), shall be the highest fair market value during the correction period. “(5) Correction.—The terms ‘correction’ and ‘correct’ mean, with respect to a prohibited transaction, undoing the transaction to the extent possible, but in any case placing the plan in a financial position not worse than that in which it would be if the disqualified person were acting under the highest fiduciary standards. “(6) Correction period.—The term ‘correction period’ means, with respect to a prohibited transaction, the period beginning with the date on which the prohibited transaction occurs and ending 90 days after the date of mailing of a notice of deficiency with respect to the tax imposed by subsection (b) under section 6212, extended by— “(A) any period in which a deficiency cannot be assessed under section 6213(a), and “(B) any other period which the Secretary or his delegate determines is reasonable and necessary to bring about the correction of the prohibited transaction. “(g) Application of Section.—This section shall not apply— “(1) in the case of a plan to which a guaranteed benefit policy (as defined in section 401(b)(2)(B) of the Employee Retirement Income Security Act of 1974) is issued, to any assets of the insurance company, insurance service, or insurance organization merely because of its issuance of such policy; “(2) to a governmental plan (within the meaning of section 414(d)); or “(3) to a church plan (within the meaning of section 414(e)) with respect to which the election provided by section 410(d) has not been made. In the case of a plan which invests in any security issued by an investment company registered under the Investment Company Act of 1940, the assets of such plan shall be deemed to include such security but shall not, by reason of such investment, be deemed to include any assets of such company. 88 Stat. 978 “(h) Notification of Secretary of Labor.—Before sending a notice of deficiency with respect to the tax imposed by subsection (a) or (b), the Secretary or his delegate shall notify the Secretary of Labor and provide him a reasonable opportunity to obtain a correction of the prohibited transaction or to comment on the imposition of such tax. “(i) Cross Reference.— “For provisions concerning coordination procedures between Secretary of Labor and Secretary of Treasury with respect to application of tax imposed by this section and for authority to waive imposition of the tax imposed by subsection (b), see section 3003 of the Employee Retirement Income Security Act of 1974.” (b) Amendment of Section 503.—Section 503 (relating to requirements for exemption) is amended— (1) by striking out “or (18)” in subsection (a)(1)(A), (2) by amending subsection (a)(1)(B) by inserting “which is referred to in section 4975(g) (2) or (3)” after “described in section 401(a)”, (3) by striking out “or section 401” in subsection (a)(2) and inserting in lieu thereof “or paragraph (1)(B)”, (4) by striking out “or section 401” in subsection (c) and inserting in lieu thereof “or subsection (a)(1)(B)”, and (5) by striking out subsection (g). (c) Effective Date and Savings Provisions.— (1)(A) The amendments made by this section shall take effect on January 1, 1975. (B) If, before the amendments made by this section take effect, an organization described in section 401(a) of the Internal Revenue Code of 1954 is denied exemption under section 501(a) of such Code by reason of section 503 of such Code, the denial of such exemption shall not apply if the disqualified person elects (in such manner and at such time as the Secretary or his delegate shall by regulations prescribe) to pay, with respect to the prohibited transaction (within the meaning of section 503 (b) or (g)) which resulted in such denial of exemption, a tax in the amount and in the manner provided with respect to the tax imposed under section 4975 of such Code. An election made under this subparagraph, once made, shall be irrevocable. The Secretary of the Treasury or his delegate shall prescribe such regulations as may be necessary to carry out the purposes of this subparagraph. (2) Section 4975 of the Internal Revenue Code of 1954 (relating to tax on prohibited transactions) shall not apply to— (A) a loan of money or other extension of credit between a plan and a disqualified person under a binding contract in effect on July 1, 1974 (or pursuant to renewals of such a contract), until June 30, 1984, if such loan or other extension of credit remains at least as favorable to the plan as an arm’s-length transaction with an unrelated party would be, and if the execution of the contract, the making of the loan, or the extension of credit was not, at the time of such execution, making, or extension, a prohibited transaction (within the meaning of section 503(b) of such Code or the corresponding provisions of prior law); (B) a lease or joint use of property involving the plan and a disqualified person pursuant to a binding contract in effect on July 1, 1974 (or pursuant to renewals of such a contract), until June 30, 1984, if such lease or joint use remains at least as favorable to the plan as an arm’s-length transaction with an unrelated party would be and if the execution of the contract was not, at the time of such execution, a prohibited 88 Stat. 979 transaction (within the meaning of section 503(b) of such Code) or the corresponding provisions of prior law; (C) the sale, exchange, or other disposition of property described in subparagraph (B) between a plan and a disqualified person before June 30, 1984, if— (i) in the case of a sale, exchange, or other disposition of the property by the plan to the disqualified person, the plan receives an amount which is not less than the fair market value of the property at the time of such disposition; and (ii) in the case of the acquisition of the property by the plan, the plan pays an amount which is not in excess of the fair market value of the property at the time of such acquisition; (D) Until June 30, 1977, the provision of services to which subparagraphs (A), (B), and (C) do not apply between a plan and a disqualified person (i) under a binding contract in effect on July 1, 1974 (or pursuant to renewals of such contract), or (ii) if the disqualified person ordinarily and customarily furnished such services on June 30, 1974, if such provision of services remains at least as favorable to the plan as an arm’s-length transaction with an unrelated party would be and if the provision of services was not, at the time of such provision, a prohibited transaction (within the meaning of section 503(b) of such Code) or the corresponding provisions of prior law; or (E) the sale, exchange, or other disposition of property which is owned by a plan on June 30, 1974, and all times thereafter, to a disqualified person, if such plan is required to dispose of such property in order to comply with the provisions of section 407(a)(2)(A) (relating to the prohibition against holding excess employer securities and employer real property) of the Employee Retirement Income Security Act of 1974, and if the plan receives not less than adequate consideration. For the purposes of this paragraph, the term “disqualified person” has the meaning provided by section 4975(e)(2) of the Internal Revenue Code of 1954.