EMPLOYEE STOCK OWNERSHIP PLANS; STUDY OF EXPANDED STOCK OWNERSHIP.

SEC. 803. EMPLOYEE STOCK OWNERSHIP PLANS; STUDY OF EXPANDED STOCK OWNERSHIP. (a) Amendment of the Internal Revenue Code of 1954.— Section 46(f) (relating to limitation in case of certain regulated companies) is amended by adding at the end thereof the following new paragraph: “(9) Special rule for additional credit.— If the taxpayer makes an election under subparagraph (B) of subsection (a)(2), for a taxable year beginning after December 31, 1975, then, notwithstanding the prior paragraphs of this subsection, no credit shall be allowed by section 38 in excess of the amount which would be allowed without regard to the provisions of subparagraph (B) of subsection (a)(2) if— “(A) the taxpayer’s cost of service for ratemaking purposes or in its regulated books of account is reduced by reason of any portion of such credit which results from the transfer of employer securities or cash to an employee stock ownership plan which meets the requirements of section 301(d) of the Tax Reduction Act of 1975; “(B) the base to which the taxpayer’s rate of return for ratemaking purposes is applied is reduced by reason of any portion of such credit which results from a transfer described in subparagraph (A) to such employee stock ownership plan; or “(C) any portion of the amount of such credit which results from a transfer described in subparagraph (A) to such employee stock ownership plan is treated for ratemaking purposes in any way other than as though it had been contributed by the taxpayer’s common shareholders.” (b) Special Rules.— (1) Paragraph (4) of section 46(f) is amended— (A) by striking out “paragraphs (1) and (2)” in subparagraph (A) and inserting in lieu thereof “paragraphs (1),(2),and (9)”; 90 STAT. 1584 (B) by striking out “paragraph (1) or (2)” each place it appears in subparagraph (A) and inserting in lieu thereof “paragraph (1), (2), or 79)”; and (C) by striking out “paragraph (2),” in subparagraph (B)(ii) and inserting in lieu thereof “paragraph (2) or the election described in paragraph (9),”. (2) Section 401(a) (relating to qualified pension, etc., plans) is amended by adding after paragraph (20) the following new paragraph: “(21) A trust forming part of an employee stock ownership plan which satisfies the requirements of section 301(d) of the Tax Reduction Act of 1975 shall not fail to be considered a permanent program merely because employer contributions under the plan are determined solely by reference to the amount of credit which would be allowable under section 46(a) if the employer made the transfer described in subsection (d)(6) or (e)(3) of section 301 of the Tux Reduction Act of 1975.” (3) Section 1504(a) is amended by striking out “dividends.” at the end thereof and inserting in lieu thereof “dividends, employer securities within the meaning of section 301(d)(9)(A) of the Tax Reduction Act of 1975, or qualifying employer securities within the meaning of section 4975(e)(8) while such securities are held under an employee stock ownership plan which meets the requirements of section 301(d) of such Act or section 4975 (e)(7), respectively.” (4) Section 415 (e)(5) is amended by striking out. “For purposes of this subsection,” and inserting in lieu thereof “For purposes of this section,”. (c) Plan Requirements for Taxpayers Electing Additional Credit.— Section 301(d) of the Tax Reduction Act of 1975 is amended— (1) by adding at the end of paragraph (3) the following sentence: “For purposes of this paragraph, the amount of compensation paid to a participant for a year is the amount of such participant’s compensation within the meaning of section 415 (c)(3) of such Code for such year.”, (2) by striking out paragraph (6) and inserting in lieu thereof the following: “(6) On making a claim for credit, adjustment, or refund under section 38 of the Internal Revenue Code of 1954, the employer states in such claim that it agrees, as a condition of receiving any such credit, adjustment, or refund— “(A) in the case of a taxable year beginning before .January 1, 1977, to transfer employer securities forthwith to the plan having an aggregate value at the time of the claim of 1 percent of the amount of the qualified investment (as determined under section 46 (c) and (d) of such Code) of the taxpayer for the taxable year, and “(B) in the case of a taxable year beginning after December 31, 1976— “(i) to transfer employer securities to the plan having an aggregate value at the time of the claim of 1 percent of the amount of the qualified investment (as determined under section 46 (c) and (d) of such Code) of the employer for the taxable year, 90 STAT. 1585 “(ii) except as provided in clause (iii), to effect the transfer not later than 30 days after the time (including extensions) for filing its income tax return for a taxable year, and “(iii) in the case of an employer whose credit (as determined under section 46(a)(2)(B) of such Code) for a taxable year beginning after December 31, 1976, exceeds the limitations of paragraph (3) of section 46(a) of such Code— “(I) to effect that portion of the transfer allocable to investment credit carrybacks of such excess credit at the time required under clause (ii) for the unused credit year (within the meaning of section 46(b) of such Code), and “(II) to effect that portion of the transfer allocable to investment credit carryovers of such excess credit at the time required under clause (ii) for the taxable year to which such portion is carried over. For purposes of meeting the requirements of t his paragraph, a transfer of cash shall be treated as a transfer of employer securities if the cash is, under the plan, used to purchase employer securities.”. (3) by deleting paragraph (8) and inserting in lieu thereof the following: “(8) (A) Except as provided in subparagraph (B)(iii), if the amount of the credit determined under section 46(a)(2)(B) of the Internal Revenue Code of 1954 is recaptured or redetermined in accordance with the provisions of such Code, the amounts transferred to the plan under this subsection and subsection (e) and allocated under the plan shall remain in the plan or in participant accounts, as the case may be, and continue to be allocated in accordance with the plan. “(B) If the amount of the credit determined under section 46(a)(2)(B) of the Internal Revenue Code of 1954 is recaptured in accordance with the provisions of such Code— “(i) the employer may reduce the amount required to be transferred to the plan under paragraph (6) of this subsection, or under paragraph (3) of subsection (e), for the current taxable year or any succeeding taxable years by the portion of the amount so recaptured which is attributable to the contribution to such plan, “(ii) notwithstanding the provisions of paragraph (12), the employer may deduct such portion, subject to the limitations of section 404 of such Code (relating to deductions for contributions to an employees’ trust or plan), or “(iii) if the requirements of subsection (f)(1) are met, the employer may withdraw from the plan an amount not in excess of such portion, “(C) If the amount of the credit claimed by an employer for a prior taxable year under section 38 of the Internal Revenue Code of 1954 is reduced because of a redetermination which becomes final during the taxable year, and the employer transferred amounts to a plan which were taken into account for purposes of this subsection for that prior taxable year, then— 90 STAT. 1586 “(i) the employer may reduce the amount it is required to transfer to the plan under paragraph (6) of this subsection, or under paragraph (3) of subsection (e), for the taxable year or any succeeding taxable year by the portion of the amount of such reduction in the credit or increase in tax which is attributable to the contribution to such plan, or “(ii) notwithstanding the provisions of paragraph (12), the employer may deduct such portion subject to the limitations of section 404 of such Code.”, (4) by striking out “in control of the employer (within the meaning of section 368(c) of the Internal Revenue Code of 1954)” in paragraph (9)(A) and inserting in lieu thereof “a member of a controlled group of corporations which includes the employer (within the meaning of section 1563(a) of the Internal Revenue Code of 1954, determined without regard to section 1563(a)(4) and (e)(3)(C) of such Code)”, and (5) by adding at the end thereof the following new paragraphs: (13) (A) As reimbursement for the expense of establishing the plan, the employer may withhold from amounts due the plan for the taxable year for which the plan is established, or the plan may pay, so much of the amounts paid or incurred in connection with the establishment of the plan as does not exceed the sum of 10 percent of the first $100,000 that the employer is required to transfer to the plan for that taxable year under paragraph (6)(including any amounts transferred under subsection (e)(3)) and 5 percent of any amount in excess of the first $100,000 of such amount. “(B) As reimbursement for the expense of administering the plan, the employer may withhold from amounts due the plan, or the plan may pay, so much of the amounts paid or incurred during the taxable year as expenses of administering the plan as does not exceed the smaller of— “(i) the sum of 10 percent of the first $100,000 and 5 percent of any amount in excess of $100,000 of the income from dividends paid to the plan with respect to stock of the employer during the plan year ending with or within the employer’s taxable year, or “(ii) $100,000. “(14) The return of a contribution made by an employer to an employee stock ownership plan designed to satisfy the requirements of this subsection or subsection (e)(or a provision for such a return) does not fail to satisfy the requirements of this subsection, subsection (e), section 401(a) of the Internal Revenue Code of 1954, or section 403(c)(1) of the Employee Retirement Income Security Act of 1974 if— “(A) the contribution is conditioned under the plan upon determination by the Secretary of the Treasury that such plan meets the applicable requirements of this subsection, subsection (e), or section 401(a) of such Code, “(B) the application for such a determination is filed with the Secretary not later than DO days after the date on which the credit under section 38 is allowed, and “(C) the contribution is returned within one year after the date on which the Secretary issues notice to the employer that such plan does not satisfy the requirements of this subsection. subsection (e), or section 401(a) of such Code.” 90 STAT. 1587 (d) Plan Requirements for Taxpayers Electing Additional One-Half Percent Credit.— Section 301 of the Tax Reduction Act of 1975 (relating to increase in investment credit) is amended by adding at the end thereof the following new subsections: “(e) Plan Requirements for Taxpayers Electing Additional One-Half Percent Credit.— “(1) General rule.— For purposes of clause (ii) of section 46 (a)(2)(B) of the Internal Revenue Code of 1954, the amount determined under this subsection for a taxable year is an amount equal to the sum of the matching employee contributions for the taxable year which meet the requirements of this subsection. “(2) Election; basic plan requirements.— No amount shall be determined under this subsection for the taxable year unless the corporation elects to have this subsection apply for that year. A corporation may not elect to have the provisions of this subsection apply for a taxable year unless the corporation meets the requirements of subsection (d) and the requirements of this subsection. “(3) Employer contribution.— On making a claim for credit, adjustment, or refund under section 38 of the Internal Revenue Code of 1954, the employer shall state in such claim that the employer agrees, as a condition of receiving any such credit, adjustment, or refund attributable to the provisions of section 46 (a)(2)(B)(ii) of such Code, to transfer at the time described in subsection (d)(6)(B) employer securities (as defined in subsection (d)(9)(A)) to the plan having an aggregate value at the time of the transfer of not more than one-half of one percent of the amount of the qualified investment (as determined under subsections (c) and (d) of section 46 of such Code) of the taxpayer for the taxable year. For purport’s of meeting the requirements of this paragraph, a transfer of cash shall be treated as a transfer of employer securities if the cash is, under the plan, used to purchase employer securities. “(4) Requirements relating to matching employee contributions.— “(A) An amount contributed by an employee under a plan described in subsection (d) for the taxable year may not be treated as a matching employee contribution for that taxable year under this subsection unless— “(i) each employee who participates in the plan described in subsection (d) is entitled to make such a contribution, “(ii) the contribution is designated by the employee as a contribution intended to be used for matching employer amounts transferred under paragraph (3) to a plan which meets the requirements of this subsection, and “(iii) the contribution is in the form of an amount paid in cash to the employer or plan administrator not at er than 24 months after the close of the taxable year in which the portion of the credit allowed by section 38 of such Code (and determined under clause.’ (ii) of section 46(a)(2)(B) of such Code which the contribution is to match) is allowed, and is invested forthwith in employer securities (as defined in subsection (d)(9)(A)). “(B) The sum of the amounts of matching employee contributions taken into account for purposes of this subsection 90 STAT. 1588for any taxable year may not exceed the value (at the time of transfer) of the employer securities transferred to the plan in accordance with the requirements of paragraph (3) for the year for which the employee contributions are designated as matching contributions. “(C) The employer may not make participation in the plan a condition of employment and the plan may not require matching employee contributions as a condition of participation in the plan. “(D) Employee contributions under the plan must meet the requirements of section 401(a)(4) of such Code (relating to contributions). “(5) A plan must provide for allocation of all employer securities transferred to it or purchased by it under this subsection to the account of each participant (who was a participant at any time during the plan year, whether or not he is a participant at the close of the plan year) as of the close of the plan year in an amount equal to his matching employee contributions for the year. Matching employee contributions and amounts so allocated shall be deemed to be allocated under subsection (d)(3), “(f) Recaptube.— “(1) General rule.— Amounts transferred to a plan under subsection (d)(6) or (e)(3) may be withdrawn from the plan by the employer if the plan provides that while subject to recapture— “(A) amounts so transferred with respect to a taxable year are segregated from other plan assets, and “(B) separate accounts are maintained for participants on whose behalf amounts so transferred have been allocated for a taxable year. “(2) Coordination with other law.— Notwithstanding any other law or rule of law, an amount withdrawn by the employer will neither fail to be considered to be nonforfeitable nor fail to be for the exclusive benefit of participants or their beneficiaries merely because of the withdrawal from the plan of— “(A) amounts described in paragraph (1) , or “(B) employer amounts transferred under-subsection (e)(3) to the plan which are not matched by matching employee contributions or which are in excess of the limitations of section 415 of such Code, nor will the withdrawal of any such amount be considered to violate the provisions of section 403(c)(1) of the Employee Retirement Income Security Act of 1974.” (e) Clerical Amendment.— (1) The heading of section 301 (d) of the Tax Reduction Act of 1975 is amended by striking out “11-Percent” and inserting in lieu thereof “Additional”. (2) Section 301 (d) of the Tax Reduction Act of 1975 is amended by— (A) striking out “A corporation” in paragraph (1) and inserting in lieu thereof “Except as expressly provided in subsections (e) and (f), a corporation”, (B) inserting “or subsection (e)(3)” in paragraph (7)(A) immediately after “(6)”, (C) striking out “this subsection” in paragraph (10) and substituting in lieu thereof “this subsection and subsections (e) and (f)”, and 90 STAT. 1589 (D) striking out “this subsection” each time it appears in paragraph (11) and substituting in lieu thereof “this subsection or subsection (e) or (f)”. (f) Limitations on Contributions.— (1) Special limitation for employee stock ownership plans.— Section 415(c) (relating to limitation for defined contribution plans) is amended by adding at the end thereof the following new paragraph: “(6) Special limitation for employee stock ownership plan.— “(A) in the case of an employee stock ownership plan (as defined in subparagraph (B)), under which no more than one-third of the employer contributions for a year are allocated to the group of employees consisting of officers, .shareholders owning more than 10 percent of the employer’s stock (determined under subparagraph (B)(iv)), or employees described in subparagraph (B)(Hi), the amount described in paragraph (c)(1)(A)(as adjusted for such year pursuant to subsection (d)(1)) for a year with respect to any participant shall be equal to the sum of (i) the amount described in paragraph (c)(1)(A)(as so adjusted) determined without, regard to this paragraph and (ii) the lesser of the amount determined under clause (i) or the amount of employer securities contributed to the employee stock ownership plan. “(B) For purposes of this paragraph— “(i) the term ‘employee stock ownership plan’ means a plan which meets the requirements of section 4975(e)(7) or section 301(d) of the Tax Reduction Act of 1975, “(ii) the term ‘employer securities’ means, in the case of an employee stock ownership plan within the meaning of section 4975(e)(7), qualifying employer securities within the meaning of section 4975(e)(8), but only if they are described in section 301(d)(9)(A) of the Tax Reduction Act of 1975, or, in the ease of an employee stock ownership plan described in section 301(d)(2) of the Tax Reduction Act of 1975, employer securities within the meaning of section 301(d)(9)(A) of such Act, “(iii) an employee described in this clause is any participant whose compensation for a year exceeds an amount equal to twice the amount described in paragraph (1)(A) for such year (as adjusted for such year pursuant to subsection (d)(1)), determined without regard to subparagraph (A) of this paragraph, and “(iv) an individual shall be considered to own more than 10 percent of the employer’s stock if, without regard to stock held under the employee stock ownership plan, he owns (after application of section 1563(e)) more than 10 percent of the total combined voting power of all classes of stock entitled to vote or more than 10 percent of the total value of shares of all classes of stock.”. (2) Conforming amendment.— Paragraph (3)(B) of section 415(e) (relating to defined contribution plan fraction) is amended by inserting “determined without regard to paragraph (6) of such subsection)” after “employer”. (g) Waiver of Penalty for Underpayment of Estimated Tax.— 90 STAT. 1590 (1) a corporation made underpayments of estimated tax for a taxable year of the corporation which includes August 1, 1975, because-(he cor pointion intended to elect to have the provisions of subparagraph (B) of section 46(a)(1) of the Internal Revenue Code of 1954 (as it existed before the date of enactment of this Act) apply for such taxable year, and (2) the corporation does not elect to have the provisions of such subparagraph apply for such taxable year because this Act does not contain the amendments made by section 804(a)(2) (relating to flowthrough of investment credit), or the provisions of subsection (f) of such section (relating to grace period for certain plan transfers), of the bill H.R. 10612 (94th Congress, 2d Session), as amended by the Senate, then the provisions of section 6655 of such Code (relating to failure by corporation to pay estimated income tax) shall not apply to so much of any such underpayment as the corporation can establish, to the satisfaction of the Secretary of the Treasury, is properly attributable to the inapplicability of such subparagraph (B) for such taxable year. (h) Intent of Congress Concerning Employee Stock Ownership Plans.— The Congress, in a series of laws (the Regional Rail Reorganization Act of 1973, the Employee Retirement Income Security Act of 1974, the Trade Act of 1974, and the Tax Reduction Act of 1975) and this Act has made clear its interest in encouraging employee stock ownership plans as a bold and innovative method of strengthening the free private enterprise system which will solve the dual problems of securing capital funds for necessary capital growth and of bringing about stock ownership by all corporate employers. The Congress is deeply concerned that the objectives sought by this series of laws will be made unattainable by regulations and rulings which treat employee stock ownership plans as conventional retirement plans, which reduce the freedom of the employee trusts and employers to take the necessary steps to implement the plans, and which otherwise block the establishment and success of these plans. Because of the special purposes for which employee stock ownership plans are established, it is consistent with the intent of Congress to permit these plans (whether structured as pension, stock bonus, or profit-sharing plans) to distribute income on employer securities currently. (i) Study of Expanded Stock Ownership.— (1) In general.— Section 3022(a) of the Employee Retirement Income Security Act of 1974 (relating to duties of Joint Pension Task Force) is amended— (A) by redesignating paragraphs (4) and (5) as (5) and (6),and (B) by inserting after paragraph (3) the following new paragraph: “(4) the broadening of stock ownership, particularly with regard to employee stock ownership plans (as defined in section 4975(e)(7) of the Internal Revenue Code of 1954 and section 407 (d)(6) of this Act) and all other alternative-methods for broadening stock ownership to the American labor force and others;”. (2) Change of title.— (A) Subtitle B of title III of such Act is amended— (i) by striking out “Pension” in the caption of such subtitle and inserting in lieu thereof “Pension, Profit-sharing, and Employee Stock Ownership Plan”, 90 STAT. 1591 (ii) by striking out “PENSION” in the caption of part 1 of such subtitle and inserting in lieu thereof the following: “PENSION, PROFIT-SHARING, AND EMPLOYEE STOCK OWNERSHIP PLAN”, and (iii) by striking out “Joint Pension” each place it appears in sections 3021 and 3022 and inserting in lieu thereof the following: “Joint Pension, Profit-sharing, and Employee Stock Ownership Plan”. (B) The table of contents of such Act is amended— (i) by striking out “PENSION” in the item relating to title III and inserting in lieu thereof the following: “PENSION, PROFIT-SHARING, AND EMPLOYEE STOCK OWNERSHIP PLAN”, (ii) by striking out “PENSION” in the item relating to subtitle B of title III and inserting in lieu thereof the following: “PENSION, PROFIT-SHARING, AND EMPLOYEE STOCK OWNERSHIP PLAN”, and (iii) by striking out “PENSION” in the item relating to part 1 of subtitle B of title III and inserting in lieu thereof “PENSION, PROFIT-SHARING, AND EMPLOYEE STOCK OWNERSHIP PLAN”. (j) Effective Dates.— (1) General rule.— Except as provided in paragraph (2), the amendments made by this section shall apply for taxable years beginning after December 31, 1974. (2) Exceptions.— (A) Section 301(e) of the Tax Reduction Act of 1975, as added by subsection (d), shall apply for taxable years beginning after December 31, 1976. (B) The amendments made by subsections (a) and (b)(1) shall apply for taxable years beginning after December 31, 1975. (C) The amendments made by subsections (b)(4) and (f) shall apply for years beginning after December 31, 1975.