< Back to H.R. 2759 (103rd Congress, 1993–1994)

Text of the Equity Expansion Act of 1993

This bill was introduced on July 27, 1993, in a previous session of Congress, but was not enacted. The text of the bill below is as of Jul 27, 1993 (Introduced).

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HR 2759 IH

103d CONGRESS

1st Session

H. R. 2759

To amend the Internal Revenue Code of 1986 to allow corporations to issue performance stock options to employees, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

July 27, 1993

Mr. PAYNE of Virginia (for himself and Mrs. JOHNSON of Connecticut) introduced the following bill; which was referred jointly to the Committees on Ways and Means and Energy and Commerce


A BILL

To amend the Internal Revenue Code of 1986 to allow corporations to issue performance stock options to employees, 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 ‘Equity Expansion Act of 1993’.

SEC. 2. PERFORMANCE STOCK OPTIONS.

    (a) IN GENERAL- Part II of subchapter D of chapter 1 of the Internal Revenue Code of 1986 (relating to certain stock options) is amended by redesignating section 424 as section 425 and by inserting after section 423 the following new section:

‘SEC. 424. PERFORMANCE STOCK OPTIONS.

    ‘(a) IN GENERAL- Section 421(a) shall apply with respect to the transfer of a share of stock to any person pursuant to the exercise of a performance stock option if no disposition of such share is made by such person within 1 year after the transfer of such share to such person.

    ‘(b) PERFORMANCE STOCK OPTION- For purposes of this part--

      ‘(1) IN GENERAL- The term ‘performance stock option’ means an option granted to any person for any reason in connection with the performance of services for an entity described in paragraph (4) to purchase stock of any corporation described in paragraph (4).

      ‘(2) ADDITIONAL REQUIREMENTS- An option shall not be treated as a performance stock option unless the following requirements are met:

        ‘(A) NONDISCRIMINATION- Either--

          ‘(i) the option is granted to an employee who, at the time of the grant, is not a highly compensated employee, or

          ‘(ii) immediately after the grant of the option, employees who are not highly compensated employees hold performance share options which permit the acquisition of at least 50 percent of all shares which may be acquired pursuant to all performance stock options outstanding (whether or not exercisable) as of such time.

        For purposes of clause (ii), only that portion of the options held by persons other than nonhighly compensated employees which results in the requirements of clause (ii) not being met shall be treated as options which are not performance stock options, and such portion shall be allocated among options held by such persons in such manner as the Secretary may prescribe.

        ‘(B) SPECIFIC NUMBER OF OPTIONS- The option is granted pursuant to a plan that includes either--

          ‘(i) the aggregate number of shares that may be issued under options granted under the plan, or

          ‘(ii) a method by which the aggregate number of shares that may be issued under options granted under the plan can be determined (without regard to whether such aggregate number may change under such method),

        and which is approved by the stockholders of the granting corporation within 12 months before or after the date such plan is adopted.

        ‘(C) TIME WHEN OPTION GRANTED- The option is granted within 10 years after the date the plan described in subparagraph (B) is adopted, or the date such plan is approved by the stockholders, whichever is earlier.

        ‘(D) TIME FOR EXERCISING OPTION- The option by its terms is not exercisable after the expiration of 10 years from the date such option is granted.

        ‘(E) OPTION PRICE- Except as provided in paragraph (6) of subsection (c), the option price is not less than the fair market value of the stock at the time the option is granted.

        ‘(F) TRANSFERABILITY- The option by its terms is not transferable by the person holding the option, other than--

          ‘(i) in the case of an individual, by will or the laws of descent and distribution, or pursuant to a qualified domestic relations order (as defined in subsection (p) of section 414), and

          ‘(ii) in the case of any other person, by any transaction in which gain or loss is not recognized in whole or in part.

      ‘(3) ELECTION NOT TO TREAT OPTION AS PERFORMANCE STOCK OPTION- An option shall not be treated as a performance stock option if--

        ‘(A) as of the time the option is granted the terms of such option provide that it will not be treated as a performance stock option, or

        ‘(B) as of the time such option is exercised the grantor and holder agree that such option will not be treated as a performance stock option.

      ‘(4) ENTITIES TO WHICH SECTION APPLIES- This section shall apply to an option granted to a person who performs services for--

        ‘(A) the corporation issuing the option, or its parent or subsidiary corporation,

        ‘(B) a partnership in which the corporation issuing the option holds (at the time of the grant) a capital or profits interest representing at least 20 percent of the total capital or profits interest of the partnership, or

        ‘(C) a corporation or a parent or subsidiary corporation of such corporation issuing or assuming a stock option in a transaction to which section 425(a) applies.

      ‘(5) HIGHLY COMPENSATED EMPLOYEE- For purposes of this subsection, the term ‘highly compensated employee’ has the meaning given such term by section 414(q).

    ‘(c) SPECIAL RULES-

      ‘(1) GOOD FAITH EFFORTS TO VALUE STOCK- If a share of stock is acquired pursuant to the exercise by any person of an option which would fail to qualify as a performance stock option under subsection (b) because there was a failure in an attempt, made in good faith, to meet the requirement of subparagraph (E) of subsection (b)(2), the requirement of subparagraph (E) of subsection (b)(2) shall be considered to have been met.

      ‘(2) PERMISSIBLE PROVISIONS- An option that meets the requirements of subsection (b) shall be treated as a performance stock option even if--

        ‘(A) the option holder may pay for the stock with stock of the corporation granting the option,

        ‘(B) the option holder has the right to receive property at the time of the exercise of the option,

        ‘(C) the right to exercise all or any portion of a performance stock option may be subject to any condition, contingency or other criteria (including, without limitation, the continued performance of services, achievement of performance objectives, or the occurrence of any event) which are determined in accordance with the provisions of the plan or the terms of such option, or

        ‘(D) the option is subject to any condition not inconsistent with the provisions of subsection (b).

      ‘(3) FAIR MARKET VALUE- For purposes of this section, the fair market value of stock shall be determined without regard to any restriction other than a restriction that, by its terms, will never lapse.

      ‘(4) DEFINITION OF PARENT AND SUBSIDIARY CORPORATIONS- For purposes of this section, the terms ‘parent corporation’ and ‘subsidiary corporation’ have the meanings given such terms by subsections (e) and (f) of section 425 except that such subsections shall be applied by substituting ‘20 percent’ for ‘50 percent’ each place it appears.

      ‘(5) PERFORMANCE CRITERIA- In the case of a performance stock option that provides that its exercise is subject to any conditions or criteria described in subparagraph (C) of paragraph (2), the date or time the option is granted with respect to each share that may be acquired shall be the date or time the original performance share option is granted and subject to the provisions of section 425(h), no portion of the option shall be treated as granted at any other time.

      ‘(6) CONVERSION OF OPTIONS- If--

        ‘(A) there is a transfer of an incentive stock option in exchange for a performance stock option, and

        ‘(B) the number of shares that may be acquired pursuant to such performance stock option and the transferred incentive stock option are the same,

      then the option acquired shall qualify as a performance stock option if the option price pursuant to the performance share option is no less than the option price under the transferred incentive stock option.’.

    (b) CONFORMING AMENDMENTS-

      (1) Section 421(a) of such Code is amended by striking ‘or 423(a)’ and inserting ‘, 423(a), or 424(a)’.

      (2) Section 421(b) of such Code is amended--

        (A) by striking ‘or 423(a)’ and inserting ‘, 423(a), or 424(a)’, and

        (B) by striking ‘or 423(a)(1)’ and inserting ‘423(a)(1), or 424(a)’.

      (3) Section 421(c)(1)(A) of such Code is amended by inserting ‘and the holding period requirement of section 424(a)’ after ‘423(a)’.

      (4)(A) Sections 421(a)(2), 422(a)(2), and 423(a)(2) of such Code are each amended by striking ‘424(a)’ and inserting ‘425(a)’.

      (B) Clause (ii) of section 402(e)(4)(E) of such Code is amended by striking ‘424’ and inserting ‘425’.

      (5) Section 423(b)(3) of such Code is amended by striking ‘424(d)’ and inserting ‘425(d)’.

      (6) Section 425(a) of such Code, as redesignated by subsection (a), is amended by striking ‘424(a)’ and inserting ‘425(a)’.

      (7) Section 425(c)(3)(A)(ii) of such Code, as redesignated by subsection (a), is amended by striking ‘or 423(a)(1)’ and inserting ‘, 423(a)(1), or 424(a)’.

      (8) Section 425(g) of such Code, as redesignated by subsection (a), is amended by striking ‘and 423(a)(2)’ and inserting ‘, 423(a)(2) and 424(b)(4) (as modified by section 424(c)(4))’.

      (9) Section 425(j) of such Code, as redesignated by subsection (a) (relating to cross-references), is amended by inserting ‘performance stock option’ after ‘employee stock purchase plans,’.

      (10) Section 1042(c)(1)(B)(ii) of such Code is amended by striking ‘or 423’ and inserting ‘423, or 424’.

      (11)(A) Section 6039(a)(1) of such Code is amended by inserting ‘or performance stock option’ after ‘incentive stock option’.

      (B) Section 6039(b)(1) is amended by inserting ‘, performance share option,’ after ‘incentive stock option’.

      (C) Section 6039(c) is amended by striking ‘and’ at the end of paragraph (1), by striking the period at the end of paragraph (2) and inserting ‘, and’ and by adding at the end the following new paragraph:

      ‘(3) the term ‘performance share option’, see 424(b).’.

      (12) The table of sections for part II of subchapter D of chapter 1 of such Code is amended by striking the item relating to section 424 and inserting the following new items:

‘Sec. 424. Performance stock options.

‘Sec. 425. Definitions and special rules.’.

    (c) CLARIFICATION OF MINIMUM TAX TREATMENT- Neither the grant, exercise, sale, exchange, disposition, nor any other event or transaction involving a performance stock option (as defined in section 424 of the Internal Revenue Code of 1986) shall constitute a tax preference item or adjustment for purposes of determining the tax imposed by section 55 of such Code (relating to alternative minimum tax).

SEC. 3. TAX TREATMENT OF GAIN ON PERFORMANCE SHARE OPTIONS.

    (a) EXCLUSION-

      (1) IN GENERAL- Part I of subchapter P of chapter 1 of the Internal Revenue Code of 1986 (relating to capital gains and losses) is amended by adding at the end the following new section:

‘SEC. 1202. 50-PERCENT EXCLUSION FOR GAIN FROM STOCK ACQUIRED THROUGH PERFORMANCE STOCK OPTIONS.

    ‘(a) GENERAL RULE- Gross income shall not include 50 percent of the gain from the disposition of any stock acquired pursuant to the exercise of a performance stock option if such disposition occurs more than 2 years after the date on which such option was exercised with respect to such stock.

    ‘(b) DEFINITIONS AND RULES- For purposes of this section--

      ‘(1) PERFORMANCE STOCK OPTION- The term ‘performance stock option’ has the meaning given such term by section 424(b).

      ‘(2) CERTAIN ACQUISITIONS DISREGARDED- If stock described in subsection (a) is disposed of and the basis of the person acquiring the stock is determined by reference to the basis of the stock in the hands of the person who acquired it through exercise of the performance stock option, such person shall be treated as acquiring such stock pursuant to such option on the date such stock was acquired pursuant to the exercise of such option.

      ‘(3) EXERCISE BY ESTATE- If a performance stock option is exercised after the death of an individual holder by the estate of the decedent, or by a person who acquired the right to exercise such option by bequest or inheritance or by reason of the death of the decedent, the 2-year holding requirement of subsection (a) shall not apply to the disposition by such estate or person.’.

      (2) CONFORMING AMENDMENTS-

        (A)(i) Section 172(d)(2) of such Code (relating to modifications with respect to net operating loss deduction) is amended to read as follows:

      ‘(2) CAPITAL GAINS AND LOSSES OF TAXPAYERS OTHER THAN CORPORATIONS- In the case of a taxpayer other than a corporation--

        ‘(A) the amount deductible on account of losses from sales or exchanges of capital assets shall not exceed the amount includable on account of gains from sales or exchanges of capital assets, and

        ‘(B) the exclusion provided by section 1202 shall not be allowed.’.

        (ii) Subparagraph (B) of section 172(d)(4) of such Code is amended by inserting ‘, (2)(B),’ after ‘paragraph (1)’.

        (B) Paragraph (4) of section 642(c) is amended to read as follows:

      ‘(4) ADJUSTMENTS- To the extent that the amount otherwise allowable as a deduction under this subsection consists of gain described in section 1202(a), proper adjustment shall be made for any exclusion allowable to the estate or trust under section 1202. In the case of a trust, the deduction allowed by this subsection shall be subject to section 681 (relating to unrelated business income).’.

        (C) Paragraph (3) of section 643(a) of such Code is amended by adding at the end thereof the following new sentence: ‘The exclusion under section 1202 shall not be taken into account.’

        (D) Paragraph (4) of section 691(c) of such Code is amended by striking ‘1201, and 1211’ and inserting ‘1201, 1202, and 1211’.

        (E) The second sentence of paragraph (2) of section 871(a) of such Code is amended by inserting ‘such gains and losses shall be determined without regard to section 1202 and’ after ‘except that’.

        (F) The table of sections for part I of subchapter P of chapter 1 is amended by adding after the item relating to section 1201 the following new item:

‘Sec. 1202. 50-percent exclusion for gain from stock acquired through performance stock options.’.

    (b) TREATMENT FOR WAGE WITHHOLDING AND EMPLOYMENT TAXES-

      (1) FICA TAXES- Section 3121(a) of the Internal Revenue Code of 1986 (defining wages) is amended by striking ‘or’ at the end of paragraph (20), by striking the period at the end of paragraph (21) and inserting ‘, or’, and by adding after paragraph (21) the following new paragraph:

      ‘(22) any gain from the exercise of a performance stock option (as defined in section 424(b)) or from the disposition of stock acquired pursuant to the exercise of such a performance stock option.’.

      (2) FUTA TAXES- Section 3306(b) of such Code (defining wages) is amended by striking ‘or’ at the end of paragraph (15), by striking the period at the end of paragraph (16) and inserting ‘, or’, and by adding after paragraph (16) the following new paragraph:

      ‘(17) any gain described in section 3121(a)(22).’.

      (3) WAGE WITHHOLDING-

        (A) Section 3401(a) of such Code (defining wages) is amended by striking ‘or’ at the end of paragraph (19), by striking the period at the end of paragraph (20) and inserting ‘, or’, and by adding at the end the following new paragraph:

      ‘(21) any gain from the exercise of a performance stock option (as defined in section 424(b)) or from the disposition of stock acquired pursuant to such a performance stock option .’.

        (B) Section 421(b) of such Code (relating to effect of disqualifying disposition) is amended by adding at the end the following new sentence: ‘A deduction to the employer corporation in the case of a transfer pursuant to an option described in section 422, 423, or 424 shall not be disallowed by reason of a failure to withhold tax under chapter 24 with respect to gain on stock acquired in the transfer.’.

SEC. 4. STOCK OPTION COMPENSATION.

    Section 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78n) is amended by adding at the end the following new subsection:

    ‘(h) STOCK OPTION COMPENSATION- The Commission shall not require or permit an issuer to recognize any expense or other charge in financial statements furnished to its security holders resulting from, or attributable to, either the grant, vesting, or exercise of any option or other right to acquire any equity security of such issuer (even if the right to exercise such option or right is subject to any conditions, contingencies or other criteria, including, without limitation, the continued performance of services, achievement of performance objectives, or the occurrence of any event) which is granted to its directors, officers, employees, or other persons in connection with the performance of services, where the exercise price of such option or right is not less than the fair market value of the underlying security at the time such option or right is granted.’

SEC. 5. EFFECTIVE DATE.

    The amendments made by this Act shall apply to options granted after the date of the enactment of this Act.