This bill amends the Internal Revenue Code to modify how private foundations count stock held by employee-owned enterprises. Specifically, it adds new provisions that treat certain voting stock purchased from an employee stock ownership plan (ESOP) as outstanding voting stock for purposes of calculating excess business holdings, but only to the extent doing so would not push a foundation’s permitted holdings over 49 percent.
The stock must meet criteria: it is not readily tradable on a securities market, is purchased from the ESOP after 2020 by the business enterprise, and is held as treasury stock, cancelled, or retired. The measure also provides that the 10-year period beginning with the ESOP plan’s establishment is not covered by this treatment.
Finally, the amendments apply to taxable years ending after enactment and to purchases by a business enterprise of voting stock in years beginning after December 31, 2019.
At a Glance
What It Does
Adds two new clauses to IRC 4943(c)(4)(A): (v) to treat certain ESOP stock as outstanding voting stock (subject to a 49% cap), and (vi) to disregard any decrease in holdings caused by applying clause (v).
Who It Affects
Private foundations with holdings in ESOP-backed businesses, and the businesses themselves that purchase ESOP stock; ESOP sponsors and employees participating in the ESOP.
Why It Matters
This tightens the interaction between employee ownership structures and private foundation rules, potentially easing or constraining counting of holdings depending on whether the 49% cap is reached, and clarifying how ESOP stock is treated for foundation purposes.
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What This Bill Actually Does
The bill targets how private foundations count holdings in businesses that have ESOP-based ownership. It specifically adds new language to the tax code to treat some employee-owned stock, purchased by a business from an ESOP and held as treasury stock, as if it were still outstanding voting stock for the purpose of determining excess business holdings.
However, this treatment is capped: it only applies to the extent that counting the stock would not push a foundation beyond a 49% ownership threshold. The stock must be voting, not readily tradable, and purchased after 2020 from an ESOP in which employees participate, with the stock held by the business enterprise as treasury stock, cancelled, or retired.
In addition, the provision excludes purchases during the first 10 years after an ESOP plan’s establishment from this treatment, and it clarifies that a decrease in holdings caused by this new treatment is not covered by another specific provision. The amendments propose two effective dates: for taxable years ending after enactment and for ESOP stock purchases in taxable years beginning after December 31, 2019.
The Five Things You Need to Know
The bill adds IRC 4943(c)(4)(A)(v) to count certain ESOP stock as outstanding voting stock, up to the 49% cap.
It applies only to voting stock not readily tradable and purchased from an ESOP after 2020 by the involved business enterprise.
Stock held as treasury stock, cancelled, or retired and purchased from ESOPs is eligible for treatment under the new clause.
Clause (vi) ensures that decreases in holdings due to clause (v) are not treated under another subsection of the code.
The amendments apply to taxable years ending after enactment and to ESOP stock purchases in years beginning after December 31, 2019.
Section-by-Section Breakdown
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Short title
This section designates the bill’s short title as the Reduction of Excess Business Holding Accrual Act.
Purchases of employee-owned stock disregarded for foundation tax
This section adds two new clauses to section 4943(c)(4)(A) of the Internal Revenue Code. Clause (v) provides that voting stock not readily tradable on an established market, purchased by a business entity from an ESOP after January 1, 2020, and held by the enterprise as treasury stock, cancelled, or retired, shall be treated as outstanding voting stock. This treatment is limited to the extent that it would not cause a private foundation’s permitted holdings to exceed 49 percent. Clause (vi) states that the application of clause (v) shall not trigger the treatment described in Section 4943(c)(4)(A)(ii) for any decrease in holdings caused by clause (v). The section also includes an effective date tying the amendments to taxable years ending after enactment and purchases in taxable years beginning after December 31, 2019.
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Explore Finance in Codify Search →Who Benefits and Who Bears the Cost
Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Private foundations that have investments in ESOP-backed businesses and seek guidance on counting stock without breaching the 49% cap.
- Businesses operating ESOPs that rely on employee ownership and want to retain flexibility in ownership calculations for foundation purposes.
- ESOP plan sponsors and participating employees who may benefit from clearer tax treatment of stock distributions.
- Tax professionals and compliance officers who must implement the policy changes with precision.
Who Bears the Cost
- Foundations that could see more complex calculations when ESOP stock approaches the 49% threshold.
- Businesses with large non-tradable ESOP stock holdings that could be counted as outstanding under the new rule.
- IRS and private foundation administrators who must administer and audit compliance under the revised standard.
- Plan sponsors who must ensure stock purchases comply with the 10-year window and the tradability criteria.
- Entities that rely on adaptive application of “permitted holdings” in mixed-ownership structures.
Key Issues
The Core Tension
The core dilemma is whether to count as outstanding voting stock in a way that preserves the ability of foundations to hold interests in ESOP-backed enterprises without eroding the 49% cap, while avoiding loopholes that widen a foundation’s control beyond intended limits.
The bill creates a narrow, targeted adjustment intended to balance the goal of employee ownership with the private foundation framework’s exposure limits. It hinges on a few technical definitions—such as “not readily tradable,” “treasury stock, cancelled, or retired,” and how “outstanding voting stock” is counted—whose interpretations could shape practical compliance.
The 10-year window adds a temporal guardrail that may limit early use of the new treatment, potentially reducing immediate impact for newly established ESOPs. Ambiguities could arise in mixed-ownership contexts or where stock transitions between treasury and outstanding status occur during a taxable year.
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