§133. Interest on certain loans used to acquire employer securities

(a) In general

Gross income does not include 50 percent of the interest received by-

(1) a bank (within the meaning of section 581),

(2) an insurance company to which subchapter L applies,

(3) a corporation actively engaged in the business of lending money, or

(4) a regulated investment company (as defined in section 851),

with respect to a securities acquisition loan.

(b) Securities acquisition loan

(1) In general

For purposes of this section, the term "securities acquisition loan" means-

(A) any loan to a corporation or to an employee stock ownership plan to the extent that the proceeds are used to acquire employer securities for the plan, or

(B) any loan to a corporation to the extent that, within 30 days, employer securities are transferred to the plan in an amount equal to the proceeds of such loan and such securities are allocable to accounts of plan participants within 1 year of the date of such loan.

For purposes of this paragraph, the term "employer securities" has the meaning given such term by section 409(l). The term "securities acquisition loan" shall not include a loan with a term greater than 15 years.

(2) Loans between related persons

The term "securities acquisition loan" shall not include-

(A) any loan made between corporations which are members of the same controlled group of corporations, or

(B) any loan made between an employee stock ownership plan and any person that is-

(i) the employer of any employees who are covered by the plan; or

(ii) a member of a controlled group of corporations which includes such employer.

For purposes of this paragraph, subparagraphs (A) and (B) shall not apply to any loan which, but for such subparagraphs, would be a securities acquisition loan if such loan was not originated by the employer of any employees who are covered by the plan or by any member of the controlled group of corporations which includes such employer, except that this section shall not apply to any interest received on such loan during such time as such loan is held by such employer (or any member of such controlled group).

(3) Terms applicable to certain securities acquisition loans

A loan to a corporation shall not fail to be treated as a securities acquisition loan merely because the proceeds of such loan are lent to an employee stock ownership plan sponsored by such corporation (or by any member of the controlled group of corporations which includes such corporation) if such loan includes-

(A) repayment terms which are substantially similar to the terms of the loan of such corporation from a lender described in subsection (a), or

(B) repayment terms providing for more rapid repayment of principal or interest on such loan, but only if allocations under the plan attributable to such repayment do not discriminate in favor of highly compensated employees (within the meaning of section 414(q)).

(4) Controlled group of corporations

For purposes of this paragraph, the term "controlled group of corporations" has the meaning given such term by section 409(l)(4).

(5) Treatment of refinancings

The term "securities acquisition loan" shall include any loan which-

(A) is (or is part of a series of loans) used to refinance a loan described in subparagraph (A) or (B) of paragraph (1), and

(B) meets the requirements of paragraphs (2) and (3).

(6) Plan must hold more than 50 percent of stock after acquisition or transfer

(A) In general

A loan shall not be treated as a securities acquisition loan for purposes of this section unless, immediately after the acquisition or transfer referred to in subparagraph (A) or (B) of paragraph (1), respectively, the employee stock ownership plan owns more than 50 percent of-

(i) each class of outstanding stock of the corporation issuing the employer securities, or

(ii) the total value of all outstanding stock of the corporation.

(B) Failure to retain minimum stock interest

(i) In general

Subsection (a) shall not apply to any interest received with respect to a securities acquisition loan which is allocable to any period during which the employee stock ownership plan does not own stock meeting the requirements of subparagraph (A).

(ii) Exception

To the extent provided by the Secretary, clause (i) shall not apply to any period if, within 90 days of the first date on which the failure occurred (or such longer period not in excess of 180 days as the Secretary may prescribe), the plan acquires stock which results in its meeting the requirements of subparagraph (A).

(C) Stock

For purposes of subparagraph (A)-

(i) In general

The term "stock" means stock other than stock described in section 1504(a)(4).

(ii) Treatment of certain rights

The Secretary may provide that warrants, options, contracts to acquire stock, convertible debt interests and other similar interests be treated as stock for 1 or more purposes under subparagraph (A).

(D) Aggregation rule

For purposes of determining whether the requirements of subparagraph (A) are met, an employee stock ownership plan shall be treated as owning stock in the corporation issuing the employer securities which is held by any other employee stock ownership plan which is maintained by-

(i) the employer maintaining the plan, or

(ii) any member of a controlled group of corporations (within the meaning of section 409(l)(4)) of which the employer described in clause (i) is a member.

(7) Voting rights of employer securities

A loan shall not be treated as a securities acquisition loan for purposes of this section unless-

(A) the employee stock ownership plan meets the requirements of section 409(e)(2) with respect to all employer securities acquired by, or transferred to, the plan in connection with such loan (without regard to whether or not the employer has a registration-type class of securities), and

(B) no stock described in section 409(l)(3) is acquired by, or transferred to, the plan in connection with such loan unless-

(i) such stock has voting rights equivalent to the stock to which it may be converted, and

(ii) the requirements of subparagraph (A) are met with respect to such voting rights.

(c) Employee stock ownership plan

For purposes of this section, the term "employee stock ownership plan" has the meaning given to such term by section 4975(e)(7).

(d) Application with section 483 and original issue discount rules

In applying section 483 and subpart A of part V of subchapter P to any obligation to which this section applies, appropriate adjustments shall be made to the applicable Federal rate to take into account the exclusion under subsection (a).

(e) Period to which interest exclusion applies

(1) In general

In the case of-

(A) an original securities acquisition loan, and

(B) any securities acquisition loan (or series of such loans) used to refinance the original securities acquisition loan,

subsection (a) shall apply only to interest accruing during the excludable period with respect to the original securities acquisition loan.

(2) Excludable period

For purposes of this subsection, the term "excludable period" means, with respect to any original securities acquisition loan-

(A) In general

The 7-year period beginning on the date of such loan.

(B) Loans described in subsection (b)(1)(A)

If the term of an original securities acquisition loan described in subsection (b)(1)(A) is greater than 7 years, the term of such loan. This subparagraph shall not apply to a loan described in subsection (b)(3)(B).

(3) Original securities acquisition loan

For the purposes of this subsection, the term "original securities acquisition loan" means a securities acquisition loan described in subparagraph (A) or (B) of subsection (b)(1).

(Added Pub. L. 98–369, div. A, title V, §543(a), July 18, 1984, 98 Stat. 891 ; amended Pub. L. 99–514, title XI, §1173(b)(1)(A), (2), title XVIII, §1854(c)(2)(A), (C), (D), Oct. 22, 1986, 100 Stat. 2515 , 2879; Pub. L. 100–647, title I, §1011B(h)(1), (2), Nov. 10, 1988, 102 Stat. 3490 ; Pub. L. 101–239, title VII, §7301(a)–(c), Dec. 19, 1989, 103 Stat. 2346 , 2347.)

Prior Provisions

A prior section 133 was renumbered section 137 of this title.

Amendments

1989-Subsec. (b)(1). Pub. L. 101–239, §7301(b), inserted at end "The term 'securities acquisition loan' shall not include a loan with a term greater than 15 years."

Subsec. (b)(6). Pub. L. 101–239, §7301(a), added par. (6).

Subsec. (b)(7). Pub. L. 101–239, §7301(c), added par. (7).

1988-Subsec. (b)(1)(A). Pub. L. 100–647, §1011B(h)(2)(A)(i), struck out "or are used to refinance such a loan," before "or" at end.

Subsec. (b)(1)(B). Pub. L. 100–647, §1011B(h)(2)(A)(ii), struck out ", except that this subparagraph shall not apply to any loan the commitment period of which exceeds 7 years" before period at end.

Subsec. (b)(3)(B). Pub. L. 100–647, §1011B(h)(2)(B), amended subpar. (B) generally. Prior to amendment, subpar. (B) read as follows: "repayment terms providing for more rapid repayment of principal or interest on such loan but only if-

"(i) allocations under the plan attributable to such repayment do not discriminate in favor of highly compensated employees (within the meaning of section 414(q)), and

"(ii) the total commitment period of such loan to the corporation does not exceed 7 years."

Subsec. (b)(5). Pub. L. 100–647, §1011B(h)(2)(A)(iii), added par. (5).

Subsec. (e). Pub. L. 100–647, §1011B(h)(1), added subsec. (e).

1986-Subsec. (a)(4). Pub. L. 99–514, §1173(b)(1)(A), added par. (4).

Subsec. (b)(1). Pub. L. 99–514, §1173(b)(2), amended par. (1) generally. Prior to amendment, par. (1) read as follows: "For purposes of this section, the term 'securities acquisition loan' means any loan to a corporation, or to an employee stock ownership plan, to the extent that the proceeds are used to acquire employer securities (within the meaning of section 409(l)) for the plan."

Subsec. (b)(2). Pub. L. 99–514, §1854(c)(2)(C), inserted second sentence relating to inapplicability of subpars. (A) and (B) to certain loans.

Subsec. (b)(3), (4). Pub. L. 99–514, §1854(c)(2)(D), added par. (3) and redesignated former par. (3) as (4).

Subsec. (d). Pub. L. 99–514, §1854(c)(2)(A), added subsec. (d).

Effective Date of 1989 Amendment

Section 7301(f) of Pub. L. 101–239 provided that:

"(1) In general.-Except as provided in this subsection, the amendments made by this section [enacting section 4978B of this title and amending this section and section 6047 of this title] shall apply to loans made after July 10, 1989.

"(2) Binding commitment exceptions.-

"(A) The amendments made by this section shall not apply to any loan-

"(i) which is made pursuant to a binding written commitment in effect on June 6, 1989, and at all times thereafter before such loan is made, or

"(ii) to the extent that the proceeds of such loan are used to acquire employer securities pursuant to a written binding contract (or tender offer registered with the Securities and Exchange Commission) in effect on June 6, 1989, and at all times thereafter before such securities are acquired.

"(B) The amendments made by this section shall not apply to any loan to which subparagraph (A) does not apply which is made pursuant to a binding written commitment in effect on July 10, 1989, and at all times thereafter before such loan is made. The preceding sentence shall only apply to the extent that the proceeds of such loan are used to acquire employer securities pursuant to a written binding contract (or tender offer registered with the Securities and Exchange Commission) in effect on July 10, 1989, and at all times thereafter before such securities are acquired.

"(C) The amendments made by this section shall not apply to any loan made on or before July 10, 1992, pursuant to a written agreement entered into on or before July 10, 1989, if such agreement evidences the intent of the borrower on a periodic basis to enter into securities acquisition loans described in section 133(b)(1)(B) of the Internal Revenue Code of 1986 (as in effect on the day before the date of the enactment of this Act [Dec. 19, 1989]). The preceding sentence shall apply only if one or more securities acquisition loans were made to the borrower on or before July 10, 1989.

"(3) Refinancings.-The amendments made by this section shall not apply to loans made after July 10, 1989, to refinance securities acquisition loans (determined without regard to section 133(b)(2) of the Internal Revenue Code of 1986) made on or before such date or to refinance loans described in this paragraph or paragraph (2), (4), or (5) if-

"(A) such refinancing loans meet the requirements of such section 133 of such Code (as in effect before such amendments) applicable to such loans,

"(B) immediately after the refinancing the principal amount of the loan resulting from the refinancing does not exceed the principal amount of the refinanced loan (immediately before the refinancing), and

"(C) the term of such refinancing loan does not extend beyond the later of-

"(i) the last day of the term of the original securities acquisition loan, or

"(ii) the last day of the 7-year period beginning on the date the original securities acquisition loan was made.

For purposes of this paragraph, the term 'securities acquisition loan' shall include a loan from a corporation to an employee stock ownership plan described in section 133(b)(3) of such Code.

"(4) Collective bargaining agreements.-The amendments made by this section shall not apply to any loan to the extent such loan is used to acquire employer securities for an employee stock ownership plan pursuant to a collective bargaining agreement which sets forth the material terms of such employee stock ownership plan and which was agreed to on or before June 6, 1989, by one or more employers and employee representatives (and ratified on or before such date or within a reasonable period thereafter).

"(5) Filings with united states.-The amendments made by this section shall not apply to any loan the aggregate principal amount of which was specified in a filing with an agency of the United States on or before June 6, 1989, if-

"(A) such filing specifies such loan is to be a securities acquisition loan for purposes of section 133 of the Internal Revenue Code of 1986 and such filing is for the registration required to permit the offering of such loan, or

"(B) such filing is for the approval required in order for the employee stock ownership plan to acquire more than a certain percentage of the stock of the employer.

"(6) 30-percent test substituted for 50-percent test in case of certain loans.-In the case of a loan to which the amendments made by this section apply-

"(A) which is made before November 18, 1989, or

"(B) with respect to which such amendments would not apply if paragraph (2)(A) were applied by substituting 'November 17, 1989' for 'June 6, 1989' each place it appears,

section 133(b)(6)(A) of the Internal Revenue Code of 1986 (as added by subsection (a)) shall be applied by substituting 'at least 30 percent' for 'more than 50 percent' and section 4978B(c)(1)(B) of such Code (as added by subsection (d)) shall be applied by substituting 'less than 30 percent' for '50 percent or less'. The preceding sentence shall apply to any loan which is used to refinance a loan described in such sentence if the requirements of subparagraphs (A), (B), and (C) of paragraph (3) are met with respect to the refinancing loan."

Effective Date of 1988 Amendment

Section 1011B(h)(5)(A) of Pub. L. 100–647 provided that: "The amendments made by paragraphs (1) and (2) [amending this section] shall apply to-

"(i) any loan used to acquire employer securities after July 18, 1984, and

"(ii) loans made after July 18, 1984, which were used (or were part of a series of loans used) to refinance any loan which-

"(I) was used to acquire employer securities after May 23, 1984 (July 18, 1984, in the case of a loan described in section 133(b)(3)(B) of the Internal Revenue Code of 1986), and

"(II) met the requirements of section 133 (other than subsection (b)(2) thereof) of such Code as in effect as of the later of the date on which the loan was made, or July 19, 1984.

In no event shall such amendments apply to any loan described in section 133(b)(1)(B) of such Code which is made before October 22, 1986 (or loan used, or part of a series of loans used, to refinance such a loan)."

Section 6061 of Pub. L. 100–647, as amended by Pub. L. 101–239, title VII, §7816(i), Dec. 19, 1989, 103 Stat. 2421 , provided that: "Notwithstanding the last sentence of section 1011B(h)(5)(A) of this Act [set out above], the amendments made by paragraphs (1) and (2) of section 1011B(h) of this Act [amending this section] shall not apply to any loan used to refinance a loan described in section 133(b)(1)(A) of the 1986 Code which is made before October 22, 1986, if the terms of the refinanced loan do not extend the total commitment period beyond the later of-

"(1) the term of the original securities acquisition loan, or

"(2) the amortization period used to determine the regular payments (prior to any final or balloon payment) applicable to the original securities acquisition loan."

Effective Date of 1986 Amendment

Section 1173(c)(2) of Pub. L. 99–514, as amended by Pub. L. 100–647, title I, §1011B(h)(5)(B), Nov. 10, 1988, 102 Stat. 3491 , provided that:

"(A) The amendments made by subsection (b)(1) [amending this section and section 852 of this title] shall apply to loans used to acquire employer securities after the date of the enactment of this Act [Oct. 22, 1986], including loans used to refinance loans used to acquire employer securities before such date if such loans were used to acquire employer securities after May 23, 1984.

"(B) Section 133(b)(1)(A) of the Internal Revenue Code of 1986, as amended by subsection (b)(2), shall apply to any loan used (or part of a series of loans used) to refinance a loan which-

"(i) was used to acquire employer securities after May 23, 1984, and

"(ii) met the requirements of section 133 of the Internal Revenue Code of 1986 as in effect as of the later of-

"(I) the date on which the loan was made, or

"(II) July 19, 1984.

"(C) Section 133(b)(1)(B) of the Internal Revenue Code of 1986, as added by subsection (b)(2), shall apply to loans incurred after the date of enactment of this Act [Oct. 22, 1986]."

Amendment by section 1854(c)(2)(A), (C), (D) of Pub. L. 99–514 effective, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, Pub. L. 98–369, div. A, to which such amendment relates, see section 1881 of Pub. L. 99–514, set out as a note under section 48 of this title.

Effective Date

Section 543(c) of Pub. L. 98–369 provided that: "The amendments made by this section [enacting this section] shall apply to loans used to acquire employer securities after the date of the enactment of this Act [July 18, 1984]."

Plan Amendments Not Required Until January 1, 1989

For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title.

Section Referred to in Other Sections

This section is referred to in sections 291, 812, 852, 4978, 4978B, 6047, 7872 of this title.