Here is the text of Section 409B of Rangel's Corporate Tax Proposal:

SEC. 409B. RECOGNITION OF ORDINARY INCOME ON SALE OR EXERCISE OF STOCK OPTION IN S CORPORATION WITH AN ESOP.

(a) IN GENERAL.—If an S corporation in which an employee stock ownership plan is a stockholder grants an option with respect to its stock and such option is sold or exercised, there shall be included in the gross income of the holder of such option (determined immediately before such sale or exercise) as ordinary income an amount equal to the income inclusion amount.

(b) INCOME INCLUSION AMOUNT.—For purposes of this section, the term 'income inclusion amount' means, with respect to the holder of any option, the excess (if any) of—

(1) the sum of the net income amounts with respect to such option for all taxable years of the S corporation ending during the taxpayer's holding period, over

(2) the sum of the net loss amounts with respect to such option for all such taxable years.

(c) NET INCOME AND LOSS AMOUNTS.—For purposes of this section, with respect to any taxable year of the S corporation—

(1) NET INCOME AMOUNT.—The term 'net income amount' means the excess (if any) of—

(A) the pass-thru income share for such taxable year, over

(B) the pass-thru loss share for such taxable year.

(2) NET LOSS AMOUNT.—The term 'net loss amount' means the excess (if any) of the amount described in paragraph (1)(B) over the amount described in paragraph (1)(A).

(d) PASS-THRU INCOME AND LOSS SHARES.—For purposes of this section, with respect to any taxable year of the S corporation—

(1) PASS-THRU INCOME SHARE.—The term 'pass-thru income share' means the excess (if any) of—

(A) the aggregate items of income taken into account under section 1366 by the employee stock ownership plan for such taxable year, over

(B) the aggregate items of income which would have been so taken into account if such option had been exercised upon being granted.

(2) PASS-THRU LOSS SHARE.—The term 'pass-thru loss share' means the excess (if any) of—

(A) the aggregate items of deduction and loss taken into account under section 1366 by the employee stock ownership plan for such taxable year, over

(B) the aggregate items of deduction and loss which would have been so taken into account if such option had been exercised upon being granted.

(e) INTEREST AT UNDERPAYMENT RATE.—

(1) IN GENERAL.—In the case of any taxpayer who includes any amount in gross income for any taxable year under subsection (a), the tax imposed by this chapter on such taxpayer for such taxable year shall be increased by interest at the under payment rate determined under section 6621 on the underpayments that would have occurred had the net income amounts with respect to each taxable year taken into account under subsection (c) been includible in the taxpayer's gross income for each of taxable year of the taxpayer in or with which the taxable year so taken into account ends.

(2) REDUCTION FOR PREVIOUS NET LOSS AMOUNTS.—For purposes of paragraph (1), the net income amount for any taxable year shall be reduced by the excess of—

(A) the aggregate net loss amounts for taxable years taken into account under subsection (c) with respect to the taxpayer, over

(B) the amount of such aggregate previously taken into account under this paragraph to reduce any net income amount.

(f) OTHER DEFINITIONS AND SPECIAL RULES.— For purposes of this section—

(1) OPTION.—The term 'option' includes any synthetic equity described in section 409(p)(6)(C).

(2) EFFECT OF STARTING OR TERMINATING AN S CORPORATION ELECTION.—With respect to any option, a corporation which is an S corporation for any taxable year which ends while such option is outstanding shall be treated for purposes of this section (other than subsection (d)) as an S corporation for all taxable years which end while such option is outstanding.

(3) ADJUSTMENTS TO BASIS.—

(A) INCREASE IN BASIS OF ACQUIRED STOCK.—The taxpayer's basis in any stock acquired pursuant to the exercise of an option to which subsection (a) applies shall be increased by the amount included in gross income by the taxpayer under subsection (a) with respect to such option.

(B) INCREASE IN BASIS OF OPTION ON SALE.—The taxpayer's basis in any option shall be increased by the amount included in gross income by the taxpayer under subsection (a) with respect to such option.''.

(b) CONFORMING AMENDMENTS.—

(1) Section 26(b)(2), as amended by this Act, is amended by striking ''and'' at the end of subparagraph (T), by striking the period at the end of sub paragraph (U) and inserting '', and'', and by adding at the end the following new subparagraph: ''(V) subsection (e) of section 409B (relating to interest on income recognized upon exercise of a stock option in an S corporation with an ESOP).''.

(2) Section 1016(a) is amended by striking ''and'' at the end of paragraph (36), by striking the period at the end of paragraph (37) and inserting '', and'', and by adding at the end the following new paragraph:''(38) to the extent provided in section 409B(f)(3).''.

(3) The table of sections for subpart A of part I of subchapter D of chapter 1 is amended by adding at the end the following new item:

''Sec. 409B. Recognition of ordinary income on sale or exercise of stock option in S corporation with an ESOP.''.

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to options granted after the date of the enactment of this Act.

As we discussed in the previously-mentioned post and this post, the bill is unlikely to pass earlier than 2008, if at all. For more coverage of the impact of the proposed tax bill on ESOPs, see Rangel Bill Would Tax Stock Option Exercise in S Corps. With ESOPs.