Home > 106th Congressional Bills > H.R. 1897 (ih) To provide for the establishment and maintenance of personal Social Security investment accounts under the Social Security system. [Introduced in House] ...

H.R. 1897 (ih) To provide for the establishment and maintenance of personal Social Security investment accounts under the Social Security system. [Introduced in House] ...


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108th CONGRESS
  1st Session
                                H. R. 1896

To amend the Internal Revenue Code of 1986 to provide for S corporation 
                    reform, and for other purposes.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                             April 30, 2003

Mr. Shaw (for himself, Mr. Matsui, Mr. McInnis, and Mrs. Jones of Ohio) 
 introduced the following bill; which was referred to the Committee on 
                             Ways and Means

_______________________________________________________________________

                                 A BILL


 
To amend the Internal Revenue Code of 1986 to provide for S corporation 
                    reform, 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; AMENDMENT OF 1986 CODE; TABLE OF CONTENTS.

    (a) Short Title.--This Act may be cited as the ``Subchapter S 
Modernization Act of 2003''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.
    (c) Table of Contents.--The table of contents is as follows:

Sec. 1. Short title; amendment of 1986 code; table of contents.
           TITLE I--ELIGIBLE SHAREHOLDERS OF AN S CORPORATION

Sec. 101. Members of family treated as 1 shareholder.
Sec. 102. Nonresident aliens allowed to be shareholders.
Sec. 103. Expansion of bank S corporation eligible shareholders to 
                            include IRAs.
Sec. 104. Increase in number of eligible shareholders to 150.
 TITLE II--QUALIFICATION AND ELIGIBILITY REQUIREMENTS OF S CORPORATIONS

Sec. 201. Issuance of preferred stock permitted.
Sec. 202. Safe harbor expanded to include convertible debt.
Sec. 203. Repeal of excessive passive investment income as a 
                            termination event.
Sec. 204. Modifications to passive income rules.
Sec. 205. Adjustment to basis of S corporation stock for certain 
                            charitable contributions.
           TITLE III--TREATMENT OF S CORPORATION SHAREHOLDERS

Sec. 301. Treatment of losses to shareholders.
Sec. 302. Transfer of suspended losses incident to divorce.
Sec. 303. Use of passive activity loss and at-risk amounts by qualified 
                            subchapter S trust income beneficiaries.
Sec. 304. Deductibility of interest expense incurred by an electing 
                            small business trust to acquire S 
                            corporation stock.
Sec. 305. Disregard of unexercised powers of appointment in determining 
                            potential current beneficiaries of ESBT.
Sec. 306. Clarification of electing small business trust distribution 
                            rules.
Sec. 307. Allowance of charitable contributions deduction for electing 
                            small business trusts.
Sec. 308. Shareholder basis not increased by income derived from 
                            cancellation of S corporation's debt.
Sec. 309. Back to back loans as indebtedness.
       TITLE IV--EXPANSION OF S CORPORATION ELIGIBILITY FOR BANKS

Sec. 401. Exclusion of investment securities income from passive income 
                            test for bank S corporations.
Sec. 402. Treatment of qualifying director shares.
Sec. 403. Recapture of bad debt reserves.
              TITLE V--QUALIFIED SUBCHAPTER S SUBSIDIARIES

Sec. 501. Relief from inadvertently invalid qualified subchapter S 
                            subsidiary elections and terminations.
Sec. 502. Information returns for qualified subchapter S subsidiaries.
Sec. 503. Treatment of the sale of interest in a qualified subchapter S 
                            subsidiary.
Sec. 504. Exception to application of step transaction doctrine for 
                            restructuring in connection with making 
                            qualified subchapter S subsidiary 
                            elections.
                    TITLE VI--ADDITIONAL PROVISIONS

Sec. 601. Elimination of all earnings and profits attributable to pre-
                            1983 years.
Sec. 602. No gain or loss on deferred intercompany transactions because 
                            of conversion to S corporation or qualified 
                            S corporation subsidiary.
Sec. 603. Treatment of charitable contribution and foreign tax credit 
                            carryforwards.
Sec. 604. Distributions by an S corporation to an employee stock 
                            ownership plan.
Sec. 605. Special rules of application.

           TITLE I--ELIGIBLE SHAREHOLDERS OF AN S CORPORATION

SEC. 101. MEMBERS OF FAMILY TREATED AS 1 SHAREHOLDER.

    (a) In General.--Paragraph (1) of section 1361(c) (relating to 
special rules for applying subsection (b)) is amended to read as 
follows:
            ``(1) Members of family treated as 1 shareholder.--
                    ``(A) In general.--For purpose of subsection 
                (b)(1)(A)--
                            ``(i) except as provided in clause (ii), a 
                        husband and wife (and their estates) shall be 
                        treated as 1 shareholder, and
                            ``(ii) in the case of a family with respect 
                        to which an election is in effect under 
                        subparagraph (E), all members of the family 
                        shall be treated as 1 shareholder.
                    ``(B) Members of the family.--For purpose of 
                subparagraph (A)(ii), the term `members of the family' 
                means the common ancestor, lineal descendants of the 
                common ancestor and the spouses (or former spouses) of 
                such lineal descendants or common ancestor.
                    ``(C) Common ancestor.--For purposes of this 
                paragraph, an individual shall not be considered a 
                common ancestor if, as of the later of the effective 
                date of this paragraph or the time the election under 
                section 1362(a) is made, the individual is more than 6 
                generations removed from the youngest generation of 
                shareholders.
                    ``(D) Effect of adoption, etc.--In determining 
                whether any relationship specified in subparagraph (B) 
                or (C) exists, the rules of section 152(b)(2) shall 
                apply.
                    ``(E) Election.--An election under subparagraph 
                (A)(ii)--
                            ``(i) must be made with the consent of 
                        shareholders (including those that are family 
                        members) holding in the aggregate more than 
                        one-half of the shares of stock in the 
                        corporation on the day the election is made,
                            ``(ii) in the case of--
                                    ``(I) an electing small business 
                                trust, shall be made by the trustee of 
                                the trust, and
                                    ``(II) a qualified subchapter S 
                                trust, shall be made by the beneficiary 
                                of the trust,
                            ``(iii) under regulations, shall remain in 
                        effect until terminated, and
                            ``(iv) shall apply only with respect to 1 
                        family in any corporation.''.
    (b) Relief From Inadvertent Invalid Election or Termination.--
Section 1362(f) (relating to inadvertent invalid elections or 
terminations), as amended by section 501, is amended--
            (1) by inserting ``or under section 1361(c)(1)(A)(ii)'' 
        after ``section 1361(b)(3)(B)(ii)'' in paragraph (1), and
            (2) by inserting ``or under section 1361(c)(1)(E)(iii)'' 
        after ``section 1361(b)(3)(C)'' in paragraph (1)(B).
    (c) Effective Dates.--
            (1) Subsection (a).--The amendment made by subsection (a) 
        shall apply to taxable years beginning after December 31, 2003.
            (2) Subsection (b).--The amendments made by subsection (b) 
        shall apply to elections and terminations made after December 
        31, 2003.

SEC. 102. NONRESIDENT ALIENS ALLOWED TO BE SHAREHOLDERS.

    (a) Nonresident Aliens Allowed To Be Shareholders.--
            (1) In general.--Paragraph (1) of section 1361(b) (defining 
        small business corporation) is amended--
                    (A) by adding ``and'' at the end of subparagraph 
                (B),
                    (B) by striking subparagraph (C), and
                    (C) by redesignating subparagraph (D) as 
                subparagraph (C).
            (2) Conforming amendments.--Paragraph (4) and (5)(A) of 
        section 1361(c) (relating to special rules for applying 
        subsection (b)) are each amended by striking ``subsection 
        (b)(1)(D)'' and inserting ``subsection (b)(1)(C)''.
    (b) Nonresident Alien Shareholder Treated as Engaged in Trade or 
Business Within United States.--
            (1) In general.--Section 875 is amended--
                    (A) by striking ``and'' at the end of paragraph 
                (1),
                    (B) by striking the period at the end of paragraph 
                (2) and inserting ``, and'', and
                    (C) by adding at the end the following new 
                paragraph:
            ``(3) a nonresident alien individual shall be considered as 
        being engaged in a trade or business within the United States 
        if the S corporation of which such individual is a shareholder 
        is so engaged.''.
            (2) Application of withholding tax on nonresident alien 
        shareholders.--Section 1446 (relating to withholding tax on 
        foreign partners' share of effectively connected income) is 
        amended by redesignating subsection (f) as subsection (g) and 
        by inserting after subsection (e) the following new subsection:
    ``(f) S Corporation Treated as Partnership, Etc.--For purposes of 
this section--
            ``(1) an S corporation shall be treated as a partnership,
            ``(2) the shareholders of such corporation shall be treated 
        as partners of such partnership,
            ``(3) any reference to section 704 shall be treated as a 
        reference to section 1366, and
            ``(4) no withholding tax under subsection (a) shall be 
        required in the case of any income realized by such corporation 
        and allocable to a shareholder which is an electing small 
        business trust (as defined in section 1361(e)).''.
            (3) Conforming amendments.--
                    (A) The heading of section 875 is amended to read 
                as follows:

``SEC. 875. PARTNERSHIPS; BENEFICIARIES OF ESTATES AND TRUSTS; S 
              CORPORATIONS.''.

                    (B) The heading of section 1446 is amended to read 
                as follows:

``SEC. 1446. WITHHOLDING TAX ON FOREIGN PARTNERS' AND S CORPORATION 
              SHAREHOLDERS' SHARE OF EFFECTIVELY CONNECTED INCOME.''.

            (4) Clerical amendments.--
                    (A) The item relating to section 875 in the table 
                of sections for subpart A of part II of subchapter N of 
                chapter 1 is amended to read as follows:

``Sec. 875. Partnerships; beneficiaries of estates and trusts; S 
                            corporations.''.
                    (B) The item relating to section 1446 in the table 
                of sections for subchapter A of chapter 3 is amended to 
                read as follows:

``Sec. 1446. Withholding tax on foreign partners' and S corporation 
                            shareholders' share of effectively 
                            connected income.''.
                    (C) Permanent establishment of partners and s 
                corporation shareholders.--Section 894 (relating to 
                income affected by treaty) is amended by redesignating 
                subsection (c) as subsection (d) and by inserting after 
                subsection (b) the following new subsection:
    ``(c) Permanent Establishment of Partners and S Corporation 
Shareholders.--If a partnership or S corporation has a permanent 
establishment in the United States (within the meaning of a treaty to 
which the United States is a party) at any time during a taxable year 
of such entity, a nonresident alien individual or foreign corporation 
which is a partner in such partnership, or a nonresident alien 
individual who is a shareholder in such S corporation, shall be treated 
as having a permanent establishment in the United States for purposes 
of such treaty.''.
    (c) Application of Other Withholding Tax Rules on Nonresident Alien 
Shareholders.--
            (1) Section 1441.--Section 1441 (relating to withholding of 
        tax on nonresident aliens) is amended by redesignating 
        subsection (g) as subsection (h) and by inserting after 
        subsection (f) the following new subsection:
    ``(g) S Corporation Treated as Partnership, Etc.--For purposes of 
this section--
            ``(1) an S corporation shall be treated as a partnership,
            ``(2) the shareholders of such corporation shall be treated 
        as partners of such partnership, and
            ``(3) no deduction or withholding under subsection (a) 
        shall be required in the case of any item of income realized by 
        such corporation and allocable to a shareholder which is an 
        electing small business trust (as defined in section 
        1361(e)).''.
            (2) Section 1445.--Section 1445(e) (relating to special 
        rules relating to distributions, etc., by corporations, 
        partnerships, trusts, or estates) is amended by redesignating 
        paragraph (6) as paragraph (7) and by inserting after paragraph 
        (5) the following new paragraph:
            ``(6) S corporation treated as partnership, etc.--For 
        purposes of this section--
                    ``(A) an S corporation shall be treated as a 
                partnership, and
                    ``(B) the shareholders of such corporation shall be 
                treated as partners of such partnership, and
                    ``(C) no deduction or withholding under subsection 
                (a) shall be required in the case of any gain realized 
                by such corporation and allocable to a shareholder 
                which is an electing small business trust (as defined 
                in section 1361(e)).''.
    (d) Conforming Amendment.--Section 1361(e)(2) is amended by 
inserting ``(including a nonresident alien)'' after ``person'' the 
first place it appears.
    (e) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

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