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108th CONGRESS
1st Session
H. R. 714
To amend the Internal Revenue Code of 1986 to expand S corporation
eligibility for banks, and for other purposes.
_______________________________________________________________________
IN THE HOUSE OF REPRESENTATIVES
February 12, 2003
Mr. McInnis (for himself, Mr. Ramstad, Mr. Matsui, Mr. English, Mr.
Pomeroy, Mr. Foley, Mr. Beauprez, Mr. Tancredo, Mr. Green of Wisconsin,
Mr. Udall of Colorado, Mrs. Musgrave, and Ms. DeGette) 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 expand S corporation
eligibility for banks, 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 ``Small Business and Financial
Institutions Tax Relief Act of 2003''.
SEC. 2. EXPANSION OF BANK S CORPORATION ELIGIBLE SHAREHOLDERS TO
INCLUDE IRAS.
(a) In General.--Section 1361(c)(2)(A) of the Internal Revenue Code
of 1986 (relating to certain trusts permitted as shareholders) is
amended by inserting after clause (v) the following new clause:
``(vi) In the case of a corporation which
is a bank (as defined in section 581), a trust
which constitutes an individual retirement
account under section 408(a), including one
designated as a Roth IRA under section 408A,
but only to the extent of the stock held by
such trust in such bank as of the date of the
enactment of this clause.''.
(b) Treatment as Shareholder.--Section 1361(c)(2)(B) of such Code
(relating to treatment as shareholders) is amended by adding at the end
the following new clause:
``(vi) In the case of a trust described in
clause (vi) of subparagraph (A), the individual
for whose benefit the trust was created shall
be treated as a shareholder.''.
(c) Sale of Stock in IRA Relating to S Corporation Election Exempt
From Prohibited Transaction Rules.--Section 4975(d) of such Code
(relating to exemptions) is amended by striking ``or'' at the end of
paragraph (14), by striking the period at the end of paragraph (15) and
inserting ``; or'', and by adding at the end the following new
paragraph:
``(16) a sale of stock held by a trust which constitutes an
individual retirement account under section 408(a) to the
individual for whose benefit such account is established if
such sale is pursuant to an election under section 1362(a).''.
(d) Conforming Amendment.--Section 512(e)(1) of such Code is
amended by inserting ``1361(c)(2)(A)(vi) or'' before ``1361(c)(6)''.
(e) Effective Date.--The amendments made by this section shall
apply to trusts which constitute individual retirement accounts on the
date of the enactment of this Act.
SEC. 3. EXCLUSION OF INVESTMENT SECURITIES INCOME FROM PASSIVE INCOME
TEST FOR BANK S CORPORATIONS.
(a) In General.--Section 1362(d)(3)(C) of the Internal Revenue
Code of 1986 (defining passive investment income) is amended by adding
at the end the following:
``(v) Exception for banks; etc.--In the
case of a bank (as defined in section 581) or a
bank holding company (as defined in section
246A(c)(3)(B)(ii)), the term `passive
investment income' shall not include--
``(I) interest income earned by
such bank or bank holding company, or
``(II) dividends on assets required
to be held by such bank or bank holding
company to conduct a banking business,
including stock in the Federal Reserve
Bank, the Federal Home Loan Bank, or
the Federal Agricultural Mortgage Bank
or participation certificates issued by
a Federal Intermediate Credit Bank.''
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2003.
SEC. 4. INCREASE IN NUMBER OF ELIGIBLE SHAREHOLDERS TO 150.
(a) In General.--Section 1361(b)(1)(A) of the Internal Revenue Code
of 1986 (defining small business corporation) is amended by striking
``75 shareholders'' and inserting ``150 shareholders''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2003.
SEC. 5. TREATMENT OF QUALIFYING DIRECTOR SHARES.
(a) In General.--Section 1361 of the Internal Revenue Code of 1986
is amended by adding at the end the following:
``(f) Treatment of Qualifying Director Shares.--
``(1) In general.--For purposes of this subchapter--
``(A) qualifying director shares shall not be
treated as a second class of stock, and
``(B) no person shall be treated as a shareholder
of the corporation by reason of holding qualifying
director shares.
``(2) Qualifying director shares defined.--For purposes of
this subsection, the term `qualifying director shares' means
any shares of stock in a bank (as defined in section 581) or in
a bank holding company registered as such with the Federal
Reserve System--
``(i) which are held by an individual
solely by reason of status as a director
of such bank or company or its controlled subsidiary; and
``(ii) which are subject to an agreement
pursuant to which the holder is required to
dispose of the shares of stock upon termination
of the holder's status as a director at the
same price as the individual acquired such
shares of stock.
``(3) Distributions.--A distribution (not in part or full
payment in exchange for stock) made by the corporation with
respect to qualifying director shares shall be includible as
ordinary income of the holder and deductible to the corporation
as an expense in computing taxable income under section 1363(b)
in the year such distribution is received.''
(b) Conforming Amendments.--
(1) Section 1361(b)(1) of the Internal Revenue Code of 1986
is amended by inserting ``, except as provided in subsection
(f),'' before ``which does not''.
(2) Section 1366(a) of such Code is amended by adding at
the end the following:
``(3) Allocation with respect to qualifying director
shares.--The holders of qualifying director shares (as defined
in section 1361(f)) shall not, with respect to such shares of
stock, be allocated any of the items described in paragraph
(1).''
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2003.
SEC. 6. RECAPTURE OF BAD DEBT RESERVES.
In the case of a bank which makes an S corporation election which
first takes effect for a taxable year beginning after December 31,
2003, the entire adjustment required by section 481 of the Internal
Revenue Code of 1986 by reason of changing its accounting method for
recognizing bad debts from the reserve method under section 585 or 593
of such Code to the charge-off method under section 166 of such Code
may be taken into in the year of the change or the preceding taxable
year (whichever is elected by the bank).
SEC. 7. CLARIFICATION OF 3-YEAR S CORPORATION RULE FOR CORPORATE
PREFERENCE ITEMS.
(a) In General.--Section 1363(b) of the Internal Revenue Code of
1986 (relating to computation of corporation's taxable income) is
amended by adding at the end the following new flush sentence:
``Nothing in the preceding sentence shall be construed to apply section
291 to any taxable year which is more than 3 taxable years after the S
corporation (or any predecessor) was a C corporation.''
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2003.
SEC. 8. MEMBERS OF FAMILY TREATED AS 1 SHAREHOLDER.
(a) In General.--Paragraph (1) of section 1361(c) of the Internal
Revenue Code of 1986 (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 3
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) of such Code (relating to inadvertent invalid elections
or terminations) is amended--
(1) by inserting ``or under section 1361(c)(1)(A)(ii)''
after ``subsection (a)'' in paragraph (1), and
(2) by inserting ``or under section 1361(c)(1)(E)(iii)''
after ``subsection (d)'' 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. 9. ISSUANCE OF PREFERRED STOCK PERMITTED.
(a) In General.--Section 1361 of the Internal Revenue Code of 1986,
as amended by section 5(a), is amended by adding at the end the
following:
``(g) Treatment of Qualified Preferred Stock.--
``(1) In general.--For purposes of this subchapter--
``(A) qualified preferred stock shall not be
treated as a second class of stock, and
``(B) no person shall be treated as a shareholder
of the corporation by reason of holding qualified
preferred stock.
``(2) Qualified preferred stock defined.--For purposes of
this subsection, the term `qualified preferred stock' means
stock which meets the requirements of subparagraphs (A), (B),
and (C) of section 1504(a)(4). Stock shall not fail to be
treated as qualified preferred stock solely because it is
convertible into other stock.
``(3) Distributions.--A distribution (not in part or full
payment in exchange for stock) made by the corporation with
respect to qualified preferred stock shall be includible as
ordinary income of the holder and deductible to the corporation
as an expense in computing taxable income under section 1363(b)
in the year such distribution is received.''
(b) Conforming Amendments.--
(1) Section 1361(b)(1) of the Internal Revenue Code of
1986, as amended by section 5(b)(1), is amended by striking
``subsection (f)'' and inserting ``subsections (f) and (g)''.
(2) Section 1366(a) of such Code, as amended by section
5(b)(2), is amended by adding at the end the following:
``(4) Allocation with respect to qualified preferred
stock.--The holders of qualified preferred stock (as defined in
section 1361(g)) shall not, with respect to such stock, be
allocated any of the items described in paragraph (1).''
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2003.
SEC. 10. INFORMATION RETURNS FOR QUALIFIED SUBCHAPTER S SUBSIDIARIES.
(a) In General.--Section 1361(b)(3)(A) of the Internal Revenue Code
of 1986 (relating to treatment of certain wholly owned subsidiaries) is
amended by inserting ``and in the case of information returns required
under part III of subchapter A of chapter 61'' after ``Secretary''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2003.
SEC. 11. ADJUSTMENT TO BASIS OF S CORPORATION STOCK FOR CERTAIN
CHARITABLE CONTRIBUTIONS.
(a) In General.--Paragraph (2) of section 1367(a) of the Internal
Revenue Code of 1986 (relating to adjustments to basis of stock of
shareholders, etc.) is amended by adding at the end the following new
flush sentence:
``The decrease under subparagraph (B) by reason of a charitable
contribution (as defined in section 170(c)) of property shall
be the amount equal to the shareholder's pro rata share of the
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