Small Business and Financial Institutions Tax Relief Act of 1999

Summary: Small Business and Financial Institutions Tax Relief Act of 1999 - Amends the Internal Revenue Code to permit S corporation eligible shareholders to include individual retirement accounts (IRAs). 
(Sec. 2) Exempts from prohibited transaction rules any sale of stock in an IRA pursuant to a small business corporation's election to be an S corporation. 
(Sec. 3) Excludes from the definition of passive income for purposes of S status termination any interest income earned by or dividends on assets required to be held by a bank, a bank holding company, or a qualified subchapter S subsidiary bank. 
(Sec. 4) Increases from 75 to 150 the maximum number of shareholders a small business organization may have to be eligible to elect S corporation treatment. 
(Sec. 5) States that stock held by a bank director as required by banking regulations (director qualifying stock) shall not be considered a disqualifying second class of S corporation stock. 
(Sec. 6) Directs the Secretary of the Treasury to modify a certain regulation to permit an S corporation bank to treat certain bad debt deductions as built-in losses during the entire period during which the bank recognized built-in gains from changing its accounting method for recognizing bad debts from the reserve method to the charge-off method. 
(Sec. 7) Includes all banks within the three-year deduction preference rule. 
(Sec. 8) Makes family limited partnerships eligible to be S corporation shareholders. 
(Sec. 9) Permits the issuance of qualified preferred stock, which shall not be treated as second class stock.  Makes any distribution (not in payment in exchange for stock) made by an S corporation with respect to qualified preferred stock includible as ordinary income of the holder and deductible to the corporation as an expense. 
(Sec. 10) Reduces from 100 percent to 90 percent the percentage of shares held by shareholders necessary for consent to election by a small business organization to be an S corporation.  Prescribes rules for such consent. 
(Sec. 11) Revises exceptions to the criteria for the treatment of certain wholly owned subchapter S subsidiaries with reference to required information returns.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Small Business and Financial 
Institutions Tax Relief Act of 1999''.

SEC. 2. EXPANSION OF 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:
                            ``(vi) A trust which constitutes an 
                        individual retirement account under section 
                        408(a), including one designated as a Roth IRA 
                        under section 408A.''
    (b) Treatment as Shareholder.--Section 1361(c)(2)(B) of the 
Internal Revenue Code of 1986 (relating to treatment as shareholders) 
is amended by adding at the end the following:
                            ``(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 the Internal 
Revenue Code of 1986 (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:
            ``(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) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1999.

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), a 
                        bank holding company (as defined in section 
                        246A(c)(3)(B)(ii)), or a qualified subchapter S 
                        subsidiary bank, the term `passive investment 
                        income' shall not include--
                                    ``(I) interest income earned by 
                                such bank, bank holding company, or 
                                qualified subchapter S subsidiary bank, 
                                or
                                    ``(II) dividends on assets required 
                                to be held by such bank, bank holding 
                                company, or qualified subchapter S 
                                subsidiary bank 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, 1996.

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'' and inserting ``150''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 1999.

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).''
            (3) Section 1373(a) of such Code is amended by striking 
        ``and'' at the end of paragraph (1), by striking the period at 
        the end of paragraph (2) and inserting ``, and'', and adding at 
        the end the following:
            ``(3) no amount of an expense deductible under this 
        subchapter by reason of section 1361(f)(3) shall be apportioned 
        or allocated to such income.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1996.

SEC. 6. BAD DEBT CHARGE OFFS IN YEARS AFTER ELECTION YEAR TREATED AS 
              ITEMS OF BUILT-IN LOSS.

    The Secretary of the Treasury shall modify Regulation 1.1374-4(f) 
for S corporation elections made in taxable years beginning after 
December 31, 1996, with respect to bad debt deductions under section 
166 of the Internal Revenue Code of 1986 to treat such deductions as 
built-in losses under section 1374(d)(4) of such Code during the entire 
period during which the bank recognizes built-in gains from changing 
its accounting method for recognizing bad debts from the reserve method 
under section 585 of such Code to the charge-off method under section 
166 of such Code.

SEC. 7. INCLUSION OF BANKS IN 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:
``Paragraph (4) shall apply to any bank whether such bank is an S 
corporation or a qualified subchapter S subsidiary.''
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 1999.

SEC. 8. EXPANSION OF S CORPORATION ELIGIBLE SHAREHOLDERS TO INCLUDE 
              FAMILY LIMITED PARTNERSHIPS.

    (a) In General.--Section 1361(b)(1)(B) of the Internal Revenue Code 
of 1986 (defining small business corporation) is amended--
            (1) by striking ``or an organization'' and inserting ``an 
        organization'', and
            (2) by inserting ``, or a family partnership described in 
        subsection (c)(8)'' after ``subsection (c)(6)''.
    (b) Family Partnership.--Section 1361(c) of the Internal Revenue 
Code of 1986 (relating to special rules for applying subsection (b)), 
as amended by section 5, is amended by adding at the end the following:
            ``(8) Family partnerships.--
                    ``(A) In general.--For purposes of subsection 
                (b)(1)(B), any partnership or limited liability company 
                may be a shareholder in an S corporation if--
                            ``(i) all partners or members are members 
                        of 1 family as determined under section 
                        704(e)(3), and
                            ``(ii) all of the partners or members would 
                        otherwise be eligible shareholders of an S 
                        corporation.
                    ``(B) Treatment as shareholders.--For purposes of 
                subsection (b)(1)(A), in the case of a partnership or 
                limited liability company described in subparagraph 
                (A), each partner or member shall be treated as a 
                shareholder.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1999.

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).''
            (3) Section 1373(a)(3) of such Code, as added by section 
        5(b)(3), is amended by inserting ``or 1361(g)(3)'' after 
        ``section 1361(f)(3)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1999.

SEC. 10. CONSENT TO ELECTIONS.

    (a) 90 Percent of Shares Required for Consent to Election.--Section 
1362(a)(2) of the Internal Revenue Code of 1986 (relating to all 
shareholders must consent to election) is amended--
            (1) by striking ``all persons who are shareholders in'' and 
        inserting ``shareholders holding at least 90 percent of the 
        shares of'', and
            (2) by striking ``All shareholders'' in the heading and 
        inserting ``At least 90 percent of shares''.
    (b) Rules for Consent.--Section 1362(a) of the Internal Revenue 
Code of 1986 (relating to election) is amended by adding at the end the 
following:
            ``(3) Rules for consent.--For purposes of making any 
        consent required under paragraph (2) or subsection (d)(1)(B)--
                    ``(A) each joint owner of shares shall consent with 
                respect to such shares,
                    ``(B) the personal representative or other 
                fiduciary authorized to act on behalf of the estate of 
                a deceased individual shall consent for the estate,
                    ``(C) one parent, the custodian, the guardian, or 
                the conservator shall consent with respect to shares 
                owned by a minor or subject to a custodianship, 
                guardianship, conservatorship, or similar arrangement,
                    ``(D) the trustee of a trust shall consent with 
                respect to shares owned in trust,
                    ``(E) the trustee of the estate of a bankrupt 
                individual shall consent for shares owned by a 
                bankruptcy estate,
                    ``(F) an authorized officer or the trustee of an 
                organization described in subsection (c)(6) shall 
                consent for the shares owned by such organization, and
                    ``(G) in the case of a partnership or limited 
                liability company described in subsection (c)(8)--
                            ``(i) all general partners shall consent 
                        with respect to shares owned by such 
                        partnership,
                            ``(ii) all managers shall consent with 
                        respect to shares owned by such company if 
                        management of such company is vested in 1 or 
                        more managers, and
                            ``(iii) all members shall consent with 
                        respect to shares owned by such company if 
                        management of such company is vested in the 
                        members.''
    (c) Treatment of Nonconsenting Shareholder Stock.--
            (1) In general.--Section 1361 of the Internal Revenue Code 
        of 1986, as amended by section 9(a), is amended by adding at 
        the end the following:
    ``(h) Treatment of Nonconsenting Shareholder Stock.--
            ``(1) In general.--For purposes of this subchapter--
                    ``(A) nonconsenting shareholder stock shall not be 
                treated as a second class of stock,
                    ``(B) such stock shall be treated as C corporation 
                stock, and
                    ``(C) the shareholder's pro rata share under 
                section 1366(a)(1) with respect to such stock shall be 
                subject to tax paid by the S corporation at the highest 
                rate of tax specified in section 11(b).
            ``(2) Nonconsenting shareholder stock defined.--For 
        purposes of this subsection, the term `nonconsenting 
        shareholder stock' means stock of an S corporation which is 
        held by a shareholder who did not consent to an election under 
        section 1362(a) with respect to such S corporation.
            ``(3) Distributions.--A distribution (not in part or full 
        payment in exchange for stock) made by the corporation with 
        respect to nonconsenting shareholder 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.''
            (2) Conforming amendment.--Section 1361(b)(1) of the 
        Internal Revenue Code of 1986, as amended by section 9(b)(1), 
        is amended by striking ``subsections (f) and (g)'' and 
        inserting ``subsections (f), (g), and (h)''.
    (d) Effective Date.--The amendments made by this section shall 
apply to elections made in taxable years beginning after December 31, 
1999.

SEC. 11. 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, 1999.