SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

    (a) Short Title.--This Act may be cited as the ``S Corporation 
Investment Act of 1995''.
    (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.

SEC. 2. S CORPORATIONS PERMITTED TO HAVE 40 SHAREHOLDERS.

    Subparagraph (A) of section 1361(b)(1) (defining small business 
corporation) is amended by striking ``35 shareholders'' and inserting 
``40 shareholders''.

SEC. 3. MEMBERS OF FAMILY TREATED AS 1 SHAREHOLDER.

    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 purposes 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 purposes of 
                subparagraph (A)(ii), the term `members of the family' 
                means the 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 4 
                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 all 
                        shareholders,
                            ``(ii) shall remain in effect until 
                        terminated, and
                            ``(iii) shall apply only with respect to 1 
                        family in any corporation.''

SEC. 4. INCREASE IN PASSIVE INCOME PERMITTED.

    (a) Termination Provision.--Paragraph (3) of section 1362(d) 
(relating to termination) is amended by striking ``25 percent'' in the 
heading and in subparagraph (A)(i) and inserting ``40 percent''.
    (b) Tax on Former C Corporations.--
            (1) Subsections (a)(2) and (b)(1)(A)(i) of section 1375 
        (relating to tax imposed when passive investment income of 
        corporation having subchapter C earnings and profits exceeds 25 
        percent of gross receipts) are each amended by striking ``25 
        percent'' and inserting ``40 percent''.
            (2) The heading of section 1375 is amended by striking ``25 
        percent'' and inserting ``40 percent''.
            (3) The table of sections for part III of subchapter S of 
        chapter 1 is amended by striking ``25 percent'' and inserting 
        ``40 percent'' in the item relating to section 1375.

SEC. 5. REINVESTMENT RESERVE.

    (a) In General.--Part III of subchapter S of chapter 1 (relating to 
special rules) is amended by adding at the end the following new 
section:

``SEC. 1376. REINVESTMENT RESERVE.

    ``(a) In General.--In the case of an S corporation, at the election 
of such corporation, there shall be allowed as a deduction for the 
taxable year an amount equal to the payments made by the corporation 
during such taxable year to a reinvestment reserve.
    ``(b) Limitation.--The amount which an S corporation may pay into 
its reinvestment reserve for any taxable year shall not exceed an 
amount equal to 3 percent of its taxable income (determined without 
regard to this section) for such taxable year.
    ``(c) Reinvestment Reserve.--
            ``(1) In general.--Each S corporation which elects the 
        application of this section shall establish a reinvestment 
        reserve.
            ``(2) No tax on reserve earnings.--Earnings (including 
        gains and losses) from the investment of amounts in the reserve 
        shall not be taken into account under this title.
            ``(3) Use of reserve.--The reinvestment reserve shall be 
        used exclusively for the acquisition, construction, 
        reconstruction, or erection of tangible property to which 
        section 168 applies for use in the active conduct of a trade or 
        business of the S corporation.
            ``(4) Contributions to reserve.--The reinvestment reserve 
        shall not accept any payments (or other amounts) other than 
        payments with respect to which a deduction is allowable under 
        subsection (a).
            ``(5) Distributions from reserve.--There shall be 
        includible in the gross income of the S corporation for any 
        taxable year any amount distributed from the reinvestment 
        reserve during such taxable year.
            ``(6) Treatment of amounts not withdrawn within 3 years.--
                    ``(A) In general.--Any amount not withdrawn from 
                the reinvestment reserve within the 3-year period 
                beginning on the date of its deposit shall be treated 
                as distributed as of the close of such period.
                    ``(B) Deemed distributions taxed at highest 
                marginal rate.--If any amount is treated under 
                subparagraph (A) as distributed during any taxable 
                year--
                            ``(i) such amount shall be excluded from 
                        the gross income of the corporation, and
                            ``(ii) there is hereby imposed on such 
                        amount a tax equal to the product of such 
                        amount and the highest rate of tax specified in 
                        section 1.
                    ``(C) Certain rules to apply.--Rules similar to the 
                rules of subparagraphs (B) and (C) of paragraphs (5) 
                and (6) of section 7518(g) shall apply for purposes of 
                this paragraph.
    ``(d) Time When Payments Deemed Made.--For purposes of this 
section, a taxpayer shall be deemed to have made a payment to the 
reinvestment reserve on the last day of a taxable year if such payment 
is made on account of such taxable year and is made with 2\1/2\ months 
after the close of such taxable year.''
    (b) Clerical Amendment.--The table of sections for part III of 
subchapter S of chapter 1 is amended by adding at the end the following 
new section:

                              ``Sec. 1376. Reinvestment reserve.''

SEC. 6. EFFECTIVE DATE.

    The amendments made by this Act shall apply to taxable years 
beginning after the date of the enactment of this Act.
S Corporation Investment Act of 1995 - Amends the Internal Revenue Code to permit small business corporations to have not more than 40 (currently, not more than 35) shareholders, treating members of a family (currently, a husband and wife) as one shareholder. 
Terminates a small business corporation's election to be an S corporation when passive investment income exceeds 40 (currently, 25) percent of gross receipts for three consecutive years and other requirements are met.  Imposes a tax when an S corporation has C earnings and profits and has gross receipts more than 40 (currently, 25) percent of which are passive investment income. 
Allows S corporations to elect to deduct payments to a reinvestment reserve.
S Corporation Investment Act of 1995