I

104TH CONGRESS

2D SESSION H. R. 2911

To amend the Internal Revenue Code of 1986 to limit the tax rate for

certain small businesses, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 31, 1996

Mr. CRANE 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 limit the

tax rate for certain small businesses, and for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Small Business Invest5 ment and Growth Act’’.

6 SEC. 2. SMALL BUSINESS TAX RATE.

7 (a) IN GENERAL.—Section 1 of the Internal Revenue

8 Code of 1986 (relating to tax imposed) is amended by add9 ing at the end of the following new subsection:

10 ‘‘(i) MAXIMUM SMALL BUSINESS TAX RATE.—
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1 ‘‘(1) IN GENERAL.—Except as provided in para2 graph (4), if a taxpayer has taxable small business

3 income for any taxable year to which this subsection

4 applies, then the tax imposed by this section shall

5 not exceed the sum of—

6 ‘‘(A) a tax computed at the rates and in

7 the same manner as if this subsection had not

8 been enacted on the greater of—

9 ‘‘(i) taxable income reduced by the

10 amount of taxable small business income,

11 or

12 ‘‘(ii) the amount of taxable income

13 taxed at a rate below 34 percent, plus

14 ‘‘(B) a tax of 34 percent of the amount of

15 taxable income in excess of the taxable income

16 that is subject to tax under subparagraph (A).

17 ‘‘(2) TAXABLE SMALL BUSINESS INCOME.—For

18 purposes of this subsection, the term ‘taxable small

19 business income’ means, with respect to any taxable

20 year, the taxable income of the taxpayer for such

21 year attributable to the active conduct of any trade

22 or business of an eligible small business.

23 ‘‘(3) QUALIFIED RETAINED EARNINGS AC24 COUNT.—For purposes of this subsection—
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1 ‘‘(A) S CORPORATIONS.—Each S corpora2 tion shall establish a qualified retained earnings

3 account which shall be—

4 ‘‘(i) increased each year by the por5 tion of the taxable income of the S cor6 poration that is attributable to the active

7 conduct of a trade or business by the S

8 corporation,

9 ‘‘(ii) decreased each year by the por10 tion of the taxable loss of the S corpora11 tion that is attributable to such active con12 duct of a trade or business, and

13 ‘‘(iii) decreased by qualified and non14 qualified distributions from such S cor15 poration to the shareholders thereof.

16 ‘‘(B) QUALIFIED DISTRIBUTIONS.—For

17 purposes of subparagraph (A), a distribution

18 from a qualified retained earnings account shall

19 be treated as a qualified distribution if the dis20 tribution—

21 ‘‘(i) is made to the owners of the eligi22 ble small business, and

23 ‘‘(ii) is made to enable the S corpora24 tion shareholder to pay income taxes (Fed-
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1 eral, State, local) on the income of the eli2 gible small business.

3 The Secretary is authorized to promulgate reg4 ulations pursuant to this subparagraph to pro5 vide rules to determine the extent to which dis6 tributions by an S corporation are made to en7 able the distributee to pay its income taxes, in8 cluding regulations that establish a presumption

9 that distributions are to enable the distributee

10 to pay income taxes if such distributions do not

11 exceed 34 percent of taxable small business in12 come.

13 ‘‘(C) DISTRIBUTIONS AFTER TAXABLE

14 YEAR.—For purposes of subparagraph (B), a

15 distribution from a qualified retained earnings

16 account within 75 days after the end of a tax17 able year of the eligible small business may be

18 treated as a distribution made on the last day

19 of such taxable year.

20 ‘‘(4) ADDITIONAL TAX ON NONQUALIFIED DIS21 TRIBUTIONS.—

22 ‘‘(A) IN GENERAL.—If—

23 ‘‘(i) a distribution other than a quali24 fied distribution is made from a qualified

25 retained earnings account, and
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1 ‘‘(ii) such distribution is made from

2 additions to the account for a taxable year

3 with respect to which paragraph (1)(B) ap4 plied to the taxpayer by reason of such ad5 ditions,

6 then the tax imposed by this section for the tax7 able year of the taxpayer with or within which

8 the taxable year of the eligible small business in

9 which the distribution was made ends shall be

10 increased by the amount determined under sub11 paragraph (B).

12 ‘‘(B) AMOUNT OF ADDITIONAL TAX.—The

13 amount of tax determined under this subpara14 graph is an amount equal to the product of the

15 taxpayer’s pro rata share of the distribution de16 scribed in subparagraph (A)(i) and the number

17 of percentage points (and fractions thereof) by

18 which the highest rate of tax in effect under

19 this section for the taxpayer’s taxable year ex20 ceeds 34 percent.

21 ‘‘(C) ORDER OF DISTRIBUTIONS.—For

22 purposes of this paragraph, distributions shall

23 be treated as having been made from the quali24 fied retained earnings account on a last-in,

25 first-out basis. Distributions in excess of the
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1 balance of the qualified retained earnings ac2 count shall not reduce such account below zero.

3 ‘‘(5) ELIGIBLE SMALL BUSINESS.—For pur4 poses of this subsection—

5 ‘‘(A) IN GENERAL.—Except as provided in

6 subparagraph (B), the term ‘eligible small busi7 ness’ means, with respect to any taxable year,

8 an S corporation which has been designated, as

9 of the beginning of the taxable year, as a small

10 business concern (within the meaning of section

11 3(a) of the Small Business Act) according to

12 size standard regulations published by the

13 Small Business Administration.

14 ‘‘(B) EXCLUSIONS.—Such term shall not

15 include—

16 ‘‘(i) any personal service corporation

17 (as defined in section 469(j)(2)), and

18 ‘‘(ii) any personal holding company

19 (as defined in section 542).

20 ‘‘(C) ELECTION TO USE 3 PRECEDING

21 YEARS.—If the determination under subpara22 graph (A) is made on the basis of number of

23 employees or gross receipts, the taxpayer may

24 elect to have the determination made on the

25 basis of the average number of employees or the
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1 average gross receipts of the taxpayer for the 3

2 taxable years preceding the taxable year.

3 ‘‘(6) YEARS TO WHICH SUBSECTION APPLIES.—

4 This subsection shall apply to any taxable year if the

5 highest rate of tax set forth in subsection (a), (b),

6 (c), (d), or (e) (whichever applies) for the taxable

7 year exceeds 34 percent.

8 ‘‘(7) REGULATIONS.—The Secretary shall pre9 scribe such regulations as may be necessary or ap10 propriate to carry out the purposes of this section,

11 including regulations preventing the characterization

12 of distributions for purposes of compensation or per13 sonal use as distributions of qualified retained earn14 ings.’’

15 (b) EFFECTIVE DATE.—The amendment made by

16 subsection (a) shall apply to taxable years beginning after

17 December 31, 1995.

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