I

103D CONGRESS

2D SESSION H. R. 4877

To amend the Internal Revenue Code of 1986 to modify certain rules relating

to subchapter S corporations.

IN THE HOUSE OF REPRESENTATIVES

AUGUST 1, 1994

Mr. MCHALE 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 modify

certain rules relating to subchapter S corporations.

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; AMENDMENT OF 1986 CODE.

4 (a) SHORT TITLE.—This Act may be cited as the ‘‘S

5 Corporation Investment Act of 1994’’.

6 (b) AMENDMENT OF 1986 CODE.—Except as other7 wise expressly provided, whenever in this Act an amend8 ment or repeal is expressed in terms of an amendment

9 to, or repeal of, a section or other provision, the reference
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1 shall be considered to be made to a section or other provi2 sion of the Internal Revenue Code of 1986.

3 SEC. 2. S CORPORATIONS PERMITTED TO HAVE 40 SHARE4 HOLDERS.

5 Subparagraph (A) of section 1361(b)(1) (defining

6 small business corporation) is amended by striking ‘‘35

7 shareholders’’ and inserting ‘‘40 shareholders’’.

8 SEC. 3. MEMBERS OF FAMILY TREATED AS 1 SHARE9 HOLDER.

10 Paragraph (1) of section 1361(c) (relating to special

11 rules for applying subsection (b)) is amended to read as

12 follows:

13 ‘‘(1) MEMBERS OF FAMILY TREATED AS 1

14 SHAREHOLDER.—

15 ‘‘(A) IN GENERAL.—For purposes of sub16 section (b)(1)(A)—

17 ‘‘(i) except as provided in clause (ii),

18 a husband and wife (and their estates)

19 shall be treated as 1 shareholder, and

20 ‘‘(ii) in the case of a family with re21 spect to which an election is in effect

22 under subparagraph (E), all members of

23 the family shall be treated as 1 share24 holder.
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1 ‘‘(B) MEMBERS OF THE FAMILY.—For

2 purposes of subparagraph (A)(ii), the term

3 ‘members of the family’ means the lineal de4 scendants of the common ancestor and the

5 spouses (or former spouses) of such lineal de6 scendants or common ancestor.

7 ‘‘(C) COMMON ANCESTOR.—For purposes

8 of this paragraph, an individual shall not be

9 considered a common ancestor if, as of the later

10 of the effective date of this paragraph or the

11 time the election under section 1362(a) is

12 made, the individual is more than 4 generations

13 removed from the youngest generation of share14 holders.

15 ‘‘(D) EFFECT OF ADOPTION, ETC.—In de16 termining whether any relationship specified in

17 subparagraph (B) or (C) exists, the rules of

18 section 152(b)(2) shall apply.

19 ‘‘(E) ELECTION.—An election under sub20 paragraph (A)(ii)—

21 ‘‘(i) must be made with the consent of

22 all shareholders,

23 ‘‘(ii) shall remain in effect until termi24 nated, and
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1 ‘‘(iii) shall apply only with respect to

2 1 family in any corporation.’’

3 SEC. 4. INCREASE IN PASSIVE INCOME PERMITTED.

4 (a) TERMINATION PROVISION.—Paragraph (3) of

5 section 1362(d) (relating to termination) is amended by

6 striking ‘‘25 percent’’ in the heading and in subparagraph

7 (A)(i) and inserting ‘‘40 percent’’.

8 (b) TAX ON FORMER C CORPORATIONS.—

9 (1) Subsections (a)(2) and (b)(1)(A)(i) of sec10 tion 1375 (relating to tax imposed when passive in11 vestment income of corporation having subchapter C

12 earnings and profits exceeds 25 percent of gross re13 ceipts) are each amended by striking ‘‘25 percent’’

14 and inserting ‘‘40 percent’’.

15 (2) The heading of section 1375 is amended by

16 striking ‘‘25 PERCENT’’ and inserting ‘‘40 PER17 CENT’’.

18 (3) The table of sections for part III of sub19 chapter S of chapter 1 is amended by striking ‘‘25

20 percent’’ and inserting ‘‘40 percent’’ in the item re21 lating to section 1375.

22 SEC. 5. REINVESTMENT RESERVE.

23 (a) IN GENERAL.—Part III of subchapter S of chap24 ter 1 (relating to special rules) is amended by adding at

25 the end the following new section:
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1 ‘‘SEC. 1376. REINVESTMENT RESERVE.

2 ‘‘(a) IN GENERAL.—In the case of an S corporation,

3 at the election of such corporation, there shall be allowed

4 as a deduction for the taxable year an amount equal to

5 the payments made by the corporation during such taxable

6 year to a reinvestment reserve.

7 ‘‘(b) LIMITATION.—The amount which an S corpora8 tion may pay into its reinvestment reserve for any taxable

9 year shall not exceed an amount equal to 3 percent of its

10 taxable income (determined without regard to this section)

11 for such taxable year.

12 ‘‘(c) REINVESTMENT RESERVE.—

13 ‘‘(1) IN GENERAL.—Each S corporation which

14 elects the application of this section shall establish

15 a reinvestment reserve.

16 ‘‘(2) NO TAX ON RESERVE EARNINGS.—Earn17 ings (including gains and losses) from the invest18 ment of amounts in the reserve shall not be taken

19 into account under this title.

20 ‘‘(3) USE OF RESERVE.—The reinvestment re21 serve shall be used exclusively for the acquisition,

22 construction, reconstruction, or erection of tangible

23 property to which section 168 applies for use in the

24 active conduct of a trade or business of the S cor25 poration.
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1 ‘‘(4) CONTRIBUTIONS TO RESERVE.—The rein2 vestment reserve shall not accept any payments (or

3 other amounts) other than payments with respect to

4 which a deduction is allowable under subsection (a).

5 ‘‘(5) DISTRIBUTIONS FROM RESERVE.—There

6 shall be includible in the gross income of the S cor7 poration for any taxable year any amount distrib8 uted from the reinvestment reserve during such tax9 able year.

10 ‘‘(6) TREATMENT OF AMOUNTS NOT WITH11 DRAWN WITHIN 3 YEARS.—

12 ‘‘(A) IN GENERAL.—Any amount not with13 drawn from the reinvestment reserve within the

14 3-year period beginning on the date of its de15 posit shall be treated as distributed as of the

16 close of such period.

17 ‘‘(B) DEEMED DISTRIBUTIONS TAXED AT

18 HIGHEST MARGINAL RATE.—If any amount is

19 treated under subparagraph (A) as distributed

20 during any taxable year—

21 ‘‘(i) such amount shall be excluded

22 from the gross income of the corporation,

23 and

24 ‘‘(ii) there is hereby imposed on such

25 amount a tax equal to the product of such
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1 amount and the highest rate of tax speci2 fied in section 1.

3 ‘‘(C) CERTAIN RULES TO APPLY.—Rules

4 similar to the rules of subparagraphs (B) and

5 (C) of paragraphs (5) and (6) of section

6 7518(g) shall apply for purposes of this para7 graph.

8 ‘‘(d) TIME WHEN PAYMENTS DEEMED MADE.—For

9 purposes of this section, a taxpayer shall be deemed to

10 have made a payment to the reinvestment reserve on the

11 last day of a taxable year if such payment is made on

account of such taxable year and is made with 21 12 ⁄2 months

13 after the close of such taxable year.’’

14 (b) CLERICAL AMENDMENT.—The table of sections

15 for part III of subchapter S of chapter 1 is amended by

16 adding at the end the following new section:

‘‘Sec. 1376. Reinvestment reserve.’’

17 SEC. 6. EFFECTIVE DATE.

18 The amendments made by this Act shall apply to tax19 able years beginning after the date of the enactment of

20 this Act.

Æ