II

106TH CONGRESS

1ST SESSION S. 55

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

certain small businesses, and for other purposes.

IN THE SENATE OF THE UNITED STATES

JANUARY 19, 1999

Mr. KYL (for himself and Mr. COVERDELL) introduced the following bill;

which was read twice and referred to the Committee on Finance

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. S CORPORATION 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 the following new subsection:
2

S 55 IS

1 ‘‘(i) TAX RATE ON CERTAIN S CORPORATION IN2 COME.—

3 ‘‘(1) IN GENERAL.—Except as provided in para4 graph (4), if a taxpayer has taxable S corporation

5 income for any taxable year to which this subsection

6 applies, then the tax imposed by this section shall

7 not exceed the sum of—

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

9 the same manner as if this subsection had not

10 been enacted on the greater of—

11 ‘‘(i) taxable income reduced by quali12 fied taxable S corporation income, or

13 ‘‘(ii) the amount of taxable income

14 taxed at a rate below 36 percent, plus

15 ‘‘(B) a tax of 34 percent of qualified tax16 able S corporation income in excess of the tax17 able income that is subject to tax under sub18 paragraph (A).

19 ‘‘(2) TAXABLE S CORPORATION INCOME.—For

20 purposes of this subsection—

21 ‘‘(A) QUALIFIED TAXABLE S CORPORATION

22 INCOME.—The term ‘qualified taxable S cor23 poration income’ means taxable S corporation

24 income only to the extent such income does not

25 exceed $5,000,000.
3

S 55 IS

1 ‘‘(B) SPECIAL RULE FOR QUALIFIED PER2 SONAL SERVICE CORPORATION.—

3 ‘‘(i) IN GENERAL.—In the case of a

4 qualified personal service corporation, tax5 able S corporation income taken into ac6 count under subparagraph (A) may not ex7 ceed the excess of—

8 ‘‘(I) capital expenditures during

9 the taxable year and the 2 prior tax10 able years, over

11 ‘‘(II) the amount of capital ex12 penditures taken into account under

13 subclause (I) for 2 prior taxable

14 years.

15 ‘‘(ii) ORDERING RULE.—For purposes

16 of clause (i), capital expenditures shall be

17 used in the order in which such expendi18 tures are made, beginning with the earliest

19 year.

20 ‘‘(C) TAXABLE S CORPORATION INCOME.—

21 The term ‘taxable S corporation income’ means,

22 with respect to any taxable year, the taxable in23 come of the taxpayer for such year attributable

24 to the active conduct of any trade or business

25 of an eligible S corporation.
4

S 55 IS

1 ‘‘(D) ELIGIBLE S CORPORATION.—The

2 term ‘eligible S corporation’ means an S cor3 poration, except that such term does not

4 include—

5 ‘‘(i) a personal service corporation as

6 defined in section 469(j)(2), other than a

7 qualified personal service corporation, and

8 ‘‘(ii) a personal holding company (as

9 defined in section 542).

10 ‘‘(E) QUALIFIED PERSONAL SERVICE COR11 PORATION DEFINED.—The term ‘qualified per12 sonal service corporation’ has the meaning

13 given such term in section 448(d)(2).

14 ‘‘(3) QUALIFIED RETAINED EARNINGS AC15 COUNT.—For purposes of this subsection—

16 ‘‘(A) IN GENERAL.—Each S corporation

17 shall establish a qualified retained earnings ac18 count which shall be—

19 ‘‘(i) increased each year by the por20 tion of the taxable income of the S cor21 poration that is attributable to the active

22 conduct of a trade or business by the S

23 corporation,

24 ‘‘(ii) decreased each year by the por25 tion of the taxable loss of the S corpora-
5

S 55 IS

1 tion that is attributable to such active con2 duct of a trade or business, and

3 ‘‘(iii) decreased by qualified and non4 qualified distributions from such S cor5 poration to the shareholders thereof.

6 ‘‘(B) QUALIFIED DISTRIBUTIONS.—For

7 purposes of subparagraph (A), a distribution

8 from a qualified retained earnings account shall

9 be treated as a qualified distribution if the

10 distribution—

11 ‘‘(i) is made to the owners of the eligi12 ble S corporation, and

13 ‘‘(ii) is made to enable the S corpora14 tion shareholder to pay income taxes (Fed15 eral, State, local) on the income of the eli16 gible S corporation.

17 The Secretary is authorized to promulgate reg18 ulations pursuant to this subparagraph to pro19 vide rules to determine the extent to which dis20 tributions by an S corporation are made to en21 able the distributee to pay its income taxes, in22 cluding regulations that establish a presumption

23 that distributions are to enable the distributee

24 to pay income taxes if such distributions do not
6

S 55 IS

1 exceed 34 percent of qualified taxable S cor2 poration income.

3 ‘‘(C) DISTRIBUTIONS AFTER TAXABLE

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

5 distribution from a qualified retained earnings

6 account within 75 days after the end of a tax7 able year of the eligible S corporation may be

8 treated as a distribution made on the last day

9 of such taxable year.

10 ‘‘(4) ADDITIONAL TAX ON NONQUALIFIED DIS11 TRIBUTIONS.—

12 ‘‘(A) IN GENERAL.—If—

13 ‘‘(i) a distribution other than a quali14 fied distribution is made from a qualified

15 retained earnings account, and

16 ‘‘(ii) such distribution is made from

17 additions to the account for a taxable year

18 with respect to which paragraph (1)(B) ap19 plied to the taxpayer by reason of such ad20 ditions,

21 then the tax imposed by this section for the tax22 able year of the taxpayer with or within which

23 the taxable year of the eligible S corporation in

24 which the distribution was made ends shall be
7

S 55 IS

1 increased by the amount determined under sub2 paragraph (B).

3 ‘‘(B) AMOUNT OF ADDITIONAL TAX.—The

4 amount of tax determined under this subpara5 graph is an amount equal to the product of the

6 taxpayer’s pro rata share of the distribution de7 scribed in subparagraph (A)(i) and the number

8 of percentage points (and fractions thereof) by

9 which the highest rate of tax applicable to the

10 taxpayer in effect under this section for the tax11 payer’s taxable year exceeds 34 percent.

12 ‘‘(C) ORDER OF DISTRIBUTIONS.—For

13 purposes of this paragraph, distributions shall

14 be treated as having been made from the quali15 fied retained earnings account on a last-in,

16 first-out basis. Distributions in excess of the

17 balance of the qualified retained earnings ac18 count shall not reduce such account below zero.

19 ‘‘(5) YEARS TO WHICH SUBSECTION APPLIES.—

20 This subsection shall apply to any taxable year if the

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

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

23 year exceeds 34 percent.

24 ‘‘(6) REGULATIONS.—The Secretary shall pre25 scribe such regulations as may be necessary or ap-
8

S 55 IS

1 propriate to carry out the purposes of this section,

2 including regulations preventing the characterization

3 of distributions for purposes of compensation or per4 sonal use as distributions of qualified retained earn5 ings.’’

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

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

8 December 31, 1997.

Æ