I

107TH CONGRESS

1ST SESSION H. R. 1263

To amend the Internal Revenue Code of 1986 to expand S corporation

eligibility for banks, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

MARCH 28, 2001

Mr. MCINNIS (for himself, Mr. HEFLEY, Mr. TANCREDO, Mr. SCHAFFER, Mr.

UDALL of Colorado, and Ms. DEGETTE) 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 expand

S corporation eligibility for banks, 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 and

5 Financial Institutions Tax Relief Act of 2001’’.

6 SEC. 2. ELIGIBLE SHAREHOLDERS OF S CORPORATION

7 BANKS TO INCLUDE IRAS.

8 (a) IN GENERAL.—Section 1361(c)(2)(A) of the In9 ternal Revenue Code of 1986 (relating to certain trusts
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1 permitted as shareholders) is amended by inserting after

2 clause (v) the following:

3 ‘‘(vi) In the case of a corporation

4 which is a bank (as defined in section

5 581), a trust which constitutes an indi6 vidual retirement account under section

7 408(a), including one designated as a Roth

8 IRA under section 408A, but only to the

9 extent of the stock held in such bank as of

10 the date of the enactment of this clause.’’

11 (b) TREATMENT AS SHAREHOLDER.—Section

12 1361(c)(2)(B) of the Internal Revenue Code of 1986 (re13 lating to treatment as shareholders) is amended by adding

14 at the end the following:

15 ‘‘(vi) In the case of a trust described

16 in clause (vi) of subparagraph (A), the in17 dividual for whose benefit the trust was

18 created shall be treated as a shareholder.’’

19 (c) SALE OF STOCK IN IRA RELATING TO S COR20 PORATION ELECTION EXEMPT FROM PROHIBITED

21 TRANSACTION RULES.—Section 4975(d) of the Internal

22 Revenue Code of 1986 (relating to exemptions) is amend23 ed by striking ‘‘or’’ at the end of paragraph (14), by strik24 ing the period at the end of paragraph (15) and inserting

25 ‘‘; or’’, and by adding at the end the following:
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1 ‘‘(16) a sale of stock held by a trust which con2 stitutes an individual retirement account under sec3 tion 408(a) to the individual for whose benefit such

4 account is established if such sale is pursuant to an

5 election under section 1362(a).’’

6 (d) EFFECTIVE DATE.—The amendments made by

7 this section shall apply to taxable years beginning after

8 December 31, 2001.

9 SEC. 3. EXCLUSION OF INVESTMENT SECURITIES INCOME

10 FROM PASSIVE INCOME TEST FOR BANK S

11 CORPORATIONS.

12 (a) IN GENERAL.—Section 1362(d)(3)(C) of the In13 ternal Revenue Code of 1986 (defining passive investment

14 income) is amended by adding at the end the following:

15 ‘‘(v) EXCEPTION FOR BANKS; ETC.—

16 In the case of a bank (as defined in section

17 581), a bank holding company (as defined

18 in section 246A(c)(3)(B)(ii)), or a qualified

19 subchapter S subsidiary bank, the term

20 ‘passive investment income’ shall not in21 clude—

22 ‘‘(I) interest income earned by

23 such bank, bank holding company, or

24 qualified subchapter S subsidiary

25 bank, or
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1 ‘‘(II) dividends on assets required

2 to be held by such bank, bank holding

3 company, or qualified subchapter S

4 subsidiary bank to conduct a banking

5 business, including stock in the Fed6 eral Reserve Bank, the Federal Home

7 Loan Bank, or the Federal Agricul8 tural Mortgage Bank or participation

9 certificates issued by a Federal Inter10 mediate Credit Bank.’’

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

12 this section shall apply to taxable years beginning after

13 December 31, 1996.

14 SEC. 4. INCREASE IN NUMBER OF ELIGIBLE SHARE15 HOLDERS TO 150.

16 (a) IN GENERAL.—Section 1361(b)(1)(A) of the In17 ternal Revenue Code of 1986 (defining small business cor18 poration) is amended by striking ‘‘75 shareholders’’ and

19 inserting ‘‘150 shareholders (100 shareholders in the case

20 of taxable years beginning after 2001 and before 2006 and

21 125 shareholders in the case of taxable years beginning

22 after 2005 and before 2009)’’.

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

24 this section shall apply to taxable years beginning after

25 December 31, 2001.
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1 SEC. 5. TREATMENT OF QUALIFYING DIRECTOR SHARES.

2 (a) IN GENERAL.—Section 1361 of the Internal Rev3 enue Code of 1986 is amended by adding at the end the

4 following:

5 ‘‘(f) TREATMENT OF QUALIFYING DIRECTOR

6 SHARES.—

7 ‘‘(1) IN GENERAL.—For purposes of this sub8 chapter—

9 ‘‘(A) qualifying director shares shall not be

10 treated as a second class of stock, and

11 ‘‘(B) no person shall be treated as a share12 holder of the corporation by reason of holding

13 qualifying director shares.

14 ‘‘(2) QUALIFYING DIRECTOR SHARES DE15 FINED.—For purposes of this subsection, the term

16 ‘qualifying director shares’ means any shares of

17 stock in a bank (as defined in section 581) or in a

18 bank holding company registered as such with the

19 Federal Reserve System—

20 ‘‘(i) which are held by an individual

21 solely by reason of status as a director of

22 such bank or company or its controlled

23 subsidiary; and

24 ‘‘(ii) which are subject to an agree25 ment pursuant to which the holder is re26 quired to dispose of the shares of stock
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1 upon termination of the holder’s status as

2 a director at the same price as the indi3 vidual acquired such shares of stock.

4 ‘‘(3) DISTRIBUTIONS.—A distribution (not in

5 part or full payment in exchange for stock) made by

6 the corporation with respect to qualifying director

7 shares shall be includible as ordinary income of the

8 holder and deductible to the corporation as an ex9 pense in computing taxable income under section

10 1363(b) in the year such distribution is received.’’

11 (b) CONFORMING AMENDMENTS.—

12 (1) Section 1361(b)(1) of the Internal Revenue

13 Code of 1986 is amended by inserting ‘‘, except as

14 provided in subsection (f),’’ before ‘‘which does not’’.

15 (2) Section 1366(a) of such Code is amended

16 by adding at the end the following:

17 ‘‘(3) ALLOCATION WITH RESPECT TO QUALI18 FYING DIRECTOR SHARES.—The holders of quali19 fying director shares (as defined in section 1361(f))

20 shall not, with respect to such shares of stock, be al21 located any of the items described in paragraph

22 (1).’’

23 (3) Section 1373(a) of such Code is amended

24 by striking ‘‘and’’ at the end of paragraph (1), by

25 striking the period at the end of paragraph (2) and
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1 inserting ‘‘, and’’, and adding at the end the fol2 lowing:

3 ‘‘(3) no amount of an expense deductible under

4 this subchapter by reason of section 1361(f)(3) shall

5 be apportioned or allocated to such income.’’

6 (c) EFFECTIVE DATE.—The amendments made by

7 this section shall apply to taxable years beginning after

8 December 31, 1996.

9 SEC. 6. BAD DEBT CHARGE OFFS IN YEARS AFTER ELEC10 TION YEAR TREATED AS ITEMS OF BUILT–IN

11 LOSS.

12 The Secretary of the Treasury shall modify Regula13 tion 1.1374–4(f) for S corporation elections made in tax14 able years beginning after December 31, 1996, with re15 spect to bad debt deductions under section 166 of the In16 ternal Revenue Code of 1986 to treat such deductions as

17 built-in losses under section 1374(d)(4) of such Code dur18 ing the entire period during which the bank recognizes

19 built-in gains from changing its accounting method for

20 recognizing bad debts from the reserve method under sec21 tion 585 of such Code to the charge-off method under sec22 tion 166 of such Code.
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1 SEC. 7. INCLUSION OF BANKS IN 3-YEAR S CORPORATION

2 RULE FOR CORPORATE PREFERENCE ITEMS.

3 (a) IN GENERAL.—Section 1363(b) of the Internal

4 Revenue Code of 1986 (relating to computation of cor5 poration’s taxable income) is amended by adding at the

6 end the following new flush sentence:

7 ‘‘Paragraph (4) shall apply to any bank whether such

8 bank is an S corporation or a qualified subchapter S sub9 sidiary.’’

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

11 this section shall apply to taxable years beginning after

12 December 31, 2001.

13 SEC. 8. EXPANSION OF S CORPORATION ELIGIBLE SHARE14 HOLDERS TO INCLUDE FAMILY LIMITED

15 PARTNERSHIPS.

16 (a) IN GENERAL.—Section 1361(b)(1)(B) of the In17 ternal Revenue Code of 1986 (defining small business cor18 poration) is amended—

19 (1) by striking ‘‘or an organization’’ and insert20 ing ‘‘an organization’’, and

21 (2) by inserting ‘‘, or a family partnership de22 scribed in subsection (c)(8)’’ after ‘‘subsection

23 (c)(6)’’.

24 (b) FAMILY PARTNERSHIP.—Section 1361(c) of the

25 Internal Revenue Code of 1986 (relating to special rules
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1 for applying subsection (b)), as amended by section 5, is

2 amended by adding at the end the following:

3 ‘‘(8) FAMILY PARTNERSHIPS.—

4 ‘‘(A) IN GENERAL.—For purposes of sub5 section (b)(1)(B), any partnership or limited li6 ability company may be a shareholder in an S

7 corporation if—

8 ‘‘(i) all partners or members are mem9 bers of 1 family as determined under sec10 tion 704(e)(3), and

11 ‘‘(ii) all of the partners or members

12 would otherwise be eligible shareholders of

13 an S corporation.

14 ‘‘(B) TREATMENT AS SHAREHOLDERS.—

15 For purposes of subsection (b)(1)(A), in the

16 case of a partnership or limited liability com17 pany described in subparagraph (A), each part18 ner or member shall be treated as a share19 holder.’’

20 (c) EFFECTIVE DATE.—The amendments made by

21 this section shall apply to taxable years beginning after

22 December 31, 2001.
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1 SEC. 9. ISSUANCE OF PREFERRED STOCK PERMITTED.

2 (a) IN GENERAL.—Section 1361 of the Internal Rev3 enue Code of 1986, as amended by section 5(a), is amend4 ed by adding at the end the following:

5 ‘‘(g) TREATMENT OF QUALIFIED PREFERRED

6 STOCK.—

7 ‘‘(1) IN GENERAL.—For purposes of this sub8 chapter—

9 ‘‘(A) qualified preferred stock shall not be

10 treated as a second class of stock, and

11 ‘‘(B) no person shall be treated as a share12 holder of the corporation by reason of holding

13 qualified preferred stock.

14 ‘‘(2) QUALIFIED PREFERRED STOCK DE15 FINED.—For purposes of this subsection, the term

16 ‘qualified preferred stock’ means stock which meets

17 the requirements of subparagraphs (A), (B), and (C)

18 of section 1504(a)(4). Stock shall not fail to be

19 treated as qualified preferred stock solely because it

20 is convertible into other stock.

21 ‘‘(3) DISTRIBUTIONS.—A distribution (not in

22 part or full payment in exchange for stock) made by

23 the corporation with respect to qualified preferred

24 stock shall be includible as ordinary income of the

25 holder and deductible to the corporation as an ex-
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1 pense in computing taxable income under section

2 1363(b) in the year such distribution is received.’’

3 (b) CONFORMING AMENDMENTS.—

4 (1) Section 1361(b)(1) of the Internal Revenue

5 Code of 1986, as amended by section 5(b)(1), is

6 amended by striking ‘‘subsection (f)’’ and inserting

7 ‘‘subsections (f) and (g)’’.

8 (2) Section 1366(a) of such Code, as amended

9 by section 5(b)(2), is amended by adding at the end

10 the following:

11 ‘‘(4) ALLOCATION WITH RESPECT TO QUALI12 FIED PREFERRED STOCK.—The holders of qualified

13 preferred stock (as defined in section 1361(g)) shall

14 not, with respect to such stock, be allocated any of

15 the items described in paragraph (1).’’

16 (3) Section 1373(a)(3) of such Code, as added

17 by section 5(b)(3), is amended by inserting ‘‘or

18 1361(g)(3)’’ after ‘‘section 1361(f)(3)’’.

19 (c) EFFECTIVE DATE.—The amendments made by

20 this section shall apply to taxable years beginning after

21 December 31, 2001.

22 SEC. 10. CONSENT TO ELECTIONS.

23 (a) 90 PERCENT OF SHARES REQUIRED FOR CON24 SENT TO ELECTION.—Section 1362(a)(2) of the Internal
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1 Revenue Code of 1986 (relating to all shareholders must

2 consent to election) is amended—

3 (1) by striking ‘‘all persons who are share4 holders in’’ and inserting ‘‘shareholders holding at

5 least 90 percent of the shares of’’, and

6 (2) by striking ‘‘ALL SHAREHOLDERS’’ in the

7 heading and inserting ‘‘AT LEAST 90 PERCENT OF

8 SHARES’’.

9 (b) RULES FOR CONSENT.—Section 1362(a) of the

10 Internal Revenue Code of 1986 (relating to election) is

11 amended by adding at the end the following:

12 ‘‘(3) RULES FOR CONSENT.—For purposes of

13 making any consent required under paragraph (2) or

14 subsection (d)(1)(B)—

15 ‘‘(A) each joint owner of shares shall con16 sent with respect to such shares,

17 ‘‘(B) the personal representative or other

18 fiduciary authorized to act on behalf of the es19 tate of a deceased individual shall consent for

20 the estate,

21 ‘‘(C) one parent, the custodian, the guard22 ian, or the conservator shall consent with re23 spect to shares owned by a minor or subject to

24 a custodianship, guardianship, conservatorship,

25 or similar arrangement,
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1 ‘‘(D) the trustee of a trust shall consent

2 with respect to shares owned in trust,

3 ‘‘(E) the trustee of the estate of a bank4 rupt individual shall consent for shares owned

5 by a bankruptcy estate,

6 ‘‘(F) an authorized officer or the trustee of

7 an organization described in subsection (c)(6)

8 shall consent for the shares owned by such or9 ganization, and

10 ‘‘(G) in the case of a partnership or lim11 ited liability company described in subsection

12 (c)(8)—

13 ‘‘(i) all general partners shall consent

14 with respect to shares owned by such part15 nership,

16 ‘‘(ii) all managers shall consent with

17 respect to shares owned by such company

18 if management of such company is vested

19 in 1 or more managers, and

20 ‘‘(iii) all members shall consent with

21 respect to shares owned by such company

22 if management of such company is vested

23 in the members.’’

24 (c) TREATMENT OF NONCONSENTING SHAREHOLDER

25 STOCK.—
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1 (1) IN GENERAL.—Section 1361 of the Internal

2 Revenue Code of 1986, as amended by section 9(a),

3 is amended by adding at the end the following:

4 ‘‘(h) TREATMENT OF NONCONSENTING SHARE5 HOLDER STOCK.—

6 ‘‘(1) IN GENERAL.—For purposes of this sub7 chapter—

8 ‘‘(A) nonconsenting shareholder stock shall

9 not be treated as a second class of stock,

10 ‘‘(B) such stock shall be treated as C cor11 poration stock, and

12 ‘‘(C) the shareholder’s pro rata share

13 under section 1366(a)(1) with respect to such

14 stock shall be subject to tax paid by the S cor15 poration at the highest rate of tax specified in

16 section 11(b).

17 ‘‘(2) NONCONSENTING SHAREHOLDER STOCK

18 DEFINED.—For purposes of this subsection, the

19 term ‘nonconsenting shareholder stock’ means stock

20 of an S corporation which is held by a shareholder

21 who did not consent to an election under section

22 1362(a) with respect to such S corporation.

23 ‘‘(3) DISTRIBUTIONS.—A distribution (not in

24 part or full payment in exchange for stock) made by

25 the corporation with respect to nonconsenting share-
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1 holder stock shall be includible as ordinary income

2 of the holder and deductible to the corporation as an

3 expense in computing taxable income under section

4 1363(b) in the year such distribution is received.’’

5 (2) CONFORMING AMENDMENT.—Section

6 1361(b)(1) of the Internal Revenue Code of 1986, as

7 amended by section 9(b)(1), is amended by striking

8 ‘‘subsections (f) and (g)’’ and inserting ‘‘subsections

9 (f), (g), and (h)’’.

10 (d) EFFECTIVE DATE.—The amendments made by

11 this section shall apply to elections made in taxable years

12 beginning after December 31, 2001.

13 SEC. 11. INFORMATION RETURNS FOR QUALIFIED SUB14 CHAPTER S SUBSIDIARIES.

15 (a) IN GENERAL.—Section 1361(b)(3)(A) of the In16 ternal Revenue Code of 1986 (relating to treatment of cer17 tain wholly owned subsidiaries) is amended by inserting

18 ‘‘and in the case of information returns required under

19 part III of subchapter A of chapter 61’’ after ‘‘Secretary’’.

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

21 this section shall apply to taxable years beginning after

22 December 31, 2001.
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1 SEC. 12. ALLOWANCE OF CHARITABLE CONTRIBUTIONS OF

2 INVENTORY AND SCIENTIFIC PROPERTY.

3 (a) IN GENERAL.—Section 170(e) of the Internal

4 Revenue Code of 1986 (relating to certain contributions

5 of ordinary income and capital gain property) is amend6 ed—

7 (1) by striking ‘‘(other than a corporation

8 which is an S corporation)’’ in paragraph (3)(A),

9 and

10 (2) by striking clause (i) of paragraph (4)(D)

11 and by redesignating clauses (ii) and (iii) of such

12 paragraph as clauses (i) and (ii), respectively.

13 (b) STOCK BASIS ADJUSTMENT.—Paragraph (1) of

14 section 1367(a) of such Code (relating to adjustments to

15 basis of stock of shareholders, etc.) is amended by striking

16 ‘‘and’’ at the end of subparagraph (B), by striking the

17 period at the end of subparagraphs (C) and inserting ‘‘,

18 and’’, and by adding at the end the following new subpara19 graph:

20 ‘‘(D) the excess of the deductions for char21 itable contributions over the basis of the prop22 erty contributed.’’

23 (c) EFFECTIVE DATE.—The amendment made by

24 this section shall apply to taxable years beginning after

25 December 31, 2001.

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