May 4, 1995 CONGRESSIONAL RECORD— SENATE S6169 

S. 758. A bill to amend the Internal Revenue Code of 1986 to provide for S corporation reform, and for other purposes; to the 

Committee on Finance. 

By Mr. BRADLEY (for himself and Mr. 

HOLLINGS): 

S. 759. A bill to amend the Immigration 

and Nationality Act to limit the adjustment 

of status of aliens who are unlawfully residing in the United States; to the Committee 

on the Judiciary. 

By Mr. ROCKEFELLER: 

S. 760. A bill to establish the National 

Commission on the Long-Term Solvency of 

the Medicare Program; to the Committee on 

Finance. 

SUBMISSION OF CONCURRENT AND 

SENATE RESOLUTIONS 

The following concurrent resolutions 

and Senate resolutions were read, and 

referred (or acted upon), as indicated: 

By Mrs. MURRAY: 

S. Con. Res. 12. A concurrent resolution expressing the sense of the Congress concerning the trafficking of Burmese women 

and girls into Thailand for the purposes of 

forced prostitution; to the Committee on 

Foreign Relations. 

f 

STATEMENTS ON INTRODUCED 

BILLS AND JOINT RESOLUTIONS 

By Mr. LAUTENBERG (for himself, Mrs. FEINSTEIN, Mr. SIMON

and Mr. LEVIN): 

S. 757. A bill to amend title 10, 

United States Code, to terminate the 

Civilian Marksmanship Program; to rescind funding for the National Board 

for the Promotion of Rifle Practice; 

and for other purposes; to the Committee on Armed Services. 

THE CIVILIAN MARKSMANSHIP PROGRAM

TERMINATION ACT OF 1995

Mr. LAUTENBERG. Mr. President, 

this morning I rise to introduce a bill 

to terminate a program that I think 

has long outlived its usefulness. It is 

called the Army Civilian Marksmanship Program. 

It is no secret that I do not like this 

program. In fact, I offered an amendment to terminate it in the last Congress. It got 30 votes. The arguments 

then may not have been persuasive. 

But perhaps recent events will change 

that. 

Like everyone else, I read the reports 

that come out about the terrorist 

bombing in Oklahoma City. And they 

are shocked by the scope of that tragedy. Every day we hear more and more 

news about confirmed dead and the fact 

that the search may in fact have to be 

abandoned. It is a tragedy that will 

live on forever in the minds of our 

democratic society and throughout the 

world. 

But in one of these stories, Mr. President, I found information that members of extremist militia groups in this 

country may have received weapons, 

ammunition, and training at Army facilities under the auspices of the Civilian Marksmanship Program. 

Indeed, Mark Koerneke, the leader of 

the Michigan-based militia group, told 

ABC’s ‘‘Prime Time Live’’ that he had 

access to U.S. military bases in Michigan for the purpose of training through 

this program. 

We all know that one of the individuals accused of masterminding the 

Oklahoma City bombing, Timothy 

McVeigh, was associated with the 

Michigan-based militia group. I do not 

know, Mr. President, whether Timothy 

McVeigh received training and ammunition under the Civilian Marksmanship Program. But I know it is possible 

that he did. 

A few days ago, Mr. President, I 

wrote to Secretary Perry and urged 

him to conduct an investigation to determine the veracity of the reports 

linking members of extremist militia 

groups to the Civilian Marksmanship 

Program. I also called on the Pentagon 

to immediately suspend the Civilian 

Marksmanship Program and propose 

terminating it in the long run. 

I ask unanimous consent that a copy 

of the letter I sent to Secretary Perry, 

along with a press report related to 

Mark Koerneke’s comments, be inserted in the RECORD. 

There being no objection, the material was ordered to be printed in the 

RECORD, as follows: 

EXHIBIT 1 

U.S. SENATE, 

Washington, DC, May 2, 1995. 

Hon. WILLIAM J. PERRY, 

Secretary of Defense, 

The Pentagon, 

Washington, DC. 

DEAR SECRETARY PERRY: Recent press reports indicate that members of extremist 

militia groups in this country may have received weapons, ammunition, and training at 

Army facilities under the auspices of the Civilian Marksmanship Program (CMP). I am 

writing to urge you to conduct an investigation to determine the veracity of these reports and to ask that you provide me with a 

list of all the clubs that participate in the 

CMP program. In the interim, I urge you to 

immediately suspend the CMP and propose 

terminating it in the long run. 

As you know, I have long believed the CMP 

is a low priority program and is an egregious 

example of waste in government. The program promotes rifle training for civilians 

through a system of affiliated clubs and 

other organizations, and sponsors shooting 

competitions. As part of these activities, the 

program donates, loans, and sells weapons, 

ammunition and other shooting supplies. 

The program was first established in 1903, 

at a time when civilian marksmanship training was believed to be important for military 

preparedness. Yet, according to a report by 

the General Accounting Office, the program 

now has limited military value. As Army officials told the GAO, no Army requirements 

exist for civilians trained in marksmanship, 

and no system is in place to track programtrained personnel. In a March 15, 1994 hearing in the Senate Defense Appropriations 

Subcommittee, Army Secretary West stated 

that national security objectives will be met 

with or without the CMP. 

In essence, the CMP provides a taxpayer 

subsidy for recreational shooting. In light of 

budget deficit we face and the military needs 

we ought to address, this simply is not a justifiable use of scarce resources. After all, defense dollars are not used to subsidize other 

sports. They ought not to be used to subsidize a shooting program which has no relationship to military needs and requirements. 

At a minimum we ought to ensure the 

CMP is not being used to train and arm 

members of extremist militia groups. The 

American people have a right to know that 

their tax dollars are not being used to train 

people who pose a threat to law abiding citizens and to peace and order in this country. 

I appreciate your prompt attention to this 

request. 

Sincerely, 

FRANK P. LAUTENBERG. 

U.S. RIFLERY PROGRAM MAY AID MILITIAS

(By Colum Lynch) 

NEW YORK.—Even as the Clinton administration moves to monitor extremist groups 

that hate federal agencies, the government 

continues to fund a $2.5 million program that 

may have provided elements of such groups 

with low-cost surplus weapons, free bullets 

and access to Army training facilities. 

Mark Koernke, the shortwave radio broadcaster and leader of the Michigan Militia 

group that disdains the federal government, 

suggested the embarrassing prospect that 

the government was aiding some of its domestic adversaries when he told ABC’s 

‘‘Prime Time Live’’ Tuesday that he had 

gained access to US military bases in Michigan to train through the 92-year-old Civilian 

Marksmanship Program. 

Critics of the federal program, which provides about 1,150 civilian gun clubs around 

the country with access to military firing 

ranges and more than 40 million rounds of 

free ammunition, are demanding that the 

Pentagon immediately suspend the financing 

and launch an investigation into whether the 

program has provided training facilities and 

equipment to Koernke and to 

antigovernment militia groups. 

Investigators also want to probe for possible links to Oklahoma City bombing suspect Timothy McVeigh, and brothers James 

and Terry Nichols, who allegedly helped 

McVeigh produce explosives in recent years. 

‘‘Our government may be inadvertently 

arming and training individuals and groups 

whose goal is to harm law enforcement officials and other innocent people,’’ said Rep. 

Carolyn Maloney, a New York Democrat who 

has led an unsuccessful two-year battle in 

Congress to halt the program. 

To be sure, many thousands of law-abiding 

gun enthusiasts have used the program over 

the years to hone their skills with no other 

goal than to operate their weapons safely, effectively and peacefully. In Michigan alone, 

there are 51 clubs with more than 6,400 members in the riflery program. 

Army officials yesterday defended the program as a valuable public service, particularly useful in training youths to handle 

weapons. Still, the Pentagon last year suggested the program might have outlived its 

usefulness. 

The program was started in 1903. Military 

officials during the Spanish-American War 

were appalled at the ineptitude of American 

marksmanship and sought to remedy that by 

providing rifle training to civilians in peacetime. 

‘‘It was discovered that the majority of 

Americans who were recruited to fight in 

that war couldn’t hit the side of a barn,’’

said Martha Rudd, an Army spokeswoman in 

Virginia. ‘‘The program has been continued 

ever since. And the only way that it can be 

made to go away is if Congress makes it go 

away.’’

In addition to providing civilian marksmen 

with access to military facilities, the Army 

also sells up to 6,000 surplus M–1 rifles annually to club participants at a bargain cost of 

$250 apiece. Each year, the program funds 

what one Army official called ‘‘the World Series of marksmanship,’’ a shooting tournament at Camp Perry, Ohio, hosted by the 

Army and the National Rifle Association. 

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S6170 CONGRESSIONAL RECORD— SENATE May 4, 1995 

Army officials said yesterday that the riflery program is an innocent recreational affair that promotes civic virtue and in particular aids the safe training of youths ages 

10 to 18. In the 1980s, Rudd said, the military 

worked to discourage more extreme militia 

organizations from participating by insisting 

that each club chapter include at least 10 

youths. 

But she said that adults are welcome to 

participate and that it is impossible to say 

whether Koernke or other groups hostile to 

the government received ammunition or purchased weapons through the program. 

In a letter to Defense Secretary William J. 

Perry, Maloney requested a list of the gun 

clubs and military bases participating, as 

well as information on ‘‘links between this 

program and militia groups or individual extremists.’’ Rudd said no investigation into 

the program had been initiated. 

Maloney also circulated a bill calling on 

Congress to end the program. 

‘‘Long before this bombing, the Civilian 

Marksmanship Program stood out as one of 

the most ridiculous items in the federal government budget,’’ she said. ‘‘We’re slashing 

funding for abused children, foster care and 

child nutrition, yet we’re subsidizing recreational marksmanship.’’

Indeed, the Pentagon issued a report to 

Congress last year that said the program no 

longer served a military purpose. Even conservative commentator George Will has referred to it as ‘‘petrified pork.’’ However, 

largely because of lobbying by the NRA and 

resistance from some Democratic and Republican supporters, the program has survived. 

‘‘The NRA has been the official agent for 

the Civilian Marksmanship Program,’’ contended Bob Walker, the legislative director 

for Handgun Control Inc., a Washingtonbased group advocating gun control. ‘‘In 

order to qualify for surplus rifles and free 

ammunition, one of the requirements is that 

you belong to the NRA. This program is a 

subsidy for the NRA and its members.’’

The NRA press office did not respond yesterday to several requests for an interview. 

Mr. LAUTENBERG. Mr. President, I 

have long believed the Civilian Marksmanship Program is a low priority program and an egregious example of 

waste in government. The program promotes rifle training for civilians 

through a system of affiliated clubs 

and other organizations, and sponsors 

shooting competitions. As part of these 

activities, the program donates, loans, 

and sells weapons, ammunition, and 

other shooting supplies. 

The program was first established in 

1903, soon after the Spanish-American 

War, at a time when civilian marksmanship training was believed to be 

important for military preparedness. 

Back then, some Federal officials were 

concerned that recruits often were unable to shoot straight. The officials believed that a trained corps of civilians 

with marksmanship skills would be 

useful to prepare for future military 

conflicts. 

Mr. President, that may have made 

sense in 1903. But this is 1995. The 

Spanish-American War ended more 

than 90 years ago, and things have 

changed. 

According to a report by the General 

Accounting Office, the program now 

has limited military value. As Army 

officials told the GAO, no Army requirements exist for civilians trained 

in marksmanship. In a March 15, 1994, 

hearing in the Senate Defense Appropriations Subcommittee, Army Secretary West stated that national security objectives will be met with or 

without the Civilian Marksmanship 

Program. 

Unlike the situation in 1903 and the 

Spanish-American War, today we have 

well-trained Reserves and National 

Guard Forces, and we have advanced, 

high-technology weapons systems. The 

military does not need a ready supply 

of ordinary civilians who know how to 

shoot a rifle. 

Even if we did need such a corps, the 

program does not give us one. No system is in place that tracks the program-trained personnel, and the program is not part of the Army plan for 

mobilizing forces in an emergency. 

In essence, the Civilian Marksmanship Program provides a taxpayer subsidy for recreational shooting. In light 

of the budget deficit we face and the 

military needs we ought to address, 

this simply is not a justifiable use of 

scarce resources. 

After all, defense dollars are not used 

to subsidize other sports. They ought 

not be used to subsidize a shooting program which has no relationship to 

military needs and requirements. 

Training young people to play baseball 

is a nice thing to do, but the Government does not subsidize Little League. 

We do not give children free baseballs? 

Why should we give them bullets? 

Mr. President, Americans are deeply 

cynical about the Congress. They think 

we are controlled by narrow special interests and that we are wasting taxpayers’ money on useless boondoggles. 

A program like bucks for bullets only 

reinforces that image. 

It also makes people wonder about 

our priorities. After all, how can we 

close military bases and lay off thousands of defense workers while spending money on recreational gun clubs? 

How can we fail to fully fund Head 

Start if we can pass out free bullets to 

school kids? How can we omit funds for 

people unable to afford a college education if we can find millions to teach 

kids how to shoot? 

Where is our sense of priorities? 

Where is our common sense? 

Mr. President, I hope my colleagues 

will agree that it is time to end this 

program. At a minimum, Mr. President, we ought to ensure the Civilian 

Marksmanship Program is not being 

used to train and arm members of extremist militia groups. The American 

people have a right to know that their 

tax dollars are not being used to train 

people who pose a threat to law-abiding 

citizens and to peace and order in this 

country. 

I urge my colleagues to cosponsor 

this bill, and I ask unanimous consent 

that a copy of the bill be printed in the 

RECORD. 

There being no objection, the bill was 

ordered to be printed in the RECORD, as 

follows: 

S. 757 

Be it enacted by the Senate and House of Representatives of the United States of America in 

Congress assembled, 

SECTION 1. TERMINATION OF THE CIVILIAN 

MARKSMANSHIP PROGRAM. 

Chapter 410 of title 10, United States Code, 

is amended—

(1) by striking out sections 4307, 4308, 4310, 

4311, 4312, and 4313; 

(2) in section 4309—

(A) in subsection (a), by striking out ‘‘and 

by persons capable of bearing arms’’ and inserting in lieu thereof ‘‘law enforcement 

agencies’’; and 

(B) in subsection (b), by striking out ‘‘civilians’’ each place it appears in paragraphs 

(1) and (3) and inserting in lieu thereof ‘‘law 

enforcement agencies’’; and 

(3) in the table of sections at the beginning 

of chapter 410 of such title, by striking out 

the items relating to sections 4307, 4308, 4310, 

4311, 4312, and 4313. 

SEC. 2. RESCISSION OF FUNDS FOR NATIONAL 

BOARD FOR THE PROMOTION OF 

RIFLE PRACTICE. 

The unobligated balanced of the funds appropriated by title II of Public Law 103–335 

under the heading ‘‘NATIONAL BOARD FOR THE

PROMOTION OF RIFLE PRACTICE, ARMY’’ is rescinded. 

SEC. 3. FISCAL YEAR 1996 FUNDING NOT AUTHORIZED FOR THE NATIONAL BOARD 

FOR THE PROMOTION OF RIFLE 

PRACTICE. 

Funds are not authorized to be appropriated for the National Board for the Promotion of Rifle Practice. 

Mrs. FEINSTEIN. Mr. President, I 

rise in support of the Senator from 

New Jersey in this legislation to rescind the appropriation for the Civilian 

Marksmanship Program. I do so for a 

number of reasons, and I want to briefly cite them. 

At a time when our Government and 

this body is cutting virtually every 

program that benefits people all across 

the board, I think the Civilian Marksmanship Program is one program that 

is truly expendable and can be rescinded. As was pointed out, the military has said this program is not necessary. The General Accounting Office 

in 1990 found the program unnecessary 

and not related to the military mission. 

In March 1994, the Department of Defense testified before the Defense Subcommittee on Appropriations that the 

Civilian Marksmanship Program was 

not related to our Nation’s military 

readiness and had no effect on our national security objectives. 

About a week ago, Mr. President, I 

had a group gathered of major law enforcement organizations to talk about 

the intended repeal of the assault 

weapons legislation, and the head of a 

Federal law enforcement organization 

handed me a copy of the National Rifle 

Association’s letter, a 6-page directmail piece that went out, and said to 

me this was received by one of our law 

enforcement people who was, frankly, 

amazed that this kind of rhetoric could 

appear on an NRA direct-mail piece. 

I took a look at it, and I was astonished by what I saw. Since that time, a 

number of Members of the Senate have 

commented in the Chamber on their 

concern about this piece. It was 

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May 4, 1995 CONGRESSIONAL RECORD— SENATE S6171 

thought that the National Rifle Association might agree that it was hyper 

hyperbole and that it seemed to have a 

purpose to incite people to take action 

against the Federal Government, and it 

made statements which were in effect 

libelous; they were untrue; they were 

slanderous; statements like it did not 

matter to those of us who support the 

assault weapons ban that it gave 

‘‘jack-booted Government thugs more 

power to take away our constitutional 

rights, break in our doors, seize our 

guns, destroy our property, and even 

injure or kill us.’’

Mr. President, I have had a lot of 

things said about me but never that. 

That is untrue. It is a lie. It is patently 

false and it is said for one reason and 

one reason only, and that is to incite 

people. 

Then it goes on to say, ‘‘President 

Clinton’s army of antigun Government 

agents continue to intimidate and harass law-abiding citizens. In Clinton’s 

administration, if you have a badge, 

you have the Government’s go ahead to 

harass, to intimidate, and to even murder law-abiding citizens.’’

On its face, that is slanderous and in 

writing it is libelous. It is factually untrue. It is said but for one reason and 

one reason only. And that is to incite 

and develop hatred against the Federal 

Government and the very people who 

carry out the intent of the laws that 

we in this body and the other body pass 

and are signed by the President and become the law of the land. I do not 

think this body can condone this kind 

of rhetoric. 

Now, is this connected with the Civilian Marksmanship Program? Not directly. Not directly. But indirectly it 

is, because the NRA effectively participates in this program—it is estimated 

by some to the extent of $1 million out 

of the $2.5 million appropriation. 

Moreover, given the association’s refusal to recant this letter, a letter 

which is blatantly political and inciting, certainly not one of a nonpolitical 

organization, should Federal funds benefit a political organization of this 

type? I would come down and say no, 

Federal moneys should not go to benefit an organization that openly admits 

it plays a major political role in the 

election and in the unelection of Members of Congress and members of other 

local bodies. 

I believe letters of this kind really 

defeat its purpose as a so-called nonpolitical organization. 

In addition, I am disturbed about recent reports, such as the ABC 

‘‘PrimeTime Live’’ episode and a Boston Globe article, that describe how 

militia members brag that they have 

received ammunition, surplus weaponry, and training on Army bases 

through the Civilian Marksmanship 

Program. 

I do not know whether this is true or 

not. I have no way on my own of 

verifying it, but the fact is they did 

brag that this was the case. 

In fact, my staff was recently told by 

the Department of Defense about a recent incident where a military security 

patrol monitoring an Army rifle range 

saw that club members were using the 

range and wearing Michigan militia 

patches. These club members were 

asked to leave the range, which is located at Camp Grayling, MI, on April 

27. 

As DOD staff admit, there is nothing 

in the regulations of this program to 

prevent militia members from joining 

civilian marksmanship clubs and receiving ammunition, weaponry, and access to military training facilities, because—and I stress this—the program 

does not check members for their 

membership in other organizations or 

limit the number of adults that can 

join. 

So in light of these reports, which 

suggest this possibility to train, supply, or subsidize anti-Government extremist militias, and the letter which 

seems to indicate to me, and I think to 

other reasonable readers of the letter, 

that the National Rifle Association is 

willing to go a step further to raise the 

level of the rhetoric, to increase the 

hostility, one can certainly question 

the wisdom of Federal dollars going to 

provide weapons and bullets and training to groups who may—and I say may 

and I say might—use these weapons 

and use that training against the very 

people that this body empowers to 

carry out our laws. 

So I believe the time has come to 

take definitive, direct action and, by 

that action, to send a message that we 

will not, in fact, tolerate this. That is 

why I am cosponsoring this legislation, 

and I hope this body will be receptive 

to its passage. 

By Mr. HATCH (for himself, Mr. 

PRYOR, Mr. SIMPSON, Mr. 

BREAUX, Mr. LUGAR, Mr. LEAHY, 

Mrs. HUTCHISON, Mrs. MURRAY, 

Mr. BOND, Mr. KEMPTHORNE, 

Mr. JOHNSTON, Mr. FORD, Mr. 

ROBB, Mr. DORGAN, Mr. KERREY, 

Mr. KYL, Mr. BAUCUS, Mr. 

CRAIG, Mr. COCHRAN, Mr. COHEN, 

Mr. GRASSLEY, Mr. D’AMATO, 

Mr. BENNETT, and Mr. BINGAMAN): 

S. 758. A bill to amend the Internal 

Revenue Code of 1986 to provide for S 

corporation reform, and for other purposes; to the Committee on Finance. 

THE S CORPORATION REFORM ACT OF 1995

Mr. HATCH. Mr. President, on behalf 

of myself and Senator PRYOR, I rise 

today to introduce the S Corporation 

Reform Act of 1995. We are pleased to 

be joined by Senators SIMPSON, 

BREAUX, LUGAR, LEAHY, HUTCHISON, 

MURRAY, BOND, KEMPTHORNE, JOHNSTON, FORD, ROBB, DORGAN, KERREY of 

Nebraska, KYL, BAUCUS, CRAIG, COCHRAN, GRASSLEY, D’AMATO, COHEN, BENNETT, and BINGAMAN. 

Mr. President, today almost 1.7 million businesses pay taxes as S corporations and the vast majority of these 

are small enterprises. As we all know, 

small business is the engine that drives 

American job creation. It is important 

to note that while in ordinary times, 

small businesses create half of the new 

jobs in this country, in times of recovery, this number jumps to 75 percent. 

It is obvious that the tax and economic 

policies of this Nation should support 

and sustain the creation and growth of 

small businesses. Our economic future 

depends on the health and strength of 

our small business sector. 

This is why we are introducing a bill 

today to strengthen small businesses. 

Mr. President, this bill will help to 

fine-tune the Nation’s job-creating engine of small business in three ways: by 

improving access to capital, by making 

it easier to pass on family-owned businesses from one generation to the next, 

and by simplifying many of the outdated, unnecessary and complex tax 

rules that apply to S corporations. 

One of the biggest problems facing 

small business is that of attracting 

adequate capital. This bill helps to expand access to capital by S corporations by increasing the number of permitted shareholders from 35 to 50, by 

permitting tax-exempt organizations 

to be shareholders, and by allowing 

non-citizens to own S corporation 

stock. It will also modernize S corporation financing by allowing them to 

issue preferred stock and convertible 

bonds. 

Further, this legislation will make it 

easier for one S corporation to own another corporation. Our outmoded rules 

already permit this, but not without a 

sizeable diversion of capital away from 

productive investment and into the 

pockets of lawyers and accountants. 

This bill’s provisions will streamline 

small business structure and return 

common sense to the realm of business 

ownership. 

Additionally, the bill will help preserve family-owned businesses by making it easier for families to establish 

trusts funded by S corporation shares, 

and by counting all members of a family who hold S corporation stock as a 

single shareholder. These are important provisions, Mr. President, because 

so many successful small businesses 

fail to survive beyond the first generation. 

Finally, the bill will repair a number 

of outmoded, inefficient provisions of S 

corporation tax law. Among the revised 

rules are a provision giving fringe benefits in S corporations the same tax 

treatment provided to ordinary corporations, and another which will stop 

corporate elections from being invalidated by mere technicalities. Most importantly, all of the bill’s provisions 

have been carefully designed to avoid 

creating future difficulties for America’s small businesses. 

In my home state of Utah, there are 

thousands of current and future entrepreneurs for whom this bill will provide 

much-needed financial and legal flexibility in the increasingly competitive 

marketplace. Throughout the country, 

small businessmen and women have 

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S6172 CONGRESSIONAL RECORD— SENATE May 4, 1995 

been clamoring for relief from our Nation’s outdated and inflexible policies 

regarding S corporation. 

I encourage my colleagues to support 

this badly needed legislation, which 

will give small businesses the strength 

and flexibility they will need to thrive 

into the next century. 

Mr. President, there is much talk 

these days about tax simplification and 

about throwing out the old tax system 

and starting over again with a better 

one that makes more sense. This debate is a very positive thing for this 

country and I believe it will eventually 

lead to some vast improvements in the 

way our economy operates. In the 

meantime, however, let us not overlook some of the relatively simple and 

noncontroversial changes that will 

make our tax system work better. This 

bill represents such changes. These are 

improvements that we can make right 

now that will help small and growing 

businesses. 

I ask unanimous consent that the 

text of this bill be printed in the 

RECORD. 

There being no objection, the bill was 

ordered to be printed in the RECORD, as 

follows: 

S. 758 

Be it enacted by the Senate and House of Representatives of the United States of America in 

Congress assembled, 

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 

CODE; TABLE OF CONTENTS. 

(a) SHORT TITLE.—This Act may be cited as 

the ‘‘S Corporation Reform 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. 

(c) TABLE OF CONTENTS.—The table of contents is as follows: 

Sec. 1. Short title; amendment of 1986 Code; 

table of contents. 

TITLE I—ELIGIBLE SHAREHOLDERS OF S 

CORPORATION 

Subtitle A—Number of Shareholders 

Sec. 101. S corporations permitted to have 50 

shareholders. 

Sec. 102. Members of family treated as 1 

shareholder. 

Subtitle B—Persons Allowed As 

Shareholders 

Sec. 111. Certain exempt organizations. 

Sec. 112. Financial institutions. 

Sec. 113. Nonresident aliens. 

Sec. 114. Electing small business trusts. 

Subtitle C—Other Provisions 

Sec. 121. Expansion of post-death qualification for certain trusts. 

TITLE II—QUALIFICATION AND ELIGIBILITY REQUIREMENTS FOR S CORPORATIONS 

Subtitle A—One Class of Stock 

Sec. 201. Issuance of preferred stock permitted. 

Sec. 202. Financial institutions permitted to 

hold safe harbor debt. 

Subtitle B—Elections and Terminations 

Sec. 211. Rules relating to inadvertent terminations and invalid elections. 

Sec. 212. Agreement to terminate year. 

Sec. 213. Expansion of post-termination 

transition period. 

Sec. 214. Repeal of excessive passive investment income as a termination 

event. 

Subtitle C—Other Provisions 

Sec. 221. S corporations permitted to hold 

subsidiaries. 

Sec. 222. Treatment of distributions during 

loss years. 

Sec. 223. Consent dividend for AAA bypass 

election. 

Sec. 224. Treatment of S corporations under 

subchapter C. 

Sec. 225. Elimination of pre-1983 earnings 

and profits. 

Sec. 226. Allowance of charitable contributions of inventory and scientific property. 

Sec. 227. C corporation rules to apply for 

fringe benefit purposes. 

TITLE III—TAXATION OF S 

CORPORATION SHAREHOLDERS 

Sec. 301. Uniform treatment of owner-employees under prohibited transaction rules. 

Sec. 302. Treatment of losses to shareholders. 

TITLE IV—EFFECTIVE DATE 

Sec. 401. Effective date. 

TITLE I—ELIGIBLE SHAREHOLDERS OF S 

CORPORATION 

Subtitle A—Number of Shareholders 

SEC. 101. S CORPORATIONS PERMITTED TO HAVE 

50 SHAREHOLDERS. 

Subparagraph (A) of section 1361(b)(1) (defining small business corporation) is amended by striking ‘‘35 shareholders’’ and inserting ‘‘50 shareholders’’. 

SEC. 102. 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 6 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.’’. 

Subtitle B—Persons Allowed as Shareholders 

SEC. 111. CERTAIN EXEMPT ORGANIZATIONS. 

(a) CERTAIN EXEMPT ORGANIZATIONS ALLOWED TO BE SHAREHOLDERS.—

(1) IN GENERAL.—Subparagraph (B) of section 1361(b)(1) (defining small business corporation) is amended to read as follows: 

‘‘(B) have as a shareholder a person (other 

than an estate, a trust described in subsection (c)(2), or an organization described in 

subsection (c)(7)) who is not an individual,’’. 

(2) ELIGIBLE EXEMPT ORGANIZATIONS.—Section 1361(c) (relating to special rules for applying subsection (b)) is amended by adding 

at the end the following new paragraph: 

‘‘(7) CERTAIN EXEMPT ORGANIZATIONS PERMITTED AS SHAREHOLDERS.—For purposes of 

subsection (b)(1)(B), an organization described in section 401(a) or 501(c)(3) may be a 

shareholder in an S corporation.’’

(b) CONTRIBUTIONS OF S CORPORATION

STOCK.—Section 170(e)(1) (relating to certain 

contributions of ordinary income and capital 

gain property) is amended by adding at the 

end the following sentence: ‘‘For purposes of 

applying this paragraph in the case of a 

charitable contribution of stock in an S corporation, rules similar to the rules of section 

751 shall apply in determining whether gain 

on such stock would have been long-term 

capital gain if such stock were sold by the 

taxpayer.’’

(c) SPECIAL RULES APPLICABLE TO PARTNERSHIPS AND S CORPORATIONS.—

(1) IN GENERAL.—Subsection (c) of section 

512 (relating to unrelated business tax income) is amended—

(A) by inserting ‘‘or S corporation’’ after 

‘‘partnership’’ each place it appears in paragraphs (1) and (3), 

(B) by inserting ‘‘or shareholder’’ after 

‘‘member’’ in paragraph (1), and 

(C) by inserting ‘‘AND S CORPORATIONS’’

after ‘‘PARTNERSHIPS’’ in the heading. 

(2) REPORTING REQUIREMENT.—Section 6037 

(relating to return of S corporation) is 

amended by adding at the end the following 

new subsection: 

‘‘(c) SEPARATE STATEMENT OF ITEMS OF UNRELATED BUSINESS TAXABLE INCOME.—In the 

case of any S corporation regularly carrying 

on a trade or business (within the meaning of 

section 512(c)(1)), the information required 

under subsection (b) to be furnished to any 

shareholder described in section 1361(c)(7) 

shall include such information as is necessary to enable the shareholder to compute 

its pro rata share of the corporation’s income or loss from the trade or business in 

accordance with section 512(a)(1), but without regard to the modifications described in 

paragraphs (8) through (15) of section 512(b).’’

SEC. 112. FINANCIAL INSTITUTIONS. 

Subparagraph (B) of section 1361(b)(2) (defining ineligible corporation) is amended to 

read as follows: 

‘‘(B) a financial institution which uses the 

reserve method of accounting for bad debts 

described in section 585 or 593,’’. 

SEC. 113. NONRESIDENT ALIENS. 

(a) NONRESIDENT ALIENS ALLOWED TO BE

SHAREHOLDERS.—

(1) IN GENERAL.—Paragraph (1) of section 

1361(b) (defining small business corporation) 

is amended—

(A) by adding ‘‘and’’ at the end of subparagraph (B), 

(B) by striking subparagraph (C), and 

(C) by redesignating subparagraph (D) as 

subparagraph (C). 

(2) CONFORMING AMENDMENTS.—Paragraphs 

(4) and (5)(A) of section 1361(c) (relating to 

special rules for applying subsection (b)) are 

each amended by striking ‘‘subsection 

(b)(1)(D)’’ and inserting ‘‘subsection 

(b)(1)(C)’’. 

(b) NONRESIDENT ALIEN SHAREHOLDER

TREATED AS ENGAGED IN TRADE OR BUSINESS

WITHIN UNITED STATES.—

(1) IN GENERAL.—Section 875 is amended—

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

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(B) by striking the period at the end of 

paragraph (2) and inserting ‘‘, and’’, and 

(C) by adding at the end the following new 

paragraph: 

‘‘(3) a nonresident alien individual shall be 

considered as being engaged in a trade or 

business within the United States if the S 

corporation of which such individual is a 

shareholder is so engaged.’’

(2) APPLICATION OF WITHHOLDING TAX ON

NONRESIDENT ALIEN SHAREHOLDERS.—Section 

1446 (relating to withholding tax on foreign 

partners’ share of effectively connected income) is amended by redesignating subsection (f) as subsection (g) and by inserting 

after subsection (e) the following new subsection: 

‘‘(f) S CORPORATION TREATED AS PARTNERSHIP, ETC.—For purposes of this section—

‘‘(1) an S corporation shall be treated as a 

partnership, 

‘‘(2) the shareholders of such corporation 

shall be treated as partners of such partnership, and 

‘‘(3) any reference to section 704 shall be 

treated as a reference to section 1366.’’

(3) CONFORMING AMENDMENTS.—

(A) The heading of section 875 is amended 

to read as follows: 

‘‘SEC. 875. PARTNERSHIPS; BENEFICIARIES OF 

ESTATES AND TRUSTS; S CORPORATIONS.’’

(B) The heading of section 1446 is amended 

to read as follows: 

‘‘SEC. 1446. WITHHOLDING TAX ON FOREIGN 

PARTNERS’ AND S CORPORATE 

SHAREHOLDERS’ SHARE OF EFFECTIVELY CONNECTED INCOME.’’

(4) CLERICAL AMENDMENTS.—

(A) The item relating to section 875 in the 

table of sections for subpart A of part II of 

subchapter N of chapter 1 is amended to read 

as follows: 

‘‘Sec. 875. Partnerships; beneficiaries of estates and trusts; S corporations.’’

(B) The item relating to section 1446 in the 

table of sections for subchapter A of chapter 

3 is amended to read as follows: 

‘‘Sec. 1446. Withholding tax on foreign partners’ and S corporate shareholders’ share of effectively 

connected income.’’

(c) PERMANENT ESTABLISHMENT OF PARTNERS AND S CORPORATION SHAREHOLDERS.—

Section 894 (relating to income affected by 

treaty) is amended by adding at the end the 

following new subsection: 

‘‘(c) PERMANENT ESTABLISHMENT OF PARTNERS AND S CORPORATION SHAREHOLDERS.—If 

a partnership or S corporation has a permanent establishment in the United States 

(within the meaning of a treaty to which the 

United States is a party) at any time during 

a taxable year of such entity, a nonresident 

alien individual or foreign corporation which 

is a partner in such partnership, or a nonresident alien individual who is a shareholder in such S corporation, shall be treated 

as having a permanent establishment in the 

United States for purposes of such treaty.’’

SEC. 113. ELECTING SMALL BUSINESS TRUSTS. 

(a) GENERAL RULE.—Subparagraph (A) of 

section 1361(c)(2) (relating to certain trusts 

permitted as shareholders) is amended by inserting after clause (iv) the following new 

clause: 

‘‘(v) An electing small business trust.’’

(b) CURRENT BENEFICIARIES TREATED AS

SHAREHOLDERS.—Subparagraph (B) of section 

1361(c)(2) is amended by adding at the end 

the following new clause: 

‘‘(v) In the case of a trust described in 

clause (v) of subparagraph (A), each potential current beneficiary of such trust shall be 

treated as a shareholder; except that, if for 

any period there is no potential current beneficiary of such trust, such trust shall be 

treated as the shareholder during such period.’’

(c) ELECTING SMALL BUSINESS TRUST DEFINED.—Section 1361 (defining S corporation) 

is amended by adding at the end the following new subsection: 

‘‘(e) ELECTING SMALL BUSINESS TRUST DEFINED.—

‘‘(1) ELECTING SMALL BUSINESS TRUST.—For 

purposes of this section—

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

subparagraph (B), the term ‘electing small 

business trust’ means any trust if—

‘‘(i) such trust does not have as a beneficiary any person other than an individual, 

an estate, or an organization described in 

section 401(a) or 501(c)(3), 

‘‘(ii) no interest in such trust was acquired 

by purchase, and 

‘‘(iii) an election under this subsection applies to such trust. 

‘‘(B) CERTAIN TRUSTS NOT ELIGIBLE.—The 

term ‘electing small business trust’ shall not 

include—

‘‘(i) any qualified subchapter S trust (as 

defined in subsection (d)(3)) if an election 

under subsection (d)(2) applies to any corporation the stock of which is held by such 

trust, and 

‘‘(ii) any trust exempt from tax under this 

subtitle. 

‘‘(C) PURCHASE.—For purposes of subparagraph (A), the term ‘purchase’ means any acquisition if the basis of the property acquired is determined under section 1012. 

‘‘(2) POTENTIAL CURRENT BENEFICIARY.—For 

purposes of this section, the term ‘potential 

current beneficiary’ means, with respect to 

any period, any person who at any time during such period is entitled to, or at the discretion of any person may receive, a distribution from the principal or income of the 

trust. If a trust disposes of all of the stock 

which it holds in an S corporation, then, 

with respect to such corporation, the term 

‘potential current beneficiary’ does not include any person who first met the requirements of the preceding sentence during the 

60-day period ending on the date of such disposition. 

‘‘(3) ELECTION.—An election under this subsection shall be made by the trustee in such 

manner and form, and at such time, as the 

Secretary may prescribe. Any such election 

shall apply to the taxable year of the trust 

for which made and all subsequent taxable 

years of such trust unless revoked with the 

consent of the Secretary. 

‘‘(4) CROSS REFERENCE.—

‘‘For special treatment of electing small 

business trusts, see section 641(d).’’

(d) TAXATION OF ELECTING SMALL BUSINESS

TRUSTS.—Section 641 (relating to imposition 

of tax on trusts) is amended by adding at the 

end the following new subsection: 

‘‘(d) SPECIAL RULES FOR TAXATION OF

ELECTING SMALL BUSINESS TRUSTS.—

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

chapter—

‘‘(A) the portion of any electing small business trust which consists of stock in 1 or 

more S corporations shall be treated as a 

separate trust, and 

‘‘(B) the amount of the tax imposed by this 

chapter on such separate trust shall be determined with the modifications of paragraph (2). 

‘‘(2) MODIFICATIONS.—For purposes of paragraph (1), the modifications of this paragraph are the following: 

‘‘(A) Except as provided in section 1(h), the 

amount of the tax imposed by section 1(e) 

shall be determined by using the highest rate 

of tax set forth in section 1(e). 

‘‘(B) The exemption amount under section 

55(d) shall be zero. 

‘‘(C) The only items of income, loss, deduction, or credit to be taken into account are 

the following: 

‘‘(i) The items required to be taken into account under section 1366. 

‘‘(ii) Any gain or loss from the disposition 

of stock in an S corporation. 

‘‘(iii) To the extent provided in regulations, State or local income taxes or administrative expenses to the extent allocable to 

items described in clauses (i) and (ii). 

No deduction or credit shall be allowed for 

any amount not described in this paragraph, 

and no item described in this paragraph shall 

be apportioned to any beneficiary. 

‘‘(D) No amount shall be allowed under 

paragraph (1) or (2) of section 1211(b). 

‘‘(3) TREATMENT OF REMAINDER OF TRUST

AND DISTRIBUTIONS.—For purposes of determining—

‘‘(A) the amount of the tax imposed by this 

chapter on the portion of any electing small 

business trust not treated as a separate trust 

under paragraph (1), and 

‘‘(B) the distributable net income of the 

entire trust, 

the items referred to in paragraph (2)(C) 

shall be excluded. Except as provided in the 

preceding sentence, this subsection shall not 

affect the taxation of any distribution from 

the trust. 

‘‘(4) TREATMENT OF UNUSED DEDUCTIONS

WHERE TERMINATION OF SEPARATE TRUST.—If a 

portion of an electing small business trust 

ceases to be treated as a separate trust under 

paragraph (1), any carryover or excess deduction of the separate trust which is referred 

to in section 642(h) shall be taken into account by the entire trust. 

‘‘(5) ELECTING SMALL BUSINESS TRUST.—For 

purposes of this subsection, the term ‘electing small business trust’ has the meaning 

given such term by section 1361(e)(1).’’

Subtitle C—Other Provisions 

SEC. 121. EXPANSION OF POST-DEATH QUALIFICATION FOR CERTAIN TRUSTS. 

Subparagraph (A) of section 1361(c)(2) (relating to certain trusts permitted as shareholders) is amended—

(1) by striking ‘‘60-day period’’ each place 

it appears in clauses (ii) and (iii) and inserting ‘‘2-year period’’, and 

(2) by striking the last sentence in clause 

(ii). 

TITLE II—QUALIFICATION AND ELIGIBILITY REQUIREMENTS FOR S CORPORATIONS 

Subtitle A—One Class of Stock 

SEC. 201. ISSUANCE OF PREFERRED STOCK PERMITTED. 

(a) IN GENERAL.—Section 1361(c), as amended by section 111(a)(2), is amended by adding 

at the end the following new paragraph: 

‘‘(8) TREATMENT OF QUALIFIED PREFERRED

STOCK.—

‘‘(A) IN GENERAL.—Notwithstanding subsection (b)(1)(D), an S corporation may issue 

qualified preferred stock. 

‘‘(B) QUALIFIED PREFERRED STOCK DEFINED.—For purposes of this paragraph, the 

term ‘qualified preferred stock’ means stock 

described in section 1504(a)(4) which is issued 

to a person eligible to hold common stock of 

an S corporation. 

‘‘(C) DISTRIBUTIONS.—A distribution (not in 

part or full payment in exchange for stock) 

made by the corporation with respect to 

qualified preferred stock shall be includible 

as interest income of the holder and deductible to the corporation as interest expense in 

computing taxable income under section 

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

(b) CONFORMING AMENDMENTS.—

(1) Subparagraph (C) of section 1361(b)(1), 

as redesignated by section 113(a)(1)(C), is 

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amended by inserting ‘‘except as provided in 

paragraph (8),’’ before ‘‘have’’. 

(2) Subsection (a) of section 1366 is amended by adding at the end the following new 

paragraph: 

‘‘(3) ALLOCATION WITH RESPECT TO QUALIFIED PREFERRED STOCK.—The holders of 

qualified preferred stock shall not, with respect to such stock, be allocated any of the 

items described in paragraph (1).’’

SEC. 202. FINANCIAL INSTITUTIONS PERMITTED 

TO HOLD SAFE HARBOR DEBT. 

Subparagraph (B) of section 1361(c)(5) (defining straight debt) is amended by adding 

‘‘and’’ at the end of clause (i) and by striking 

clauses (ii) and (iii) and inserting the following: 

‘‘(ii) in any case in which the terms of such 

promise include a provision under which the 

obligation to pay may be converted (directly 

or indirectly) into stock of the corporation, 

such terms, taken as a whole, are substantially the same as the terms which could 

have been obtained on the effective date of 

the promise from a person which is not a related person (within the meaning of section 

465(b)(3)(C)) to the S corporation or its shareholders, and 

‘‘(iii) the creditor is—

‘‘(I) an individual, 

‘‘(II) an estate, 

‘‘(III) a trust described in paragraph (2), or 

‘‘(IV) a person which is actively and regularly engaged in the business of lending 

money.’’

Subtitle B—Elections and Terminations 

SEC. 211. RULES RELATING TO INADVERTENT 

TERMINATIONS AND INVALID ELECTIONS. 

(a) GENERAL RULE.—Subsection (f) of section 1362 (relating to inadvertent terminations) is amended to read as follows: 

‘‘(f) INADVERTENT INVALID ELECTIONS OR

TERMINATIONS.—If—

‘‘(1) an election under subsection (a) by 

any corporation—

‘‘(A) was not effective for the taxable year 

for which made (determined without regard 

to subsection (b)(2)) by reason of a failure to 

meet the requirements of section 1361(b) or 

to obtain shareholder consents, or 

‘‘(B) was terminated under paragraph (2) of 

subsection (d), 

‘‘(2) the Secretary determines that the circumstances resulting in such ineffectiveness 

or termination were inadvertent, 

‘‘(3) no later than a reasonable period of 

time after discovery of the circumstances resulting in such ineffectiveness or termination, steps were taken—

‘‘(A) so that the corporation is a small 

business corporation, or 

‘‘(B) to acquire the required shareholder 

consents, and 

‘‘(4) the corporation, and each person who 

was a shareholder in the corporation at any 

time during the period specified pursuant to 

this subsection, agrees to make such adjustments (consistent with the treatment of the 

corporation as an S corporation) as may be 

required by the Secretary with respect to 

such period, 

then, notwithstanding the circumstances resulting in such ineffectiveness or termination, such corporation shall be treated as 

an S corporation during the period specified 

by the Secretary.’’

(b) LATE ELECTIONS.—Subsection (b) of section 1362 is amended by adding at the end 

thereof the following new paragraph: 

‘‘(5) AUTHORITY TO TREAT LATE ELECTIONS

AS TIMELY.—If—

‘‘(A) an election under subsection (a) is 

made for any taxable year (determined without regard to paragraph (3)) after the date 

prescribed by this subsection for making 

such election for such taxable year, and 

‘‘(B) the Secretary determines that there 

was reasonable cause for the failure to timely make such election, 

the Secretary may treat such election as 

timely made for such taxable year (and paragraph (3) shall not apply).’’

(c) AUTOMATIC WAIVERS.—The Secretary of 

the Treasury shall provide for an automatic 

waiver procedure under section 1362(f) of the 

Internal Revenue Code of 1986 in cases in 

which the Secretary determines appropriate. 

(d) EFFECTIVE DATE.—The amendments 

made by subsection (a) and (b) shall apply 

with respect to elections for taxable years 

beginning after December 31, 1982. 

SEC. 212. AGREEMENT TO TERMINATE YEAR. 

Paragraph (2) of section 1377(a) (relating to 

pro rata share) is amended to read as follows: 

‘‘(2) ELECTION TO TERMINATE YEAR.—

‘‘(A) IN GENERAL.—Under regulations prescribed by the Secretary, if any shareholder 

terminates the shareholder’s interest in the 

corporation during the taxable year and all 

affected shareholders agree to the application of this paragraph, paragraph (1) shall be 

applied to the affected shareholders as if the 

taxable year consisted of 2 taxable years the 

first of which ends on the date of the termination. 

‘‘(B) AFFECTED SHAREHOLDERS.—For purposes of subparagraph (A), the term ‘affected 

shareholders’ means the shareholder whose 

interest is terminated and all shareholders 

to whom such shareholder has transferred 

shares during the taxable year. If such shareholder has transferred shares to the corporation, the term ‘affected shareholders’ shall 

include all persons who are shareholders during the taxable year.’’

SEC. 213. EXPANSION OF POST-TERMINATION 

TRANSITION PERIOD. 

(a) IN GENERAL.—Paragraph (1) of section 

1377(b) (relating to post-termination transition period) is amended by striking ‘‘and’’ at 

the end of subparagraph (A), by redesignating subparagraph (B) as subparagraph (C), 

and by inserting after subparagraph (A) the 

following new subparagraph: 

‘‘(B) the 120-day period beginning on the 

date of any determination pursuant to an 

audit of the taxpayer which follows the termination of the corporation’s election and 

which adjusts a subchapter S item of income, 

loss, or deduction of the corporation arising 

during the S period (as defined in section 

1368(e)(2)), and’’. 

(b) DETERMINATION DEFINED.—Paragraph 

(2) of section 1377(b) is amended by striking 

subparagraphs (A) and (B), by redesignating 

subparagraph (C) as subparagraph (B), and by 

inserting before subparagraph (B) (as so redesignated) the following new subparagraph: 

‘‘(A) a determination as defined in section 

1313(a), or’’. 

(c) REPEAL OF SPECIAL AUDIT PROVISIONS

FOR SUBCHAPTER S ITEMS.—

(1) GENERAL RULE.—Subchapter D of chapter 63 (relating to tax treatment of subchapter S items) is hereby repealed. 

(2) CONSISTENT TREATMENT REQUIRED.—Section 6037 (relating to return of S corporation), as amended by section 111(c)(2), is 

amended by adding at the end the following 

new subsection: 

‘‘(d) SHAREHOLDER’S RETURN MUST BE CONSISTENT WITH CORPORATE RETURN OR SECRETARY NOTIFIED OF INCONSISTENCY.—

‘‘(1) IN GENERAL.—A shareholder of an S 

corporation shall, on such shareholder’s return, treat a subchapter S item in a manner 

which is consistent with the treatment of 

such item on the corporate return. 

‘‘(2) NOTIFICATION OF INCONSISTENT TREATMENT.—

‘‘(A) IN GENERAL.—In the case of any subchapter S item, if—

‘‘(i)(I) the corporation has filed a return 

but the shareholder’s treatment on his return is (or may be) inconsistent with the 

treatment of the item on the corporate return, or 

‘‘(II) the corporation has not filed a return, 

and 

‘‘(ii) the shareholder files with the Secretary a statement identifying the inconsistency, 

paragraph (1) shall not apply to such item. 

‘‘(B) SHAREHOLDER RECEIVING INCORRECT INFORMATION.—A shareholder shall be treated 

as having complied with clause (ii) of subparagraph (A) with respect to a subchapter S 

item if the shareholder—

‘‘(i) demonstrates to the satisfaction of the 

Secretary that the treatment of the subchapter S item on the shareholder’s return is 

consistent with the treatment of the item on 

the schedule furnished to the shareholder by 

the corporation, and 

‘‘(ii) elects to have this paragraph apply 

with respect to that item. 

‘‘(3) EFFECT OF FAILURE TO NOTIFY.—In any 

case—

‘‘(A) described in subparagraph (A)(i)(I) of 

paragraph (2), and 

‘‘(B) in which the shareholder does not 

comply with subparagraph (A)(ii) of paragraph (2), 

any adjustment required to make the treatment of the items by such shareholder consistent with the treatment of the items on 

the corporate return shall be treated as arising out of mathematical or clerical errors 

and assessed according to section 6213(b)(1). 

Paragraph (2) of section 6213(b) shall not 

apply to any assessment referred to in the 

preceding sentence. 

‘‘(4) SUBCHAPTER S ITEM.—For purposes of 

this subsection, the term ‘subchapter S item’

means any item of an S corporation to the 

extent that regulations prescribed by the 

Secretary provide that, for purposes of this 

subtitle, such item is more appropriately determined at the corporation level than at the 

shareholder level. 

‘‘(5) ADDITION TO TAX FOR FAILURE TO COMPLY WITH SECTION.—

‘‘For addition to tax in the case of a shareholder’s negligence in connection with, or 

disregard of, the requirements of this section, 

see part II of subchapter A of chapter 68.’’

(3) CONFORMING AMENDMENTS.—

(A) Section 1366 is amended by striking 

subsection (g). 

(B) Subsection (b) of section 6233 is amended to read as follows: 

‘‘(b) SIMILAR RULES IN CERTAIN CASES.—If a 

partnership return is filed for any taxable 

year but it is determined that there is no entity for such taxable year, to the extent provided in regulations, rules similar to the 

rules of subsection (a) shall apply.’’

(C) The table of subchapters for chapter 63 

is amended by striking the item relating to 

subchapter D. 

SEC. 214. REPEAL OF EXCESSIVE PASSIVE INVESTMENT INCOME AS A TERMINATION EVENT. 

(a) IN GENERAL.—Section 1362(d) (relating 

to termination) is amended by striking paragraph (3). 

(b) MODIFICATION OF TAX IMPOSED ON EXCESSIVE PASSIVE INVESTMENT INCOME.—

(1) INCREASE IN THRESHOLD.—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 ‘‘50 percent’’. 

(2) TAX RATE INCREASE AFTER THIRD CONSECUTIVE YEAR.—Section 1375 is amended by 

redesignating subsections (c) and (d) as subsections (d) and (e), respectively, and by inserting after subsection (b) the following new 

subsection: 

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May 4, 1995 CONGRESSIONAL RECORD— SENATE S6175 

‘‘(c) TAX RATE INCREASE AFTER THIRD CONSECUTIVE YEAR.—

‘‘(1) IN GENERAL.—If an S corporation is described in subsection (a) for more than 3 consecutive taxable years, then the rate of tax 

imposed under subsection (a) with respect to 

each succeeding consecutive taxable year (if 

any) shall be determined under the following 

table: 

‘‘In the case of the— The rate of tax imposed 

under subsection (a) 

shall be equal to such 

rate of tax for the 3rd 

taxable year, plus the 

following percentage 

points: 

4th taxable year .............................. 10

5th taxable year .............................. 20

6th taxable year .............................. 30

7th taxable year .............................. 40

8th taxable year and thereafter ...... 50. 

‘‘(2) YEARS TAKEN INTO ACCOUNT.—No tax 

shall be increased under paragraph (1) for 

any taxable year beginning before January 1, 

1996.’’

(c) CONFORMING AMENDMENTS.—

(1) Section 1362(f)(1) is amended by striking 

‘‘or (3)’’. 

(2) Subsection (b) of section 1375 is amended by striking paragraphs (3) and (4) and inserting the following new paragraphs: 

‘‘(3) SUBCHAPTER C EARNINGS AND PROFITS.—

The term ‘subchapter C earnings and profits’

means earnings and profits of any corporation for any taxable year with respect to 

which an election under section 1362(a) (or 

under section 1372 of prior law) was not in effect. 

‘‘(4) GROSS RECEIPTS FROM SALES OF CAPITAL ASSETS (OTHER THAN STOCK AND SECURITIES).—In the case of dispositions of capital 

assets (other than stock and securities), 

gross receipts from such dispositions shall be 

taken into account only to the extent of the 

capital gain net income therefrom. 

‘‘(5) PASSIVE INVESTMENT INCOME DEFINED.—

‘‘(A) IN GENERAL.—Except as otherwise provided in this paragraph, the term ‘passive investment income’ means gross receipts derived from royalties, rents, dividends, interest, and annuities. 

‘‘(B) EXCEPTION FOR INTEREST ON NOTES

FROM SALES OF INVENTORY.—The term ‘passive investment income’ shall not include interest on any obligation acquired in the ordinary course of the corporation’s trade or 

business from its sale of property described 

in section 1221(1). 

‘‘(C) TREATMENT OF CERTAIN LENDING OR FINANCE COMPANIES.—If the S corporation 

meets the requirements of section 542(c)(6) 

for the taxable year, the term ‘passive investment income’ shall not include gross receipts for the taxable year which are derived 

directly from the active and regular conduct 

of a lending or finance business (as defined in 

section 542(d)(1)). 

‘‘(D) SPECIAL RULE FOR OPTIONS AND COMMODITY DEALINGS.—

‘‘(i) IN GENERAL.—In the case of any options dealer or commodities dealer, passive 

investment income shall be determined by 

not taking into account any gain or loss (in 

the normal course of the taxpayer’ activity 

of dealing in or trading section 1256 contracts) from any section 1256 contract or 

property related to such a contract. 

‘‘(ii) DEFINITIONS.—For purposes of this 

subparagraph—

‘‘(I) OPTIONS DEALER.—The term ‘options 

dealer’ has the meaning given such term by 

section 1256(g)(8). 

‘‘(II) COMMODITIES DEALER.—The term 

‘commodities dealer’ means a person who is 

actively engaged in trading section 1256 contracts and is registered with a domestic 

board of trade which is designated as a contract market by the Commodities Futures 

Trading Commission. 

‘‘(III) SECTION 1256 CONTRACT.—The term 

‘section 1256 contract’ has the meaning given 

to such term by section 1256(b). 

‘‘(E) COORDINATION WITH SECTION 1374.—The 

amount of passive investment income shall 

be determined by not taking into account 

any recognized built-in gain or loss of the S 

corporation for any taxable year in the recognition period. Terms used in the preceding 

sentence shall have the same respective 

meaning as when used in section 1374.’’

(3) The heading for section 1375 is amended 

by striking ‘‘25’’ and inserting ‘‘50’’. 

(4) The table of sections for part III of subchapter S of chapter 1 is amended by striking ‘‘25’’ in the item relating to section 1375 

and inserting ‘‘50’’. 

(5) Clause (i) of section 1042(c)(4)(A) is 

amended by striking ‘‘section 1362(d)(3)(D)’’

and inserting ‘‘section 1375(b)(5)’’. 

Subtitle C—Other Provisions 

SEC. 221. S CORPORATIONS PERMITTED TO HOLD 

SUBSIDIARIES. 

(a) IN GENERAL.—Paragraph (2) of section 

1361(b) (defining ineligible corporation), as 

amended by section 112, is amended by striking subparagraph (A) and by redesignating 

subparagraphs (B), (C), (D), and (E) as subparagraphs (A), (B), (C), and (D), respectively. 

(b) TREATMENT OF CERTAIN WHOLLY OWNED

S CORPORATION SUBSIDIARIES.—Section 

1361(b) (defining small business corporation) 

is amended by adding at the end thereof the 

following new subsection: 

‘‘(3) TREATMENT OF CERTAIN WHOLLY OWNED

SUBSIDIARIES.—

‘‘(A) IN GENERAL.—For purposes of this 

title—

‘‘(i) a corporation which is a qualified subchapter S subsidiary shall not be treated as 

a separate corporation, and 

‘‘(ii) all assets, liabilities, and items of income, deduction, and credit of a qualified 

subchapter S subsidiary shall be treated as 

assets, liabilities, and such items (as the 

case may be) of the S corporation. 

‘‘(B) QUALIFIED SUBCHAPTER S SUBSIDIARY.—

For purposes of this subsection, the term 

‘qualified subchapter S subsidiary’ means 

any corporation 100 percent of the stock of 

which is held by an S corporation as of the 

later of the effective date of the S election of 

the S corporation or the acquisition of the 

subsidiary, and at all times thereafter. 

‘‘(C) TREATMENT OF TERMINATIONS OF

QUALIFIED SUBCHAPTER S SUBSIDIARY STATUS.—For purposes of this subtitle, if any 

corporation which was a qualified subchapter 

S subsidiary ceases to meet the requirements 

of subparagraph (B), such corporation shall 

be treated as a new corporation acquiring all 

of its assets (and assuming all of its liabilities) immediately before such cessation 

from the S corporation in exchange for its 

stock.’’. 

(c) CERTAIN DIVIDENDS NOT TREATED AS

PASSIVE INVESTMENT INCOME.—Section 

1375(b)(5) (defining passive investment income), as added by section 214(c)(2), is 

amended by adding at the end the following 

new subparagraph: 

‘‘(F) TREATMENT OF CERTAIN DIVIDENDS.—If 

an S corporation holds stock in a C corporation meeting the requirements of section 

1504(a)(2), the term ‘passive investment income’ shall not include dividends from such 

C corporation to the extent such dividends 

are attributable to the earnings and profits 

of such C corporation derived from the active 

conduct of a trade or business.’’

(d) CONFORMING AMENDMENTS.—

(1) Subsection (c) of section 1361, as amended by sections 111(a)(2) and 201(a), is amended 

by striking paragraph (6) and redesignating 

paragraphs (7) and (8) as paragraphs (6) and 

(7), respectively. 

(2) Subsection (b) of section 1504 (defining 

includible corporation) is amended by adding 

at the end the following new paragraph: 

‘‘(8) An S corporation.’’

SEC. 222. TREATMENT OF DISTRIBUTIONS DURING LOSS YEARS. 

(a) ADJUSTMENTS FOR DISTRIBUTIONS TAKEN

INTO ACCOUNT BEFORE LOSSES.—

(1) Subparagraph (A) of section 1366(d)(1) 

(relating to losses and deductions cannot exceed shareholder’s basis in stock and debt) is 

amended by striking ‘‘paragraph (1)’’ and inserting ‘‘paragraphs (1) and (2)(A)’’. 

(2) Subsection (d) of section 1368 (relating 

to certain adjustments taken into account) 

is amended by adding at the end the following new sentence: 

‘‘In the case of any distribution made during 

any taxable year, the adjusted basis of the 

stock shall be determined with regard to the 

adjustments provided in paragraph (1) of section 1367(a) for the taxable year.’’

(b) ACCUMULATED ADJUSTMENTS ACCOUNT.—

Paragraph (1) of section 1368(e) (relating to 

accumulated adjustments account) is amended by adding at the end the following new 

subparagraph: 

‘‘(C) NET LOSS FOR YEAR DISREGARDED.—

‘‘(i) IN GENERAL.—In applying this section 

to distributions made during any taxable 

year, the amount in the accumulated adjustments account as of the close of such taxable 

year shall be determined without regard to 

any net negative adjustment for such taxable year. 

‘‘(ii) NET NEGATIVE ADJUSTMENT.—For purposes of clause (i), the term ‘net negative adjustment’ means, with respect to any taxable 

year, the excess (if any) of—

‘‘(I) the reductions in the account for the 

taxable year (other than for distributions), 

over 

‘‘(II) the increases in such account for such 

taxable year.’’

(c) CONFORMING AMENDMENTS.—Subparagraph (A) of section 1368(e)(1) is amended—

(1) by striking ‘‘as provided in subparagraph (B)’’ and inserting ‘‘as otherwise provided in this paragraph’’, and 

(2) by striking ‘‘section 1367(b)(2)(A)’’ and 

inserting ‘‘section 1367(a)(2)’’. 

SEC. 223. CONSENT DIVIDEND FOR AAA BYPASS 

ELECTION. 

Section 1368(e)(3) (relating to election to 

distribute earnings first) is amended by adding at the end the following new subparagraph: 

‘‘(C) CONSENT DIVIDEND.—Under regulations 

prescribed by the Secretary, an S corporation may, subject to the election under this 

paragraph, consent to treat as a distribution 

the amount specified in such consent, to the 

extent such amount does not exceed the accumulated earnings and profits of such corporation. The amount so specified shall be 

considered—

‘‘(i) as distributed in money by the corporation to its shareholders on the last day 

of the taxable year of the corporation and as 

contributed to the capital of the corporation 

by the shareholders on such day, and 

‘‘(ii) if any such shareholder is an organization described in section 511(a)(2), as unrelated business taxable income (as defined in 

section 512) to such shareholder.’’

SEC. 224. TREATMENT OF S CORPORATIONS 

UNDER SUBCHAPTER C. 

Subsection (a) of section 1371 (relating to 

application of subchapter C rules) is amended to read as follows: 

‘‘(a) APPLICATION OF SUBCHAPTER C 

RULES.—Except as otherwise provided in this 

title, and except to the extent inconsistent 

with this subchapter, subchapter C shall 

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S6176 CONGRESSIONAL RECORD— SENATE May 4, 1995 

apply to an S corporation and its shareholders.’’

SEC. 225. ELIMINATION OF PRE-1983 EARNINGS 

AND PROFITS. 

(a) IN GENERAL.—If—

(1) a corporation was an electing small 

business corporation under subchapter S of 

chapter 1 of the Internal Revenue Code of 

1986 for any taxable year beginning before 

January 1, 1983, and 

(2) such corporation is an S corporation 

under subchapter S of chapter 1 of such Code 

for its first taxable year beginning after December 31, 1995, 

the amount of such corporation’s accumulated earnings and profits (as of the beginning of such first taxable year) shall be reduced by an amount equal to the portion (if 

any) of such accumulated earnings and profits which were accumulated in any taxable 

year beginning before January 1, 1983, for 

which such corporation was an electing 

small business corporation under such subchapter S. 

(b) CONFORMING AMENDMENTS.—

(1)(A) Subsection (a) of section 1375 is 

amended by striking ‘‘subchapter C’’ in paragraph (1) and inserting ‘‘accumulated’’. 

(B) Subsection (b) of section 1375, as 

amended by section 214(c)(2), is amended by 

striking paragraph (3) and by redesignating 

paragraphs (4) and (5) as paragraphs (3) and 

(4), respectively. 

(C) The section heading for section 1375 is 

amended by striking ‘‘subchapter c’’ and inserting ‘‘accumulated’’. 

(D) The table of sections for part III of subchapter S of chapter 1 is amended by striking ‘‘subchapter C’’ in the item relating to 

section 1375 and inserting ‘‘accumulated’’. 

(2) Clause (i) of section 1042(c)(4)(A), as 

amended by section 214(c)(5), is amended by 

striking ‘‘section 1375(b)(5)’’ and inserting 

‘‘section 1375(b)(4)’’. 

SEC. 226. ALLOWANCE OF CHARITABLE CONTRIBUTIONS OF INVENTORY AND 

SCIENTIFIC PROPERTY. 

(a) IN GENERAL.—Section 170(e) (relating to 

certain contributions of ordinary income and 

capital gain property) is amended—

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

which is an S corporation)’’ in paragraph 

(3)(A), and 

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

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

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

(b) STOCK BASIS ADJUSTMENT.—Paragraph 

(1) of section 1367(a) (relating to adjustments 

to basis of stock of shareholders, etc.) is 

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

end of subparagraph (C) and inserting ‘‘, 

and’’, and by adding at the end the following 

new subparagraph: 

‘‘(D) the excess of the deductions for charitable contributions over the basis of the 

property contributed.’’

SEC. 227. C CORPORATION RULES TO APPLY FOR 

FRINGE BENEFIT PURPOSES. 

(a) IN GENERAL.—Section 1372 (relating to 

partnership rules to apply for fringe benefit 

purposes) is repealed. 

(b) PARTNERSHIP RULES TO APPLY FOR

HEALTH INSURANCE COSTS OF CERTAIN S CORPORATION SHAREHOLDERS.—Paragraph (5) of 

section 162(l) is amended to read as follows: 

‘‘(5) TREATMENT OF CERTAIN S CORPORATION

SHAREHOLDERS.—

‘‘(A) IN GENERAL.—This subsection shall 

apply in the case of any 2-percent shareholder of an S corporation, except that—

‘‘(i) for purposes of this subsection, such 

shareholder’s wages (as defined in section 

3121) from the S corporation shall be treated 

as such shareholder’s earned income (within 

the meaning of section 401(c)(1)), and 

‘‘(ii) there shall be such adjustments in the 

application of this subsection as the Secretary may by regulations prescribe. 

‘‘(B) 2-PERCENT SHAREHOLDER DEFINED.—

For purposes of this paragraph, the term ‘2- 

percent shareholder’ means any person who 

owns (or is considered as owning within the 

meaning of section 318) on any day during 

the taxable year of the S corporation more 

than 2 percent of the outstanding stock of 

such corporation or stock possessing more 

than 2 percent of the total combined voting 

power of all stock of such corporation.’’

(b) CONFORMING AMENDMENT.—The table of 

sections for part III of subchapter S of chapter 1 is amended by striking the item relating to section 1372. 

TITLE III—TAXATION OF S CORPORATION 

SHAREHOLDERS 

SEC. 301. UNIFORM TREATMENT OF OWNER-EMPLOYEES UNDER PROHIBITED 

TRANSACTION RULES. 

The last sentence of section 4975(d) (relating to exemptions from prohibited transactions) is amended by striking ‘‘a shareholder-employee (as defined in section 1379, 

as in effect on the day before the date of the 

enactment of the Subchapter S Revision Act 

of 1982),’’. 

SEC. 302. TREATMENT OF LOSSES TO SHAREHOLDERS. 

(a) TREATMENT OF LOSSES IN LIQUIDATIONS.—Section 331 (relating to gain or loss 

to shareholders in corporate liquidations) is 

amended by redesignating subsection (c) as 

subsection (d) and by inserting after subsection (b) the following new subsection: 

‘‘(c) LOSSES ON LIQUIDATIONS OF S CORPORATION.—

‘‘(1) IN GENERAL.—The portion of any loss 

recognized by a shareholder of an S corporation (as defined in section 1361(a)(1)) on 

amounts received by such shareholder in a 

distribution in complete liquidation of such 

S corporation which does not exceed the ordinary income basis of stock of such S corporation in the hands of such shareholder 

shall not be treated as a loss from the sale or 

exchange of a capital asset but shall be 

treated as an ordinary loss. 

‘‘(2) ORDINARY INCOME BASIS.—For purposes 

of this subsection, the ordinary income basis 

of stock of an S corporation in the hands of 

a shareholder of such S corporation shall be 

an amount equal to the portion of such 

shareholder’s basis in such stock which is 

equal to the aggregate increases in such 

basis under section 1367(a)(1) resulting from 

such shareholder’s pro rata share of ordinary 

income of such S corporation attributable to 

the complete liquidation.’’

(b) CARRYOVER OF DISALLOWED LOSSES AND

DEDUCTIONS UNDER AT-RISK RULES ALLOWED.—Paragraph (3) of section 1366(d) (relating to carryover of disallowed losses and 

deductions to post-termination transition 

period) is amended by adding at the end the 

following new subparagraph: 

‘‘(D) AT-RISK LIMITATIONS.—To the extent 

that any increase in adjusted basis described 

in subparagraph (B) would have increased 

the shareholder’s amount at risk under section 465 if such increase had occurred on the 

day preceding the commencement of the 

post-termination transition period, rules 

similar to the rules described in subparagraphs (A) through (C) shall apply to any 

losses disallowed by reason of section 

465(a).’’

TITLE IV—EFFECTIVE DATE 

SEC. 401. EFFECTIVE DATE. 

(a) IN GENERAL.—Except as otherwise provided in this Act, the amendments made by 

this Act shall apply to taxable years beginning after December 31, 1995. 

(b) TREATMENT OF CERTAIN ELECTIONS

UNDER PRIOR LAW.—For purposes of section 

1362(g) of the Internal Revenue Code of 1986 

(relating to election after termination), any 

termination under section 1362(d) of such 

Code (as in effect on the day before the date 

of the enactment of this Act) shall not be 

taken into account. 

Mr. HATCH. Mr. President, I also 

want to pay specific tribute to our distinguished colleague from Arkansas, 

Senator PRYOR. Not only has he been a 

great Senator here but he has been the 

leader on this particular issue for years 

and he deserves the credit for these 

changes in the S corporation law. I 

have agreed to assistance this year in 

trying to get this done and we intend 

to get it done this year. It is something 

that is long overdue, and thanks to his 

leadership and his intellectual prowess 

I think we will be able to get it done. 

So I want to personally compliment 

him. 

Mr. PRYOR. Mr. President, first I 

would like to thank my very good 

friend, my long-time friend and distinguished colleague from Utah, Senator 

HATCH. 

Senator HATCH and I have worked on 

this proposal for a long time and we 

are very proud today to be able to introduce it as a bill and to also announce our 23 cosponsors from each 

side of the aisle in support of the S 

Corporation Reform Act of 1995. 

Senator HATCH has been, certainly, a 

teacher for me in this whole process. I 

thank him. He has been a great ally. 

Truly, serving on the Finance Committee together, working with this legislation and working with a number of 

colleagues that we have in support, and 

also the number of organizations that I 

will list in a moment, we think truly in 

1995 we can make this reform of S corporation law become a reality. 

This legislation is truly the culmination of the efforts of many, many individuals and groups. It is a bipartisan 

effort, and certainly represents, I 

think, a step that Congress can and 

should take in order to capitalize on 

one of our country’s most valuable resources, small business, as Senator 

HATCH has just so eloquently stated. 

I want to thank all of the businessmen and women, attorneys, accountants, and small business organizations 

who have worked with me and my staff 

to help us to understand the unique 

problems of subchapter S corporations. 

They have helped us arrive at solutions 

that we think are easily administered 

and targeted to encourage economic 

growth. 

The interest and enthusiasm for this 

effort is of special mention. At this 

date, the bill is endorsed by the : 

Members of the S Corp Subcommittee of the American Bar Association’s tax section; the U.S. Chamber 

of Commerce; National Federation of 

Independent Businesses Small Business 

Legislative Council; American Institute of Certified Public Accountants; 

American Vintners Association; American Consulting Engineers Council; 

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May 4, 1995 CONGRESSIONAL RECORD— SENATE S6177 

American Electronics Association; Associated Builders and Contractors; Associated Equipment Distributors; National Association of Life Underwriters; National Association of Realtors; National Association of Wholesale-Distributors; National Business 

Owners Association; National Society 

of Public Accountants; and the S Corp 

Reform Project. 

Mr. President, these fine organizations we think represent hundreds of 

thousands of businesses across this 

country that will be impacted in a good 

way across our country. It is quite a 

team, and a team that I think is very 

rarely put together. It is quite a team 

that has worked thoughtfully and diligently, and I must say, patiently, 

through this system to help produce a 

bill that Congress can pass and we 

should pass overwhelmingly. 

Mr. President, I would like to point 

out to my colleagues that I introduced 

similar legislation in the last session 

of Congress. On November 19, 1993, S. 

1690 was introduced with our former 

colleague, Senator John Danforth, who 

retired from the U.S. Senate. Working 

together, we were joined by a strongly 

bipartisan group of 40 of our colleagues 

who cosponsored that bill at that time. 

Today, once again, I am so proud to 

be able to join my friend and colleague, 

Senator HATCH, with whom I very 

much look forward to working in order 

that we might take the next step and 

move this bill into law. 

The S Corporation Reform Act of 1995 

contains 27 provisions designed to 

usher sub-S corporations into the financial environment of the 1990’s. 

Subchapter S was first enacted in 

1958. In fact, I think it might have been 

about the year that the distinguished 

occupant of our chair was born. On 

that particular date that subchapter S 

was passed into law, it was enacted to 

remove tax considerations from small 

business owners’ decisions to incorporate. This tax treatment has proved 

helpful to small business over the 

years, especially to startup businesses, 

to new businesses. But subchapter S, as 

originally enacted in 1958, was very 

limiting and contained a large number 

of pitfalls. Today, hundreds of thousands of U.S. businesses are S corporations. These businesses are still subject 

to many of the oppressive restraints 

which date back to its original enactment in 1958. 

Mr. President, it goes without saying 

that times have changed a great deal 

since that year. The financial environment is far more complex than the 

1950’s. Sub S limitations restrict 

growth opportunities, and frankly sub 

S needs an overhaul, and it needs an 

overhaul now. 

This legislation we think is the overhaul we need. It is an overhaul that is 

doable. It is an overhaul that can give 

a boost to our economic recovery by 

creating more opportunities for capital 

growth and jobs throughout every segment of American economic activity. 

Mr. President, these objectives are 

met by this legislation in ways that 

have been carefully thought through. 

There may well be other ways to encourage these goals that Senator 

HATCH and I share this afternoon. But 

I hope and expect my colleagues respectfully will come forward with their 

ideas should they see areas where we 

might improve upon this proposal. I 

look forward to this dialog. I urge my 

colleagues to examine this bill closely 

and to join with Senator HATCH and 

myself in this effort. 

Mr. President, I ask unanimous consent that a copy of a summary description of the major provisions of this bill 

be printed in the RECORD. 

There being no objection, the material was ordered to be printed in the 

RECORD, as follows: 

S CORPORATION REFORM ACT OF 1995 

ACCELERATING CAPITAL FORMATION

Shareholder limitations 

Increase the number of permitted shareholders from 35 to 50. Currently a corporation is not eligible to be an S corporation if 

it has more than 35 shareholders. Increasing 

the number of permitted shareholders to 50 

will make S corporation status available to 

additional closely-held businesses, allowing 

them the benefits of limited liability. Further, increasing the number of permitted 

shareholders will enable S corporations to 

raise more capital. 

Permit tax-exempt organizations to be 

shareholders. This would permit charities 

and pension plans to be eligible shareholders 

of an S corporation, thereby increasing an S 

corporation’s access to certain capital markets. Specifically, an S corporation would be 

able to establish an employee stock ownership plan and would have access to additional capital from charitable organizations 

and pension funds. The bill further provides 

that the flow-through income of an S corporation would be treated as unrelated business taxable income to a tax-exempt shareholder as if the S corporation’s activities 

were conducted directly by the tax-exempt 

shareholder. 

Allow nonresident alien shareholders to 

own S corporation stock. By permitting nonresident aliens to be eligible shareholders of 

an S corporation, the bill expands an S corporation’s access to capital. In addition, it 

enhances an S corporation’s ability to expand into international markets because it 

provides them the ability to offer an equity 

interest to individuals they are trying to recruit to grow their business overseas. To ensure collection of tax on nonresident aliens, 

the bill subjects these shareholders to U.S. 

withholding tax on S corporation income. 

Preferred Stock and Convertible Debt 

Permit S corporations to issue preferred 

stock. Currently, S corporations may not 

issue more than one class of stock. By permitting S corporations to issue preferred 

stock, the bill increases access to capital 

from investors who insist on having a preferential return. The provision also facilitates family succession by permitting the 

older generation of shareholders to relinquish control of the corporation but maintain an equity interest. The bill also provides that a distribution made with respect 

to qualified preferred stock will be considered interest income to the shareholder and 

deductible interest expense to the S corp. 

Expand Safe Harbor Debt to permit convertible debt. This provision permits S corporations to issue debt that may be converted into stock of the corporation provided 

that the terms of the debt are substantially 

the same as the terms that could have been 

obtained from an unrelated party. The provision will also permit the debt to be held not 

only by qualified shareholders, but also by a 

person who is actively and regularly engaged 

in the business of lending money. The current law provision, which prohibits conversion of the debt into stock, unnecessarily impairs the ability of an S corporation to raise 

investment capital. 

Subsidiaries 

Permit an S corporation to own greater 

that 80% of another corporation. Currently, 

S corporations may not own more than 79% 

of a C corporation. This provision removes 

this limitation to allow S corporations to 

hold more than 80% of the stock of a subsidiary C corporations, which will greatly 

enhance an S corporation’s ability to achieve 

significant non-tax objectives in structuring 

their operations. In reality, taxpayers get 

around current rules through complex arrangements used by expensive tax planners. 

So, this provision allows S corporation to do 

directly, what they now do indirectly. 

Permit S Corporations to own whollyowned S Corporation Subsidiaries. The provision would permit an S corporation to serve 

as a holding company for the various operating S corporations, which would simplify 

management of the group. The holding company could enter into contracts on behalf of 

the group, serve as a common paymaster, 

perform other centralized management services, and facilitate obtaining financing for 

the group. 

PRESERVING FAMILY-OWNED BUSINESSES

Expand the types of trusts that can own S 

corporation stock to include certain complex 

trusts that qualify as ‘‘electing small business trusts.’’ This provision would enable S 

corporation shareholders to accomplish 

many estate planning goals not currently 

available because of current law limitations 

on the types of trusts that can be S corporation shareholders. Specifically, this provision would enable S corporation shareholders 

to establish complex trusts with multiple 

beneficiaries and permit the trustee to have 

discretion as to which beneficiary to make 

distributions. Providing this type of flexibility is consistent with a major underlying 

purpose of the S corporation—to provide a 

vehicle for family-owned corporations. 

Count all members of a single family that 

own an S corporation’s stock as a single 

shareholder. An election could be made with 

the consent of all shareholders to count family members that are not more than six generations removed from a common ancestor 

as one shareholder for purposes of the number of shareholder limitation. 

REMOVING TRAPS FOR THE UNWARY

Elections 

Permit the Secretary of the Treasury to 

treat invalid elections as effective and permit late elections. This provision permits 

the IRS to retroactively validate an invalid 

S corporation election in cases where the 

corporation inadvertently failed to meet the 

definition of a small business corporation or 

to obtain the required shareholder consents. 

The bill sets forth the criteria under which 

the IRS should validate such elections. The 

bill also provides for an automatic waiver 

procedure for certain inadvertent terminations. In addition, the bill provides that if 

a corporation fails to make a timely S election (i.e., by the 15th day of the third month 

of the first S corporation year) and the Secretary determines that there was reasonable 

cause for the failure to make such election, 

the Secretary may treat the election as 

timely made. 

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S6178 CONGRESSIONAL RECORD— SENATE May 4, 1995 

Passive Investment Income 

Repeal excessive passive income as a termination event. Under current law, if more 

than 25 percent of the gross receipts of an S 

corporation are passive investment income, 

a corporate level tax will be imposed on the 

excess passive income. In addition, en election of S corporation status will be terminated if at the close of three consecutive 

years a corporation has subchapter C earnings and profits and more than 25 percent of 

gross receipts are from passive investment 

income. The provision would increase the 

threshold for taxing excess passive income 

from 25 percent to 50 percent. Importantly, 

the provision would also provide that an S 

corporation would not lose its S corporation 

status if it has excess passive income for 

three consecutive years. Instead, the corporate level tax rate applied to the excess 

passive income would increase by 10 percent 

for each successive year. The provision also 

makes it clear that items of income connected with an S corp’s trade or business will 

not be considered passive income. 

FRINGE BENEFITS

Place S corporation shareholders in the 

same position as regular corporations with 

respect to fringe benefits such as life insurance premiums. 

Repeal restrictions on qualified plan loans 

made to S corporation shareholders. 

TECHNICAL PROPOSALS

Treat losses on liquidation of S corporations as ordinary to the extent the loss created by ordinary income passthrough triggered the liquidation. In the case of a liquidation of an S corporation, current law can 

result in double taxation because of a mismatch of ordinary income (realized at the 

corporate level and passed through to the 

shareholder) and a capital loss (recognized at 

the shareholder level on the liquidating distribution). Although careful tax planning 

can avoid this result, many S corporations 

do not have the benefit of sophisticated tax 

counsel. The provision in the bill would 

eliminate this potential trap. 

Allow interim closing of the books in termination of shareholder interest with consent of corporation and affected shareholder. 

Current law requires that if a shareholder 

terminates his interest in an S corporation 

during the taxable year, the corporation and 

all persons who are shareholders during the 

taxable year must agree to close the books 

on the date of termination. The bill would 

eliminate the requirement that all shareholders consent to the closing and instead 

requires only that the ‘‘affected shareholders’’ (the shareholder whose interest is 

terminated and all shareholders to whom 

such shareholder transferred shares during 

the year) consent to the closing. This change 

will ease procedural problems in preparing 

and filing timely corporate tax returns. 

Allow charitable contributions of inventory and scientific property to be the same 

for S corporations as for regular corporations. S corporations would be permitted an 

increased charitable contribution, equivalent to the deduction amount allowed to regular corporations. 

By Mr. BRADLEY (for himself 

and Mr. HOLLINGS): 

S. 759. A bill to amend the Immigration and Nationality Act to limit the 

adjustment of status of aliens who are 

unlawfully residing in the United 

States; to the Committee on the Judiciary. 

THE ILLEGAL IMMIGRATION ENFORCEMENT ACT

OF 1995

Mr. BRADLEY. Madam President, I 

am pleased to introduce, for myself and 

Senator HOLLINGS, the Illegal Immigration Enforcement Act of 1995. This is a 

bill to improve the Federal Government’s ability to deter illegal immigration by enhancing enforcement of existing laws that prohibit employment 

of illegal aliens and bar overstays by 

legally admitted visitors. 

Madam President, I have been watching the unfolding immigration debate 

with real concern. As I followed California’s proposition 187 campaign, I realized the arguments over illegal immigration are occurring in a vacuum. We 

are trying to address the impact of immigration without understanding how 

it relates to the deeper transformations that are shaping our society. We find ourselves susceptible to 

the demagogic quick fix, and risk undermining the diversity that underlies 

our strength as an American people. 

Peter Drucker once said: 

Every few hundred years throughout Western history, a sharp transformation has occurred. In a matter of decades, society rearranges itself—its world view, its basic values; its social and political structures; its 

art; its key institutions. Fifty years later, 

there is a new world. And the people born 

into that world cannot even imagine the 

world in which their grandparents lived and 

into which their own parents were born. 

Madam President, we are currently 

living through such a period of transformation. Not since the age of democratic revolution coincided with the industrial revolution has our world undergone such sweeping change as we 

are having today. The forces at work in 

our lives today are as dramatic and 

powerful as the Declaration of Independence and the steam engine were 

two centuries ago. 

We face today a rapidly transforming 

world full of new opportunities. But 

those opportunities are accompanied 

by profound uncertainties and painful 

adaptations. Progress creates losers as 

well as winners. For example, the 

death of the Soviet Union has ended 

our fear of nuclear annihilation. At the 

same time, the resulting military 

downsizing has cost over 1.1 million 

jobs in the defense sector alone since 

1987. As a result, and not for the first 

time in our history, politicians and 

voters have seized upon immigration, 

especially illegal immigration, as a 

scapegoat for the deeper uncertainties 

we feel. 

Illegal immigration has also become 

a lightning rod for worries about the 

budget crises we face at all levels of 

Government. There is no doubt that illegal immigrants impose a cost on taxpayers. According to the estimates by 

the Urban Institute, the seven most affected States pay approximately $3.1 

billion yearly on education, $471 million on incarceration, and $313 million 

on providing medical treatment for undocumented aliens. The Urban Institute’s fiscal year 1993 estimates for my 

own State of New Jersey, which has the 

sixth largest population of illegal 

aliens, are $146 million for education, 

$6.6 million for incarceration, and $0.5–

3.9 million for Medicaid, for a total of 

$153.1–156.5 million. 

Anger over illegal immigration inevitably creates a backlash against legal 

immigrants and even citizens of different ethnic backgrounds. However, 

this is a self-defeating response. Our 

country is increasingly a mixture of 

races, languages, and religions, as new 

immigrants arrive in search of economic promise and political freedom. 

By the year 2000, only 57 percent of the 

people who enter the work force in 

America will be native-born white 

Americans. That means that the economic future of all Americans will depend increasingly on the talents of 

nonwhite Americans. We will all either 

advance together or each of us will be 

diminished. 

We most need to appreciate the remarkable opportunity that our racial 

and ethnic diversity represents for the 

future of our country. Our immigrants 

and new citizens can be our guide to 

the cultural rhythms in the fastest 

growing areas of the world economy. 

Given high-quality and price-competitive goods, the cultural knowledge 

they have can American the advantage. 

Our diversity can mean more jobs, 

more prosperity for all Americans, if 

we can seize the moment and not run 

away from it. 

To do so, we must reinvigorate the 

institutions and organizations which 

integrate new arrivals into American 

society. I have spoken elsewhere of the 

crisis afflicting civil society in this 

country. One of the effects of the decline of the institutions of civil society 

is the weakening of the lodges, clubs, 

churches, Scout troops, and other organizations which used to give immigrants entree into American society. 

As a result, we all too often see groups 

of teenage immigrants operating on 

the fringes of society instead of productive new members integrating into the 

heart of American society. 

We cannot realize the opportunity 

presented by our diversity if we let 

frustration over the Federal Government’s inability to control its borders 

spill over into action against those who 

are here legally. We must control illegal immigration in order to make our 

country safe for legal immigration. We 

must control illegal immigration if we 

are to make our country safe for diversity. 

There is no shortage of laws on the 

books to control illegal immigration. 

There are laws to punish employers 

and smugglers of illegal aliens, to deny 

illegal aliens most Government benefits and even to compensate the States 

for some of the costs associated with illegal immigration. 

The primary problem, however, is enforcement. The Immigration and Naturalization Service is underfunded and 

hindered by a history of incompetence 

that the current management is hard 

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May 4, 1995 CONGRESSIONAL RECORD— SENATE S6179 

put to reverse. The INS cannot keep illegal aliens out of the country, track 

them once they enter, or remove them 

once they are identified. Its various 

databases are, frankly, a shambles. 

At the same time, certain economic 

interests benefit from the labor of illegal aliens. They profit from the general 

climate of neglect in which they can 

demand long hours of labor for low 

wages and few benefits. 

Madam President, sweatshops 

manned by illegal men, women, and 

children are a disgrace to America and 

a drag on the fortunes of legal immigrant and American workers. These are 

the very inhumane labor conditions 

and practices we try to improve in 

countries abroad, but they are here, in 

America, today. American workers and 

honest American employers should not 

have to compete against this exploited 

labor force. 

That brings me, Madam President, to 

my bill, the Illegal Immigration Enforcement Act of 1995. This legislation 

contains three major provisions which 

can help end this gentleman’s agreement and will enforce the laws that are 

on the books. The gentleman’s agreement is: pass tough legislation, but do 

not enforce it. Talk about being tough 

on illegal immigrants, but allow certain economic interests to benefit from 

illegal immigrant labor. 

The first provision goes to, I think, 

the root problem, which is employment. Most illegal aliens do not come 

to the United States for health care or 

welfare or even education. They come 

to work. That means that the way to 

discourage them is not to punish their 

children by denying them medical care 

or education, as proposition 187 tries to 

do, but instead remove the employment magnet and remove the incentive 

that attracts them to the United 

States. 

Existing law, starting with the Immigration Reform and Control Act of 1986, 

contains provisions which would reduce 

employment opportunities for illegal 

immigrants if they were simply enforced. Before enacting fundamental 

changes in this bedrock piece of legislation, we should try enforcing the 

laws already on the books. Empty legislating is no substitute for enforcement. 

The place to start is employer sanctions. The 1986 act, better known as the 

Simpson-Mazzoli Act, imposes civil 

penalties on employers of illegal aliens 

of up to $10,000 per alien for repeat offenders. There is also a criminal penalty of up to 6 months imprisonment 

and a $3,000 fine for pattern or practice 

violations. 

Madam President, enforcement of 

employer sanctions is a low priority at 

INS. In part, this is because the labor 

regulatory function is different from 

the policing function usually done by 

the investigative branch of the Immigration and Naturalization Service. As 

in any bureaucracy, ‘‘different’’ means 

‘‘low priority.’’

In addition, this branch has a mandate to focus on antismuggling and removal of criminal aliens. By implication, everything else has low priority. 

This low priority shows up in the figures. The 1986 act authorized $100 million per year to enforce employer sanctions, and even that was probably too 

little, but by fiscal year 1994, the appropriation had shrunk to $23 million. 

Funding has recovered somewhat since 

1994, but remains well under the 

amount necessary to implement the 

law properly. 

As a result, the number of cases investigated has declined by nearly 50 

percent from 1989 to 1994. In particular, 

the number of investigations resulting 

from leads, the most productive investigations, declined from 5,118 in 1989 to 

2,240 in 1994. 

It is clear that as long as the same 

INS branch tries to perform investigative and employer sanctions functions, 

the latter will have to take a back 

seat. The way it is currently structured, employer sanctions will always 

take a back seat. 

My bill fixes this problem by creating 

a separate Office for the Enforcement 

of Employer Sanctions and authorizing 

it for $100 million, the figure that was 

contained in the 1986 Act. 

This first provision of my bill also 

addresses the potential for employment 

discrimination that exists in any employment eligibility legislation. For 

example, in 1990, a GAO study found 

that the 1986 act’s employer sanctions 

provisions resulted in employment discrimination. The study suggested three 

causes for this: 

First, the employers do not understand the law’s requirements; second, 

employers do not understand how to 

determine employment eligibility; and 

third, the prevalence of counterfeit 

documents increases employer confusion. 

As the GAO study implies, the problem is not with the law but with the 

INS’s failure to educate employers 

about what the law requires them to 

do. Most employers, for example, still 

do not know that they must fill out an 

I–9 employment eligibility form for 

every employee, whether that employee is white, African-American, Hispanic, Asian, or otherwise. This is the 

key to combating discrimination, educating employers that this form applies 

to all. 

Note that the GAO study reports that 

an estimated 346,000 employers said 

that they applied the 1986 act’s 

verification system only to persons 

who had a foreign appearance or accent, and recommends, among other 

steps, increasing employer understanding through effective education 

efforts. 

Madam President, my bill takes this 

problem head on by mandating that 

the INS Office for the Enforcement of 

Employer Sanctions be charged with 

‘‘educating employers on the requirements of the law, and in other ways as 

is necessary to prevent employment 

discrimination.’’

The bottom line, then, is that my bill 

does not add to employers’ burdens; it 

does not add one single form to the 

mountain of paperwork they must already fill out when they hire a new 

legal worker. Instead, it requires the 

Federal Government to explain the existing law to them. In this way, it will 

reduce the burden of uncertainty employers now bear. 

Let me point out as well that the bill 

complements other efforts by the administration, Senator FEINSTEIN, Senator SIMPSON—the coauthor of the 1986 

act—and others, to reduce the number 

of documents that can be used to confirm employment eligibility, make it 

more difficult to counterfeit the documents and develop a more reliable national employment eligibility data 

base. 

So, Madam President, the first initiative in the bill is to tighten up employer sanctions. 

Second, the bill prevents illegal 

aliens from reaping the rewards of 

their illegal entry into the United 

States. It prohibits adjustment of status within the United States for those 

seeking employment-based legal immigrant status. Further, it disqualifies 

those who have worked illegally in the 

United States from becoming legal immigrants. Currently, those in the 

United States illegally can try to adjust to a legal status, based upon family relationship or employment in a 

hard-to-fill job. 

While I do not advocate separating 

families, we can and should go after 

those who come to the United States 

illegally and expect to find an employer who will sponsor them for adjustment to legal status. 

My bill does this by forcing those 

who want to adjust for work-related 

reasons to do so outside the United 

States. So that, if they are denied, 

they cannot simply melt back into the 

population. In addition, by making previous illegal employment a disqualification for adjustment of status for 

work-related reasons, this bill denies 

illegal workers the benefit of their 

lawbreaking. 

Finally, Madam President, the bill 

addresses the problem of overstays by 

visitors admitted to this country legally. The debate on illegal immigration is focused on the United StatesMexican border. This is understandable, given the flow of illegal aliens 

across the border and the impact of 

this flow on border States. However, 

even sealing off the United StatesMexican border would not solve the 

problem of illegal immigration. 

Indeed, Madam President, the United 

States-Mexican border is less than half 

of the problem. The Immigration and 

Naturalization Service estimates that 

52 percent of all illegal aliens residing 

in the United States do not sneak 

across the U.S. border. Instead, they 

enter legally on visitor’s visas and then 

overstay their visas. The percentage in 

my State of New Jersey is even higher, 

given its distance from Mexico and the 

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S6180 CONGRESSIONAL RECORD— SENATE May 4, 1995 

sources of our illegal alien population. 

The INS estimates that 60 percent of 

New Jersey’s illegal aliens enter the 

country legally on a visitor’s visa and 

then just overstay, convinced that the 

INS will never find them. And most 

times they are right. 

The administration and Congress, 

fixated on the Mexican border, are ignoring this very substantial problem. 

My bill addresses it by requiring the 

INS to develop an entry and exit data 

base that will alert it to overstays by 

legally admitted nonimmigrants. It is 

pretty simple. We cannot hope to control our borders unless we know who is 

inside them. Once we know who is 

overstaying his or her visa and where 

that person is staying, we can easily 

take steps to remove that person from 

our country. It is a very simple step. It 

is not taken today, so you have 52 percent of the people who come on legitimate visas disappearing into the society as a whole. 

Madam President, the terrorist 

atrocity in Oklahoma City reminded us 

that we live in a dangerous world. Of 

course, non-Americans have no monopoly on terrorism. That is what Oklahoma City said as well. The evidence 

indicates that the Oklahoma City 

bombing was not perpetrated by an illegal alien. However, illegal aliens 

overstaying tourism visas have been 

implicated in terrorism in this country. For example, take Mohammad 

Salameh, who is accused of having 

rented the van used in the World Trade 

Center bombing. He was living in the 

United States illegally at the time of 

that crime. He entered this country legally, on a 6-month tourist visa, on 

February 17, 1988. And he still had not 

departed at the time the World Trade 

Center bombing on February 26, 1993—

5 years later. 

Under current procedures, the INS 

had no idea of Salameh’s failure to depart or his whereabouts in the United 

States. Under this bill, the INS would 

have been alerted to Salameh’s overstay and illegal residence in the United 

States nearly 41⁄2 years before the 

crime. 

So, Madam President, there you have 

it. Enforcement of employer sanctions, 

restrictions on rewarding aliens for illegal work, and measures to discourage 

overstays by legally admitted visitors. 

With these steps toward enforcing existing law, we can help to build common ground here at home, to parlay 

our diversity into strength, to protect 

legal immigration, and to lead the 

world by the power of our example. 

Mr. President, I ask unanimous consent that the text of the bill be printed 

in the RECORD. 

There being no objection, the bill was 

ordered to be printed in the RECORD, as 

follows: 

S. 759 

Be it enacted by the Senate and House of Representatives of the United States of America in 

Congress assembled, 

SECTION 1. SHORT TITLE. 

This Act may be cited as the ‘‘Illegal Immigration Enforcement Act of 1995’’. 

SEC. 2. FINDINGS. 

The Congress makes the following findings: 

(1) The Government of the United States 

has failed to curb the influx of undocumented aliens into the United States. 

(2) The social and economic costs of illegal 

immigration create a backlash against legal 

immigrants and citizens of different ethnic 

backgrounds. 

(3) The primary magnet for illegal aliens is 

work. 

(4) Existing law contains provisions to prevent the employment of undocumented 

aliens. 

(5) Properly enforced, these provisions 

could reduce employment opportunities for 

illegal immigrants and thereby reduce the 

incentive for illegal immigration. 

(6) With proper enforcement and employer 

education, the employer sanctions laws 

should not result in employment discrimination. 

(7) However, these laws are not now adequately enforced. 

(8) This is in part because Immigration and 

Naturalization Service inspectors have 

other, legislatively mandated, priorities that 

have first call on their limited resources. 

(9) Many illegal immigrants adjust their 

status to become legal residents. 

(10) This prospect is another encouragement to illegal immigration. 

(11) Statistics show that approximately 

one-half of all illegal aliens living in the 

United States arrived legally on nonimmigrant visas, then failed to depart. 

(12) The Immigration and Naturalization 

Service (INS) is currently unable to identify 

or locate such visa overstayers in a systematic fashion. 

SEC. 3. ENFORCEMENT OF EMPLOYER SANCTIONS. 

(a) ESTABLISHMENT OF NEW OFFICE.—There 

shall be in the Immigration and Naturalization Service of the Department of Justice an 

Office for the Enforcement of Employer 

Sanctions (in this section referred to as the 

‘‘Office’’). 

(b) FUNCTIONS.—The functions of the Office 

established under subsection (a) shall be—

(1) to investigate and prosecute violations 

of section 274A(a) of the Immigration and 

Nationality Act (8 U.S.C. 1324a(a)); and 

(2) to educate employers on the requirements of the law and in other ways as necessary to prevent employment discrimination. 

(c) AUTHORIZATION OF APPROPRIATIONS.—

There are authorized to be appropriated to 

the Attorney General $100,000,000 to carry 

out the functions of the Office established 

under subsection (a). 

SEC. 4. LIMITATION ON ADJUSTMENT OF STATUS. 

Section 245(c) of the Immigration and Nationality Act (8 U.S.C. 1255(c)) is amended—

(1) by striking ‘‘or (4)’’ and inserting ‘‘(4)’’; 

and 

(2) by inserting before the period at the end 

the following: ‘‘(5) any alien who seeks adjustment of status as an employment-based 

immigrant; or (6) any alien who was employed while the alien was an unauthorized 

alien, as defined in section 274(h)(3)’’. 

SEC. 5. MONITORING OF OVERSTAYS. 

The Attorney General shall develop an 

entry and exit data base that will permit the 

Attorney General to identify lawfully admitted nonimmigrants who overstay their visas. 

By Mr. ROCKEFELLER: 

S. 760. A bill to establish the National Commission on the Long-Term 

Solvency of the Medicare Program; to 

the Committee on Finance. 

THE MEDICARE COMMISSION ACT OF 1995

∑ Mr. ROCKEFELLER. Mr. President, I 

ask unanimous consent that the text of 

the bill be printed in the RECORD. 

There being no objection, the bill was 

ordered to be printed in the RECORD, as 

follows: 

S. 760 

Be it enacted by the Senate and House of Representatives of the United States of America in 

Congress assembled, 

SECTION 1. SHORT TITLE. 

This Act may be cited as the ‘‘Medicare 

Commission Act of 1995’’. 

SEC. 2. ESTABLISHMENT. 

(a) ESTABLISHMENT.—There is established a 

commission to be known as the National 

Commission on the Long-Term Solvency of 

the Medicare Program (hereafter in this Act 

referred to as the ‘‘Commission’’). 

(b) MEMBERSHIP.—The Commission shall be 

composed of 15 members appointed as follows: 

(1) Five members shall be appointed by the 

President from among officers or employees 

of the executive branch, private citizens of 

the United States, or both. Not more than 3 

members selected by the President shall be 

members of the same political party. 

(2) Five members shall be appointed by the 

Majority Leader of the Senate from among 

members of the Senate, private citizens of 

the United States, or both. Not more than 3 

of the members selected by the Majority 

Leader shall be members of the same political party. 

(3) Five members shall be appointed by the 

Speaker of the House of Representatives 

from among members of the House of Representatives, private citizens of the United 

States, or both. Not more than 3 of the members selected by the Speaker shall be members of the same political party. 

(4) DATE.—The appointments of the members of the Commission shall be made no 

later than November 30, 1995. 

(c) PERIOD OF APPOINTMENT; VACANCIES.—

Members shall be appointed for the life of 

the Commission. Any vacancy in the Commission shall not affect its powers, but shall 

be filled in the same manner as the original 

appointment. 

(d) INITIAL MEETING.—No later than 30 days 

after the date on which all members of the 

Commission have been appointed, the Commission shall hold its first meeting. 

(e) MEETINGS.—The Commission shall meet 

at the call of the Chairman. 

(f) QUORUM.—A majority of the members of 

the Commission shall constitute a quorum, 

but a lesser number of members may hold 

hearings. 

(g) CHAIRMAN.—The Commission shall select a Chairman from among its members. 

SEC. 3. DUTIES OF THE COMMISSION. 

(a) ANALYSES AND RECOMMENDATIONS.—

(1) IN GENERAL.—The Commission shall—

(A) review relevant analyses of the current 

and long-term financial condition of the 

medicare trust funds; 

(B) identify problems that may threaten 

the long-term solvency of such trust funds; 

(C) analyze potential solutions to such 

problems that will both assure the financial 

integrity of the medicare program under 

title XVIII of the Social Security Act (42 

U.S.C. 1395 et seq.) and the provision of appropriate health benefits; and 

(D) provide appropriate recommendations 

to the Secretary of Health and Human Services, the President, and the Congress. 

(2) DEFINITION OF MEDICARE TRUST FUNDS.—

For purposes of this subsection, the term 

‘‘medicare trust funds’’ means the Federal 

Hospital Insurance Trust Fund established 

under section 1817 of the Social Security Act 

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May 4, 1995 CONGRESSIONAL RECORD— SENATE S6181 

(42 U.S.C. 1395i) and the Federal Supplementary Medical Insurance Trust Fund established under section 1841 of such Act (42 

U.S.C. 1395t). 

(b) REPORT.—The Commission shall submit 

its report to the President and the Congress 

not later than December 31, 1996. 

SEC. 4. POWERS OF THE COMMISSION. 

(a) HEARINGS.—The Commission may hold 

such hearings, sit and act at such times and 

places, take such testimony, and receive 

such evidence as the Commission considers 

advisable to carry out the purposes of this 

Act. 

(b) INFORMATION FROM FEDERAL AGENCIES.—The Commission may secure directly 

from any Federal department or agency such 

information as the Commission considers 

necessary to carry out the provisions of this 

Act. Upon request of the Chairman of the 

Commission, the head of such department or 

agency shall furnish such information to the 

Commission. 

(c) POSTAL SERVICES.—The Commission 

may use the United States mails in the same 

manner and under the same conditions as 

other departments and agencies of the Federal Government. 

SEC. 5. COMMISSION PERSONNEL MATTERS. 

(a) COMPENSATION OF MEMBERS.—

(1) OFFICERS AND EMPLOYEES OF THE FEDERAL GOVERNMENT.—All members of the 

Commission who are officers or employees of 

the Federal Government shall serve without 

compensation in addition to that received 

for their services as officers or employees of 

the United States. 

(2) PRIVATE CITIZENS OF THE UNITED

STATES.—

(A) IN GENERAL.—Subject to subparagraph 

(B), all members of the Commission who are 

not officers or employees of the Federal Government shall serve without compensation 

for their work on the Commission. 

(B) TRAVEL EXPENSES.—The members of 

the Commission who are not officers or employees of the Federal Government shall be 

allowed travel expenses, including per diem 

in lieu of subsistence, at rates authorized for 

employees of agencies under subchapter I of 

chapter 57 of title 5, United States Code, 

while away from their homes or regular 

places of business in the performance of services for the Commission, to the extent funds 

are available therefor. 

(b) STAFF.—

(1) IN GENERAL.—The Chairman of the Commission may, without regard to the civil 

service laws and regulations, appoint and 

terminate an executive director and such 

other additional personnel as may be necessary to enable the Commission to perform 

its duties. At the request of the Chairman, 

the Secretary of Health and Human Services 

shall provide the Commission with any necessary administrative and support services. 

The employment of an executive director 

shall be subject to confirmation by the Commission. 

(2) COMPENSATION.—The Chairman of the 

Commission may fix the compensation of the 

executive director and other personnel without regard to the provisions of chapter 51 and 

subchapter III of chapter 53 of title 5, United 

States Code, relating to classification of positions and General Schedule pay rates, except that the rate of pay for the executive director and other personnel may not exceed 

the rate payable for level V of the Executive 

Schedule under section 5316 of such title. 

(c) DETAIL OF GOVERNMENT EMPLOYEES.—

Any Federal Government employee may be 

detailed to the Commission without reimbursement, and such detail shall be without 

interruption or loss of civil service status or 

privilege. 

(d) PROCUREMENT OF TEMPORARY AND

INTERMITTENT SERVICES.—The Chairman of 

the Commission may procure temporary and 

intermittent services under section 3109(b) of 

title 5, United States Code, at rates for individuals which do not exceed the daily equivalent of the annual rate of basic pay prescribed for level V of the Executive Schedule 

under section 5316 of such title. 

SEC. 6. TERMINATION OF THE COMMISSION. 

The Commission shall terminate 30 days 

after the date on which the Commission submits its report under section 2(b). 

SEC. 7. FUNDING FOR THE COMMISSION. 

Any expenses of the Commission shall be 

paid from such funds as may be otherwise 

available to the Secretary of Health and 

Human Services.

f 

∑ 

ADDITIONAL COSPONSORS 

S. 216

At the request of Mr. HATCH, the 

name of the Senator from New York 

[Mr. D’AMATO] was added as a cosponsor of S. 216, a bill to repeal the reduction in the deductible portion of expenses for business meals and entertainment. 

S. 230

At the request of Mr. DOLE, the name 

of the Senator from Maryland [Mr. 

SARBANES] was added as a cosponsor of 

S. 230, a bill to prohibit U.S. assistance 

to countries that prohibit or restrict 

the transport of delivery of U.S. humanitarian assistance. 

S. 327

At the request of Mr. HATCH, the 

name of the Senator from New York 

[Mr. D’AMATO] was added as a cosponsor of S. 237, a bill to amend the Internal Revenue Code of 1986 to provide 

clarification for the deductibility of expenses incurred by a taxpayer in connection with the business use of the 

home. 

S. 457

At the request of Mr. SIMON, the 

name of the Senator from Delaware 

[Mr. BIDEN] was added as a cosponsor of 

S. 457, a bill to amend the Immigration 

and Nationality Act to update references in the classification of children 

for purposes of U.S. immigration laws. 

S. 471

At the request of Mr. BIDEN, the 

name of the Senator from Nevada [Mr. 

REID] was added as a cosponsor of S. 

471, a bill to provide for the payment to 

States of plot allowances for certain 

veterans eligible for burial in a national cemetery who are buried in 

cemeteries of such States. 

S. 506

At the request of Mr. CRAIG, the 

name of the Senator from Mississippi 

[Mr. LOTT] was added as a cosponsor of 

S. 506, a bill to amend the general mining laws to provide a reasonable royalty from mineral activities on Federal 

lands, to specify reclamation requirements for mineral activities on Federal 

lands, to create a State program for 

the reclamation of abandoned hard 

rock mining sites on Federal lands, and 

for other purposes. 

S. 515

At the request of Mr. BRADLEY, the 

name of the Senator from Vermont 

[Mr. LEAHY] was added as a cosponsor 

of S. 515, a bill to amend the Federal 

Meat Inspection Act and the Poultry 

Products Inspection Act to provide for 

improved public health and food safety 

through the reduction of harmful substances in meat and poultry that 

present a threat to public health, and 

for other purposes. 

S. 548

At the request of Mr. ROCKEFELLER, 

the name of the Senator from North 

Dakota [Mr. DORGAN] was added as a 

cosponsor of S. 548, a bill to provide 

quality standards for mammograms 

performed by the Department of Veterans Affairs. 

S. 553

At the request of Mr. MOSELEYBRAUN, the name of the Senator from 

Rhode Island [Mr. CHAFEE] was added 

as a cosponsor of S. 553, a bill to amend 

the Age Discrimination in Employment 

Act of 1967 to reinstate an exemption 

for certain bona fide hiring and retirement plans applicable to State and 

local firefighters and law enforcement 

officers, and for other purposes. 

S. 580

At the request of Mrs. FEINSTEIN, the 

name of the Senator from California 

[Mrs. BOXER] was added as a cosponsor 

of S. 580, a bill to amend the Immigration and Nationality Act to control illegal immigration to the United 

States, reduce incentives for illegal immigration, reform asylum procedures, 

strengthen criminal penalties for the 

smuggling of aliens, and reform other 

procedures. 

S. 641

At the request of Mrs. KASSEBAUM, 

the name of the Senator from Idaho 

[Mr. KEMPTHORNE] was added as a cosponsor of S. 641, a bill to reauthorize 

the Ryan White CARE Act of 1990, and 

for other purposes. 

S. 650

At the request of Mr. SHELBY, the 

name of the Senator from Alabama 

[Mr. HEFLIN] was added as a cosponsor 

of S. 650, a bill to increase the amount 

of credit available to fuel local, regional, and national economic growth 

by reducing the regulatory burden imposed upon financial institutions, and 

for other purposes. 

S. 733

At the request of Mr. ROTH, the name 

of the Senator from Massachusetts 

[Mr. KERRY] was added as a cosponsor 

of S. 733, a bill to amend title 23, 

United States Code, to permit States 

to use Federal highway funds for capital improvements to, and operating 

support for, intercity passenger rail 

service, and for other purposes. 

S. 751

At the request of Mr. EXON, the name 

of the Senator from Nebraska [Mr. 

KERREY] was added as a cosponsor of S. 

751, a bill to provide that certain games 

of chance conducted by a nonprofit organization not be treated as an unrelated business of such organization. 

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