I
107TH CONGRESS
1ST SESSION
H. R. 1263
To amend the Internal Revenue Code of 1986 to expand S corporation
eligibility for banks, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
MARCH 28, 2001
Mr. MCINNIS (for himself, Mr. HEFLEY, Mr. TANCREDO, Mr. SCHAFFER, Mr.
UDALL of Colorado, and Ms. DEGETTE) introduced the following bill;
which was referred to the Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to expand
S corporation eligibility for banks, and for other purposes.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Small Business and
Financial Institutions Tax Relief Act of 2001’’.
SEC. 2. ELIGIBLE SHAREHOLDERS OF S CORPORATION
BANKS TO INCLUDE IRAS.
(a) IN GENERAL.—Section 1361(c)(2)(A) of the In-
ternal Revenue Code of 1986 (relating to certain trusts
permitted as shareholders) is amended by inserting after
clause (v) the following:
‘‘(vi) In the case of a corporation
which is a bank (as defined in section
581), a trust which constitutes an indi-
vidual retirement account under section
408(a), including one designated as a Roth
IRA under section 408A, but only to the
extent of the stock held in such bank as of
the date of the enactment of this clause.’’
(b) 
TREATMENT
AS
SHAREHOLDER.—Section
1361(c)(2)(B) of the Internal Revenue Code of 1986 (re-
lating to treatment as shareholders) is amended by adding
at the end the following:
‘‘(vi) In the case of a trust described
in clause (vi) of subparagraph (A), the in-
dividual for whose benefit the trust was
created shall be treated as a shareholder.’’
(c) SALE OF STOCK IN IRA RELATING TO S COR-
PORATION
ELECTION
EXEMPT
FROM
PROHIBITED
TRANSACTION RULES.—Section 4975(d) of the Internal
Revenue Code of 1986 (relating to exemptions) is amend-
ed by striking ‘‘or’’ at the end of paragraph (14), by strik-
ing the period at the end of paragraph (15) and inserting
‘‘; or’’, and by adding at the end the following:
‘‘(16) a sale of stock held by a trust which con-
stitutes an individual retirement account under sec-
tion 408(a) to the individual for whose benefit such
account is established if such sale is pursuant to an
election under section 1362(a).’’
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2001.
SEC. 3. EXCLUSION OF INVESTMENT SECURITIES INCOME
FROM PASSIVE INCOME TEST FOR BANK S
CORPORATIONS.
(a) IN GENERAL.—Section 1362(d)(3)(C) of the In-
ternal Revenue Code of 1986 (defining passive investment
income) is amended by adding at the end the following:
‘‘(v) EXCEPTION FOR BANKS; ETC.—
In the case of a bank (as defined in section
581), a bank holding company (as defined
in section 246A(c)(3)(B)(ii)), or a qualified
subchapter S subsidiary bank, the term
‘passive investment income’ shall not in-
clude—
‘‘(I) interest income earned by
such bank, bank holding company, or
qualified 
subchapter 
S 
subsidiary
bank, or
‘‘(II) dividends on assets required
to be held by such bank, bank holding
company, or qualified subchapter S
subsidiary bank to conduct a banking
business, including stock in the Fed-
eral Reserve Bank, the Federal Home
Loan Bank, or the Federal Agricul-
tural Mortgage Bank or participation
certificates issued by a Federal Inter-
mediate Credit Bank.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years beginning after
December 31, 1996.
SEC. 4. INCREASE IN NUMBER OF ELIGIBLE SHARE-
HOLDERS TO 150.
(a) IN GENERAL.—Section 1361(b)(1)(A) of the In-
ternal Revenue Code of 1986 (defining small business cor-
poration) is amended by striking ‘‘75 shareholders’’ and
inserting ‘‘150 shareholders (100 shareholders in the case
of taxable years beginning after 2001 and before 2006 and
125 shareholders in the case of taxable years beginning
after 2005 and before 2009)’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years beginning after
December 31, 2001.
SEC. 5. TREATMENT OF QUALIFYING DIRECTOR SHARES.
(a) IN GENERAL.—Section 1361 of the Internal Rev-
enue Code of 1986 is amended by adding at the end the
following:
‘‘(f) 
TREATMENT
OF
QUALIFYING
DIRECTOR
SHARES.—
‘‘(1) IN GENERAL.—For purposes of this sub-
chapter—
‘‘(A) qualifying director shares shall not be
treated as a second class of stock, and
‘‘(B) no person shall be treated as a share-
holder of the corporation by reason of holding
qualifying director shares.
‘‘(2) 
QUALIFYING
DIRECTOR
SHARES
DE-
FINED.—For purposes of this subsection, the term
‘qualifying director shares’ means any shares of
stock in a bank (as defined in section 581) or in a
bank holding company registered as such with the
Federal Reserve System—
‘‘(i) which are held by an individual
solely by reason of status as a director of
such bank or company or its controlled
subsidiary; and
‘‘(ii) which are subject to an agree-
ment pursuant to which the holder is re-
quired to dispose of the shares of stock
upon termination of the holder’s status as
a director at the same price as the indi-
vidual acquired such shares of stock.
‘‘(3) DISTRIBUTIONS.—A distribution (not in
part or full payment in exchange for stock) made by
the corporation with respect to qualifying director
shares shall be includible as ordinary income of the
holder and deductible to the corporation as an ex-
pense in computing taxable income under section
1363(b) in the year such distribution is received.’’
(b) CONFORMING AMENDMENTS.—
(1) Section 1361(b)(1) of the Internal Revenue
Code of 1986 is amended by inserting ‘‘, except as
provided in subsection (f),’’ before ‘‘which does not’’.
(2) Section 1366(a) of such Code is amended
by adding at the end the following:
‘‘(3) ALLOCATION
WITH
RESPECT
TO
QUALI-
FYING
DIRECTOR
SHARES.—The holders of quali-
fying director shares (as defined in section 1361(f))
shall not, with respect to such shares of stock, be al-
located any of the items described in paragraph
(1).’’
(3) Section 1373(a) of such Code is amended
by striking ‘‘and’’ at the end of paragraph (1), by
striking the period at the end of paragraph (2) and
SEC. 7. INCLUSION OF BANKS IN 3-YEAR S CORPORATION
RULE FOR CORPORATE PREFERENCE ITEMS.
(a) IN GENERAL.—Section 1363(b) of the Internal
Revenue Code of 1986 (relating to computation of cor-
poration’s taxable income) is amended by adding at the
end the following new flush sentence:
‘‘Paragraph (4) shall apply to any bank whether such
bank is an S corporation or a qualified subchapter S sub-
sidiary.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years beginning after
December 31, 2001.
SEC. 8. EXPANSION OF S CORPORATION ELIGIBLE SHARE-
HOLDERS 
TO 
INCLUDE 
FAMILY 
LIMITED
PARTNERSHIPS.
(a) IN GENERAL.—Section 1361(b)(1)(B) of the In-
ternal Revenue Code of 1986 (defining small business cor-
poration) is amended—
(1) by striking ‘‘or an organization’’ and insert-
ing ‘‘an organization’’, and
(2) by inserting ‘‘, or a family partnership de-
scribed in subsection (c)(8)’’ after ‘‘subsection
(c)(6)’’.
(b) FAMILY PARTNERSHIP.—Section 1361(c) of the
Internal Revenue Code of 1986 (relating to special rules
for applying subsection (b)), as amended by section 5, is
amended by adding at the end the following:
‘‘(8) FAMILY PARTNERSHIPS.—
‘‘(A) IN GENERAL.—For purposes of sub-
section (b)(1)(B), any partnership or limited li-
ability company may be a shareholder in an S
corporation if—
‘‘(i) all partners or members are mem-
bers of 1 family as determined under sec-
tion 704(e)(3), and
‘‘(ii) all of the partners or members
would otherwise be eligible shareholders of
an S corporation.
‘‘(B) TREATMENT
AS
SHAREHOLDERS.—
For purposes of subsection (b)(1)(A), in the
case of a partnership or limited liability com-
pany described in subparagraph (A), each part-
ner or member shall be treated as a share-
holder.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2001.
SEC. 9. ISSUANCE OF PREFERRED STOCK PERMITTED.
(a) IN GENERAL.—Section 1361 of the Internal Rev-
enue Code of 1986, as amended by section 5(a), is amend-
ed by adding at the end the following:
‘‘(g) 
TREATMENT
OF
QUALIFIED
PREFERRED
STOCK.—
‘‘(1) IN GENERAL.—For purposes of this sub-
chapter—
‘‘(A) qualified preferred stock shall not be
treated as a second class of stock, and
‘‘(B) no person shall be treated as a share-
holder of the corporation by reason of holding
qualified preferred stock.
‘‘(2) 
QUALIFIED
PREFERRED
STOCK
DE-
FINED.—For purposes of this subsection, the term
‘qualified preferred stock’ means stock which meets
the requirements of subparagraphs (A), (B), and (C)
of section 1504(a)(4). Stock shall not fail to be
treated as qualified preferred stock solely because it
is convertible into other stock.
‘‘(3) 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 ordinary income of the
holder and deductible to the corporation as an ex-
pense in computing taxable income under section
1363(b) in the year such distribution is received.’’
(b) CONFORMING AMENDMENTS.—
(1) Section 1361(b)(1) of the Internal Revenue
Code of 1986, as amended by section 5(b)(1), is
amended by striking ‘‘subsection (f)’’ and inserting
‘‘subsections (f) and (g)’’.
(2) Section 1366(a) of such Code, as amended
by section 5(b)(2), is amended by adding at the end
the following:
‘‘(4) ALLOCATION
WITH
RESPECT
TO
QUALI-
FIED PREFERRED STOCK.—The holders of qualified
preferred stock (as defined in section 1361(g)) shall
not, with respect to such stock, be allocated any of
the items described in paragraph (1).’’
(3) Section 1373(a)(3) of such Code, as added
by section 5(b)(3), is amended by inserting ‘‘or
1361(g)(3)’’ after ‘‘section 1361(f)(3)’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2001.
SEC. 10. CONSENT TO ELECTIONS.
(a) 90 PERCENT OF SHARES REQUIRED FOR CON-
SENT TO ELECTION.—Section 1362(a)(2) of the Internal
Revenue Code of 1986 (relating to all shareholders must
consent to election) is amended—
(1) by striking ‘‘all persons who are share-
holders in’’ and inserting ‘‘shareholders holding at
least 90 percent of the shares of’’, and
(2) by striking ‘‘ALL SHAREHOLDERS’’ in the
heading and inserting ‘‘AT LEAST 90 PERCENT OF
SHARES’’.
(b) RULES FOR CONSENT.—Section 1362(a) of the
Internal Revenue Code of 1986 (relating to election) is
amended by adding at the end the following:
‘‘(3) RULES FOR CONSENT.—For purposes of
making any consent required under paragraph (2) or
subsection (d)(1)(B)—
‘‘(A) each joint owner of shares shall con-
sent with respect to such shares,
‘‘(B) the personal representative or other
fiduciary authorized to act on behalf of the es-
tate of a deceased individual shall consent for
the estate,
‘‘(C) one parent, the custodian, the guard-
ian, or the conservator shall consent with re-
spect to shares owned by a minor or subject to
a custodianship, guardianship, conservatorship,
or similar arrangement,
‘‘(D) the trustee of a trust shall consent
with respect to shares owned in trust,
‘‘(E) the trustee of the estate of a bank-
rupt individual shall consent for shares owned
by a bankruptcy estate,
‘‘(F) an authorized officer or the trustee of
an organization described in subsection (c)(6)
shall consent for the shares owned by such or-
ganization, and
‘‘(G) in the case of a partnership or lim-
ited liability company described in subsection
(c)(8)—
‘‘(i) all general partners shall consent
with respect to shares owned by such part-
nership,
‘‘(ii) all managers shall consent with
respect to shares owned by such company
if management of such company is vested
in 1 or more managers, and
‘‘(iii) all members shall consent with
respect to shares owned by such company
if management of such company is vested
in the members.’’
(c) TREATMENT OF NONCONSENTING SHAREHOLDER
STOCK.—