I
105TH CONGRESS
1ST SESSION
H. R. 2884
To amend the Internal Revenue Code of 1986 to limit the tax rate for
certain small businesses, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
NOVEMBER 7, 1997
Mr. CRANE 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 limit the
tax rate for certain small businesses, 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 Invest-
ment and Growth Act’’.
SEC. 2. S CORPORATION TAX RATE.
(a) IN GENERAL.—Section 1 of the Internal Revenue
Code of 1986 (relating to tax imposed) is amended by add-
ing at the end the following new subsection:
‘‘(i) TAX RATE ON CERTAIN S CORPORATION IN-
COME.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (4), if a taxpayer has taxable S corporation
income for any taxable year to which this subsection
applies, then the tax imposed by this section shall
not exceed the sum of—
‘‘(A) a tax computed at the rates and in
the same manner as if this subsection had not
been enacted on the greater of—
‘‘(i) taxable income reduced by quali-
fied taxable S corporation income, or
‘‘(ii) the amount of taxable income
taxed at a rate below 36 percent, plus
‘‘(B) a tax of 34 percent of qualified tax-
able S corporation income in excess of the tax-
able income that is subject to tax under sub-
paragraph (A).
‘‘(2) TAXABLE S CORPORATION INCOME.—For
purposes of this subsection—
‘‘(A) QUALIFIED TAXABLE S CORPORATION
INCOME.—The term ‘qualified taxable S cor-
poration income’ means taxable S corporation
income only to the extent such income does not
exceed $5,000,000.
‘‘(D) ELIGIBLE
S
CORPORATION.—The
term ‘eligible S corporation’ means an S cor-
poration, except that such term does not in-
clude—
‘‘(i) a personal service corporation as
defined in section 469(j)(2), other than a
qualified personal service corporation, and
‘‘(ii) a personal holding company (as
defined in section 542).
‘‘(E) QUALIFIED PERSONAL SERVICE COR-
PORATION DEFINED.—The term ‘qualified per-
sonal service corporation’ has the meaning
given such term in section 448(d)(2).
‘‘(3) QUALIFIED
RETAINED
EARNINGS
AC-
COUNT.—For purposes of this subsection—
‘‘(A) IN
GENERAL.—Each S corporation
shall establish a qualified retained earnings ac-
count which shall be—
‘‘(i) increased each year by the por-
tion of the taxable income of the S cor-
poration that is attributable to the active
conduct of a trade or business by the S
corporation,
‘‘(ii) decreased each year by the por-
tion of the taxable loss of the S corpora-
tion that is attributable to such active con-
duct of a trade or business, and
‘‘(iii) decreased by qualified and non-
qualified distributions from such S cor-
poration to the shareholders thereof.
‘‘(B) 
QUALIFIED
DISTRIBUTIONS.—For
purposes of subparagraph (A), a distribution
from a qualified retained earnings account shall
be treated as a qualified distribution if the dis-
tribution—
‘‘(i) is made to the owners of the eligi-
ble S corporation, and
‘‘(ii) is made to enable the S corpora-
tion shareholder to pay income taxes (Fed-
eral, State, local) on the income of the eli-
gible S corporation.
The Secretary is authorized to promulgate reg-
ulations pursuant to this subparagraph to pro-
vide rules to determine the extent to which dis-
tributions by an S corporation are made to en-
able the distributee to pay its income taxes, in-
cluding regulations that establish a presumption
that distributions are to enable the distributee
to pay income taxes if such distributions do not
exceed 34 percent of qualified taxable S cor-
poration income.
‘‘(C) DISTRIBUTIONS
AFTER
TAXABLE
YEAR.—For purposes of subparagraph (B), a
distribution from a qualified retained earnings
account within 75 days after the end of a tax-
able year of the eligible S corporation may be
treated as a distribution made on the last day
of such taxable year.
‘‘(4) ADDITIONAL TAX ON NONQUALIFIED DIS-
TRIBUTIONS.—
‘‘(A) IN GENERAL.—If—
‘‘(i) a distribution other than a quali-
fied distribution is made from a qualified
retained earnings account, and
‘‘(ii) such distribution is made from
additions to the account for a taxable year
with respect to which paragraph (1)(B) ap-
plied to the taxpayer by reason of such ad-
ditions,
then the tax imposed by this section for the tax-
able year of the taxpayer with or within which
the taxable year of the eligible S corporation in
which the distribution was made ends shall be
increased by the amount determined under sub-
paragraph (B).
‘‘(B) AMOUNT OF ADDITIONAL TAX.—The
amount of tax determined under this subpara-
graph is an amount equal to the product of the
taxpayer’s pro rata share of the distribution de-
scribed in subparagraph (A)(i) and the number
of percentage points (and fractions thereof) by
which the highest rate of tax applicable to the
taxpayer in effect under this section for the tax-
payer’s taxable year exceeds 34 percent.
‘‘(C) ORDER
OF
DISTRIBUTIONS.—For
purposes of this paragraph, distributions shall
be treated as having been made from the quali-
fied retained earnings account on a last-in,
first-out basis. Distributions in excess of the
balance of the qualified retained earnings ac-
count shall not reduce such account below zero.
‘‘(5) YEARS TO WHICH SUBSECTION APPLIES.—
This subsection shall apply to any taxable year if the
highest rate of tax set forth in subsection (a), (b),
(c), (d), or (e) (whichever applies) for the taxable
year exceeds 34 percent.
‘‘(6) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or ap-
propriate to carry out the purposes of this section,
including regulations preventing the characterization
of distributions for purposes of compensation or per-
sonal use as distributions of qualified retained earn-
ings.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
December 31, 1997.
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