I 
108TH CONGRESS 
1ST SESSION 
H. R. 714
To amend the Internal Revenue Code of 1986 to expand S corporation 
eligibility for banks, and for other purposes. 
IN THE HOUSE OF REPRESENTATIVES 
FEBRUARY 12, 2003
Mr. MCINNIS (for himself, Mr. RAMSTAD, Mr. MATSUI, Mr. ENGLISH, Mr. 
POMEROY, Mr. FOLEY, Mr. BEAUPREZ, Mr. TANCREDO, Mr. GREEN of 
Wisconsin, Mr. UDALL of Colorado, Mrs. MUSGRAVE, 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 2003’’. 
SEC. 2. EXPANSION OF BANK S CORPORATION ELIGIBLE 
SHAREHOLDERS 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 new clause: 
‘‘(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 by such trust in 
such bank as of the date of the enactment 
of this clause.’’. 
(b) 
TREATMENT
AS
SHAREHOLDER.—Section 
1361(c)(2)(B) of such Code (relating to treatment as 
shareholders) is amended by adding at the end the fol-
lowing new clause: 
‘‘(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 such Code (re-
lating to exemptions) is amended by striking ‘‘or’’ at the 
end of paragraph (14), by striking the period at the end
of paragraph (15) and inserting ‘‘; or’’, and by adding at 
the end the following new paragraph: 
‘‘(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) CONFORMING AMENDMENT.—Section 512(e)(1) 
of such Code is amended by inserting ‘‘1361(c)(2)(A)(vi) 
or’’ before ‘‘1361(c)(6)’’. 
(e) EFFECTIVE DATE.—The amendments made by 
this section shall apply to trusts which constitute indi-
vidual retirement accounts on the date of the enactment 
of this Act. 
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 invest-
ment income) is amended by adding at the end the fol-
lowing: 
‘‘(v) EXCEPTION FOR BANKS; ETC.—
In the case of a bank (as defined in section 
581) or a bank holding company (as de-
fined in section 246A(c)(3)(B)(ii)), the
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).’’ 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2003. 
SEC. 6. RECAPTURE OF BAD DEBT RESERVES. 
In the case of a bank which makes an S corporation 
election which first takes effect for a taxable year begin-
ning after December 31, 2003, the entire adjustment re-
quired by section 481 of the Internal Revenue Code of 
1986 by reason of changing its accounting method for rec-
ognizing bad debts from the reserve method under section 
585 or 593 of such Code to the charge-off method under 
section 166 of such Code may be taken into in the year 
of the change or the preceding taxable year (whichever is 
elected by the bank). 
SEC. 7. CLARIFICATION OF 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: 
‘‘Nothing in the preceding sentence shall be construed to 
apply section 291 to any taxable year which is more than
3 taxable years after the S corporation (or any prede-
cessor) was a C corporation.’’
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
December 31, 2003. 
SEC. 8. MEMBERS OF FAMILY TREATED AS 1 SHARE-
HOLDER. 
(a) IN GENERAL.—Paragraph (1) of section 1361(c) 
of the Internal Revenue Code of 1986 (relating to special 
rules for applying subsection (b)) is amended to read as 
follows: 
‘‘(1) MEMBERS
OF
FAMILY
TREATED
AS
SHAREHOLDER.—
‘‘(A) IN GENERAL.—For purpose of sub-
section (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 re-
spect to which an election is in effect 
under subparagraph (E), all members of 
the family shall be treated as 1 share-
holder. 
‘‘(B) MEMBERS
OF
THE
FAMILY.—For 
purpose of subparagraph (A)(ii), the term
‘members of the family’ means the common an-
cestor, lineal descendants of the common ances-
tor 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 3 generations 
removed from the youngest generation of share-
holders. 
‘‘(D) EFFECT OF ADOPTION, ETC.—In de-
termining whether any relationship specified in 
subparagraph (B) or (C) exists, the rules of 
section 152(b)(2) shall apply. 
‘‘(E) ELECTION.—An election under sub-
paragraph (A)(ii)—
‘‘(i) must be made with the consent of 
shareholders (including those that are fam-
ily members) holding in the aggregate 
more than one-half of the shares of stock 
in the corporation on the day the election 
is made, 
‘‘(ii) in the case of—
‘‘(I) an electing small business 
trust, shall be made by the trustee of 
the trust, and 
‘‘(II) a qualified subchapter S 
trust, shall be made by the beneficiary 
of the trust, 
‘‘(iii) under regulations, shall remain 
in effect until terminated, and 
‘‘(iv) shall apply only with respect to 
1 family in any corporation.’’. 
(b) RELIEF FROM INADVERTENT INVALID ELECTION 
OR TERMINATION.—Section 1362(f) of such Code (relat-
ing to inadvertent invalid elections or terminations) is 
amended—
(1) 
by 
inserting 
‘‘or 
under 
section 
1361(c)(1)(A)(ii)’’ after ‘‘subsection (a)’’ in para-
graph (1), and 
(2) 
by 
inserting 
‘‘or 
under 
section 
1361(c)(1)(E)(iii)’’ after ‘‘subsection (d)’’ in para-
graph (1)(B). 
(c) EFFECTIVE DATES.—
(1) SUBSECTION (a).—The amendment made by 
subsection (a) shall apply to taxable years beginning 
after December 31, 2003.
(2) SUBSECTION (b).—The amendments made 
by subsection (b) shall apply to elections and termi-
nations made after December 31, 2003. 
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