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tion derived from the active conduct of a 
trade or business. 
‘‘(v) EXCEPTION FOR BANKS, ETC.— 
In the case of a bank (as defined in section 
581) or a depository institution holding 
company (as defined in section 3(w)(1) of 
the Federal Deposit Insurance Act (12 
U.S.C. 1813(w)(1)), the term ‘passive in-
vestment income’ shall not include— 
‘‘(I) interest income earned by 
such bank or company, or 
‘‘(II) dividends on assets required 
to be held by such bank or company, 
including stock in the Federal Reserve 
Bank, the Federal Home Loan Bank, 
or the Federal Agricultural Mortgage 
Bank 
or 
participation 
certificates 
issued by a Federal Intermediate 
Credit Bank.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
the date of the enactment of this division. 
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HR 2206 PCS 
SEC. 7232. TREATMENT OF BANK DIRECTOR SHARES. 
(a) IN GENERAL.—Section 1361 (defining S corpora-
tion) is amended by adding at the end the following new 
subsection: 
‘‘(f) RESTRICTED BANK DIRECTOR STOCK.— 
‘‘(1) IN
GENERAL.—Restricted bank director 
stock shall not be taken into account as outstanding 
stock of the S corporation in applying this sub-
chapter (other than section 1368(f)). 
‘‘(2) RESTRICTED
BANK
DIRECTOR
STOCK.— 
For purposes of this subsection, the term ‘restricted 
bank director stock’ means stock in a bank (as de-
fined in section 581) or a depository institution 
holding company (as defined in section 3(w)(1) of 
the Federal Deposit Insurance Act (12 U.S.C. 
1813(w)(1)), if such stock— 
‘‘(A) is required to be held by an individual 
under applicable Federal or State law in order 
to permit such individual to serve as a director, 
and 
‘‘(B) is subject to an agreement with such 
bank or company (or a corporation which con-
trols (within the meaning of section 368(c)) 
such bank or company) pursuant to which the 
holder is required to sell back such stock (at 
the same price as the individual acquired such 
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HR 2206 PCS 
stock) upon ceasing to hold the office of direc-
tor. 
‘‘(3) CROSS REFERENCE.— 
‘‘For treatment of certain distributions with respect to restricted bank director 
stock, see section 1368(f).’’. 
(b) DISTRIBUTIONS.—Section 1368 (relating to dis-
tributions) is amended by adding at the end the following 
new subsection: 
‘‘(f) RESTRICTED BANK DIRECTOR STOCK.—If a di-
rector receives a distribution (not in part or full payment 
in exchange for stock) from an S corporation with respect 
to any restricted bank director stock (as defined in section 
1361(f)), the amount of such distribution— 
‘‘(1) shall be includible in gross income of the 
director, and 
‘‘(2) shall be deductible by the corporation for 
the taxable year of such corporation in which or with 
which ends the taxable year in which such amount 
in included in the gross income of the director.’’. 
(c) EFFECTIVE DATES.— 
(1) IN GENERAL.—The amendments made by 
this section shall apply to taxable years beginning 
after December 31, 2006. 
(2) SPECIAL RULE FOR TREATMENT AS SECOND 
CLASS OF STOCK.—In the case of any taxable year 
beginning after December 31, 1996, restricted bank 
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director stock (as defined in section 1361(f) of the 
Internal Revenue Code of 1986, as added by this 
section) shall not be taken into account in deter-
mining whether an S corporation has more than 1 
class of stock. 
SEC. 7233. SPECIAL RULE FOR BANK REQUIRED TO 
CHANGE FROM THE RESERVE METHOD OF 
ACCOUNTING ON BECOMING S CORPORA-
TION. 
(a) IN GENERAL.—Section 1361, as amended by this 
division, is amended by adding at the end the following 
new subsection: 
‘‘(g) SPECIAL RULE
FOR BANK REQUIRED TO 
CHANGE FROM THE RESERVE METHOD OF ACCOUNTING 
ON BECOMING S CORPORATION.—In the case of a bank 
which changes from the reserve method of accounting for 
bad debts described in section 585 or 593 for its first tax-
able year for which an election under section 1362(a) is 
in effect, the bank may elect to take into account any ad-
justments under section 481 by reason of such change for 
the taxable year immediately preceding such first taxable 
year.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2006. 
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HR 2206 PCS 
SEC. 7234. TREATMENT OF THE SALE OF INTEREST IN A 
QUALIFIED SUBCHAPTER S SUBSIDIARY. 
(a) IN GENERAL.—Subparagraph (C) of section 
1361(b)(3) (relating to treatment of terminations of quali-
fied subchapter S subsidiary status) is amended— 
(1) by striking ‘‘For purposes of this title,’’ and 
inserting the following: 
‘‘(i) IN
GENERAL.—For purposes of 
this title,’’, and 
(2) by inserting at the end the following new 
clause: 
‘‘(ii) TERMINATION
BY
REASON
OF 
SALE OF STOCK.—If the failure to meet 
the requirements of subparagraph (B) is 
by reason of the sale of stock of a corpora-
tion which is a qualified subchapter S sub-
sidiary, the sale of such stock shall be 
treated as if— 
‘‘(I) the sale were a sale of an 
undivided interest in the assets of 
such corporation (based on the per-
centage of the corporation’s stock 
sold), and 
‘‘(II) the sale were followed by an 
acquisition by such corporation of all 
of its assets (and the assumption by 
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