I
104TH CONGRESS
1ST SESSION
H. R. 2039
To amend the Internal Revenue Code of 1986 to provide for S corporation
reform, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
JULY 13, 1995
Mr. SHAW (for himself, Mr. MATSUI, Mr. PORTMAN, Mr. CHRISTENSEN, Mr.
MCDERMOTT, Mr. LEWIS of Georgia, Mr. LEVIN, Mr. HERGER, Mr.
HANCOCK, Mr. THOMAS, Mr. BUNNING of Kentucky, Mr. ENGLISH of
Pennsylvania, Mrs. MEYERS of Kansas, Mr. HOUGHTON, Mr. CAMP, Mr.
SPRATT, Ms. DUNN of Washington, Mr. FUNDERBURK, Mr. CRANE, Mr.
GORDON, Mr. PAYNE of Virginia, Mr. LONGLEY, Mr. NEAL of Massachu-
setts, Mrs. JOHNSON of Connecticut, Mr. MCCRERY, Mr. KLECZKA, and
Mr. ZIMMER) 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 provide
for S corporation reform, 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; 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 other-
wise expressly provided, whenever in this Act an amend-
ment 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 provi-
sion 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 75 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 prop-
erty.
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 SHAREHOLD-
ERS OF S CORPORATION
Subtitle A—Number of
Shareholders
SEC. 101. S CORPORATIONS PERMITTED TO HAVE 75
SHAREHOLDERS.
Subparagraph (A) of section 1361(b)(1) (defining
small business corporation) is amended by striking ‘‘35
shareholders’’ and inserting ‘‘75 shareholders’’.
SEC. 102. MEMBERS OF FAMILY TREATED AS 1 SHARE-
HOLDER.
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
SHAREHOLDER.—
‘‘(A) IN GENERAL.—For purposes 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
purposes of subparagraph (A)(ii), the term
‘members of the family’ means the lineal de-
scendants of the common ancestor and the
spouses (or former spouses) of such lineal de-
scendants 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 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
all shareholders,
‘‘(ii) shall remain in effect until termi-
nated, 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 sub-
section (c)(7)) who is not an individual,’’.
(2) ELIGIBLE EXEMPT ORGANIZATIONS.—Sec-
tion 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
PER-
MITTED AS SHAREHOLDERS.—For purposes of sub-
section (b)(1)(B), an organization described in sec-
tion 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 or-
dinary 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 con-
tribution 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 para-
graphs (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 UNRE-
LATED 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 sec-
tion 512(a)(1), but without regard to the modifications de-
scribed in paragraphs (8) through (15) of section 512(b).’’
SEC. 112. FINANCIAL INSTITUTIONS.
Subparagraph (B) of section 1361(b)(2) (defining in-
eligible corporation) is amended to read as follows:
‘‘(B) a financial institution which uses the
reserve method of accounting for bad debts de-
scribed in section 585 or 593,’’.
SEC. 113. NONRESIDENT ALIENS.
(a) NONRESIDENT ALIENS ALLOWED TO BE SHARE-
HOLDERS.—
(1) IN
GENERAL.—Paragraph (1) of section
1361(b) (defining small business corporation) is
amended—
(A) by adding ‘‘and’’ at the end of sub-
paragraph (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 para-
graph (1),
(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 con-
sidered 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 en-
gaged.’’
(2) APPLICATION
OF
WITHHOLDING
TAX
ON
NONRESIDENT
ALIEN
SHAREHOLDERS.—Section
1446 (relating to withholding tax on foreign part-
ners’ share of effectively connected income) is
amended by redesignating subsection (f) as sub-
section (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 treat-
ed 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 amend-
ed 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 chap-
ter 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 (re-
lating 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 for-
eign 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 share-
holders) is amended by inserting after clause (iv) the fol-
lowing new clause:
‘‘(v) An electing small business trust.’’
(b) CURRENT BENEFICIARIES TREATED AS SHARE-
HOLDERS.—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 po-
tential 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 add-
ing at the end the following new subsection:
‘‘(e) ELECTING
SMALL
BUSINESS
TRUST
DE-
FINED.—
‘‘(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 indi-
vidual, an estate, or an organization de-
scribed in section 401(a) or 501(c)(3),
‘‘(ii) no interest in such trust was ac-
quired 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 elec-
tion 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 sub-
paragraph (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 enti-
tled to, or at the discretion of any person may re-
ceive, 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 bene-
ficiary’ 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 dis-
position.
‘‘(3) ELECTION.—An election under this sub-
section 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 tax-
able year of the trust for which made and all subse-
quent 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 chap-
ter—
‘‘(A) the portion of any electing small busi-
ness 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 de-
termined with the modifications of paragraph
(2).
‘‘(2) MODIFICATIONS.—For purposes of para-
graph (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, deduc-
tion, 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 dis-
position of stock in an S corporation.
‘‘(iii) To the extent provided in regu-
lations, State or local income taxes or ad-
ministrative expenses to the extent alloca-
ble 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 appor-
tioned 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 determin-
ing—
‘‘(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 sen-
tence, 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 is amended by add-
ing at the end the following new subsection:
‘‘(f) 
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 merely 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 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.
‘‘(4) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or ap-
propriate to provide for the proper treatment of
qualified preferred stock under this title and for the
coordination of such treatment with other provisions
of this title.’’
(b) CONFORMING AMENDMENTS.—
(1) Paragraph (1) of section 1361(b) is amend-
ed by inserting ‘‘, except as provided in subsection
(f),’’ before ‘‘which does not’’.
(2) Subsection (a) of section 1366 is amended
by adding at the end the following new paragraph:
‘‘(3) ALLOCATION
WITH
RESPECT
TO
QUALI-
FIED PREFERRED STOCK.—The holders of qualified
preferred stock (as defined in section 1361(f)) 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 insert-
ing the following:
‘‘(ii) in any case in which the terms of
such promise include a provision under
which the obligation to pay may be con-
verted (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 (with-
in 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 para-
graph (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 TERMI-
NATIONS 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 TERMI-
NATIONS.—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 ob-
tain shareholder consents, or
‘‘(B) was terminated under paragraph (2)
of subsection (d),
‘‘(2) the Secretary determines that the cir-
cumstances resulting in such ineffectiveness or ter-
mination 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 corpora-
tion) as may be required by the Secretary with re-
spect 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 follow-
ing 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 pre-
scribed by this subsection for making such elec-
tion 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 appro-
priate.
(d) EFFECTIVE DATE.—The amendments made by
subsections (a) and (b) shall apply with respect to elec-
tions 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 cor-
poration during the taxable year and all af-
fected 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 ‘af-
fected shareholders’ means the shareholder
whose interest is terminated and all sharehold-
ers to whom such shareholder has transferred
shares during the taxable year. If such share-
holder has transferred shares to the corpora-
tion, the term ‘affected shareholders’ shall in-
clude 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 re-
designating subparagraph (B) as subparagraph (C), and
by inserting after subparagraph (A) the following new sub-
paragraph:
‘‘(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 subpara-
graph (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.—Sec-
tion 6037 (relating to return of S corporation), as