I
104TH CONGRESS
2D SESSION
H. R. 2911
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
JANUARY 31, 1996
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. SMALL BUSINESS 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 of the following new subsection:
‘‘(i) MAXIMUM SMALL BUSINESS TAX RATE.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (4), if a taxpayer has taxable small business
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 the
amount of taxable small business income,
or
‘‘(ii) the amount of taxable income
taxed at a rate below 34 percent, plus
‘‘(B) a tax of 34 percent of the amount of
taxable income in excess of the taxable income
that is subject to tax under subparagraph (A).
‘‘(2) TAXABLE SMALL BUSINESS INCOME.—For
purposes of this subsection, the term ‘taxable small
business income’ means, with respect to any taxable
year, the taxable income of the taxpayer for such
year attributable to the active conduct of any trade
or business of an eligible small business.
‘‘(3) QUALIFIED
RETAINED
EARNINGS
AC-
COUNT.—For purposes of this subsection—
‘‘(A) S CORPORATIONS.—Each S corpora-
tion shall establish a qualified retained earnings
account 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 small business, 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 small business.
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 taxable small business in-
come.
‘‘(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 small business 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 small business 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 in effect under
this section for the taxpayer’s taxable year ex-
ceeds 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) ELIGIBLE
SMALL
BUSINESS.—For pur-
poses of this subsection—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), the term ‘eligible small busi-
ness’ means, with respect to any taxable year,
an S corporation which has been designated, as
of the beginning of the taxable year, as a small
business concern (within the meaning of section
3(a) of the Small Business Act) according to
size standard regulations published by the
Small Business Administration.
‘‘(B) EXCLUSIONS.—Such term shall not
include—
‘‘(i) any personal service corporation
(as defined in section 469(j)(2)), and
‘‘(ii) any personal holding company
(as defined in section 542).
‘‘(C) ELECTION
TO
USE
PRECEDING
YEARS.—If the determination under subpara-
graph (A) is made on the basis of number of
employees or gross receipts, the taxpayer may
elect to have the determination made on the
basis of the average number of employees or the
average gross receipts of the taxpayer for the 3
taxable years preceding the taxable year.
‘‘(6) 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.
‘‘(7) 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, 1995.
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