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SEC. 574. FREEZE IN PAYMENTS FOR ITEMS OF DURABLE
MEDICAL EQUIPMENT AND ORTHOTICS AND
PROSTHETICS.
(a) DME.—Section 1834(a)(14) of the Social Security
Act (42 U.S.C. 1395m(a)(14)) is amended—
(1) in subparagraph (E), by striking ‘‘and’’ at
the end;
(2) in subparagraph (F)—
(A) by striking ‘‘a subsequent year’’ and in-
serting ‘‘2003’’; and
(B) by striking ‘‘the previous year.’’ and in-
serting ‘‘2002;’’; and
(3) by adding at the end the following new sub-
paragraphs:
‘‘(G) for each of the years 2004 through
2013, 0 percentage points; and
‘‘(H) for a subsequent year, the percentage
increase in the consumer price index for all
urban consumers (U.S. urban average) for the
12-month period ending with June of the pre-
vious year.’’.
(b) 
ORTHOTICS
AND
PROSTHETICS.—Section
1834(h)(4)(A) of the Social Security Act (42 U.S.C.
1395m(h)(4)(A)) is amended—
(1) in clause (vii), by striking ‘‘and’’ at the end;
(2) in clause (viii)—
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(A) by striking ‘‘a subsequent year’’ and in-
serting ‘‘2003’’; and
(B) by striking ‘‘the previous year’’ and in-
serting ‘‘2002’’; and
(3) by adding at the end the following new
clauses:
‘‘(ix) for each of the years 2004
through 2013, 0 percent; and
‘‘(x) for a subsequent year, the percent-
age increase in the consumer price index for
all urban consumers (U.S. urban average)
for the 12-month period ending with June
of the previous year;’’.
SEC. 575. APPLICATION OF COINSURANCE AND DEDUCT-
IBLE FOR CLINICAL DIAGNOSTIC LABORA-
TORY TESTS.
(a) COINSURANCE.—
(1) IN GENERAL.—Section 1833(a) of the Social
Security Act (42 U.S.C. 1395l(a)) is amended—
(A) in paragraph (1)(D)—
(i) in clause (i), by striking ‘‘(or 100
percent, in the case of such tests for which
payment is made on an assignment-related
basis)’’; and
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(ii) in clause (ii), by striking ‘‘100
percent’’ and inserting ‘‘80 percent’’; and
(B) in paragraph (2)(D)—
(i) in clause (i), by striking ‘‘(or 100
percent, in the case of such tests for which
payment is made on an assignment-related
basis or to a provider having an agreement
under section 1866)’’; and
(ii) in clause (ii), by striking ‘‘100
percent’’ and inserting ‘‘80 percent’’.
(2) CONFORMING AMENDMENT.—The third sen-
tence of section 1866(a)(2)(A) of the Social Security
Act (42 U.S.C. 1395cc(a)(2)(A) is amended by strik-
ing ‘‘and with respect to clinical diagnostic labora-
tory tests for which payment is made under part B’’.
(b) DEDUCTIBLE.—Section 1833(b) of the Social Secu-
rity Act (42 U.S.C. 1395l(b)) is amended—
(1) by striking paragraph (3); and
(2) by redesignating paragraphs (4), (5), and (6)
as paragraphs (3), (4), and (5), respectively.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to tests furnished on or after January
1, 2004.
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SEC. 576. REVISION IN PAYMENTS FOR COVERED OUT-
PATIENT DRUGS.
Section 1842(o)(1) of the Social Security Act (42
U.S.C. 1395u(o)(1)) is amended by striking ‘‘equal to 95
percent of the average wholesale price.’’ and inserting
‘‘equal to—
‘‘(A) in the case of drugs furnished prior to Jan-
uary 1, 2004, 95 percent of the average wholesale
price; and
‘‘(B) in the case of drugs furnished on or after
January 1, 2004, the lesser of—
‘‘(i) 85 percent of the average wholesale
price; or
‘‘(ii) the amount payable for the drug or bi-
ological during the last quarter of the previous
year (as determined under this subparagraph,
or, in the case of 2004, under subparagraph (A)
using the second quarter of 2003) increased by
the percentage increase in the consumer price
index for all urban consumers (U.S. urban aver-
age) for the 12-month period ending with June
of the previous year.’’.
SEC. 577. INAPPLICABILITY OF SUNSET.
The provisions of section 1001(a) of this Act shall not
apply to the provisions of, and amendments made by, this
subtitle.
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Subtitle E—Provisions Relating To
S Corporation Reform and Sim-
plification
PART I—MAXIMUM NUMBER OF SHAREHOLDERS
OF AN S CORPORATION
SEC. 581. MEMBERS OF FAMILY TREATED AS 1 SHARE-
HOLDER.
(a) IN GENERAL.—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 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 fam-
ily shall be treated as 1 shareholder.
‘‘(B) MEMBERS OF THE FAMILY.—For pur-
pose of subparagraph (A)(ii), the term ‘members
of the family’ means the common ancestor, lineal
descendants of the common ancestor and the
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spouses of such lineal descendants or common
ancestor.
‘‘(C) COMMON ANCESTOR.—For purposes of
this paragraph, an individual shall not be con-
sidered 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 shareholders.
‘‘(D) EFFECT OF ADOPTION, ETC.—In deter-
mining whether any relationship specified in
subparagraph (B) or (C) exists, the rules of sec-
tion 152(b)(2) shall apply.
‘‘(E) ELECTION.—An election under sub-
paragraph (A)(ii)—
‘‘(i) must be made with the consent of
all persons who are shareholders (including
those that are family members) in the cor-
poration 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
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‘‘(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) (relating to inadvertent
invalid elections or terminations), as amended by this Act,
is amended—
(1) 
by 
inserting 
‘‘or 
under 
section
1361(c)(1)(A)(ii)’’ after ‘‘section 1361(b)(3)(B)(ii)’’ in
paragraph (1), and
(2) 
by 
inserting 
‘‘or 
under 
section
1361(c)(1)(E)(iii)’’ after ‘‘section 1361(b)(3)(C)’’ in
paragraph (1)(B).
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 2003.
SEC. 582. INCREASE IN NUMBER OF ELIGIBLE SHARE-
HOLDERS TO 100.
(a) IN GENERAL.—Section 1361(b)(1)(A) (defining
small business corporation) is amended by striking ‘‘75’’
and inserting ‘‘100’’.
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(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to taxable years beginning after Decem-
ber 31, 2003.
SEC. 583. NONRESIDENT ALIENS ALLOWED AS BENE-
FICIARIES OF AN ELECTING SMALL BUSINESS
TRUST.
(a) IN
GENERAL.—Section 1361(e)(1)(A)(i)(I) is
amended by inserting ‘‘(including a nonresident alien indi-
vidual)’’ after ‘‘individual’’.
(b) CONFORMING AMENDMENT.—Clause (v) of section
1361(c)(2)(B) is amended by adding at the end the fol-
lowing new sentence: ‘‘This clause shall not apply for pur-
poses of subsection (b)(1)(C).’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall take effect on the date of the enactment of this
Act.
PART II—TERMINATION OF ELECTION AND ADDI-
TIONS TO TAX DUE TO PASSIVE INVESTMENT
INCOME
SEC. 584. MODIFICATIONS TO PASSIVE INCOME RULES.
(a) INCREASED PERCENTAGE LIMIT.—
(1) IN GENERAL.—Subsection (a)(2) of section
1375 (relating to tax imposed when passive invest-
ment income of corporation having accumulated earn-
ings and profits exceeds 25 percent of gross receipts)
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is amended by striking ‘‘25 percent’’ and inserting
‘‘60 percent’’.
(2) CONFORMING AMENDMENTS.—
(A) Section 26(b)(2)(J) is amended by
striking ‘‘25 percent’’ and inserting ‘‘60 per-
cent’’.
(B) Section 1362(d)(3)(A)(i)(II) is amended
by striking ‘‘25 percent’’ and inserting ‘‘60 per-
cent’’.
(C) The heading for paragraph (3) of sec-
tion 1362(d) is amended by striking ‘‘25 PER-
CENT’’ and inserting ‘‘60 PERCENT’’.
(D) Section 1375(b)(1)(A)(i) is amended by
striking ‘‘25 percent’’ and inserting ‘‘60 per-
cent’’.
(E) The heading for section 1375 is amend-
ed by striking ‘‘25 PERCENT’’ and inserting ‘‘60
PERCENT’’.
(F) The table of sections for part III of sub-
chapter S of chapter 1 is amended by striking
‘‘25 percent’’ in the item relating to section 1375
and inserting ‘‘60 percent’’.
(b) CAPITAL GAIN NOT TREATED AS PASSIVE INVEST-
MENT INCOME.—Section 1362(d)(3) is amended—
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(1) by striking ‘‘annuities,’’ and all that follows
in subparagraph (C)(i) and inserting ‘‘and annu-
ities.’’, and
(2) by striking subparagraphs (C)(iv) and (D)
and by redesignating subparagraph (E) as subpara-
graph (D).
(c) CONFORMING AMENDMENTS.—Section 1375(d) is
amended by striking ‘‘subchapter C’’ both places it appears
and inserting ‘‘accumulated’’.
(d) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 2003.
PART III—TREATMENT OF S CORPORATION
SHAREHOLDERS
SEC. 585. TRANSFER OF SUSPENDED LOSSES INCIDENT TO
DIVORCE.
(a) IN GENERAL.—Section 1366(d) (relating to special
rules for losses and deductions) is amended by adding at
the end the following new paragraph:
‘‘(4) TRANSFER OF SUSPENDED LOSSES AND DE-
DUCTIONS WHEN STOCK IS TRANSFERRED INCIDENT
TO
DIVORCE.—For purposes of paragraph (2), the
transfer of any shareholder’s stock in an S corpora-
tion incident to a decree of divorce shall include any
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loss or deduction described in such paragraph attrib-
utable to such stock.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to transfers in taxable years beginning
after December 31, 2003.
SEC. 586. USE OF PASSIVE ACTIVITY LOSS AND AT-RISK
AMOUNTS BY QUALIFIED SUBCHAPTER S
TRUST INCOME BENEFICIARIES.
(a) IN GENERAL.—Section 1361(d)(1) (relating to spe-
cial rule for qualified subchapter S trust) is amended—
(1) by striking ‘‘and’’ at the end of subpara-
graph (A),
(2) by striking the period at the end of subpara-
graph (B) and inserting ‘‘, and’’, and
(3) by adding at the end the following new sub-
paragraph:
‘‘(C) for purposes of applying sections 465
and 469(g) to the beneficiary of the trust, the
disposition of the S corporation stock by the
trust shall be treated as a disposition by such
beneficiary.’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to transfers in taxable years beginning
after December 31, 2003.
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SEC. 587. DISREGARD OF UNEXERCISED POWERS OF AP-
POINTMENT IN DETERMINING POTENTIAL
CURRENT BENEFICIARIES OF ESBT.
(a) IN GENERAL.—Section 1361(e)(2) (defining poten-
tial current beneficiary) is amended by inserting ‘‘(deter-
mined without regard to any unexercised (in whole or in
part) power of appointment during such period)’’ after ‘‘of
the trust’’ in the first sentence.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to taxable years beginning after Decem-
ber 31, 2003.
SEC. 588. CLARIFICATION OF ELECTING SMALL BUSINESS
TRUST DISTRIBUTION RULES.
(a) IN GENERAL.—Section 641(c)(1) (relating to spe-
cial rules for taxation of electing small business trusts) is
amended—
(1) by striking ‘‘and’’ at the end of subpara-
graph (A),
(2) by redesignating subparagraph (B) as sub-
paragraph (C), and
(3) by inserting after subparagraph (A) the fol-
lowing new subparagraph:
‘‘(B) any distribution attributable to the
portion treated as a separate trust shall be treat-
ed separately from any distribution attributable
to the portion not so treated, and’’.
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(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 2003.
PART IV—PROVISIONS RELATING TO BANKS
SEC. 589. SALE OF STOCK IN IRA RELATING TO S CORPORA-
TION ELECTION EXEMPT FROM PROHIBITED
TRANSACTION RULES.
(a) IN GENERAL.—Section 4975(d) (relating to exemp-
tions) 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).’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to sales of stock held by individual re-
tirement accounts on the date of the enactment of this Act.
SEC. 590. EXCLUSION OF INVESTMENT SECURITIES INCOME
FROM PASSIVE INCOME TEST FOR BANK S
CORPORATIONS.
(a) IN GENERAL.—Section 1362(d)(3) (relating to
where passive investment income exceeds certain percentage
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of gross receipts for 3 consecutive taxable years and corpora-
tion has accumulated earnings and profits), as amended by
this Act, is amended by adding at the end the following
new subparagraph:
‘‘(E) EXCEPTION FOR BANKS; ETC.—In the
case of a bank (as defined in section 581), a
bank holding company (as defined in section
246A(c)(3)(B)(ii)), or a qualified subchapter S
subsidiary which is a bank, the term ‘passive in-
vestment income’ shall not include—
‘‘(i) interest income earned by such
bank, bank holding company, or qualified
subchapter S subsidiary, or
‘‘(ii) dividends on assets required to be
held by such bank, bank holding company,
or qualified subchapter S subsidiary to con-
duct a banking business, including stock in
the Federal Reserve Bank, the Federal
Home Loan Bank, or the Federal Agricul-
tural Mortgage Bank or participation cer-
tificates issued by a Federal Intermediate
Credit Bank.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to taxable years beginning after Decem-
ber 31, 2003.
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SEC. 591. TREATMENT OF QUALIFYING DIRECTOR SHARES.
(a) IN GENERAL.—Section 1361 (defining S corpora-
tion) is amended by adding at the end the following new
subsection:
‘‘(f) 
TREATMENT
OF
QUALIFYING
DIRECTOR
SHARES.—
‘‘(1) 
IN
GENERAL.—For 
purposes 
of 
this
subchapter—
‘‘(A) qualifying director shares 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
qualifying director shares.
‘‘(2) QUALIFYING DIRECTOR SHARES DEFINED.—
For purposes of this subsection, the term ‘qualifying
director shares’ means any shares of stock in a bank
(as defined in section 581) or in a bank holding com-
pany registered as such with the Federal Reserve
System—
‘‘(i) which are held by an individual
solely by reason of status as a director of
such bank or company or its controlled sub-
sidiary; and
‘‘(ii) which are subject to an agreement
pursuant to which the holder is required to
dispose of the shares of stock upon termi-