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ment income’ shall not include dividends
from such C corporation to the extent such
dividends are attributable to the earnings
and profits of such C corporation derived
from the active conduct of a trade or busi-
ness.
‘‘(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 Cred-
it Bank.’’.
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(b) CONFORMING AMENDMENT.—Clause (i) of section
1042(c)(4)(A) 
is 
amended 
by 
striking 
‘‘section
1362(d)(3)(C)’’ and inserting ‘‘section 1362(d)(3)(B)’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after the date
of the enactment of this Act.
SEC. 522. 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 subchapter
(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 defined in
section 581) or a depository institution holding com-
pany (as defined in section 3(w)(1) of the Federal De-
posit 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
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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 stock) upon
ceasing to hold the office of director.
‘‘(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 di-
rector, 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.’’.
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(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 be-
ginning after December 31, 1996, restricted bank di-
rector stock (as defined in section 1361(f) of the Inter-
nal Revenue Code of 1986, as added by this section)
shall not be taken into account in determining wheth-
er an S corporation has more than 1 class of stock.
SEC. 523. SPECIAL RULE FOR BANK REQUIRED TO CHANGE
FROM THE RESERVE METHOD OF ACCOUNT-
ING ON BECOMING S CORPORATION.
(a) IN GENERAL.—Section 1361, as amended by this
Act, 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 BECOM-
ING S CORPORATION.—In the case of a bank which changes
from the reserve method of accounting for bad debts de-
scribed in section 585 or 593 for its first taxable year for
which an election under section 1362(a) is in effect, the
bank may elect to take into account any adjustments under
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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 Decem-
ber 31, 2006.
SEC. 524. 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 rea-
son of the sale of stock of a corporation
which is a qualified subchapter S sub-
sidiary, the sale of such stock shall be treat-
ed as if—
‘‘(I) the sale were a sale of an un-
divided interest in the assets of such
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corporation (based on the percentage 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
such corporation of all of its liabilities)
in a transaction to which section 351
applies.’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 2006 .
SEC. 525. ELIMINATION OF ALL EARNINGS AND PROFITS AT-
TRIBUTABLE TO PRE-1983 YEARS FOR CER-
TAIN CORPORATIONS.
In the case of a corporation which is—
(1) described in section 1311(a)(1) of the Small
Business Job Protection Act of 1996, and
(2) not described in section 1311(a)(2) of such
Act,
the amount of such corporation’s accumulated earnings and
profits (for the first taxable year beginning after the date
of the enactment of this Act) shall be reduced by an amount
equal to the portion (if any) of such accumulated earnings
and profits which were accumulated in any taxable year
beginning before January 1, 1983, for which such corpora-