174 
in taxable years beginning after December 31, 2006, and 
to carrybacks of such credits. 
SEC. 7215. FAMILY BUSINESS TAX SIMPLIFICATION. 
(a) IN GENERAL.—Section 761 (defining terms for 
purposes of partnerships) is amended by redesignating 
subsection (f) as subsection (g) and by inserting after sub-
section (e) the following new subsection: 
‘‘(f) QUALIFIED JOINT VENTURE.— 
‘‘(1) IN GENERAL.—In the case of a qualified 
joint venture conducted by a husband and wife who 
file a joint return for the taxable year, for purposes 
of this title— 
‘‘(A) such joint venture shall not be treat-
ed as a partnership, 
‘‘(B) all items of income, gain, loss, deduc-
tion, and credit shall be divided between the 
spouses in accordance with their respective in-
terests in the venture, and 
‘‘(C) each spouse shall take into account 
such spouse’s respective share of such items as 
if they were attributable to a trade or business 
conducted by such spouse as a sole proprietor. 
‘‘(2) QUALIFIED
JOINT
VENTURE.—For pur-
poses of paragraph (1), the term ‘qualified joint ven-
175 
ture’ means any joint venture involving the conduct 
of a trade or business if— 
‘‘(A) the only members of such joint ven-
ture are a husband and wife, 
‘‘(B) both spouses materially participate 
(within the meaning of section 469(h) without 
regard to paragraph (5) thereof) in such trade 
or business, and 
‘‘(C) both spouses elect the application of 
this subsection.’’. 
(b) NET EARNINGS FROM SELF-EMPLOYMENT.— 
(1) Subsection (a) of section 1402 (defining net 
earnings from self-employment) is amended by strik-
ing ‘‘, and’’ at the end of paragraph (15) and insert-
ing a semicolon, by striking the period at the end of 
paragraph (16) and inserting ‘‘; and’’, and by insert-
ing after paragraph (16) the following new para-
graph: 
‘‘(17) notwithstanding the preceding provisions 
of this subsection, each spouse’s share of income or 
loss from a qualified joint venture shall be taken 
into account as provided in section 761(f) in deter-
mining net earnings from self-employment of such 
spouse.’’.
176 
(2) Subsection (a) of section 211 of the Social 
Security Act (defining net earnings from self-em-
ployment) is amended by striking ‘‘and’’ at the end 
of paragraph (14), by striking the period at the end 
of paragraph (15) and inserting ‘‘; and’’, and by in-
serting after paragraph (15) the following new para-
graph: 
‘‘(16) Notwithstanding the preceding provisions 
of this subsection, each spouse’s share of income or 
loss from a qualified joint venture shall be taken 
into account as provided in section 761(f) of the In-
ternal Revenue Code of 1986 in determining net 
earnings from self-employment of such spouse.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2006. 
Subpart B—Gulf Opportunity Zone Tax Incentives 
SEC. 7221. EXTENSION OF INCREASED EXPENSING FOR 
QUALIFIED SECTION 179 GULF OPPORTUNITY 
ZONE PROPERTY. 
Paragraph (2) of section 1400N(e) (relating to quali-
fied section 179 Gulf Opportunity Zone property) is 
amended— 
(1) by striking ‘‘this subsection, the term’’ and 
inserting:
177 
‘‘this subsection— 
‘‘(A) IN GENERAL.—The term’’, and 
(2) by adding at the end the following new sub-
paragraph: 
‘‘(B) EXTENSION
FOR
CERTAIN
PROP-
ERTY.—In the case of property substantially all 
of the use of which is in one or more specified 
portions of the GO Zone (as defined by sub-
section (d)(6)), such term shall include section 
179 property (as so defined) which is described 
in subsection (d)(2), determined— 
‘‘(i) without regard to subsection 
(d)(6), and 
‘‘(ii) by substituting ‘2008’ for ‘2007’ 
in subparagraph (A)(v) thereof.’’. 
SEC. 7222. EXTENSION AND EXPANSION OF LOW-INCOME 
HOUSING CREDIT RULES FOR BUILDINGS IN 
THE GO ZONES. 
(a) TIME
FOR
MAKING
LOW-INCOME
HOUSING 
CREDIT ALLOCATIONS.—Subsection (c) of section 1400N 
(relating to low-income housing credit) is amended by re-
designating paragraph (5) as paragraph (6) and by insert-
ing after paragraph (4) the following new paragraph: 
‘‘(5) TIME FOR MAKING LOW-INCOME HOUSING 
CREDIT
ALLOCATIONS.—Section 42(h)(1)(B) shall
178 
not apply to an allocation of housing credit dollar 
amount to a building located in the Gulf Oppor-
tunity Zone, the Rita GO Zone, or the Wilma GO 
Zone, if such allocation is made in 2006, 2007, or 
2008, and such building is placed in service before 
January 1, 2011.’’. 
(b) EXTENSION
OF PERIOD
FOR TREATING GO 
ZONES AS DIFFICULT DEVELOPMENT AREAS.— 
(1) IN GENERAL.—Subparagraph (A) of section 
1400N(c)(3) is amended by striking ‘‘2006, 2007, or 
2008’’ and inserting ‘‘the period beginning on Janu-
ary 1, 2006, and ending on December 31, 2010’’. 
(2) CONFORMING AMENDMENT.—Clause (ii) of 
section 1400N(c)(3)(B) is amended by striking 
‘‘such period’’ and inserting ‘‘the period described in 
subparagraph (A)’’. 
(c) COMMUNITY DEVELOPMENT BLOCK GRANTS NOT 
TAKEN INTO ACCOUNT IN DETERMINING IF BUILDINGS 
ARE FEDERALLY SUBSIDIZED.—Subsection (c) of section 
1400N (relating to low-income housing credit), as amend-
ed by this division, is amended by redesignating paragraph 
(6) as paragraph (7) and by inserting after paragraph (5) 
the following new paragraph: 
‘‘(6) 
COMMUNITY
DEVELOPMENT
BLOCK 
GRANTS
NOT
TAKEN
INTO
ACCOUNT
IN
DETER-
179 
MINING
IF
BUILDINGS
ARE
FEDERALLY
SUB-
SIDIZED.—For 
purpose 
of 
applying 
section 
42(i)(2)(D) to any building which is placed in serv-
ice in the Gulf Opportunity Zone, the Rita GO Zone, 
or the Wilma GO Zone during the period beginning 
on January 1, 2006, and ending on December 31, 
2010, a loan shall not be treated as a below market 
Federal loan solely by reason of any assistance pro-
vided under section 106, 107, or 108 of the Housing 
and Community Development Act of 1974 by reason 
of section 122 of such Act or any provision of the 
Department of Defense Appropriations Act, 2006, or 
the Emergency Supplemental Appropriations Act for 
Defense, the Global War on Terror, and Hurricane 
Recovery, 2006.’’. 
SEC. 7223. SPECIAL TAX-EXEMPT BOND FINANCING RULE 
FOR REPAIRS AND RECONSTRUCTIONS OF 
RESIDENCES IN THE GO ZONES. 
Subsection (a) of section 1400N (relating to tax-ex-
empt bond financing) is amended by adding at the end 
the following new paragraph: 
‘‘(7) SPECIAL RULE FOR REPAIRS AND RECON-
STRUCTIONS.— 
‘‘(A) IN GENERAL.—For purposes of sec-
tion 143 and this subsection, any qualified GO
180 
Zone repair or reconstruction shall be treated 
as a qualified rehabilitation. 
‘‘(B) QUALIFIED GO ZONE REPAIR OR RE-
CONSTRUCTION.—For purposes of subpara-
graph (A), the term ‘qualified GO Zone repair 
or reconstruction’ means any repair of damage 
caused by Hurricane Katrina, Hurricane Rita, 
or Hurricane Wilma to a building located in the 
Gulf Opportunity Zone, the Rita GO Zone, or 
the Wilma GO Zone (or reconstruction of such 
building in the case of damage constituting de-
struction) if the expenditures for such repair or 
reconstruction are 25 percent or more of the 
mortgagor’s adjusted basis in the residence. 
For purposes of the preceding sentence, the 
mortgagor’s adjusted basis shall be determined 
as of the completion of the repair or reconstruc-
tion or, if later, the date on which the mort-
gagor acquires the residence. 
‘‘(C) TERMINATION.—This paragraph shall 
apply only to owner-financing provided after the 
date of the enactment of this paragraph and be-
fore January 1, 2011.’’.
181 
SEC. 7224. GAO STUDY OF PRACTICES EMPLOYED BY STATE 
AND LOCAL GOVERNMENTS IN ALLOCATING 
AND UTILIZING TAX INCENTIVES PROVIDED 
PURSUANT 
TO 
THE 
GULF 
OPPORTUNITY 
ZONE ACT OF 2005. 
(a) IN GENERAL.—The Comptroller General of the 
United States shall conduct a study of the practices em-
ployed by State and local governments, and subdivisions 
thereof, in allocating and utilizing tax incentives provided 
pursuant to the Gulf Opportunity Zone Act of 2005 and 
this division. 
(b) SUBMISSION OF REPORT.—Not later than one 
year after the date of the enactment of this division, the 
Comptroller General shall submit a report on the findings 
of the study conducted under subsection (a) and shall in-
clude therein recommendations (if any) relating to such 
findings. The report shall be submitted to the Committee 
on Ways and Means of the House of Representatives and 
the Committee on Finance of the Senate. 
(c) CONGRESSIONAL HEARINGS.—In the case that 
the report submitted under this section includes findings 
of significant fraud, waste or abuse, each Committee spec-
ified in subsection (b) shall, within 60 days after the date 
the report is submitted under subsection (b), hold a public 
hearing to review such findings.
182 
Subpart C—Subchapter S Provisions 
SEC. 7231. CAPITAL GAIN OF S CORPORATION NOT TREAT-
ED AS PASSIVE INVESTMENT INCOME. 
(a) IN GENERAL.—Section 1362(d)(3) is amended by 
striking subparagraphs (B), (C), (D), (E), and (F) and 
inserting the following new subparagraphs: 
‘‘(B) GROSS RECEIPTS FROM THE SALES 
OF
CERTAIN
ASSETS.—For purposes of this 
paragraph— 
‘‘(i) in the case of dispositions of cap-
ital assets (other than stock and securi-
ties), gross receipts from such dispositions 
shall be taken into account only to the ex-
tent of the capital gain net income there-
from, and 
‘‘(ii) in the case of sales or exchanges 
of stock or securities, gross receipts shall 
be taken into account only to the extent of 
the gains therefrom. 
‘‘(C) PASSIVE
INVESTMENT
INCOME
DE-
FINED.— 
‘‘(i) IN GENERAL.—Except as other-
wise provided in this subparagraph, the 
term ‘passive investment income’ means 
gross receipts derived from royalties, rents, 
dividends, interest, and annuities.
183 
‘‘(ii) EXCEPTION
FOR
INTEREST
ON 
NOTES FROM SALES OF INVENTORY.—The 
term ‘passive investment income’ shall not 
include interest on any obligation acquired 
in the ordinary course of the corporation’s 
trade or business from its sale of property 
described in section 1221(a)(1). 
‘‘(iii) TREATMENT OF CERTAIN LEND-
ING
OR
FINANCE
COMPANIES.—If the S 
corporation meets the requirements of sec-
tion 542(c)(6) for the taxable year, the 
term ‘passive investment income’ shall not 
include gross receipts for the taxable year 
which are derived directly from the active 
and regular conduct of a lending or finance 
business (as defined in section 542(d)(1)). 
‘‘(iv) TREATMENT OF CERTAIN DIVI-
DENDS.—If an S corporation holds stock 
in a C corporation meeting the require-
ments of section 1504(a)(2), the term ‘pas-
sive investment income’ shall not include 
dividends from such C corporation to the 
extent such dividends are attributable to 
the earnings and profits of such C corpora-
184 
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.
185 
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
186 
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