‘‘(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 ordinary income of the 
holder and deductible to the corporation as an ex-
pense in computing taxable income under section 
1363(b) in the year such distribution is received.’’. 
(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).’’. 
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(3) So much of clause (ii) of section 
354(a)(2)(C) as precedes subclause (II) is amended 
to read as follows: 
‘‘(ii) RECAPITALIZATION OF FAMILY- 
OWNED
CORPORATIONS
AND
S
CORPORA-
TIONS.— 
‘‘(I) IN
GENERAL.—Clause (i) 
shall not apply in the case of a recapi-
talization under section 368(a)(I)(E) 
of a family-owned corporation or S 
corporation.’’. 
(4) Subsection (a) of section 1373 is amended 
by striking ‘‘and’’ at the end of paragraph (1), by 
striking the period at the end of paragraph (2) and 
inserting ‘‘, and’’, and by adding at the end the fol-
lowing new paragraph: 
‘‘(3) no amount of an expense deductible under 
this subchapter by reason of section 1361(f)(3) shall 
be apportioned or allocated to such income.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2007. 
SEC. 503. TREATMENT OF QUALIFYING DIRECTOR SHARES. 
(a) IN GENERAL.—Section 1361 of the Internal Rev-
enue Code of 1986 (defining S corporation), as amended 
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by section 502(a), is amended by adding at the end the 
following new subsection: 
‘‘(g) 
TREATMENT
OF
QUALIFYING
DIRECTOR 
SHARES.— 
‘‘(1) IN GENERAL.—For purposes of this sub-
chapter— 
‘‘(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
DE-
FINED.—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 company registered as such with the 
Federal Reserve System— 
‘‘(A) which are held by an individual solely 
by reason of status as a director of such bank 
or company or its controlled subsidiary, and 
‘‘(B) which are subject to an agreement 
pursuant to which the holder is required to dis-
pose of the shares of stock upon termination of 
the holder’s status as a director at the same 
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price as the individual acquired such shares of 
stock. 
‘‘(3) DISTRIBUTIONS.—A distribution (not in 
part or full payment in exchange for stock) made by 
the corporation with respect to qualifying director 
shares shall be includible as ordinary income of the 
holder and deductible to the corporation as an ex-
pense in computing taxable income under section 
1363(b) in the year such distribution is received.’’. 
(b) CONFORMING AMENDMENTS.— 
(1) Section 1361(b)(1) of the Internal Revenue 
Code of 1986, as amended by section 502(b), is 
amended by striking ‘‘subsection (f)’’ and inserting 
‘‘subsections (f) and (g)’’. 
(2) Section 1366(a) of such Code, as amended 
by section 502(b), is amended by adding at the end 
the following new paragraph: 
‘‘(4) ALLOCATION
WITH
RESPECT
TO
QUALI-
FYING
DIRECTOR
SHARES.—The holders of quali-
fying director shares (as defined in section 1361(g)) 
shall not, with respect to such shares of stock, be al-
located any of the items described in paragraph 
(1).’’. 
(3) Section 1373(a) of such Code, as amended 
by section 502(b), is amended by striking ‘‘and’’ at 
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the end of paragraph (2), by striking the period at 
the end of paragraph (3) and inserting ‘‘, and’’, and 
adding at the end the following new paragraph: 
‘‘(4) no amount of an expense deductible under 
this subchapter by reason of section 1361(g)(3) shall 
be apportioned or allocated to such income.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2007. 
SEC. 504. RECAPTURE OF BAD DEBT RESERVES. 
Notwithstanding section 481 of the Internal Revenue 
Code of 1986, with respect to any S corporation election 
made by any bank in taxable years beginning after Decem-
ber 31, 1996, such bank may recognize built-in gains from 
changing its accounting method for recognizing bad debts 
from the reserve method under section 585 or 593 of such 
Code to the charge-off method under section 166 of such 
Code either in the taxable year ending with or beginning 
with such an election. 
TITLE VI—SMALL BUSINESS 
LENDING ENHANCEMENTS 
SEC. 601. REDUCED FEES FOR SECTION 7(a) LOANS. 
Section 7(a) of the Small Business Act (15 U.S.C. 
636(a)) is amended— 
(1) in paragraph (23)(C)— 
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(A) in the matter preceding clause (i), by 
striking ‘‘may be reduced,’’ and all that follows 
through ‘‘guarantees—’’ and inserting ‘‘may be 
reduced—’’; 
(B) in clause (i), by striking ‘‘, to the max-
imum extent possible’’; and 
(2) by adding at the end the following new 
paragraph: 
‘‘(32) 
FEE
REDUCTION.—Amounts 
appro-
priated or otherwise made available to the Adminis-
trator for the purpose of fee reduction shall be used 
by the Administrator to reduce the fee percentages 
in effect under paragraphs (18)(A) and (23)(A), to 
the maximum extent possible.’’. 
SEC. 602. LOW DOCUMENTATION LOAN PROGRAM MADE 
MANDATORY. 
Section 7(a) of the Small Business Act (15 U.S.C. 
636(a)) (as amended by section 601 of this title) is amend-
ed— 
(1) in paragraph (25), by striking subpara-
graph (C); and 
(2) by inserting after paragraph (32) (as added 
by section 601(3) of this title) the following new 
paragraph: 
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‘‘(33) 
LOW
DOCUMENTATION
LOAN
PRO-
GRAM.— 
‘‘(A) IN
GENERAL.—The Administrator 
shall carry out a low documentation loan pro-
gram for loans of $250,000 or less only through 
lenders with significant experience in making 
small business loans. 
‘‘(B) REGULATIONS.—Not later than 45 
days after the date of the enactment of this 
paragraph, the Administrator shall prescribe 
regulations defining the experience necessary 
for participation as a lender in the low docu-
mentation loan program.’’. 
SEC. 603. EFFECTIVE DATE. 
The amendments made by sections 601 and 602 shall 
apply for fiscal years beginning with fiscal year 2008. 
Æ 
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