S.Amdt. 2756

1. Inserts new text wherever appropriate

   Inserts

   Inserted: Subtitle --Provisions Relating To S Corporation Reform and Simplification Part I--Maximum Number of Shareholders of an S Corporation SEC. . MEMBERS OF FAMILY TREATED AS 1 SHAREHOLDER.

   Inserted: (a) In General.--Paragraph (1) of section 1361 (c) (relating to special rules for applying subsection (b)) is amended to read as follows:

   Inserted: "(1) Members of family treated as 1 shareholder.--

   Inserted: "(A) In general.--For purpose of subsection (b)(1)(A)--

   Inserted: "(i) except as provided in clause (ii), a husband and wife (and their estates) shall be treated as 1 shareholder, and

   Inserted: "(ii) in the case of a family with respect to which an election is in effect under subparagraph (E), all members of the family shall be treated as 1 shareholder.

   Inserted: "(B) Members of the family.--For purpose of subparagraph (A)(ii), the term 'members of the family' means the common ancestor, lineal descendants of the common ancestor and the spouses of such lineal descendants or common ancestor.

   Inserted: "(C) Common ancestor.--For purposes of this paragraph, an individual shall not be considered 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.

   Inserted: "(D) Effect of adoption, etc.--In determining whether any relationship specified in subparagraph (B) or (C) exists, the rules of section 152(b)(2) shall apply.

   Inserted: "(E) Election.--An election under subparagraph (A)(ii)--

   Inserted: "(i) must be made with the consent of all persons who are shareholders (including those that are family members) in the corporation on the day the election is made,

   Inserted: "(ii) in the case of--

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   Inserted: "(I) an electing small business trust, shall be made by the trustee of the trust, and

   Inserted: "(II) a qualified subchapter S trust, shall be made by the beneficiary of the trust,

   Inserted: "(iii) under regulations, shall remain in effect until terminated, and

   Inserted: "(iv) shall apply only with respect to 1 family in any corporation.".

   Inserted: (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--

   Inserted: (1) by inserting "or under section 1361(c)(1)(A)(ii)" after "section 1361(b)(3)(B)(ii)" in paragraph (1), and

   Inserted: (2) by inserting "or under section 1361(c)(1)(E)(iii)" after "section 1361(b)(3)(C)" in paragraph (1)(B).

   Inserted: (c) Effective Date.--The amendments made by this section shall apply to taxable years beginning after December 31, 2004.

   Inserted: SEC. . INCREASE IN NUMBER OF ELIGIBLE SHAREHOLDERS TO 100.

   Inserted: (a) In General.--Section 1361(b)(1)(A) (defining small business corporation) is amended by striking "75" and inserting "100".

   Inserted: (b) Effective Date.--The amendment made by this section shall apply to taxable years beginning after December 31, 2004.

   Inserted: SEC. . NONRESIDENT ALIENS ALLOWED AS BENEFICIARIES OF AN ELECTING SMALL BUSINESS TRUST.

   Inserted: (a) In General.--Section 1361(e)(1)(A)(i)(I) is amended by inserting "(including a nonresident alien individual)" after "individual".

   Inserted: (b) Conforming Amendment.--Clause (v) of section 1361(c)(2)(B) is amended by adding at the end the following new sentence: "This clause shall not apply for purposes of subsection (b)(1)(C).".

   Inserted: (c) Effective Date.--The amendments made by this section shall take effect on the date of the enactment of this Act.

   Inserted: Part II--Termination of Election and Additions to Tax Due to Passive Investment Income SEC. . MODIFICATIONS TO PASSIVE INCOME RULES.

   Inserted: (a) Increased Percentage Limit.--

   Inserted: (1) In general.--Subsection (a)(2) of section 1375 (relating to tax imposed when passive investment income of corporation having accumulated earnings and profits exceeds 25 percent of gross receipts) is amended by striking "25 percent" and inserting "60 percent".

   Inserted: (2) Conforming Amendments.--

   Inserted: (A) Section 26(b)(2)(J) is amended by striking "25 percent" and inserting "60 percent".

   Inserted: (B) Section 1362(d)(3)(A)(i)(II) is amended by striking "25 percent" and inserting "60 percent".

   Inserted: (C) The heading for paragraph (3) of section 1362(d) is amended by striking "25 PERCENT" and inserting "60 PERCENT".

   Inserted: (D) Section 1375(b)(1)(A)(i) is amended by striking "25 percent" and inserting "60 percent".

   Inserted: (E) The heading for section 1375 is amended by striking "25 percent" and inserting "60 percent."

   Inserted: (F) The table of sections for part III of subchapter S of chapter 1 is amended by striking "25 percent" in the item relating to section 1375 and inserting "60 percent".

   Inserted: (b) Capital Gain Not Treated as Passive Investment Income.--Section 1362(d)(3) is amended--

   Inserted: (1) by striking "annuities," and all that follows in subparagraph (C)(i) and inserting "and annuities.", and

   Inserted: (2) by striking subparagraphs (C)(iv) and (D) and by redesignating subparagraph (E) as subparagraph (D).

   Inserted: (c) Conforming Amendments.--Section 1375(d) is amended by striking "subchapter C" both places it appears and inserting "accumulated".

   Inserted: (d) Effective Date.--The amendments made by this section shall apply to taxable years beginning after December 31, 2004.

   Inserted: Part III--Treatment of S Corporation Shareholders SEC. . TRANSFER OF SUSPENDED LOSSES INCIDENT TO DIVORCE.

   Inserted: (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:

   Inserted: "(4) Transfer of suspended losses and deductions when stock is transferred incident to divorce.--For purposes of paragraph (2), the transfer of any shareholder's stock in an S corporation incident to a decree of divorce shall include any loss or deduction described in such paragraph attributable to such stock."

   Inserted: (b) Effective Date.--The amendment made by this section shall apply to transfers in taxable years beginning after December 31, 2004.

   Inserted: SEC. . USE OF PASSIVE ACTIVITY LOSS AND AT-RISK AMOUNTS BY QUALIFIED SUBCHAPTER S TRUST INCOME BENEFICIARIES.

   Inserted: (a) In General.--Section 1361(d)(1) (relating to special rule for qualified subchapter S trust) is amended--

   Inserted: (1) by striking "and" at the end of subparagraph (A),

   Inserted: (2) by striking the period at the end of subparagraph (B) and inserting ", and", and

   Inserted: (3) by adding at the end the following new subparagraph:

   Inserted: "(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.".

   Inserted: (b) Effective Date.--The amendments made by this section shall apply to transfers in taxable years beginning after December 31, 2004.

   Inserted: SEC. . DISREGARD OF UNEXERCISED POWERS OF APPOINTMENT IN DETERMINING POTENTIAL CURRENT BENEFICIARIES OF ESBT.

   Inserted: (a) In General.--Section 1361(e)(2) (defining potential current beneficiary) is amended by inserting "(determined without regard to any unexercised (in whole or in part) power of appointment during such period)" after "of the trust" in the first sentence.

   Inserted: (b) Effective Date.--The amendment made by this section shall apply to taxable years beginning after December 31, 2004.

   Inserted: SEC. . CLARIFICATION OF ELECTING SMALL BUSINESS TRUST DISTRIBUTION RULES.

   Inserted: (a) In General.--Section 641(c)(1) (relating to special rules for taxation of electing small business trusts) is amended--

   Inserted: (1) by striking "and" at the end of subparagraph (A),

   Inserted: (2) by redesignating subparagraph (B) as subparagraph (C), and

   Inserted: (3) by inserting after subparagraph (A) the following new subparagraph:

   Inserted: "(B) any distribution attributable to the portion treated as a separate trust shall be treated separately from any distribution attributable to the portion not so treated, and".

   Inserted: (b) Effective Date.--The amendments made by this section shall apply to taxable years beginning after December 31, 2004.

   Inserted: Part IV--Provisions Relating to Banks SEC. . SALE OF STOCK IN IRA RELATING TO S CORPORATION ELECTION EXEMPT FROM PROHIBITED TRANSACTION RULES.

   Inserted: (a) In General.--Section 4975(d) (relating to exemptions) 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:

   Inserted: "(16) a sale of stock held by a trust which constitutes an individual retirement account under section 408(a) to the individual for whose benefit such account is established if such sale is pursuant to an election under section 1362(a).".

   Inserted: (b) Effective Date.--The amendments made by this section shall apply to sales of stock held by individual retirement accounts on the date of the enactment of this Act.

   Inserted: SEC. . EXCLUSION OF INVESTMENT SECURITIES INCOME FROM PASSIVE INCOME TEST FOR BANK S CORPORATIONS.

   Inserted: (a) In General.--Section 1362(d)(3) (relating to where passive investment income exceeds certain percentage of gross receipts for 3 consecutive taxable years and corporation has accumulated earnings and profits), as amended by this Act, is amended by adding at the end the following new subparagraph:

   Inserted: "(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 investment income' shall not include--

   Inserted: "(i) interest income earned by such bank, bank holding company, or qualified subchapter S subsidiary, or

   Inserted: "(ii) dividends on assets required to be held by such bank, bank holding company, or qualified subchapter S subsidiary to conduct a banking business, 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.".

   Inserted: (b) Effective Date.--The amendment made by this section shall apply to taxable years beginning after December 31, 2004.

   Inserted: SEC. . TREATMENT OF QUALIFYING DIRECTOR SHARES.

   Inserted: (a) In General.--Section 1361 (defining S corporation) is amended by adding at the end the following new subsection:

   Inserted: "(f) Treatment of Qualifying Director Shares.--

   Inserted: "(1) In General.--For purposes of this subchapter--

   Inserted: "(A) qualifying director shares shall not be treated as a second class of stock, and

   Inserted: "(B) no person shall be treated as a shareholder of the corporation by reason of holding qualifying director shares.

   Inserted: "(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 company registered as such with the Federal Reserve System--

   Inserted: "(i) which are held by an individual solely by reason of status as a director of such bank or company or its controlled subsidiary; and

   Inserted: "(ii) which are subject to an agreement pursuant to which the holder is required to dispose of the shares of stock upon termination of the holder's status as a director at the same price as the individual acquired such shares of stock.

   Inserted: "(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 includable as ordinary income of the holder and deductible to the corporation as an expense in computing taxable income under section 1363(b) in the year such distribution is received.".

   Inserted: (b) Conforming Amendment.--Section 1366(a) is amended by adding at the end the following new paragraph:

   Inserted: "(3) Allocation with respect to qualifying director shares.--The holders of qualifying director shares (as defined in section 1361(f)) shall not, with respect to such shares of stock, be allocated any of the items described in paragraph (1).".

   Inserted: (c) Effective Date.--The amendments made by this section shall apply to taxable years beginning after December 31, 2004.

   Inserted: Part V--Qualified Subchapter S Subsidiaries SEC. . RELIEF FROM INADVERTENTLY INVALID QUALIFIED SUBCHAPTER S SUBSIDIARY ELECTIONS AND TERMINATIONS.

   Inserted: (a) In General.--Section 1362(f) (relating to inadvertent invalid elections or terminations) is amended--

   Inserted: (1) by inserting "or under section 1361(b)(3)(B)(ii)" after "subsection (a)" in paragraph (1),

   Inserted: (2) by inserting "or under section 1361(b)(3)(C)" after "subsection (d)" in paragraph (1)(B),

   Inserted: (3) by inserting "or a qualified subchapter S subsidiary, as the case may be" after "small business corporation" in paragraph (3)(A),

   Inserted: (4) by inserting "or a qualified subchapter S subsidiary, as the case may be" after "S corporation" in paragraph (4), and

   Inserted: (5) by inserting "or a qualified subchapter S subsidiary, as the case may be" after "S corporation" in the matter following paragraph (4).

   Inserted: (b) Effective Date.--The amendments made by this section shall apply to taxable years beginning after December 31, 2004.

   Inserted: SEC. . INFORMATION RETURNS FOR QUALIFIED SUBCHAPTER S SUBSIDIARIES.

   Inserted: (a) In General.--Section 1361(b)(3)(A) (relating to treatment of certain wholly owned subsidiaries) is amended by inserting "and in the case of information returns required under part III of subchapter A of chapter 61" after "Secretary".

   Inserted: (b) Effective Date.--The amendment made by this section shall apply to taxable years beginning after December 31, 2004.

   Inserted: Part VI--Additional Provisions SEC. . ELIMINATION OF ALL EARNINGS AND PROFITS ATTRIBUTABLE TO PRE-1983 YEARS.

   Inserted: (a) In General.--Subsection (a) of section 1311 of the Small Business Job Protection Act of 1996 is amended to read as follows:

   Inserted: "(a) In General.--If a corporation was an electing small business corporation under subchapter S of chapter 1 of the Internal Revenue Code of 1986 for any taxable year beginning before January 1, 1983, the amount of such corporation's accumulated earnings and profits (as of the beginning of the first taxable year beginning after December 31, 2003) 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 corporation was an electing small business corporation under such subchapter S.".

   Inserted: (b) Effective Date.--The amendment made by this section shall apply to taxable years beginning after December 31, 2004.

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