S.Amdt. 765

1. Rewrites page 32, line 13 through page 39, line 10

   Replaces

   Removes page 32, line 13 through page 39, line 10.

   Inserted: Subtitle B--Subchapter S Provisions SEC. 521. CAPITAL GAIN OF S CORPORATION NOT TREATED AS PASSIVE INVESTMENT INCOME.

   Inserted: (a) In General.--Section 1362(d)(3) is amended by striking subparagraphs (B), (C), (D), (E), and (F) and inserting the following new subparagraph:

   Inserted: "(B) Passive investment income defined.--

   Inserted: "(i) In general.--Except as otherwise provided in this subparagraph, the term 'passive investment income' means gross receipts derived from royalties, rents, dividends, interest, and annuities.

   Inserted: "(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).

   Inserted: "(iii) Treatment of certain lending or finance companies.--If the S corporation meets the requirements of section 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)).

   Inserted: "(iv) Treatment of certain dividends.--If an S corporation holds stock in a C corporation meeting the requirements of section 1504(a)(2), the term 'passive 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 corporation derived from the active conduct of a trade or business.

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

   Inserted: "(I) interest income earned by such bank or company, or

   Inserted: "(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.".

   Inserted: (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)".

   Inserted: (c) Effective Date.--The amendments made by this section shall apply to taxable years beginning after December 31, 2006.

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   Inserted: SEC. 522. TREATMENT OF BANK DIRECTOR SHARES.

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

   Inserted: "(f) Restricted Bank Director Stock.--

   Inserted: "(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)).

   Inserted: "(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 company (as defined in section 3(w)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(w)(1)), if such stock--

   Inserted: "(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

   Inserted: "(B) is subject to an agreement with such bank or company (or a corporation which controls (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.

   Inserted: "(3) Cross reference.--

   Inserted: "For treatment of certain distributions with respect to restricted bank director stock, see section 1368(f)".

   Inserted: (b) Distributions.--Section 1368 (relating to distributions) is amended by adding at the end the following new subsection:

   Inserted: "(f) Restricted Bank Director Stock.--If a director 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--

   Inserted: "(1) shall be includible in gross income of the director, and

   Inserted: "(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.".

   Inserted: (c) Effective Dates.--

   Inserted: (1) In general.--The amendments made by this section shall apply to taxable years beginning after December 31, 2006.

   Inserted: (2) Special rule for treatment as second class of stock.--In the case of any taxable year beginning after December 31, 1996, restricted bank director stock (as defined in section 1361(f) of the Internal Revenue Code of 1986, as added by this section) shall not be taken into account in determining whether an S corporation has more than 1 class of stock.

   Inserted: SEC. 523. SPECIAL RULE FOR BANK REQUIRED TO CHANGE FROM THE RESERVE METHOD OF ACCOUNTING ON BECOMING S CORPORATION.

   Inserted: (a) In General.--Section 1361, as amended by this Act, is amended by adding at the end the following new subsection:

   Inserted: "(g) Special Rule for Bank Required to Change From the Reserve Method of Accounting on Becoming S Corporation.--In the case of a bank which changes from the reserve method of accounting for bad debts described 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 section 481 by reason of such change for the taxable year immediately preceding such first taxable year.".

   Inserted: (b) Effective Date.--The amendments made by this section shall apply to taxable years beginning after December 31, 2006.

   Inserted: SEC. 524. TREATMENT OF THE SALE OF INTEREST IN A QUALIFIED SUBCHAPTER S SUBSIDIARY.

   Inserted: (a) In General.--Subparagraph (C) of section 1361(b)(3) (relating to treatment of terminations of qualified subchapter S subsidiary status) is amended--

   Inserted: (1) by striking "For purposes of this title," and inserting the following:

   Inserted: "(i) In general.--For purposes of this title,", and

   Inserted: (2) by inserting at the end the following new clause:

   Inserted: "(ii) Termination by reason of sale of stock.--If the failure to meet the requirements of subparagraph (B) is by reason of the sale of stock of a corporation which is a qualified subchapter S subsidiary, the sale of such stock shall be treated as if--

   Inserted: "(I) the sale were a sale of an undivided interest in the assets of such corporation (based on the percentage of the corporation's stock sold), and

   Inserted: "(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.".

   Inserted: (b) Effective Date.--The amendments made by this section shall apply to taxable years beginning after December 31, 2006.

   Inserted: SEC. 525. ELIMINATION OF ALL EARNINGS AND PROFITS ATTRIBUTABLE TO PRE-1983 YEARS FOR CERTAIN CORPORATIONS.

   Inserted: In the case of a corporation which is--

   Inserted: (1) described in section 1311(a)(1) of the Small Business Job Protection Act of 1996, and

   Inserted: (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 December 31, 2006) 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 subchapter S of the Internal Revenue Code of 1986.

   Inserted: SEC. 526. EXPANSION OF QUALIFYING BENEFICIARIES OF AN ELECTING SMALL BUSINESS TRUST.

   Inserted: (a) No Look Through for Eligibility Purposes.--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: (b) Effective Date.--The amendment made by this section shall apply to taxable years beginning after December 31, 2006.

   Original wording

   Beginning on page 32, line 13, strike all through page 39, line 10, and insert the following:

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As printed