[Congressional Bills 104th Congress]
[From the U.S. Government Publishing Office]
[H.R. 1661 Introduced in House (IH)]







104th CONGRESS
  1st Session
                                H. R. 1661

To permit partnerships and S corporations to elect taxable years other 
                          than required years.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                              May 17, 1995

   Mr. Shaw introduced the following bill; which was referred to the 
                      Committee on Ways and Means

_______________________________________________________________________

                                 A BILL


 
To permit partnerships and S corporations to elect taxable years other 
                          than required years.
    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    (a) Short Title.--This Act may be cited as the ``Small Business Tax 
Flexibility Act of 1995''.

SEC. 2. ELECTION OF TAXABLE YEAR.

    Part I of subchapter E of chapter 1 of the Internal Revenue Code of 
1986 (relating to accounting periods) is amended by redesignating 
section 444 as section 445 and by inserting after section 443 the 
following new section:

``SEC. 444. PARTNERSHIPS AND S CORPORATIONS MAY ELECT ANY TAXABLE YEAR.

    ``(a) General Rule.--Except as otherwise provided in this section, 
a partnership or S corporation may elect to have a taxable year other 
than the required taxable year.
    ``(b) Effect of Election.--If an entity makes an election under 
subsection (a), then--
            ``(1) the entity shall pay estimated tax at the applicable 
        rate on behalf of the owners as provided in this section,
            ``(2) if there is any underpayment of estimated tax by the 
        entity, the entity shall pay a penalty determined under section 
        6654A, and
            ``(3) in the manner provided in sections 35 and 6654, the 
        owners may credit against their respective liabilities for tax 
        their allocable shares of the estimated tax payments made by 
        the entity.
    ``(c) Definitions.--For purposes of this section, section 35, and 
section 6654A:
            ``(1) Entity.--The term `entity' means a partnership or S 
        corporation, as the case may be.
            ``(2) Owner.--The term `owner' means a partner in a 
        partnership or a shareholder in an S corporation, as the case 
        may be.
            ``(3) Required taxable year.--The term `required taxable 
        year' means the taxable year determined under section 706(b) or 
        1378.
            ``(4) Applicable rate.--The term `applicable rate' means--
                    ``(A) except as provided in subparagraph (B), 34 
                percent, and
                    ``(B) in the case of a high average income entity 
                (as defined in subsection (l), 39.6 percent.
    ``(d) Required Quarterly Installments.--
            ``(1) Requirement.--An entity shall pay a required 
        installment for each quarter of a taxable year for which an 
        election under subsection (a) is in effect.
            ``(2) No required payments where entity's liability is less 
        than $5,000.--
                    ``(A) In general.--An entity shall not be required 
                to make estimated payments under this section for any 
                taxable year for which (but for this subparagraph) its 
                aggregate liability under this section would be less 
                than $5,000.
                    ``(B) Entities under common control.--If 2 or more 
                entities are under common control, such entities shall 
                be treated as one entity for purposes of applying 
                subparagraph (A).
                    ``(C) Common control defined.--For purposes of 
                subparagraph (B), two entities are under common control 
                if the same person or persons own more than 50 percent 
                of the capital interest or profits interest in the 
                partnership or more than 50 percent in value of the 
                outstanding stock of the S corporation, as the case may 
                be. For purposes of the preceding sentence, the 
                constructive ownership rules of section 267(c) shall 
                apply except that such rules shall be applied to 
                interests in partnerships as well as to stock.
            ``(3) Amount.--The amount of the required installment for 
        any quarter shall be determined under whichever of the 
        following is the entity's applicable method for that quarter.
                    ``(A) The 110 percent method.
                    ``(B) The 100 percent method.
                    ``(C) The annualized income method.
            ``(4) Applicable method.--Unless the 100 percent method or 
        the annualized income method applies to a quarter by reason of 
        subsection (e)(4) or a timely selection under subsection (f) or 
        (g), the applicable method for an entity for any quarter shall 
        be the 110 percent method.
    ``(e) 110-Percent Method.--
            ``(1) In general.--The required quarterly installment under 
        the 110 percent method shall be \1/4\ of 110 percent of the 
        product of--
                    ``(A) the entity's applicable income for its base 
                year, and
                    ``(B) the applicable rate.
            ``(2) C corporation for base year.--
                    ``(A) In general.--For purposes of this subsection, 
                if an S corporation was a C corporation for its base 
                year, its taxable income for its base year shall be 
                substituted for its applicable income.
            ``(3) Base year defined--For purposes of this subsection, 
        the term `base year' means the most recent prior taxable year 
        containing 12 months.
            ``(4) 110-percent method not available where large increase 
        in income.--
                    ``(A) In general.--If an entity's applicable income 
                for the taxable year exceeds its applicable income for 
                the base year by more than $750,000, the 110-percent 
                method will not apply to the entity for the taxable 
                year. Instead, the 110-percent method shall apply 
                unless the entity selects the annualized income method.
                    ``(B) Entities under common control.--If 2 or more 
                entities are under common control (as defined in 
                subsection (d)(2)(C)), such entities shall be treated 
                as one entity for purposes of applying subparagraph 
                (A).
    ``(f) 100-Percent Method.--
            ``(1) In general.--The required quarterly installment under 
        the 100-percent method shall be \1/4\ of 100 percent of the 
        product of--
                    ``(A) the entity's applicable income for the 
                current taxable year, and
                    ``(B) the applicable rate.
            ``(2) 100-percent method must be selected by due date for 
        first quarter.--Except as provided in subsection (e)(4), the 
        100-percent method shall apply to an entity's taxable year only 
        if the entity selects that method for that year on or before 
        the due date for the first quarterly installment for that year.
    ``(g) Annualized Income Method.--
            ``(1) In general.--The required quarterly installment under 
        the annualized income method shall be \1/4\ of the product of--
                    ``(A) the entity's annualized applicable income 
                (determined under subsection (h)(6)), and
                    ``(B) the applicable rate.
            ``(2) Adjustments in amount.--The required installment 
        under this subsection for any quarter shall be increased or 
        decreased by any amount by which the entity's quarterly 
        installments for prior quarters in the year were higher or 
        lower than such installments would have been if computed under 
        this subsection using the annualized applicable income for the 
        current quarter.
            ``(3) Time for selecting method.--The annualized income 
        method shall apply to an entity for a quarter only if the 
        entity selects that method on or before the due date for such 
        quarter.
            ``(4) Consistency for remaining quarters.--If an entity 
        selects the annualized income method for any quarter, that 
        method shall also apply to the remaining quarters in the 
        entity's taxable year.
    ``(h) Applicable Income.--
            ``(1) In general.--For purposes of this section, the 
        applicable income for any taxable year shall be the net amount 
        (not less than zero) determined--
                    ``(A) by taking into account the entity's items in 
                the manner and with the exceptions provided in section 
                703(a) or 1363(b), as the case may be, and
                    ``(B) by making the further adjustments provided in 
                paragraphs (2), (3), (4), and (5) of this subsection.
            ``(2) Certain deductions allowed.--In determining 
        applicable income the following amounts shall be allowed as 
        deductions:
                    ``(A) Contributions to organizations described in 
                section 170(c).
                    ``(B) Taxes described in section 901(c) paid or 
                accrued to foreign countries or possessions of the 
                United States.
            ``(3) Certain limitations disregarded.--For purposes of 
        paragraphs (1) and (2), any limitation on the amount of any 
        item which may be taken into account for purposes of computing 
        the taxable income of a partner or shareholder shall be 
        disregarded.
            ``(4) Guaranteed payments to partners not deducted.--In 
        determining applicable income a guaranteed payment to a partner 
        shall not be treated as an item of deduction.
            ``(5) Disproportionate applicable payments during deferral 
        period.--
                    ``(A) Deduction not allowed.--In determining 
                applicable income, no deduction shall be allowed for 
                disproportionate deferral period applicable payments.
                    ``(B) Disproportionate deferral period applicable 
                payments.--For purposes of subparagraph (A), the term 
                `disproportionate deferral period applicable payments' 
                means the excess (if any) of--
                            ``(i) the product of the deferral ratio and 
                        the aggregate applicable payments made to 
                        owners during the entity's entire taxable year, 
                        over
                            ``(ii) the aggregate applicable payments 
                        made to owners during the deferral period.
                    ``(C) Definitions.--For purposes of this 
                paragraph--
                            ``(i) the term `applicable payments' has 
                        the meaning given to such term by section 
                        7519(d)(3), except that in the case of an S 
                        corporation only payments to 2 percent 
                        shareholders (as defined in section 1372(b)) 
                        shall be taken into account,
                            ``(ii) the term `deferral period' means the 
                        months in the period beginning with the first 
                        day of the entity's taxable year and ending on 
                        December 31, and
                            ``(iii) the term `deferral ratio' means the 
                        ratio which the number of months in the 
                        deferral period bears to the total number of 
                        months in the taxable year.
            ``(6) Annualized applicable income.--The applicable income 
        taken into account for any quarter for purposes of the 
        annualized income method of subsection (g) shall be the product 
        of--
                    ``(A) the applicable income determined in the 
                manner provided in paragraphs (1) through (5) for the 
                period consisting of the months in the entity's taxable 
                year ending before the due date for the installment for 
                such quarter, and
                    ``(B) a fraction--
                            ``(i) the numerator of which is 12, and
                            ``(ii) the denominator of which is the 
                        number of months in such period.
    ``(i) Due Dates for Installments.--Quarterly installments shall be 
due on the 15th day of the 3rd, 5th, 8th, and 12th months of the 
taxable year.
    ``(j) Election.--
            ``(1) In general.--An election under subsection (a) for a 
        taxable year may be made at any time on or before the 15th day 
        of the 3rd month of the first taxable year of 12 months under 
        the election. An election, once in effect, shall continue in 
        effect until terminated under paragraph (3) or (4) or under 
        subsection (k)(1)(B).
            ``(2) Coordination with sections 442 and 443.--A change in 
        its annual accounting period made by an entity pursuant to an 
        election under this section shall be treated for purposes of 
        sections 442 and 443 as a change approved by the Secretary.
            ``(3) Termination by revocation.--An election under 
        subsection (a) may be terminated by revocation, but only if 
        owners of more than one-half of the equity interests in the 
        entity on the day on which the revocation is made consent to 
        the revocation.
            ``(4) Entity terminates.--An election under subsection (a) 
        terminates whenever there is--
                    ``(A) a termination of the partnership under 
                section 708(b)(1), or
                    ``(B) the corporation ceases to be an S 
                corporation.
        Subparagraph (B) shall not apply to an inadvertent termination 
        if the corporation is treated as a continuing S corporation 
        under section 1362(f).
            ``(5) When terminations take effect.--For purposes of this 
        section and sections 35 and 6654A, a termination under 
        paragraph (3) or (4) or under subsection (k)(1)(B) shall take 
        effect as provided in regulations.
            ``(6) Election after termination.--
                    ``(A) If an entity has made an election under 
                subsection (a) and if such election has been 
                terminated, such entity shall not be eligible to make 
                any election under subsection (a) for any taxable year 
                before its 5th taxable year beginning after the 1st 
                taxable year for which such termination is effective, 
                unless the Secretary consents to such election.
                    ``(B) The Secretary shall prescribe regulations 
                applying subparagraph (A) to any successor entity more 
                than one-half of the equity interests in which are 
                owned by the person or persons who owned the 
                predecessor
                 entity at the time the election was terminated.
            ``(7) Equity interests defined.--For purposes of paragraphs 
        (3) and (6) and subsection (n)(2), the term `equity interests' 
        means--
                    ``(A) in the case of a partnership, the capital 
                interests, and
                    ``(B) in the case of an S corporation, the shares 
                of stock of the corporation (whether voting or 
                nonvoting.)
    ``(k) Tiered Structures.--
            ``(1) In general.--Except as provided in paragraph (2)--
                    ``(A) no election may be made under subsection (a) 
                with respect to any entity which is part of a tiered 
                structure, and
                    ``(B) an election under subsection (a) with respect 
                to an entity shall be terminated if such entity becomes 
                part of a tiered structure.
            ``(2) Entities electing same taxable year.--Paragraph (1) 
        shall not apply to any tiered structure which consists only of 
        partnerships or S corporations (or both) all of which have 
        elected the same taxable year.
            ``(3) Regulations.--The Secretary shall prescribe 
        regulations describing the conditions and manner for the 
        application of paragraph (2) and describing the rules for 
        avoiding duplicate inclusions of income and payments of 
        estimated tax with the tiered structure.
    ``(l) High Average Income Entity Defined.--
            ``(1) In general.--For purposes of subsection (c)(4)(B) 
        (providing an applicable rate of 39.6 percent for certain 
        entities), the term ``high average income entity' means an 
        entity where the average applicable income of the 2 percent 
        owners for the base year is $250,000 or more. The term also 
        includes any partnership, the applicable income of which for 
        the base year is $10,000,000 or more.
            ``(2) 2 percent owners.--For purposes of this subsection, 
        the term `2 percent owner' means--
                    ``(A) in the case of a partnership, any person who 
                owns (or is considered as owning within the meaning of 
                section 318) on any day during the base year more than 
                2 percent of the capital interests of the partnership, 
                and
                    ``(B) in the case of an S corporation, a 2 percent 
                shareholder (as defined in section 1372(b)).
            ``(3) Base year.--For purposes of this subsection--
                    ``(A) In general.--The base year shall be the most 
                recent prior taxable year containing 12 months.
                    ``(B) No base year.--In the case of an entity 
                having no base year, this subsection shall not apply, 
                and the applicable rate for the taxable year shall be 
                34 percent.
    ``(m) Estimated Tax Payment With Election.--
            ``(1) Payment required.--If, by reason of an election under 
        this section, an entity has a short year, the entity shall make 
        an additional payment of estimated tax on or before the due 
        date for such election.
            ``(2) Amount of payment.--The amount of the payment 
        required by paragraph (1) shall be the product of--
                    ``(A) the lesser of--
                            ``(i) the entity's applicable income for 
                        the short year, or
                            ``(ii) 110 percent of the entity's 
                        applicable income for the base period, and
                    ``(B) the applicable rate.
            ``(3) Allowance of credit.--For purposes of section 35, 
        each owner shall be allowed a credit (for the owner's first 
        taxable year ending with or after the close of the entity's 
        short year) equal to the owner's allocable share of the payment 
        required by paragraph (1).
            ``(4) Penalty for underpayment.--
                    ``(A) Treatment as required installment.--For 
                purposes of section 6654A, the payment required by 
                paragraph (1) shall be treated as a required 
                installment the due date for which was the last day for 
                making the election under this section for the taxable 
                year.
                    ``(B) Ending date for underpayment period.--The 
                alternative ending date for the underpayment period 
                provided by subparagraph (B) of section 6654A(d)(1) 
                shall be the first April 15 more than 3 months after 
                the close of the short year.
            ``(5) Definitions.--For purposes of this subsection.--
                    ``(A) Short year.--The term `short year' means a 
                taxable year of less than 12 months.
                    ``(B) Applicable income for short year.--The 
                applicable income for the
                 short year shall be determined in the manner provided 
by subsection (h).
                    ``(C) Applicable income for base period.--The 
                applicable income for the base period shall be--
                            ``(i) the amount of the applicable income 
                        (determined in the manner provided by 
                        subsection (h)) for the entity's most recent 
                        taxable year of 12 months preceding the short 
                        year, multiplied by
                            ``(ii) a fraction the numerator of which is 
                        the number of months in the short year and the 
                        denominator of which is 12.
                    ``(D) Allocable share.--An owner's allocable share 
                of the payment required by paragraph (1) shall be 
                determined in the manner provided by section 35(b).
    ``(n) Losses in Short Taxable Years.--
            ``(1) In general.--If, by reason of an election under this 
        section, an entity has a short taxable year, any net operating 
        loss arising in such short taxable year shall be treated for 
        purposes of this title as arising one-third in such year and 
        one-third in each of the two succeeding taxable years.
            ``(2) Spreading of loss not required for new entities.--
                    ``(A) In general.--Paragraph (1) shall not apply to 
                a new entity (other than a successor entity).
                    ``(B) Successor entity.--For purposes of 
                subparagraph (A), an entity is a successor entity if 
                more than one-half of the equity interests are owned by 
                the person or persons who owned another entity carrying 
                on the same business.
    ``(o) Information Required on Entity Returns.--For authority to 
prescribe by regulations the information required on returns made by 
the entity, see section 6031(a) (for partnerships) and 6037(a) (for S 
corporations).
    ``(p) Alternative Taxable Years.--Nothing in this section shall be 
construed to affect the right to have an alternative taxable year if 
the entity--
            ``(1) establishes a business purpose therefor as provided 
        in section 706 (b)(1)(C) or 1378(b)(2), or
            ``(2) meets the requirements set forth in Revenue Procedure 
        87-32.''.

SEC. 3. FAILURE BY ENTITY TO PAY ESTIMATED TAX.

    Part I of subchapter A of chapter 68 of the Internal Revenue Code 
of 1986 (relating to additions to the tax and additional amounts) is 
amended by inserting after section 6654 the following new section:

``SEC. 6654A. FAILURE BY ELECTING PARTNERSHIP OR S CORPORATION TO PAY 
              ESTIMATED TAX.

    ``(a) Penalty.--
            ``(1) In general.--If any entity to which an election under 
        section 444(a) applies has an underpayment of any quarterly 
        installment required under section 444, such entity shall pay a 
        penalty determined as provided in subsection (b).
            ``(2) Cross references.--
                    ``(A) For assessment, collection, and payment of 
                penalty as tax, see section 6665(a).
                    ``(B) For nonapplication of deficiency procedures 
                to penalty except when no return is filed, see section 
                6665(b).
    ``(b) Determination of Penalty.--The amount of any penalty 
described in subsection (a) for any quarter shall be determined by 
applying--
            ``(1) the underpayment rate established under section 6621,
            ``(2) to the amount of the underpayment, and
            ``(3) for the period of the underpayment.
    ``(c) Amount of Underpayment.--For purposes of subsection (a), the 
amount of the underpayment for any installment shall be the excess of--
            ``(1) the required installment (determined under section 
        444(d)), over
            ``(2) the amount of the installment paid by the entity on 
        or before the due date for the installment.
    ``(d) Period of Underpayment.--
            ``(1) In general.--The period for any portion of an 
        underpayment shall run from the date for the installment to the 
        earlier of--
                    ``(A) the date the entity pays the portion, or
                    ``(B) the first April 15 more than 3 months after 
                the close of the entity's taxable year.
            ``(2) Order of crediting payments.--For purposes of 
        paragraph (1), payments shall be credited against unpaid 
        required installments in the order in which such installments 
        are required to be paid.
    ``(e) Deposits of Estimated Tax are Too Small or Too Large.--
            ``(1) Shortfalls.--If, as of the first April 15 more than 3 
        months after the close of the entity's taxable year, the 
        aggregate deposits made by the entity under section
         444 for such year are less than the aggregate amount of 
allocable shares of estimated tax payments shown on the entity's return 
for such year, such shortfall shall be treated for all purposes of this 
Code as tax under subtitle A owed by the entity which became due on 
such April 15.
            ``(2) Excess deposits.--If, instead of the shortfall 
        described in paragraph (1), there are excess deposits as of 
        such April 15, such excess shall be treated for all purposes of 
        the Code as an overpayment of tax under subtitle A made by the 
        entity on such April 15.
    ``(f) Coordination With Payments By Owners.--
            ``(1) Relief from double payment.--If the entity fails to 
        pay estimated tax under section 444 and thereafter the owner 
        pays the income tax against which such estimated tax was 
        creditable, any shortfall of deposits attributable to such 
        failure to pay estimated tax shall not be collected from the 
        entity.
            ``(2) Coordination with penalty.--Paragraph (1) shall not 
        grant relief from the penalty provided by subsection (a) for 
        any period before the owner pays the related income tax.
    ``(g) Waiver in Certain Cases.--No addition to tax shall be imposed 
under subsection (a) with respect to any underpayment to the extent the 
Secretary determines that the entity meets the exception under section 
6654(e)(3)(A).''

SEC. 4. CREDIT.

    Subchapter C of part IV of subchapter A of chapter 1 of the 
Internal Revenue Code of 1986 (relating to refundable credits), is 
amended by redesignating section 35 as section 36 and by inserting 
after section 34 the following new section:

``SEC. 35. CREDIT FOR ESTIMATED TAX PAID BY PARTNERSHIPS AND S 
              CORPORATIONS.

    ``(a) Allowance of Credit.--
            ``(1) In general.--An owner's allocable share of estimated 
        payments made by an entity shall be allowed to the owner as a 
        credit against the tax imposed by this subtitle.
            ``(2) Year of credit.--The owner's allocable share for any 
        entity's taxable year shall be allowed as a credit for the 
        owner's first taxable year ending with or after the close of 
        the entity's taxable year.
    ``(b) Owner's Share of Tax Payments Proportional To Owner's Share 
of Applicable Income.--
            ``(1) In general.--For purposes of this section, an owner's 
        allocable share of the entity's estimated tax payments for the 
        entity's taxable year shall be an amount which bears the same 
        ratio to such payments as the owner's applicable income for 
        such year bears to the sum of all applicable incomes of owners 
        for such year. For this purpose the applicable income of each 
        owner shall be separately determined in the manner provided by 
        section 444(h).
            ``(2) Quarterly application for annualized income method.--
        If the entity selects the annualized income method for any 
        quarter, paragraph (1) shall be applied on a quarter-by-quarter 
        basis.
            ``(3) Interim closing of books.--Where during any taxable 
        year there is an interim closing of the books of an entity 
        under section 706(d)(1), 1377(a)(2), or any other provision, 
        this subsection shall be applied separately to the segment of 
        the taxable year before the closing and the segment after the 
        closing.''.

SEC. 5. COORDINATION WITH INDIVIDUAL'S LIABILITY TO PAY ESTIMATED TAX.

    (a) Definition of Tax for Purposes of Individual's Liability.--
Paragraph (3) of section 6654(f) of the Internal Revenue Code of 1986 
(relating to computation of tax after application of credits) is 
amended to read as follows:
            ``(3) the credits against tax provided by part IV of 
        subchapter A of chapter 1 (relating to the tax withheld on 
        wages), other than the credits against tax provided by--
                    ``(A) section 31 (relating to taxes withheld on 
                wages), and
                    ``(B) section 35 (relating to estimated tax paid by 
                partnerships and S corporations.''.
    (b) Estimated Tax Paid for Individual By Partnership or S 
Corporation.--Section 6654 of such Code (relating to failure by 
individual to pay estimated income tax) is amended by redesignating 
subsection (m) as subsection (n) and by inserting after subsection (l) 
the following new subsection:
    ``(m) Estimated Tax Paid by Partnership or S Corporation.--
            ``(1) In general.--For purposes of this section, an 
        individual entitled to a credit under section 35 for his or her 
        taxable year shall be treated as having paid on the due date 
        for the estimated tax installment for each quarter of such 
        year--
                    ``(A) except as provided in subparagraph (B), an 
                amount equal to one-fourth of such credit, or
                    ``(B) if the annualized income method described in 
                section 444(g) applies to any quarter in the entity's 
                taxable year, an amount equal to the portion of such 
                credit attributable to the individual's allocable share 
                of the entity's allocable income for the corresponding 
                quarter.
            ``(2) Special rules.--
                    ``(A) Credit equals amount shown on entity's 
                return.--For purposes of this section, an individual's 
                section 35 credit is the amount shown for such 
                individual on the entity's return for its taxable year 
                under section 6031 or 6037, as the case may be.
                    ``(B) Corresponding quarters.--For purposes of 
                paragraph (1)(B), the individual's first quarter shall 
                correspond to the entity's first quarter, the second to 
                the second, etc.''.

SEC. 6. COORDINATION OF OLD AND NEW SECTION 444.

    (a) No New Elections Under Old Section 444 for Partnerships and S 
Corporations.--Subsection (b) of section 445 of such Code (as 
redesignated by section 1 of this Act) is amended by adding at the end 
thereof the following new paragraph:
            ``(5) No new elections for partnerships and s 
        corporations.--No election under subsection (a) may be made by 
        a partnership or S corporation if the entity's first taxable 
        year of 12 months under such election would begin after the 
        date of the enactment of new section 444.''.
    (b) Partnerships and S Corporations May Elect Under New Section 
444.--Such section 445 is amended by redesignating subsection (g) as 
subsection (h) and by inserting after subsection (f) the following new 
subsection:
    ``(g) Partnerships and S Corporations May Elect Under New Section 
444.--
            ``(1) In general.--A partnership or S corporation to which 
        an election under this section applies may make an election 
        under section 444 at the time and in the manner provided by 
        section 444(j).
            ``(2) Effect of election.--An election described in 
        paragraph (1) shall terminate the election of the entity under 
        this section and entitle it to a credit or refund with respect 
        to the required payment under section 7519. The entity shall 
        make the selection between the credit and the refund at the 
        time it makes its election under section 444.
            ``(3) Credit.--If the entity selects a credit, it shall be 
        treated as having paid under section 444, for its first taxable 
        year of 12 months under the section 444 election, an amount of 
        estimated tax equal to its net required payment balance (within 
        the meaning of section 7519(e)(4)).
            ``(4) Refund.--If the entity selects a refund, it shall be 
        entitled to a refund of such net required payment balance at 
        the time provided in section 7519(c)(3).''.

SEC. 7. TECHNICAL AMENDMENTS.

    (a) Rules for Assessing the Penalty Under Section 6654A.--Section 
6665(b) of such Code (relating to procedures for assessing certain 
additions to tax) is amended--
          (1) by striking ``6654,'' and inserting ``6654, 6654A,'', and
          (2) by striking ``6654 or'' and inserting ``6654, 6654A, 
        or''.
    (b) Reasonable Cause Exception Allowed for Penalty Under Section 
7519.--Effective with respect to taxable years beginning after December 
31, 1986, the first sentence of section 7519(f)(4)(A) of such Code 
(relating to failure to make required payments) is amended by inserting 
``unless it is shown that such failure is due to reasonable cause and 
not to willful neglect,'' after ``any amount required by this 
section''.
    (c) Interest on Late Refunds Under Section 7519.--Effective with 
respect to refunds under section 7519 of such Code paid after the date 
of the enactment of this Act, section 7519(f)(3) of such Code is 
amended by striking ``no interest shall be allowed with respect to any 
refund of a payment under this section'' and inserting ``interest shall 
be allowed with respect to any refund of a payment under this section 
for any period before the payable date for such refund determined under 
subsection (c)(3)''.
    (d) Special Basis Ordering Rules for S Corporations.--Subsection 
(e) of section 1368 of such Code (relating to definitions and special 
rules for distribution of S corporations) is amended by adding at the 
end thereof the following new paragraph:
            ``(4) Credits under section 35.--In the case of any deemed 
        distribution attributable to a credit under section 35, under 
        regulations prescribed by the Secretary--
                    ``(A) the adjusted basis of the stock shall be 
                determined with regard to the adjustments in section 
                1367(a)(1), and
                    ``(B) the amount in the accumulated adjustments 
                account shall be determined without regard to any net 
                operating loss for the taxable year.''.

SEC. 8 CLERICAL AMENDMENTS.

    (a) Section 35.--The table of sections for subpart C of part IV of 
subchapter A of chapter 1 of the Internal Revenue Code of 1986 is 
amended by striking the item relating to section 35 and inserting:

``Sec. 35. Credit for estimated tax paid by partnerships and S 
                            corporations.
``Sec. 36. Overpayments of tax.''.
    (b) Section 444.--The table of sections for part I of subchapter E 
of chapter 1 of such Code is amended by striking the item relating to 
section 444 and inserting:

``Sec. 444. Partnerships and S corporations may elect any taxable year.
``Sec. 445. Election of taxable year other than required taxable 
                            year.''.
    (c) References to Old Section 444.--Sections 7519 and 280H of such 
Code are amended by striking ``444'' each place it appears and 
inserting ``445''.
    (d) Section 6654A.--The table of sections for part I of subchapter 
A of chapter 68 of such Code is amended by inserting after the item 
relating to section 6654 the following new item:

``Sec. 6654A. Failure by electing partnership or S corporation to pay 
                            estimated tax.''.
SEC. 9 EFFECTIVE DATE.

    Except as provided in subsections (b) and (c) or section 6, the 
amendments made by this Act shall apply to taxable years beginning 
after December 31, 1995.
                                 <all>