1.Short title; reference; table
of contents
(a)This Act may be cited
as the S Corporation Reform Act of
2006
.
(b)Except as otherwise
expressly provided, whenever in this Act an amendment or repeal is expressed in
terms of an amendment to, or repeal of, a section or other provision, the
reference shall be considered to be made to a section or other provision of the
Internal Revenue Code of 1986.
(c)The table of contents for this Act is as follows:
Sec. 1. Short title; reference; table of contents.
TITLE I—Eligible shareholders of an s corporation
Sec. 101. Nonresident aliens allowed to be
shareholders.
Sec. 102. Expansion of S corporation eligible shareholders to
include IRAS.
TITLE II—Qualification and eligibility requirements of s
corporations
Sec. 201. Issuance of preferred stock permitted.
Sec. 202. Safe harbor expanded to include convertible
debt.
Sec. 203. Repeal of excessive passive investment income as a
termination event.
Sec. 204. Modifications to passive income rules.
Sec. 205. Adjustment to basis of s corporation stock for
certain charitable contributions.
TITLE III—Treatment of s corporation shareholders
Sec. 301. Treatment of losses to shareholders.
Sec. 302. Deductibility of interest expense incurred by an
electing small business trust to acquire S corporation stock.
Sec. 303. Back to back loans as indebtedness.
TITLE IV—Expansion of s corporation eligibility for
banks
Sec. 401. Treatment of qualifying director shares.
Sec. 402. Recapture of bad debt reserves.
TITLE V—Qualified subchapter S
subsidiaries
Sec. 501. Treatment of the sale of interest in a qualified
subchapter S subsidiary.
TITLE VI—Additional provisions
Sec. 601. Elimination of all earnings and profits attributable
to pre-1983 years.
Sec. 602. Repeal of LIFO recapture tax.
Sec. 603. Expansion of post-termination transition
period.
Sec. 604. Reduction in tax rate on excess net passive
income.
Sec. 605. Increase in cap on qualified small issue
bonds.
Sec. 606. Special rules of application.
<enum>I</enum><header>Eligible
shareholders of an s corporation</header>
<section id="IDA02C0842B1C14F2F00496E826D64E0CF"><enum>101.</enum><header>Nonresident
aliens allowed to be shareholders</header>
<subsection id="ID6AA45DD8A5DD4A4F937B435054F93981"><enum>(a)</enum><header>Nonresident
aliens allowed to be shareholders</header>
<paragraph id="IDA3B499F95A394AA6A2CCB39E982F7908"><enum>(1)</enum><header>In
general</header><text>Paragraph (1) of section 1361(b) (defining small business
corporation) is amended—</text>
<subparagraph id="ID39EE2F7FEFB64E3E96A8F08DFC00AABB"><enum>(A)</enum><text>by adding
<quote>and</quote> at the end of subparagraph (B),</text>
</subparagraph><subparagraph id="IDE589D8AC1F964F649868547034C11D07"><enum>(B)</enum><text>by striking
subparagraph (C), and</text>
</subparagraph><subparagraph id="IDBE14021954C44E5C8116D9E2D77B4855"><enum>(C)</enum><text>by redesignating
subparagraph (D) as subparagraph (C).</text>
</subparagraph></paragraph><paragraph id="IDE89DEEE389AD4CF3B200080970D7C55B"><enum>(2)</enum><header>Conforming
amendments</header>
<subparagraph id="idD8EFD0F6E62F4B0BA7CDC6CA56B4772A"><enum>(A)</enum><text>Paragraph (4) and
(5)(A) of section 1361(c) (relating to special rules for applying subsection
(b)) are each amended by striking <quote>subsection (b)(1)(D)</quote> and
inserting <quote>subsection (b)(1)(C)</quote>.</text>
</subparagraph><subparagraph id="id5A8E9408ACF9430FA6D94C391335AEBF"><enum>(B)</enum><text display-inline="yes-display-inline">Clause (i) of section 280G(b)(5)(A)
(relating to general rule for exemption for small business corporations, etc.)
is amended by striking <quote>but without regard to paragraph (1)(C)
thereof</quote>.</text>
</subparagraph></paragraph></subsection><subsection id="IDAF50CEED2AC04D99A16C4774FA507E43"><enum>(b)</enum><header>Nonresident
alien shareholder treated as engaged in trade or business within United
States</header>
<paragraph id="ID73C4B7D646D24380A4BA2171BD6D852D"><enum>(1)</enum><header>In
general</header><text>Section 875 is amended—</text>
<subparagraph id="ID37279F78AEB84C7DA05BF5892F8243F9"><enum>(A)</enum><text>by striking
<quote>and</quote> at the end of paragraph (1),</text>
</subparagraph><subparagraph id="ID0633663A98F7404AA374138C76FA4B79"><enum>(B)</enum><text>by striking the
period at the end of paragraph (2) and inserting <quote>, and</quote>,
and</text>
</subparagraph><subparagraph id="ID4C6C5F75058C4BBD8F5F4B00E6FC972D"><enum>(C)</enum><text>by adding at the
end the following new paragraph:</text>
<quoted-block id="ID41981F07514F44A1BB4CE6F2FD08C703">
<paragraph id="ID26BA8653FD2B4C1C00782EFFD3DA7B00"><enum>(3)</enum><text>a nonresident
alien individual shall be considered as being engaged in a trade or business
within the United States if the S corporation of which such individual is a
shareholder is so
engaged.</text>
</paragraph><after-quoted-block>.</after-quoted-block></quoted-block>
</subparagraph></paragraph><paragraph display-inline="no-display-inline" id="id2043C09C943D4CCDBAF8254A70F1776D"><enum>(2)</enum><header>Pro rata share
of S corporation income</header><text display-inline="yes-display-inline">The
last sentence of section 1441(b) (relating to income items) is amended to read
as follows: <quote>In the case of a nonresident alien individual who is a
member of a domestic partnership or a shareholder of an S corporation, the
items of income referred to in subsection (a) shall be treated as referring to
items specified in this subsection included in his distributive share of the
income of such partnership or in his pro rata share of the income of such S
corporation.</quote>.</text>
</paragraph><paragraph id="IDA4D9CADDDD62432DAE5F835697213C2F"><enum>(3)</enum><header>Application of
withholding tax on nonresident alien shareholders</header><text>Section 1446
(relating to withholding tax on foreign partners’ share of effectively
connected income) is amended by redesignating subsection (f) as subsection (g)
and by inserting after subsection (e) the following new subsection:</text>
<quoted-block id="ID57E5D339C53147DFA959128CFEA74745">
<subsection id="ID77B8E2F8859D499683E9B360C3AAE9CA"><enum>(f)</enum><header>S corporation
treated as partnership, etc</header><text>For purposes of this section—</text>
<paragraph id="ID250EAFC5D8B74077906C8CA0A1200800"><enum>(1)</enum><text>an S corporation
shall be treated as a partnership,</text>
</paragraph><paragraph id="ID1969CC2981BD45609080377F7C72BB07"><enum>(2)</enum><text>the shareholders
of such corporation shall be treated as partners of such partnership,</text>
</paragraph><paragraph id="ID97D93FD67ED94ECCB2556761C8CA57A1"><enum>(3)</enum><text>any reference to
section 704 shall be treated as a reference to section 1366, and</text>
</paragraph><paragraph id="ID368B36AEA85E4F8885EB319C7C40A8DB"><enum>(4)</enum><text>no withholding
tax under subsection (a) shall be required in the case of any income realized
by such corporation and allocable to a shareholder which is an electing small
business trust (as defined in section
1361(e)).</text>
</paragraph></subsection><after-quoted-block>.</after-quoted-block></quoted-block>
</paragraph><paragraph id="IDF5DA9E811AED45999C80606EB56EEBD7"><enum>(4)</enum><header>Conforming
amendments</header>
<subparagraph id="ID08088E6546EB445CB33B2DE4D3B5E67D"><enum>(A)</enum><text>The heading of
section 875 is amended to read as follows:</text>
<quoted-block id="ID741AEBD2976A4FF4A2E9D623DB29108D">
<section id="ID8EDB018B6A7849ECBB645F21008BCFA3"><enum>875.</enum><header>Partnerships;
beneficiaries of estates and trusts; s
corporations</header>
</section><after-quoted-block>.</after-quoted-block></quoted-block>
</subparagraph><subparagraph id="ID06A7DA6CE18E4001B4342F5F06603FF8"><enum>(B)</enum><text>The heading of
section 1446 is amended to read as follows:</text>
<quoted-block id="IDD500D1B0E33A425BBD6C64AEE6218F56">
<section id="ID4DF7C5E49B294840B9D0E0558895F560"><enum>1446.</enum><header>Withholding
tax on foreign partners’ and s corporation shareholders’ share of effectively
connected
income</header>
</section><after-quoted-block>.</after-quoted-block></quoted-block>
</subparagraph></paragraph><paragraph id="ID506D9C8CEF244BB1BB8FC9501678B1BB"><enum>(5)</enum><header>Clerical
amendments</header>
<subparagraph id="ID9EB58E75E8E849FF863C9540E55DB28F"><enum>(A)</enum><text>The item relating
to section 875 in the table of sections for subpart A of part II of subchapter
N of chapter 1 is amended to read as follows:</text>
<quoted-block id="IDA7A2818CC51E4B36834F2EF0B08B2D7D">
<toc regeneration="no-regeneration">
<toc-entry level="section">Sec. 875. Partnerships; beneficiaries of
estates and trusts; S
corporations.</toc-entry>
</toc>
<after-quoted-block>.</after-quoted-block></quoted-block>
</subparagraph><subparagraph id="IDF32BD389ADC64FAE8539DBEB62A15633"><enum>(B)</enum><text>The item relating
to section 1446 in the table of sections for subchapter A of chapter 3 is
amended to read as follows:</text>
<quoted-block id="ID8DE60A84F2BF46E29F26A282FE854CEB">
<toc regeneration="no-regeneration">
<toc-entry level="section">Sec. 1446 Withholding tax on foreign
partners’ and S corporation shareholders’ share of effectively connected
income.</toc-entry>
</toc>
<after-quoted-block>.</after-quoted-block></quoted-block>
</subparagraph><subparagraph id="ID0EFC6EF300774844BB921B5E366E52A8"><enum>(C)</enum><header>Permanent
Establishment of Partners and S Corporation Shareholders</header><text>Section
894 (relating to income affected by treaty) is amended by redesignating
subsection (c) as subsection (d) and by inserting after subsection (b) the
following new subsection:</text>
<quoted-block id="ID12EFB52394AB47868BDBF54F0032761E">
<subsection id="ID30B89EC8D91143E2AF67B042A208A655"><enum>(c)</enum><header>Permanent
Establishment of Partners and S Corporation Shareholders</header><text>If a
partnership or S corporation has a permanent establishment in the United States
(within the meaning of a treaty to which the United States is a party) at any
time during a taxable year of such entity, a nonresident alien individual or
foreign corporation which is a partner in such partnership, or a nonresident
alien individual who is a shareholder in such S corporation, shall be treated
as having a permanent establishment in the United States for purposes of such
treaty.</text>
</subsection><after-quoted-block>.</after-quoted-block></quoted-block>
</subparagraph></paragraph></subsection><subsection id="IDBEFBA0B9E17F415095D49DCCDB69B08D"><enum>(c)</enum><header>Application of
other withholding tax rules on nonresident alien shareholders</header>
<paragraph id="IDBEDB6E1E84D94555B572026B9444B9B6"><enum>(1)</enum><header>Section
<enum-in-header>1441</enum-in-header></header><text>Section 1441 (relating to
withholding of tax on nonresident aliens) is amended by redesignating
subsection (g) as subsection (h) and by inserting after subsection (f) the
following new subsection:</text>
<quoted-block id="ID782233E789274DF28D9D57DE070096AC">
<subsection id="IDBF0B688194D741F1BAC091195BEFAD9B"><enum>(g)</enum><header>S corporation
treated as partnership, etc</header><text>For purposes of this section—</text>
<paragraph id="ID6C07A7059AA34CA5A7EF00EBF37EDCB3"><enum>(1)</enum><text>an S corporation
shall be treated as a partnership,</text>
</paragraph><paragraph id="IDC2E7D871A67749469FFAAA3237DEFA35"><enum>(2)</enum><text>the shareholders
of such corporation shall be treated as partners of such partnership,
and</text>
</paragraph><paragraph id="IDD9EB41B78D384B74B1B1FD1DE1B7F666"><enum>(3)</enum><text>no deduction or
withholding under subsection (a) shall be required in the case of any item of
income realized by such corporation and allocable to a shareholder which is an
electing small business trust (as defined in section
1361(e)).</text>
</paragraph></subsection><after-quoted-block>.</after-quoted-block></quoted-block>
</paragraph><paragraph id="ID449DFF65B2D54267B7042239A04582E5"><enum>(2)</enum><header>Section
<enum-in-header>1445</enum-in-header></header><text>Section 1445(e) (relating
to special rules relating to distributions, etc., by corporations,
partnerships, trusts, or estates) is amended by redesignating paragraph (6) as
paragraph (7) and by inserting after paragraph (5) the following new
paragraph:</text>
<quoted-block id="ID82EDDFDE6ED341A6B943B2C836E8114D">
<paragraph id="ID224460E24276448CBDCD6EF3009C5326"><enum>(6)</enum><header>S corporation
treated as partnership, etc</header><text>For purposes of this section—</text>
<subparagraph id="IDBDC33AB0C865444289CE9FEBAD47D9B9"><enum>(A)</enum><text>an S corporation
shall be treated as a partnership, and</text>
</subparagraph><subparagraph id="ID66248445862B47EA9438D1BAB37C2E24"><enum>(B)</enum><text>the shareholders
of such corporation shall be treated as partners of such partnership,
and</text>
</subparagraph><subparagraph id="ID7939FB88B4524CC08488C1407FAA9854"><enum>(C)</enum><text>no deduction or
withholding under subsection (a) shall be required in the case of any gain
realized by such corporation and allocable to a shareholder which is an
electing small business trust (as defined in section
1361(e)).</text>
</subparagraph></paragraph><after-quoted-block>.</after-quoted-block></quoted-block>
</paragraph></subsection><subsection id="idC88D90DB8EE8485492B42DFFCE28F78A"><enum>(d)</enum><header>Additional
conforming amendments</header>
<paragraph id="id442442CDC1844782A71190F3B0E6E8A6"><enum>(1)</enum><text>Section
1361(c)(2)(A)(i) is amended by striking <quote>who is a citizen or resident of
the United States</quote>.</text>
</paragraph><paragraph id="idCBB704737E104B9BAD24CF7DB2AB381D"><enum>(2)</enum><text>Section
1361(d)(3)(B) is amended by striking <quote>who is a citizen or resident of the
United States</quote>.</text>
</paragraph><paragraph commented="no" display-inline="no-display-inline" id="idB11E6DF579AF4FCAA1BAA28D8E57AAE1"><enum>(3)</enum><text>Section
1361(e)(2) is amended by inserting <quote>(including a nonresident
alien)</quote> after <quote>person</quote> the first place it appears.</text>
</paragraph></subsection><subsection id="ID20F57940EA65457EAEDDDC0060E39F2E"><enum>(e)</enum><header>Effective
date</header><text>The amendments made by this section shall apply to taxable
years beginning after December 31, 2006.</text>
</subsection></section><section id="idC377A595FE864DB6A863F01B0FCEDF3D"><enum>102.</enum><header>Expansion of S
corporation eligible shareholders to include IRAS</header>
<subsection id="idB37CB52D90BC464BA7D18A05E7150583"><enum>(a)</enum><header>In
general</header><text>Clause (vi) of section 1361(c)(2)(A) (relating to certain
trusts permitted as shareholders) is amended to read as follows:</text>
<quoted-block id="idFF2405C578A043039ADFC3F8DABC6F6E" style="OLC">
<clause id="id68646BA220F14E21904021A0475F2431"><enum>(vi)</enum><text>A trust which
constitutes an individual retirement account under section 408(a), including
one designated as a Roth IRA under section
408A.</text>
</clause><after-quoted-block>.</after-quoted-block></quoted-block>
</subsection><subsection id="id3E73C8EF612249189519E4ED3D153CD1"><enum>(b)</enum><header>Sale of stock
in IRA relating to S corporation election exempt from prohibited transaction
rules</header><text>Paragraph (16) of section 4975(d) (relating to exemptions)
is amended to read as follows:</text>
<quoted-block id="id3D375CEE524F49B3B9D2F0F04DE8A697" style="OLC">
<paragraph id="idEE2F826807784E998542A74AF42AC681"><enum>(16)</enum><text>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</text>
<subparagraph id="id09A2BBC9F0F242DCB86FA1BD8DD96740"><enum>(A)</enum><text>such sale is
pursuant to an election under section 1362(a) by the issuer of such
stock,</text>
</subparagraph><subparagraph id="id52D44890DDE246A7AB9456D920F4DF56"><enum>(B)</enum><text>such sale is for
fair market value at the time of sale (as established by an independent
appraiser) and the terms of the sale are otherwise at least as favorable to
such trust as the terms that would apply on a sale to an unrelated
party,</text>
</subparagraph><subparagraph id="idBA88685016B34A75BBED35A5082C6093"><enum>(C)</enum><text>such trust does
not pay any commissions, costs, or other expenses in connection with the sale,
and</text>
</subparagraph><subparagraph id="id60B3FBB80BF941A4A923174192D6CDF6"><enum>(D)</enum><text>the stock is sold
in a single transaction for cash not later than 120 days after the S
corporation election is
made.</text>
</subparagraph></paragraph><after-quoted-block>.</after-quoted-block></quoted-block>
</subsection><subsection commented="no" display-inline="no-display-inline" id="idF1CB331BC9334A8F83BC846DFFE769A1"><enum>(c)</enum><header>Effective
date</header><text>The amendments made by this section shall take effect on the
date of the enactment of this Act.</text>
</subsection></section><enum>II</enum><header>Qualification
and eligibility requirements of s corporations</header>
<section id="ID6A4ABCA89272461FA3F900927B64AA14"><enum>201.</enum><header>Issuance of
preferred stock permitted</header>
<subsection id="IDA9C879FA056045459DF1A0FAF473A0D5"><enum>(a)</enum><header>In
general</header><text>Section 1361 (defining S corporation) is amended by
adding at the end the following new subsection:</text>
<quoted-block id="IDDE49899445CE4A2695FA0450D2B93989">
<subsection id="ID0D5B7F7EE455421DB48CAF648B52F9DB"><enum>(f)</enum><header>Treatment of
qualified preferred stock</header>
<paragraph id="IDEDD0AA70F1D44B78B961098844FA08FB"><enum>(1)</enum><header>In
general</header><text>For purposes of this subchapter—</text>
<subparagraph id="ID70972BE4C1B1435785617049219FA655"><enum>(A)</enum><text>qualified
preferred stock shall not be treated as a second class of stock, and</text>
</subparagraph><subparagraph id="ID3B2808454A644885B79822FAE95B00CE"><enum>(B)</enum><text>no person shall
be treated as a shareholder of the corporation by reason of holding qualified
preferred stock.</text>
</subparagraph></paragraph><paragraph id="ID2E92C89BAF884A83A9C306853CF6D9CF"><enum>(2)</enum><header>Qualified
preferred stock defined</header><text>For purposes of this subsection, the term
<term>qualified preferred stock</term> 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.</text>
</paragraph><paragraph id="IDD13B43E8680144099993D44F52B9B023"><enum>(3)</enum><header>Distributions</header><text>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 expense
in computing taxable income under section 1363(b) in the year such distribution
is
received.</text>
</paragraph></subsection><after-quoted-block>.</after-quoted-block></quoted-block>
</subsection><subsection id="ID7A250BC3E4AD484EA4F84272CF00E0D3"><enum>(b)</enum><header>Conforming
amendments</header>
<paragraph id="IDACA390E5078F43EFBAEB008376B48824"><enum>(1)</enum><text>Paragraph (1) of
section 1361(b) is amended by inserting <quote>, except as provided in
subsection (f),</quote> before <quote>which does not</quote>.</text>
</paragraph><paragraph id="ID0413AF4053F14743973F343135AA07CA"><enum>(2)</enum><text>Subsection (a) of
section 1366 is amended by adding at the end the following new
paragraph:</text>
<quoted-block id="IDB676733EEE8F41EEAB05DD6EC9AD193D">
<paragraph id="ID0679AE65C864463195FB380892802B73"><enum>(3)</enum><header>Allocation with
respect to qualified preferred stock</header><text>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).</text>
</paragraph><after-quoted-block>.</after-quoted-block></quoted-block>
</paragraph><paragraph id="ID3FC6FF1FE8BA40CCBCA512BA86A97398"><enum>(3)</enum><text>So much of clause
(ii) of section 354(a)(2)(C) as precedes subclause (II) is amended to read as
follows:</text>
<quoted-block id="ID9122B575CA0741B4A610777CF9306E4C">
<clause id="ID44A5BAC1B88D487F9235DE4806DDE9B9"><enum>(ii)</enum><header>Recapitalization
of family-owned corporations and s corporations</header>
<subclause id="ID3AFA3ADFD88144CFAE9F844E6C02CD4B"><enum>(I)</enum><header>In
general</header><text>Clause (i) shall not apply in the case of a
recapitalization under section 368(a)(I)(E) of a family-owned corporation or S
corporation.</text>
</subclause></clause><after-quoted-block>.</after-quoted-block></quoted-block>
</paragraph><paragraph id="ID0796FF83B4654C55B0125C19FCD274F4"><enum>(4)</enum><text>Subsection (a) of
section 1373 is amended by striking <quote>and</quote> at the end of paragraph
(1), by striking the period at the end of paragraph (2) and inserting <quote>,
and</quote>, and by adding at the end the following new paragraph:</text>
<quoted-block id="ID8706CAC1689942F1A46F4C9D004952D6">
<paragraph id="ID8BB02E1B844E4715B3D5D7ECD02E8142"><enum>(3)</enum><text>no amount of an
expense deductible under this subchapter by reason of section 1361(f)(3) shall
be apportioned or allocated to such
income.</text>
</paragraph><after-quoted-block>.</after-quoted-block></quoted-block>
</paragraph></subsection><subsection id="IDCBA3E998852943448F1FC5F77D94BA7D"><enum>(c)</enum><header>Effective
date</header><text>The amendments made by this section shall apply to taxable
years beginning after December 31, 2006.</text>
</subsection></section><section id="ID4D6675B873C64C94A8136FDB505E74F7"><enum>202.</enum><header>Safe harbor
expanded to include convertible debt</header>
<subsection id="ID5B70C8ECFCC84A13B30580C9F000A257"><enum>(a)</enum><header>In
general</header><text>Subparagraph (B) of section 1361(c)(5) (defining straight
debt) is amended by striking clauses (ii) and (iii) and inserting the following
new clauses:</text>
<quoted-block id="IDBFDD39463FDC4D33836318ABF12CEF52">
<clause id="ID7C44CD53105D46C1BFAAD09BA772B5FA"><enum>(ii)</enum><text>in any case in
which the terms of such promise include a provision under which the obligation
to pay may be converted (directly or indirectly) into stock of the corporation,
such terms, taken as a whole, are substantially the same as the terms which
could have been obtained on the effective date of the promise from a person
which is not a related person (within the meaning of section 465(b)(3)(C)) to
the S corporation or its shareholders, and</text>
</clause><clause id="ID95F62EA07BC6430489753F46D7D1A820"><enum>(iii)</enum><text>the creditor
is—</text>
<subclause id="ID9DD85D16E55D4C15BDE4BE6F685F4843"><enum>(I)</enum><text>an
individual,</text>
</subclause><subclause id="ID08B918479C814CD1A7C0D0BE61D7A3B4"><enum>(II)</enum><text>an
estate,</text>
</subclause><subclause id="ID32243158EF054DA0BC5D98CE6636E2FA"><enum>(III)</enum><text>a trust
described in paragraph (2),</text>
</subclause><subclause id="IDDE519E1E489541739F5833167582C9C8"><enum>(IV)</enum><text>an exempt
organization described in paragraph (6), or</text>
</subclause><subclause id="IDE4CAB258571848E98D1F8597AF8D0043"><enum>(V)</enum><text>a person which is
actively and regularly engaged in the business of lending
money.</text>
</subclause></clause><after-quoted-block>.</after-quoted-block></quoted-block>
</subsection><subsection id="ID7BFDD70DD38048E6A190F557EA85D4D2"><enum>(b)</enum><header>Effective
date</header><text>The amendment made by this section shall apply to taxable
years beginning after December 31, 2006.</text>
</subsection></section><section id="IDF49426A5649C4C5A8489034DB2A5D6C9"><enum>203.</enum><header>Repeal of
excessive passive investment income as a termination event</header>
<subsection id="ID366A470C20174B728EB0C4001556346C"><enum>(a)</enum><header>In
general</header><text>Section 1362(d) (relating to termination) is amended by
striking paragraph (3).</text>
</subsection><subsection id="ID3D92EA10C6E041F19CFD776305AA47BE"><enum>(b)</enum><header>Conforming
amendments</header>
<paragraph id="ID835537E6F710440F884990B657CAF7C6"><enum>(1)</enum><text>Section
1362(f)(1) is amended by striking <quote>or (3)</quote>.</text>
</paragraph><paragraph id="IDF41A7C30CEC54E159D84DE257BD3EEF2"><enum>(2)</enum><text>Clause (i) of
section 1042(c)(4)(A) is amended by striking <quote>section
1362(d)(3)(C)</quote> and inserting <quote>section 1375(b)(3)</quote>.</text>
</paragraph></subsection><subsection id="IDBFF5B65F6BD74749A75822BF3E4201B5"><enum>(c)</enum><header>Effective
date</header><text>The amendments made by this section shall apply to taxable
years beginning after December 31, 2006.</text>
</subsection></section><section id="ID5F4A66A93C834964AC7D905D1BB378FA"><enum>204.</enum><header>Modifications
to passive income rules</header>
<subsection id="IDD93921D6DAB04E318D2E3DD9E8A5C5C3"><enum>(a)</enum><header>Increased
limit</header>
<paragraph id="IDF0A7691A76F64CC2A3B372A6FBC1355E"><enum>(1)</enum><header>In
general</header><text>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 <quote>25 percent</quote> and inserting <quote>60
percent</quote>.</text>
</paragraph><paragraph id="ID18B12E2215A64B5D85CA6E6000A399D2"><enum>(2)</enum><header>Conforming
amendments</header>
<subparagraph id="IDFB57829C1EB74B66AB121C64D5E55682"><enum>(A)</enum><text>Subparagraph (J)
of section 26(b)(2) is amended by striking <quote>25 percent</quote> and
inserting <quote>60 percent</quote>.</text>
</subparagraph><subparagraph id="ID48A79B8D39B04C129259A0E6033CD2BC"><enum>(B)</enum><text>Clause (i) of
section 1375(b)(1)(A) is amended by striking <quote>25 percent</quote> and
inserting <quote>60 percent</quote>.</text>
</subparagraph><subparagraph id="IDE23EEAB97E4C4AF18835A63DA12000FC"><enum>(C)</enum><text>The heading for
section 1375 is amended by striking <quote><header-in-text>25
percent</header-in-text></quote> and inserting <quote><header-in-text>60
percent</header-in-text></quote>.</text>
</subparagraph><subparagraph id="ID32EADB3AB6F0488091441B8CF18336C7"><enum>(D)</enum><text>The table of
sections for part III of subchapter S of chapter 1 is amended by striking
<quote>25 percent</quote> in the item relating to section 1375 and inserting
<quote>60 percent</quote>.</text>
</subparagraph></paragraph></subsection><subsection id="IDF1FC78222C8D45D996D84600C8D9368E"><enum>(b)</enum><header>Repeal of
passive income capital gain category</header>
<paragraph id="IDAAB924BDA24841A7B800C225D4D2519B"><enum>(1)</enum><header>In
general</header><text>Subsection (b) of section 1375 (relating to tax imposed
when passive investment income of corporation having accumulated earnings and
profits exceeds 60 percent of gross receipts), as amended by subsection (a), is
amended by striking paragraphs (3) and (4) and inserting the following new
paragraph:</text>
<quoted-block id="IDC72BD34746F146B5A744B796697C2C00">
<paragraph id="ID1F60DC42025A4658009D05C94EBB6FD9"><enum>(3)</enum><header>Passive
investment income defined</header>
<subparagraph id="ID2F6A5DE71B7B41CA847789E3FDF8AD00"><enum>(A)</enum><header>In
general</header><text>Except as otherwise provided in this paragraph, the term
<term>passive investment income</term> means gross receipts derived from
royalties, rents, dividends, interest, and annuities.</text>
</subparagraph><subparagraph id="ID027B62F929B14F9D98B2C8C40930AEF8"><enum>(B)</enum><header>Exception for
interest on notes from sales of inventory</header><text>The term <term>passive
investment income</term> 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).</text>
</subparagraph><subparagraph id="ID3CEABA43579943DF92773FC2CB93506D"><enum>(C)</enum><header>Treatment of
certain lending or finance companies</header><text>If the S corporation meets
the requirements of section 542(c)(6) for the taxable year, the term
<term>passive investment income</term> 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)).</text>
</subparagraph><subparagraph id="ID8A9960F72A07401291E700BDBDF159BB"><enum>(D)</enum><header>Treatment of
certain dividends</header><text>If an S corporation holds stock in a C
corporation meeting the requirements of section 1504(a)(2), the term
<term>passive investment income</term> 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.</text>
</subparagraph><subparagraph id="ID10486C39875E4792006549281D5B4205"><enum>(E)</enum><header>Coordination
with Section 1374</header><text>The amount of passive investment income shall
be determined by not taking into account any recognized built-in gain or loss
of the S corporation for any taxable year in the recognition period. Terms used
in the preceding sentence shall have the same respective meaning as when used
in section
1374.</text>
</subparagraph></paragraph><after-quoted-block>.</after-quoted-block></quoted-block>
</paragraph><paragraph id="ID4ACAC36044E24042A0F2BC2E63F7C054"><enum>(2)</enum><header>Conforming
amendments</header><text>Section 1375(d) is amended by striking
<quote>subchapter C</quote> both places it appears and inserting
<quote>accumulated</quote>.</text>
</paragraph></subsection><subsection id="IDFD41068D5F8042BA9389632D36FF68FF"><enum>(c)</enum><header>Effective
date</header><text>The amendments made by this section shall apply to taxable
years beginning after December 31, 2006.</text>
</subsection></section><section id="IDEB6F2BC06CB64A5AB0490039AA601FAF"><enum>205.</enum><header>Adjustment to
basis of s corporation stock for certain charitable contributions</header>
<subsection id="ID117AC04BED664F7BB4BFA2D2443B6926"><enum>(a)</enum><header>In
general</header><text>Paragraph (1) of section 1367(a) (relating to adjustments
to basis of stock of shareholders, etc.) is amended by striking
<quote>and</quote> at the end of subparagraph (B), by striking the period at
the end of subparagraph (C) and inserting <quote>, and</quote>, and by adding
at the end the following new subparagraph:</text>
<quoted-block id="ID5E156B1936CA4894938430EE4226E368">
<subparagraph id="IDF65E8B32FCB242899387776919D96B00"><enum>(D)</enum><text>the excess of the
amount of the shareholder’s proportionate share of any charitable contribution
made by the S corporation over the shareholder’s proportionate share of the
adjusted basis of the property
contributed.</text>
</subparagraph><after-quoted-block>.</after-quoted-block></quoted-block>
</subsection><subsection id="ID370AE959E9214A6B801564A5BFAC8EF7"><enum>(b)</enum><header>Effective
date</header><text>The amendments made by this section shall apply to taxable
years beginning after December 31, 2006.</text>
</subsection></section><enum>III</enum><header>Treatment of s
corporation shareholders</header>
<section id="ID257364FCA73A4EA78700EBD87B4E44A5"><enum>301.</enum><header>Treatment of
losses to shareholders</header>
<subsection id="ID879932846D534D189B05317400E21BD9"><enum>(a)</enum><header>Liquidations</header><text>Section
331 (relating to gain or loss to shareholders in corporate liquidations) is
amended by redesignating subsection (c) as subsection (d) and by inserting
after subsection (b) the following new subsection:</text>
<quoted-block id="IDA7A31B7DF43140488FFE933070290431">
<subsection id="ID308A3DDE53044F76972E4565AD502B8D"><enum>(c)</enum><header>Loss on
Liquidations of S Corporation</header>
<paragraph id="ID043B83FA6B2542B69C30858C7BD77F63"><enum>(1)</enum><header>In
general</header><text>The portion of any net loss recognized by a shareholder
of an S corporation (as defined in section 1361(a)(1))—</text>
<subparagraph id="IDFBC61C48C9A44F0C89D4F96871213B98"><enum>(A)</enum><text>on amounts
received by such shareholder in a distribution in complete liquidation of such
S corporation, or</text>
</subparagraph><subparagraph id="ID03CD837F2D004D1A8D146391CF1F794C"><enum>(B)</enum><text>on an installment
obligation received by such shareholder with respect to a sale or exchange by
the corporation during the 12-month period beginning on the date a plan of
complete liquidation is adopted if the liquidation is completed during such
12-month period, which does not exceed the ordinary income basis of stock of
such S corporation in the hands of such shareholder shall not be treated as a
loss from the sale or exchange of a capital asset but shall be treated as an
ordinary loss.</text>
</subparagraph></paragraph><paragraph id="ID4086373EE101434A90D76060F26B114E"><enum>(2)</enum><header>Ordinary income
basis</header><text>For purposes of this subsection, the ordinary income basis
of stock of an S corporation in the hands of a shareholder of such S
corporation shall be an amount equal to the portion of such shareholder’s basis
in such stock which is equal to the aggregate increases in such basis under
section 1367(a)(1) resulting from such shareholder’s pro rata share of ordinary
income of such S corporation attributable to the complete
liquidation.</text>
</paragraph></subsection><after-quoted-block>.</after-quoted-block></quoted-block>
</subsection><subsection id="ID0D5EEF4034664E73A9CD6BBC9C141717"><enum>(b)</enum><header>Suspended
passive activity losses</header><text>Paragraph (3) of section 1371(b) is
amended to read as follows:</text>
<quoted-block id="IDD3328924E4DF4E65B5B281C0D8017845">
<paragraph id="IDDFFC03BEA4274EF1AF4F00AB8CF54B17"><enum>(3)</enum><header>Treatment of s
year as elapsed year; passive losses</header><text>Nothing in paragraphs (1)
and (2) shall prevent treating a taxable year for which a corporation is an S
corporation as a taxable year for purposes of determining the number of taxable
years to which an item may be carried back or carried forward nor prevent the
allowance of a passive activity loss deduction to the extent provided by
section
469(g).</text>
</paragraph><after-quoted-block>.</after-quoted-block></quoted-block>
</subsection><subsection id="IDDD533B625B264067913C96AF487FC93E"><enum>(c)</enum><header>Effective
date</header><text>The amendments made by this section shall apply to taxable
years beginning after December 31, 2006.</text>
</subsection></section><section id="ID3257DCB3770647C9A9F04F0004E3DE6E"><enum>302.</enum><header>Deductibility
of interest expense incurred by an electing small business trust to acquire S
corporation stock</header>
<subsection id="IDD715E6CBA22740109ED84C5BB8D9AF1F"><enum>(a)</enum><header>In
general</header><text>Subparagraph (C) of section 641(c)(2) (relating to
modifications) is amended by inserting after clause (iii) the following new
clause:</text>
<quoted-block id="ID495377F31CD94742AB1C9C6B51F337F4">
<clause id="ID991F583A9D56493E8E3C9FFE5500B827"><enum>(iv)</enum><text>Any interest
expense incurred to acquire stock in an S
corporation.</text>
</clause><after-quoted-block>.</after-quoted-block></quoted-block>
</subsection><subsection id="ID5E23F52B9024406AAA1896F21133C58F"><enum>(b)</enum><header>Effective
date</header><text>The amendment made by this section shall apply to taxable
years beginning after December 31, 2006.</text>
</subsection></section><section id="IDAAD114F4D2F34751B98788439EC72FA0"><enum>303.</enum><header>Back to back
loans as indebtedness</header>
<subsection id="ID53A8EC4B6FE145B5B6AB352B197033A8"><enum>(a)</enum><header>In
general</header><text>Section 1366(d) (relating to special rules for losses and
deductions) is amended by adding at the end the following new paragraph:</text>
<quoted-block display-inline="no-display-inline" id="id8ED84130574F496398588B0530C195DE" style="OLC">
<paragraph id="idF077827C59024D88938D3DBA843E408F"><enum>(4)</enum><header>Loans included
in indebtedness of an s corporation</header><text>For purposes of subsection
(d), the indebtedness of an S corporation to the shareholder shall include any
loans made or acquired (by purchase, gift, or distribution from another person)
by a shareholder to the S corporation, regardless of whether the funds loaned
by the shareholder to the S corporation were obtained by the shareholder by
means of a recourse loan from another person (whether related or unrelated to
the
shareholder).</text>
</paragraph><after-quoted-block>.</after-quoted-block></quoted-block>
</subsection><subsection id="ID90AE82F774E14829B000EB93B777CD45"><enum>(b)</enum><header>Effective
date</header><text>The amendment made by this section shall apply to taxable
years beginning after December 31, 2006.</text>
</subsection></section><enum>IV</enum><header>Expansion of s
corporation eligibility for banks</header>
<section id="ID7EAB3FA577A345D8AC4EBAA6F1579762"><enum>401.</enum><header>Treatment of
qualifying director shares</header>
<subsection id="ID6820B55A84294BA2BE00CBE302D85697"><enum>(a)</enum><header>In
general</header><text>Section 1361 (defining S corporation), as amended by
section 201(a), is amended by adding at the end the following new
subsection:</text>
<quoted-block id="ID87343F83E67941B38455B59BBA5F0900">
<subsection id="ID4C4A517F75F44F60BBE296752FD9008D"><enum>(g)</enum><header>Treatment of
qualifying director shares</header>
<paragraph id="ID90695A715B0646C7BCFF46BC7056EAF0"><enum>(1)</enum><header>In
general</header><text>For purposes of this subchapter—</text>
<subparagraph id="ID53A1AE22BC1446B9BF9FCDCD4B11F744"><enum>(A)</enum><text>qualifying
director shares shall not be treated as a second class of stock, and</text>
</subparagraph><subparagraph id="IDEF35380EC58747DCA951DBDC0001DE6D"><enum>(B)</enum><text>no person shall
be treated as a shareholder of the corporation by reason of holding qualifying
director shares.</text>
</subparagraph></paragraph><paragraph id="ID98063D57D45B4B009C00B4B55CA807C6"><enum>(2)</enum><header>Qualifying
director shares defined</header><text>For purposes of this subsection, the term
<term>qualifying director shares</term> 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—</text>
<subparagraph id="ID9D29EAE0C1464660894FF4D95E340644"><enum>(A)</enum><text>which are held by
an individual solely by reason of status as a director of such bank or company
or its controlled subsidiary; and</text>
</subparagraph><subparagraph id="IDB19C8B24AB5D445398967492EC5EFCC1"><enum>(B)</enum><text>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.</text>
</subparagraph></paragraph><paragraph id="ID066CA1E64C5241419D61A5EBE9222310"><enum>(3)</enum><header>Distributions</header><text>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 expense
in computing taxable income under section 1363(b) in the year such distribution
is
received.</text>
</paragraph></subsection><after-quoted-block>.</after-quoted-block></quoted-block>
</subsection><subsection id="ID12C8252470BC4116A5E3E5E20098D140"><enum>(b)</enum><header>Conforming
amendments</header>
<paragraph id="ID2D6F8BAB13A349889D32760191797E9E"><enum>(1)</enum><text>Section
1361(b)(1), as amended by section 201(b), is amended by striking
<quote>subsection (f)</quote> and inserting <quote>subsections (f) and
(g)</quote>.</text>
</paragraph><paragraph id="ID0CC52640A415478AA4877F2DC07484AA"><enum>(2)</enum><text>Section 1366(a),
as amended by section 201(b), is amended by adding at the end the following new
paragraph:</text>
<quoted-block id="ID9A265E4D23D84247A702F4009DBA00D9">
<paragraph id="ID13D77E2B1F9B426691E4686590EF4639"><enum>(4)</enum><header>Allocation with
respect to qualifying director shares</header><text>The holders of qualifying
director shares (as defined in section 1361(g)) shall not, with respect to such
shares of stock, be allocated any of the items described in paragraph
(1).</text>
</paragraph><after-quoted-block>.</after-quoted-block></quoted-block>
</paragraph><paragraph id="ID048299AB7DAC4734963F5C94A742C8A3"><enum>(3)</enum><text>Section 1373(a),
as amended by section 201(b), is amended by striking <quote>and</quote> at the
end of paragraph (2), by striking the period at the end of paragraph (3) and
inserting <quote>, and</quote>, and adding at the end the following new
paragraph:</text>
<quoted-block id="ID6F53E5AB356741EFB95F465DCCFD921B">
<paragraph id="IDED9056CA326C43BD8C0909A8385200ED"><enum>(4)</enum><text>no amount of an
expense deductible under this subchapter by reason of section 1361(g)(3) shall
be apportioned or allocated to such
income.</text>
</paragraph><after-quoted-block>.</after-quoted-block></quoted-block>
</paragraph></subsection><subsection id="ID127BE857732D4133AE256F303D932715"><enum>(c)</enum><header>Effective
date</header><text>The amendments made by this section shall apply to taxable
years beginning after December 31, 1996.</text>
</subsection></section><section id="IDB4D021A7878D436600AD78F974EEA95C"><enum>402.</enum><header>Recapture of
bad debt reserves</header><text display-inline="no-display-inline">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 December 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.</text>
</section><enum>V</enum><header>Qualified
subchapter <enum-in-header>S</enum-in-header> subsidiaries</header>
<section id="ID6536273A03CA4AC7A98B4876EA002375"><enum>501.</enum><header>Treatment of
the sale of interest in a qualified subchapter
<enum-in-header>S</enum-in-header> subsidiary</header>
<subsection id="IDAFD6F1DC614941E5BF071203D1409E00"><enum>(a)</enum><header>In
general</header><text>Section 1361(b)(3) (relating to treatment of certain
wholly owned subsidiaries) is amended by adding at the end the following new
subparagraph:</text>
<quoted-block id="ID7A26D5DEFDC8413EBFD0DAAB6222A248">
<subparagraph id="IDF24263E10B10442D82A8613D4B46AA60"><enum>(F)</enum><header>Special rule on
termination</header><text>The tax treatment of the disposition of the stock of
the qualified subchapter S subsidiary shall be determined as if such
disposition were—</text>
<clause id="ID34FD0130257D454FB72E204F15E818A4"><enum>(i)</enum><text>a
sale of the undivided interest in the subsidiary’s assets based on the
percentage of the stock transferred, and</text>
</clause><clause id="ID06B40A9910CC47D1BA62D28ECC49F84C"><enum>(ii)</enum><text>followed by a
deemed contribution by the S corporation and the transferee in a section 351
transaction.</text>
</clause></subparagraph><after-quoted-block>.</after-quoted-block></quoted-block>
</subsection><subsection id="ID0741FA9442ED44FFA490C11695BA00DB"><enum>(b)</enum><header>Effective
date</header><text>The amendment made by this section shall apply to taxable
years beginning after December 31, 1996.</text>
</subsection></section><enum>VI</enum><header>Additional
provisions</header>
<section id="ID30F3F0F5F3604AE99548DF22541FFA1E"><enum>601.</enum><header>Elimination of
all earnings and profits attributable to pre-1983 years</header>
<subsection id="ID9455ADF5B8774C1CA601C2A0AAC6E84C"><enum>(a)</enum><header>In
general</header><text>Subsection (a) of section 1311 of the Small Business Job
Protection Act of 1996 is amended to read as follows:</text>
<quoted-block id="IDDBB2D59360F44CD3BCD5A0E9C1060027">
<subsection id="ID7E6BFD2D1A874A1AB4C4421F006319B3"><enum>(a)</enum><header>In
general</header><text>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 any
taxable year beginning after December 31, 1982) 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.</text>
</subsection><after-quoted-block>.</after-quoted-block></quoted-block>
</subsection><subsection id="ID3F4998D26AE945A69C1277A3E7689472"><enum>(b)</enum><header>Effective
date</header><text>The amendment made by this section shall apply to taxable
years beginning after December 31, 1996.</text>
</subsection></section><section id="idA30BBE566A89430197DDFC75643C04C4"><enum>602.</enum><header>Repeal of LIFO
recapture tax</header>
<subsection id="idA129A316884E45A3A3ABF254EB0DF92D"><enum>(a)</enum><header>In
general</header><text>Section 1363 (relating to effect on election on
corporations) is amended by striking subsection (d).</text>
</subsection><subsection id="id4DA59898D0E94465B82CFBA2794B70EE"><enum>(b)</enum><header>Effective
date</header><text>The amendment made by this section shall apply to elections
made after the date of the enactment of this Act.</text>
</subsection></section><section id="id4A660A94A9844E8F80439BD180168044"><enum>603.</enum><header>Expansion of
post-termination transition period</header>
<subsection id="id4DC28EB65A5745DF84266EAFE622B399"><enum>(a)</enum><header>In
general</header><text>Clause (ii) of section 1377(b)(1)(A) (defining
post-termination transition period) is amended to read as follows:</text>
<quoted-block display-inline="no-display-inline" id="id8A1A54CCED4C42B9B641BC6490112B5F" style="OLC">
<clause id="id2B88583672D945EA8807E68B2B82D161"><enum>(ii)</enum><text>the date on
which any refund or credit of any overpayment of tax with respect to the return
for such last year as an S corporation is prevented by the operation of any law
or rule of law (including res
judicata),</text>
</clause><after-quoted-block>.</after-quoted-block></quoted-block>
</subsection><subsection id="idBDFE5061190546FAA75280705CB540E4"><enum>(b)</enum><header>Effective
date</header><text>The amendment made by this section shall apply to periods
beginning after the date of the enactment of this Act.</text>
</subsection></section><section id="id83CE8EDF9F5E4086B13D29626756E2DA"><enum>604.</enum><header>Reduction in
tax rate on excess net passive income</header>
<subsection id="id123EA46982DD4DA2AD31213323502749"><enum>(a)</enum><header>In
general</header><text>Section 1375(a) (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 <quote>computed by
multiplying the excess net passive income by the highest rate of tax specified
in section 11(b)</quote> and inserting <quote>15 percent of the excess net
passive income</quote>.</text>
</subsection><subsection id="idFC9DD2C74F7B4362A193437337BD4E37"><enum>(b)</enum><header>Effective
date</header><text>The amendment made by this section shall apply to taxable
years beginning after December 31, 2006.</text>
</subsection></section><section commented="no" display-inline="no-display-inline" id="H1371F24346A5478799DFB7BE986231A0" section-type="subsequent-section"><enum>605.</enum><header>Increase in cap on
qualified small issue bonds</header>
<subsection commented="no" display-inline="no-display-inline" id="HC6D63783D43741E88E914EE2F13C2B9"><enum>(a)</enum><header>In
general</header><text display-inline="yes-display-inline">Section
144(a)(4)(A)(i) (relating to general rule for $10,000,000 limit in certain
cases) is amended by striking <quote>$10,000,000</quote> and inserting
<quote>$10,000,000($30,000,000 in the case of any bank (as defined in section
581) or any depository institution holding company (as defined in section
3(w)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(w)(1)) which is an
S corporation)</quote>.</text>
</subsection><subsection commented="no" display-inline="no-display-inline" id="H23F32E5D8CB84E1A8CC21E227314A627"><enum>(b)</enum><header>Adjustment of
cap for inflation</header><text display-inline="yes-display-inline">Section
144(a) (relating to qualified small issue bond) is amended—</text>
<paragraph commented="no" display-inline="no-display-inline" id="id3A6CD22FDBCE4C229C0410CA52A2036F"><enum>(1)</enum><text display-inline="yes-display-inline">by redesignating paragraph (12) as
paragraph (13); and</text>
</paragraph><paragraph commented="no" display-inline="no-display-inline" id="id53B999F0C7C1499DBE4604FBB8A2149A"><enum>(2)</enum><text display-inline="yes-display-inline">by inserting after paragraph (11) the
following new paragraph:</text>
<quoted-block display-inline="no-display-inline" id="HD09F039959454FA7826152DA00D1F9E9" style="OLC">
<paragraph commented="no" display-inline="no-display-inline" id="HDFBE7A8054D74B399C3FDB835855E3EB"><enum>(12)</enum><header>Inflation
adjustment</header>
<subparagraph commented="no" display-inline="no-display-inline" id="id984EB2AED4134A7A9C2B00D1FF3FE570"><enum>(A)</enum><header>In
general</header><text display-inline="yes-display-inline">In the case of any
calendar year after 2006, the $30,000,000 amount contained in paragraph
(4)(A)(i) shall be increased by an amount equal to—</text>
<clause commented="no" display-inline="no-display-inline" id="H7188EFE550844EB0BEFD51F8EBC32BF0"><enum>(i)</enum><text display-inline="yes-display-inline">such dollar amount, multiplied by</text>
</clause><clause commented="no" display-inline="no-display-inline" id="H145D4B7092CF40E9A9BFDD225E5D6588"><enum>(ii)</enum><text display-inline="yes-display-inline">the cost-of-living adjustment determined
under section 1(f)(3) for such calendar year by substituting <quote>calendar
year 2005</quote> for <quote>calendar year 1992</quote> in subparagraph (B)
thereof.</text>
</clause></subparagraph><subparagraph commented="no" display-inline="no-display-inline" id="id0EBBFD3231C741A5871B5AAD308BF93D"><enum>(B)</enum><header>Rounding</header><text display-inline="yes-display-inline">Any increase under subparagraph (A) which
is not a multiple of $100,000 shall be rounded to the next lowest multiple of
$100,000.</text>
</subparagraph></paragraph><after-quoted-block>.</after-quoted-block></quoted-block>
</paragraph></subsection><subsection commented="no" display-inline="no-display-inline" id="H8A0D5DB7BF8A4AE5BA6CDDF09216DB27"><enum>(c)</enum><header>Effective
date</header><text display-inline="yes-display-inline">The amendments made by
this section shall apply to—</text>
<paragraph commented="no" display-inline="no-display-inline" id="H51CA2BA0FC8C475EB32E66D611A723ED"><enum>(1)</enum><text display-inline="yes-display-inline">obligations issued after the date of the
enactment of this Act; and</text>
</paragraph><paragraph commented="no" display-inline="no-display-inline" id="HC5E51A9171304B22BF61FA004FC03041"><enum>(2)</enum><text display-inline="yes-display-inline">capital expenditures made after such date
with respect to obligations issued on or before such date.</text>
</paragraph></subsection></section><section id="IDD223F79E489143150080C8D973E42355"><enum>606.</enum><header>Special rules
of application</header>
<subsection id="ID6C3B5703AE4B4D85BA7D1C3F9E35D226"><enum>(a)</enum><header>Waiver of
limitations</header><text>If refund or credit of any overpayment of tax
resulting from the application of any amendment made by this Act is prevented
at any time before the close of the 1-year period beginning on the date of the
enactment of this Act by the operation of any law or rule of law (including res
judicata), such refund or credit may nevertheless be made or allowed if claimed
therefor is filed before the close of such period.</text>
</subsection><subsection commented="no" display-inline="no-display-inline" id="ID1BD21559841B496AB967F32B3887E649"><enum>(b)</enum><header>Treatment of
certain elections under prior law</header><text>For purposes of section 1362(g)
of the Internal Revenue Code of 1986 (relating to election after termination),
any termination or revocation under section 1362(d) of such Code (as in effect
on the day before enactment of this Act) shall not be taken into
account.</text>
</subsection></section>