[Congressional Record Volume 141, Number 73 (Thursday, May 4, 1995)]
[Senate]
[Pages S6169-S6181]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS
By Mr. LAUTENBERG (for himself, Mrs. Feinstein, Mr. Simon and Mr.
Levin):
S. 757. A bill to amend title 10, United States Code, to terminate
the Civilian Marksmanship Program; to rescind funding for the National
Board for the Promotion of Rifle Practice; and for other purposes; to
the Committee on Armed Services.
THE CIVILIAN MARKSMANSHIP PROGRAM TERMINATION ACT OF 1995
Mr. LAUTENBERG. Mr. President, this morning I rise to introduce a
bill to terminate a program that I think has long outlived its
usefulness. It is called the Army Civilian Marksmanship Program.
It is no secret that I do not like this program. In fact, I offered
an amendment to terminate it in the last Congress. It got 30 votes. The
arguments then may not have been persuasive. But perhaps recent events
will change that.
Like everyone else, I read the reports that come out about the
terrorist bombing in Oklahoma City. And they are shocked by the scope
of that tragedy. Every day we hear more and more news about confirmed
dead and the fact that the search may in fact have to be abandoned. It
is a tragedy that will live on forever in the minds of our democratic
society and throughout the world.
But in one of these stories, Mr. President, I found information that
members of extremist militia groups in this country may have received
weapons, ammunition, and training at Army facilities under the auspices
of the Civilian Marksmanship Program.
Indeed, Mark Koerneke, the leader of the Michigan-based militia
group, told ABC's ``Prime Time Live'' that he had access to U.S.
military bases in Michigan for the purpose of training through this
program.
We all know that one of the individuals accused of masterminding the
Oklahoma City bombing, Timothy McVeigh, was associated with the
Michigan-based militia group. I do not know, Mr. President, whether
Timothy McVeigh received training and ammunition under the Civilian
Marksmanship Program. But I know it is possible that he did.
A few days ago, Mr. President, I wrote to Secretary Perry and urged
him to conduct an investigation to determine the veracity of the
reports linking members of extremist militia groups to the Civilian
Marksmanship Program. I also called on the Pentagon to immediately
suspend the Civilian Marksmanship Program and propose terminating it in
the long run.
I ask unanimous consent that a copy of the letter I sent to Secretary
Perry, along with a press report related to Mark Koerneke's comments,
be inserted in the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
Exhibit 1
U.S. Senate,
Washington, DC, May 2, 1995.
Hon. William J. Perry,
Secretary of Defense,
The Pentagon,
Washington, DC.
Dear Secretary Perry: Recent press reports indicate that
members of extremist militia groups in this country may have
received weapons, ammunition, and training at Army facilities
under the auspices of the Civilian Marksmanship Program
(CMP). I am writing to urge you to conduct an investigation
to determine the veracity of these reports and to ask that
you provide me with a list of all the clubs that participate
in the CMP program. In the interim, I urge you to immediately
suspend the CMP and propose terminating it in the long run.
As you know, I have long believed the CMP is a low priority
program and is an egregious example of waste in government.
The program promotes rifle training for civilians through a
system of affiliated clubs and other organizations, and
sponsors shooting competitions. As part of these activities,
the program donates, loans, and sells weapons, ammunition and
other shooting supplies.
The program was first established in 1903, at a time when
civilian marksmanship training was believed to be important
for military preparedness. Yet, according to a report by the
General Accounting Office, the program now has limited
military value. As Army officials told the GAO, no Army
requirements exist for civilians trained in marksmanship, and
no system is in place to track program-trained personnel. In
a March 15, 1994 hearing in the Senate Defense Appropriations
Subcommittee, Army Secretary West stated that national
security objectives will be met with or without the CMP.
In essence, the CMP provides a taxpayer subsidy for
recreational shooting. In light of budget deficit we face and
the military needs we ought to address, this simply is not a
justifiable use of scarce resources. After all, defense
dollars are not used to subsidize other sports. They ought
not to be used to subsidize a shooting program which has no
relationship to military needs and requirements.
At a minimum we ought to ensure the CMP is not being used
to train and arm members of extremist militia groups. The
American people have a right to know that their tax dollars
are not being used to train people who pose a threat to law
abiding citizens and to peace and order in this country.
I appreciate your prompt attention to this request.
Sincerely,
Frank P. Lautenberg.
____
U.S. Riflery Program May Aid Militias
(By Colum Lynch)
New York.--Even as the Clinton administration moves to
monitor extremist groups that hate federal agencies, the
government continues to fund a $2.5 million program that may
have provided elements of such groups with low-cost surplus
weapons, free bullets and access to Army training facilities.
Mark Koernke, the shortwave radio broadcaster and leader of
the Michigan Militia group that disdains the federal
government, suggested the embarrassing prospect that the
government was aiding some of its domestic adversaries when
he told ABC's ``Prime Time Live'' Tuesday that he had gained
access to US military bases in Michigan to train through the
92-year-old Civilian Marksmanship Program.
Critics of the federal program, which provides about 1,150
civilian gun clubs around the country with access to military
firing ranges and more than 40 million rounds of free
ammunition, are demanding that the Pentagon immediately
suspend the financing and launch an investigation into
whether the program has provided training facilities and
equipment to Koernke and to antigovernment militia groups.
Investigators also want to probe for possible links to
Oklahoma City bombing suspect Timothy McVeigh, and brothers
James and Terry Nichols, who allegedly helped McVeigh produce
explosives in recent years.
``Our government may be inadvertently arming and training
individuals and groups whose goal is to harm law enforcement
officials and other innocent people,'' said Rep. Carolyn
Maloney, a New York Democrat who has led an unsuccessful two-
year battle in Congress to halt the program.
To be sure, many thousands of law-abiding gun enthusiasts
have used the program over the years to hone their skills
with no other goal than to operate their weapons safely,
effectively and peacefully. In Michigan alone, there are 51
clubs with more than 6,400 members in the riflery program.
Army officials yesterday defended the program as a valuable
public service, particularly useful in training youths to
handle weapons. Still, the Pentagon last year suggested the
program might have outlived its usefulness.
The program was started in 1903. Military officials during
the Spanish-American War were appalled at the ineptitude of
American marksmanship and sought to remedy that by providing
rifle training to civilians in peacetime.
``It was discovered that the majority of Americans who were
recruited to fight in that war couldn't
hit the side of a barn,'' said Martha Rudd, an Army
spokeswoman in Virginia. ``The program has been continued
ever since. And the only way that it can be made to go
away is if Congress makes it go away.''
In addition to providing civilian marksmen with access to
military facilities, the Army also sells up to 6,000 surplus
M-1 rifles annually to club participants at a bargain cost of
$250 apiece. Each year, the program funds what one Army
official called ``the World Series of marksmanship,'' a
shooting tournament at Camp Perry, Ohio, hosted by the Army
and the National Rifle Association.
[[Page S6170]] Army officials said yesterday that the
riflery program is an innocent recreational affair that
promotes civic virtue and in particular aids the safe
training of youths ages 10 to 18. In the 1980s, Rudd said,
the military worked to discourage more extreme militia
organizations from participating by insisting that each club
chapter include at least 10 youths.
But she said that adults are welcome to participate and
that it is impossible to say whether Koernke or other groups
hostile to the government received ammunition or purchased
weapons through the program.
In a letter to Defense Secretary William J. Perry, Maloney
requested a list of the gun clubs and military bases
participating, as well as information on ``links between this
program and militia groups or individual extremists.'' Rudd
said no investigation into the program had been initiated.
Maloney also circulated a bill calling on Congress to end
the program.
``Long before this bombing, the Civilian Marksmanship
Program stood out as one of the most ridiculous items in the
federal government budget,'' she said. ``We're slashing
funding for abused children, foster care and child nutrition,
yet we're subsidizing recreational marksmanship.''
Indeed, the Pentagon issued a report to Congress last year
that said the program no longer served a military purpose.
Even conservative commentator George Will has referred to it
as ``petrified pork.'' However, largely because of lobbying
by the NRA and resistance from some Democratic and Republican
supporters, the program has survived.
``The NRA has been the official agent for the Civilian
Marksmanship Program,'' contended Bob Walker, the legislative
director for Handgun Control Inc., a Washington-based group
advocating gun control. ``In order to qualify for surplus
rifles and free ammunition, one of the requirements is that
you belong to the NRA. This program is a subsidy for the NRA
and its members.''
The NRA press office did not respond yesterday to several
requests for an interview.
Mr. LAUTENBERG. Mr. President, I have long believed the Civilian
Marksmanship Program is a low priority program and an egregious example
of waste in government. The program promotes rifle training for
civilians through a system of affiliated clubs and other organizations,
and sponsors shooting competitions. As part of these activities, the
program donates, loans, and sells weapons, ammunition, and other
shooting supplies.
The program was first established in 1903, soon after the Spanish-
American War, at a time when civilian marksmanship training was
believed to be important for military preparedness. Back then, some
Federal officials were concerned that recruits often were unable to
shoot straight. The officials believed that a trained corps of
civilians with marksmanship skills would be useful to prepare for
future military conflicts.
Mr. President, that may have made sense in 1903. But this is 1995.
The Spanish-American War ended more than 90 years ago, and things have
changed.
According to a report by the General Accounting Office, the program
now has limited military value. As Army officials told the GAO, no Army
requirements exist for civilians trained in marksmanship. In a March
15, 1994, hearing in the Senate Defense Appropriations Subcommittee,
Army Secretary West stated that national security objectives will be
met with or without the Civilian Marksmanship Program.
Unlike the situation in 1903 and the Spanish-American War, today we
have well-trained Reserves and National Guard Forces, and we have
advanced, high-technology weapons systems. The military does not need a
ready supply of ordinary civilians who know how to shoot a rifle.
Even if we did need such a corps, the program does not give us one.
No system is in place that tracks the program-trained personnel, and
the program is not part of the Army plan for mobilizing forces in an
emergency.
In essence, the Civilian Marksmanship Program provides a taxpayer
subsidy for recreational shooting. In light of the budget deficit we
face and the military needs we ought to address, this simply is not a
justifiable use of scarce resources.
After all, defense dollars are not used to subsidize other sports.
They ought not be used to subsidize a shooting program which has no
relationship to military needs and requirements. Training young people
to play baseball is a nice thing to do, but the Government does not
subsidize Little League. We do not give children free baseballs? Why
should we give them bullets?
Mr. President, Americans are deeply cynical about the Congress. They
think we are controlled by narrow special interests and that we are
wasting taxpayers' money on useless boondoggles. A program like bucks
for bullets only reinforces that image.
It also makes people wonder about our priorities. After all, how can
we close military bases and lay off thousands of defense workers while
spending money on recreational gun clubs? How can we fail to fully fund
Head Start if we can pass out free bullets to school kids? How can we
omit funds for people unable to afford a college education if we can
find millions to teach kids how to shoot?
Where is our sense of priorities? Where is our common sense?
Mr. President, I hope my colleagues will agree that it is time to end
this program. At a minimum, Mr. President, we ought to ensure the
Civilian Marksmanship Program is not being used to train and arm
members of extremist militia groups. The American people have a right
to know that their tax dollars are not being used to train people who
pose a threat to law-abiding citizens and to peace and order in this
country.
I urge my colleagues to cosponsor this bill, and I ask unanimous
consent that a copy of the bill be printed in the Record.
There being no objection, the bill was ordered to be printed in the
Record, as follows:
S. 757
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. TERMINATION OF THE CIVILIAN MARKSMANSHIP PROGRAM.
Chapter 410 of title 10, United States Code, is amended--
(1) by striking out sections 4307, 4308, 4310, 4311, 4312,
and 4313;
(2) in section 4309--
(A) in subsection (a), by striking out ``and by persons
capable of bearing arms'' and inserting in lieu thereof ``law
enforcement agencies''; and
(B) in subsection (b), by striking out ``civilians'' each
place it appears in paragraphs (1) and (3) and inserting in
lieu thereof ``law enforcement agencies''; and
(3) in the table of sections at the beginning of chapter
410 of such title, by striking out the items relating to
sections 4307, 4308, 4310, 4311, 4312, and 4313.
SEC. 2. RESCISSION OF FUNDS FOR NATIONAL BOARD FOR THE
PROMOTION OF RIFLE PRACTICE.
The unobligated balanced of the funds appropriated by title
II of Public Law 103-335 under the heading ``National Board
for the Promotion of Rifle Practice, Army'' is rescinded.
SEC. 3. FISCAL YEAR 1996 FUNDING NOT AUTHORIZED FOR THE
NATIONAL BOARD FOR THE PROMOTION OF RIFLE
PRACTICE.
Funds are not authorized to be appropriated for the
National Board for the Promotion of Rifle Practice.
Mrs. FEINSTEIN. Mr. President, I rise in support of the Senator from
New Jersey in this legislation to rescind the appropriation for the
Civilian Marksmanship Program. I do so for a number of reasons, and I
want to briefly cite them.
At a time when our Government and this body is cutting virtually
every program that benefits people all across the board, I think the
Civilian Marksmanship Program is one program that is truly expendable
and can be rescinded. As was pointed out, the military has said this
program is not necessary. The General Accounting Office in 1990 found
the program unnecessary and not related to the military mission.
In March 1994, the Department of Defense testified before the Defense
Subcommittee on Appropriations that the Civilian Marksmanship Program
was not related to our Nation's military readiness and had no effect on
our national security objectives.
About a week ago, Mr. President, I had a group gathered of major law
enforcement organizations to talk about the intended repeal of the
assault weapons legislation, and the head of a Federal law enforcement
organization handed me a copy of the National Rifle Association's
letter, a 6-page direct-mail piece that went out, and said to me this
was received by one of our law enforcement people who was, frankly,
amazed that this kind of rhetoric could appear on an NRA direct-mail
piece.
I took a look at it, and I was astonished by what I saw. Since that
time, a number of Members of the Senate have commented in the Chamber
on their concern about this piece. It was
[[Page S6171]] thought that the National Rifle Association might agree
that it was hyper hyperbole and that it seemed to have a purpose to
incite people to take action against the Federal Government, and it
made statements which were in effect libelous; they were untrue; they
were slanderous; statements like it did not matter to those of us who
support the assault weapons ban that it gave ``jack-booted Government
thugs more power to take away our constitutional rights, break in our
doors, seize our guns, destroy our property, and even injure or kill
us.''
Mr. President, I have had a lot of things said about me but never
that. That is untrue. It is a lie. It is patently false and it is said
for one reason and one reason only, and that is to incite people.
Then it goes on to say, ``President Clinton's army of antigun
Government agents continue to intimidate and harass law-abiding
citizens. In Clinton's administration, if you have a badge, you have
the Government's go ahead to harass, to intimidate, and to even murder
law-abiding citizens.''
On its face, that is slanderous and in writing it is libelous. It is
factually untrue. It is said but for one reason and one reason only.
And that is to incite and develop hatred against the Federal Government
and the very people who carry out the intent of the laws that we in
this body and the other body pass and are signed by the President and
become the law of the land. I do not think this body can condone this
kind of rhetoric.
Now, is this connected with the Civilian Marksmanship Program? Not
directly. Not directly. But indirectly it is, because the NRA
effectively participates in this program--it is estimated by some to
the extent of $1 million out of the $2.5 million appropriation.
Moreover, given the association's refusal to recant this letter, a
letter which is blatantly political and inciting, certainly not one of
a nonpolitical organization, should Federal funds benefit a political
organization of this type? I would come down and say no, Federal moneys
should not go to benefit an organization that openly admits it plays a
major political role in the election and in the unelection of Members
of Congress and members of other local bodies.
I believe letters of this kind really defeat its purpose as a so-
called nonpolitical organization.
In addition, I am disturbed about recent reports, such as the ABC
``PrimeTime Live'' episode and a Boston Globe article, that describe
how militia members brag that they have received ammunition, surplus
weaponry, and training on Army bases through the Civilian Marksmanship
Program.
I do not know whether this is true or not. I have no way on my own of
verifying it, but the fact is they did brag that this was the case.
In fact, my staff was recently told by the Department of Defense
about a recent incident where a military security patrol monitoring an
Army rifle range saw that club members were using the range and wearing
Michigan militia patches. These club members were asked to leave the
range, which is located at Camp Grayling, MI, on April 27.
As DOD staff admit, there is nothing in the regulations of this
program to prevent militia members from joining civilian marksmanship
clubs and receiving ammunition, weaponry, and access to military
training facilities, because--and I stress this--the program does not
check members for their membership in other organizations or limit the
number of adults that can join.
So in light of these reports, which suggest this possibility to
train, supply, or subsidize anti-Government extremist militias, and the
letter which seems to indicate to me, and I think to other reasonable
readers of the letter, that the National Rifle Association is willing
to go a step further to raise the level of the rhetoric, to increase
the hostility, one can certainly question the wisdom of Federal dollars
going to provide weapons and bullets and training to groups who may--
and I say may and I say might--use these weapons and use that training
against the very people that this body empowers to carry out our laws.
So I believe the time has come to take definitive, direct action and,
by that action, to send a message that we will not, in fact, tolerate
this. That is why I am cosponsoring this legislation, and I hope this
body will be receptive to its passage.
______
By Mr. HATCH (for himself, Mr. Pryor, Mr. Simpson, Mr. Breaux,
Mr. Lugar, Mr. Leahy, Mrs. Hutchison, Mrs. Murray, Mr. Bond,
Mr. Kempthorne, Mr. Johnston, Mr. Ford, Mr. Robb, Mr. Dorgan,
Mr. Kerrey, Mr. Kyl, Mr. Baucus, Mr. Craig, Mr. Cochran, Mr.
Cohen, Mr. Grassley, Mr. D'Amato, Mr. Bennett, and Mr.
Bingaman):
S. 758. A bill to amend the Internal Revenue Code of 1986 to provide
for S corporation reform, and for other purposes; to the Committee on
Finance.
the s corporation reform act of 1995
Mr. HATCH. Mr. President, on behalf of myself and Senator Pryor, I
rise today to introduce the S Corporation Reform Act of 1995. We are
pleased to be joined by Senators Simpson, Breaux, Lugar, Leahy,
Hutchison, Murray, Bond, Kempthorne, Johnston, Ford, Robb, Dorgan,
Kerrey of Nebraska, Kyl, Baucus, Craig, Cochran, Grassley, D'Amato,
Cohen, Bennett, and Bingaman.
Mr. President, today almost 1.7 million businesses pay taxes as S
corporations and the vast majority of these are small enterprises. As
we all know, small business is the engine that drives American job
creation. It is important to note that while in ordinary times, small
businesses create half of the new jobs in this country, in times of
recovery, this number jumps to 75 percent. It is obvious that the tax
and economic policies of this Nation should support and sustain the
creation and growth of small businesses. Our economic future depends on
the health and strength of our small business sector.
This is why we are introducing a bill today to strengthen small
businesses.
Mr. President, this bill will help to fine-tune the Nation's job-
creating engine of small business in three ways: by improving access to
capital, by making it easier to pass on family-owned businesses from
one generation to the next, and by simplifying many of the outdated,
unnecessary and complex tax rules that apply to S corporations.
One of the biggest problems facing small business is that of
attracting adequate capital. This bill helps to expand access to
capital by S corporations by increasing the
number of permitted shareholders from 35 to 50, by permitting tax-
exempt organizations to be shareholders, and by allowing non-citizens
to own S corporation stock. It will also modernize S corporation
financing by allowing them to issue preferred stock and convertible
bonds.
Further, this legislation will make it easier for one S corporation
to own another corporation. Our outmoded rules already permit this, but
not without a sizeable diversion of capital away from productive
investment and into the pockets of lawyers and accountants. This bill's
provisions will streamline small business structure and return common
sense to the realm of business ownership.
Additionally, the bill will help preserve family-owned businesses by
making it easier for families to establish trusts funded by S
corporation shares, and by counting all members of a family who hold S
corporation stock as a single shareholder. These are important
provisions, Mr. President, because so many successful small businesses
fail to survive beyond the first generation.
Finally, the bill will repair a number of outmoded, inefficient
provisions of S corporation tax law. Among the revised rules are a
provision giving fringe benefits in S corporations the same tax
treatment provided to ordinary corporations, and another which will
stop corporate elections from being invalidated by mere technicalities.
Most importantly, all of the bill's provisions have been carefully
designed to avoid creating future difficulties for America's small
businesses.
In my home state of Utah, there are thousands of current and future
entrepreneurs for whom this bill will provide much-needed financial and
legal flexibility in the increasingly competitive marketplace.
Throughout the
country, small businessmen and women have
[[Page S6172]] been clamoring for relief from our Nation's outdated and
inflexible policies regarding S corporation.
I encourage my colleagues to support this badly needed legislation,
which will give small businesses the strength and flexibility they will
need to thrive into the next century.
Mr. President, there is much talk these days about tax simplification
and about throwing out the old tax system and starting over again with
a better one that makes more sense. This debate is a very positive
thing for this country and I believe it will eventually lead to some
vast improvements in the way our economy operates. In the meantime,
however, let us not overlook some of the relatively simple and
noncontroversial changes that will make our tax system work better.
This bill represents such changes. These are improvements that we can
make right now that will help small and growing businesses.
I ask unanimous consent that the text of this bill be printed in the
Record.
There being no objection, the bill was ordered to be printed in the
Record, as follows:
S. 758
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE; TABLE OF
CONTENTS.
(a) Short Title.--This Act may be cited as the ``S
Corporation Reform Act of 1995''.
(b) Amendment of 1986 Code.--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) Table of Contents.--The table of contents is as
follows:
Sec. 1. Short title; amendment of 1986 Code; table of contents.
TITLE I--ELIGIBLE SHAREHOLDERS OF S CORPORATION
Subtitle A--Number of Shareholders
Sec. 101. S corporations permitted to have 50 shareholders.
Sec. 102. Members of family treated as 1 shareholder.
Subtitle B--Persons Allowed As Shareholders
Sec. 111. Certain exempt organizations.
Sec. 112. Financial institutions.
Sec. 113. Nonresident aliens.
Sec. 114. Electing small business trusts.
Subtitle C--Other Provisions
Sec. 121. Expansion of post-death qualification for certain trusts.
TITLE II--QUALIFICATION AND ELIGIBILITY REQUIREMENTS FOR S CORPORATIONS
Subtitle A--One Class of Stock
Sec. 201. Issuance of preferred stock permitted.
Sec. 202. Financial institutions permitted to hold safe harbor debt.
Subtitle B--Elections and Terminations
Sec. 211. Rules relating to inadvertent terminations and invalid
elections.
Sec. 212. Agreement to terminate year.
Sec. 213. Expansion of post-termination transition period.
Sec. 214. Repeal of excessive passive investment income as a
termination event.
Subtitle C--Other Provisions
Sec. 221. S corporations permitted to hold subsidiaries.
Sec. 222. Treatment of distributions during loss years.
Sec. 223. Consent dividend for AAA bypass election.
Sec. 224. Treatment of S corporations under subchapter C.
Sec. 225. Elimination of pre-1983 earnings and profits.
Sec. 226. Allowance of charitable contributions of inventory and
scientific property.
Sec. 227. C corporation rules to apply for fringe benefit purposes.
TITLE III--TAXATION OF S CORPORATION SHAREHOLDERS
Sec. 301. Uniform treatment of owner-employees under prohibited
transaction rules.
Sec. 302. Treatment of losses to shareholders.
TITLE IV--EFFECTIVE DATE
Sec. 401. Effective date.
TITLE I--ELIGIBLE SHAREHOLDERS OF S CORPORATION
Subtitle A--Number of Shareholders
SEC. 101. S CORPORATIONS PERMITTED TO HAVE 50 SHAREHOLDERS.
Subparagraph (A) of section 1361(b)(1) (defining small
business corporation) is amended by striking ``35
shareholders'' and inserting ``50 shareholders''.
SEC. 102. MEMBERS OF FAMILY TREATED AS 1 SHAREHOLDER.
Paragraph (1) of section 1361(c) (relating to special rules
for applying subsection (b)) is amended to read as follows:
``(1) Members of family treated as 1 shareholder.--
``(A) In general.--For purposes of subsection (b)(1)(A)--
``(i) except as provided in clause (ii), a husband and wife
(and their estates) shall be treated as 1 shareholder, and
``(ii) in the case of a family with respect to which an
election is in effect under subparagraph (E), all members of
the family shall be treated as 1 shareholder.
``(B) Members of the family.--For purposes of subparagraph
(A)(ii), the term `members of the family' means the lineal
descendants of the common ancestor and the spouses (or former
spouses) of such lineal descendants or common ancestor.
``(C) Common ancestor.--For purposes of this paragraph, an
individual shall not be considered a common ancestor if, as
of the later of the effective date of this paragraph or the
time the election under section 1362(a) is made, the
individual is more than 6 generations removed from the
youngest generation of shareholders.
``(D) Effect of adoption, etc.--In determining whether any
relationship specified in subparagraph (B) or (C) exists, the
rules of section 152(b)(2) shall apply.
``(E) Election.--An election under subparagraph (A)(ii)--
``(i) must be made with the consent of all shareholders,
``(ii) shall remain in effect until terminated, and
``(iii) shall apply only with respect to 1 family in any
corporation.''.
Subtitle B--Persons Allowed as Shareholders
SEC. 111. CERTAIN EXEMPT ORGANIZATIONS.
(a) Certain Exempt Organizations Allowed To Be
Shareholders.--
(1) In general.--Subparagraph (B) of section 1361(b)(1)
(defining small business corporation) is amended to read as
follows:
``(B) have as a shareholder a person (other than an estate,
a trust described in subsection (c)(2), or an organization
described in subsection (c)(7)) who is not an individual,''.
(2) Eligible exempt organizations.--Section 1361(c)
(relating to special rules for applying subsection (b)) is
amended by adding at the end the following new paragraph:
``(7) Certain exempt organizations permitted as
shareholders.--For purposes of subsection (b)(1)(B), an
organization described in section 401(a) or 501(c)(3) may be
a shareholder in an S corporation.''
(b) Contributions of S Corporation Stock.--Section
170(e)(1) (relating to certain contributions of ordinary
income and capital gain property) is amended by adding at the
end the following sentence: ``For purposes of applying this
paragraph in the case of a charitable contribution of stock
in an S corporation, rules similar to the rules of section
751 shall apply in determining whether gain on such stock
would have been long-term capital gain if such stock were
sold by the taxpayer.''
(c) Special Rules Applicable to Partnerships and S
Corporations.--
(1) In general.--Subsection (c) of section 512 (relating to
unrelated business tax income) is amended--
(A) by inserting ``or S corporation'' after ``partnership''
each place it appears in paragraphs (1) and (3),
(B) by inserting ``or shareholder'' after ``member'' in
paragraph (1), and
(C) by inserting ``and S Corporations'' after
``Partnerships'' in the heading.
(2) Reporting requirement.--Section 6037 (relating to
return of S corporation) is amended by adding at the end the
following new subsection:
``(c) Separate Statement of Items of Unrelated Business
Taxable Income.--In the case of any S corporation regularly
carrying on a trade or business (within the meaning of
section 512(c)(1)), the information required under subsection
(b) to be furnished to any shareholder described in section
1361(c)(7) shall include such information as is necessary to
enable the shareholder to compute its pro rata share of the
corporation's income or loss from the trade or business in
accordance with section 512(a)(1), but without regard to the
modifications described in paragraphs (8) through (15) of
section 512(b).''
SEC. 112. FINANCIAL INSTITUTIONS.
Subparagraph (B) of section 1361(b)(2) (defining ineligible
corporation) is amended to read as follows:
``(B) a financial institution which uses the reserve method
of accounting for bad debts described in section 585 or
593,''.
SEC. 113. NONRESIDENT ALIENS.
(a) Nonresident Aliens Allowed To Be Shareholders.--
(1) In general.--Paragraph (1) of section 1361(b) (defining
small business corporation) is amended--
(A) by adding ``and'' at the end of subparagraph (B),
(B) by striking subparagraph (C), and
(C) by redesignating subparagraph (D) as subparagraph (C).
(2) Conforming amendments.--Paragraphs (4) and (5)(A) of
section 1361(c) (relating to special rules for applying
subsection (b)) are each amended by striking ``subsection
(b)(1)(D)'' and inserting ``subsection (b)(1)(C)''.
(b) Nonresident Alien Shareholder Treated as Engaged in
Trade or Business Within United States.--
(1) In general.--Section 875 is amended--
(A) by striking ``and'' at the end of paragraph (1),
[[Page S6173]] (B) by striking the period at the end of
paragraph (2) and inserting ``, and'', and
(C) by adding at the end the following new paragraph:
``(3) 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.''
(2) Application of withholding tax on nonresident alien
shareholders.--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:
``(f) S Corporation Treated as Partnership, Etc.--For
purposes of this section--
``(1) an S corporation shall be treated as a partnership,
``(2) the shareholders of such corporation shall be treated
as partners of such partnership, and
``(3) any reference to section 704 shall be treated as a
reference to section 1366.''
(3) Conforming amendments.--
(A) The heading of section 875 is amended to read as
follows:
``SEC. 875. PARTNERSHIPS; BENEFICIARIES OF ESTATES AND
TRUSTS; S CORPORATIONS.''
(B) The heading of section 1446 is amended to read as
follows:
``SEC. 1446. WITHHOLDING TAX ON FOREIGN PARTNERS' AND S
CORPORATE SHAREHOLDERS' SHARE OF EFFECTIVELY
CONNECTED INCOME.''
(4) Clerical amendments.--
(A) 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:
``Sec. 875. Partnerships; beneficiaries of estates and trusts; S
corporations.''
(B) The item relating to section 1446 in the table of
sections for subchapter A of chapter 3 is amended to read as
follows:
``Sec. 1446. Withholding tax on foreign partners' and S corporate
shareholders' share of effectively connected income.''
(c) Permanent Establishment of Partners and S Corporation
Shareholders.--Section 894 (relating to income affected by
treaty) is amended by adding at the end the following new
subsection:
``(c) Permanent Establishment of Partners and S Corporation
Shareholders.--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.''
SEC. 113. ELECTING SMALL BUSINESS TRUSTS.
(a) General Rule.--Subparagraph (A) of section 1361(c)(2)
(relating to certain trusts permitted as shareholders) is
amended by inserting after clause (iv) the following new
clause:
``(v) An electing small business trust.''
(b) Current Beneficiaries Treated as Shareholders.--
Subparagraph (B) of section 1361(c)(2) is amended by adding
at the end the following new clause:
``(v) In the case of a trust described in clause (v) of
subparagraph (A), each potential current beneficiary of such
trust shall be treated as a shareholder; except that, if for
any period there is no potential current beneficiary of such
trust, such trust shall be treated as the shareholder during
such period.''
(c) Electing Small Business Trust Defined.--Section 1361
(defining S corporation) is amended by adding at the end the
following new subsection:
``(e) Electing Small Business Trust Defined.--
``(1) Electing small business trust.--For purposes of this
section--
``(A) In general.--Except as provided in subparagraph (B),
the term `electing small business trust' means any trust if--
``(i) such trust does not have as a beneficiary any person
other than an individual, an estate, or an organization
described in section 401(a) or 501(c)(3),
``(ii) no interest in such trust was acquired by purchase,
and
``(iii) an election under this subsection applies to such
trust.
``(B) Certain trusts not eligible.--The term `electing
small business trust' shall not include--
``(i) any qualified subchapter S trust (as defined in
subsection (d)(3)) if an election under subsection (d)(2)
applies to any corporation the stock of which is held by such
trust, and
``(ii) any trust exempt from tax under this subtitle.
``(C) Purchase.--For purposes of subparagraph (A), the term
`purchase' means any acquisition if the basis of the property
acquired is determined under section 1012.
``(2) Potential current beneficiary.--For purposes of this
section, the term `potential current beneficiary' means, with
respect to any period, any person who at any time during such
period is entitled to, or at the discretion of any person may
receive, a distribution from the principal or income of the
trust. If a trust disposes of all of the stock which it holds
in an S corporation, then, with respect to such corporation,
the term `potential current beneficiary' does not include any
person who first met the requirements of the preceding
sentence during the 60-day period ending on the date of such
disposition.
``(3) Election.--An election under this subsection shall be
made by the trustee in such manner and form, and at such
time, as the Secretary may prescribe. Any such election shall
apply to the taxable year of the trust for which made and all
subsequent taxable years of such trust unless revoked with
the consent of the Secretary.
``(4) Cross reference.--
``For special treatment of electing small business trusts, see
section 641(d).''
(d) Taxation of Electing Small Business Trusts.--Section
641 (relating to imposition of tax on trusts) is amended by
adding at the end the following new subsection:
``(d) Special Rules for Taxation of Electing Small Business
Trusts.--
``(1) In general.--For purposes of this chapter--
``(A) the portion of any electing small business trust
which consists of stock in 1 or more S corporations shall be
treated as a separate trust, and
``(B) the amount of the tax imposed by this chapter on such
separate trust shall be determined with the modifications of
paragraph (2).
``(2) Modifications.--For purposes of paragraph (1), the
modifications of this paragraph are the following:
``(A) Except as provided in section 1(h), the amount of the
tax imposed by section 1(e) shall be determined by using the
highest rate of tax set forth in section 1(e).
``(B) The exemption amount under section 55(d) shall be
zero.
``(C) The only items of income, loss, deduction, or credit
to be taken into account are the following:
``(i) The items required to be taken into account under
section 1366.
``(ii) Any gain or loss from the disposition of stock in an
S corporation.
``(iii) To the extent provided in regulations, State or
local income taxes or administrative expenses to the extent
allocable to items described in clauses (i) and (ii).
No deduction or credit shall be allowed for any amount not
described in this paragraph, and no item described in this
paragraph shall be apportioned to any beneficiary.
``(D) No amount shall be allowed under paragraph (1) or (2)
of section 1211(b).
``(3) Treatment of remainder of trust and distributions.--
For purposes of determining--
``(A) the amount of the tax imposed by this chapter on the
portion of any electing small business trust not treated as a
separate trust under paragraph (1), and
``(B) the distributable net income of the entire trust,
the items referred to in paragraph (2)(C) shall be excluded.
Except as provided in the preceding sentence, this subsection
shall not affect the taxation of any distribution from the
trust.
``(4) Treatment of unused deductions where termination of
separate trust.--If a portion of an electing small business
trust ceases to be treated as a separate trust under
paragraph (1), any carryover or excess deduction of the
separate trust which is referred to in section 642(h) shall
be taken into account by the entire trust.
``(5) Electing small business trust.--For purposes of this
subsection, the term `electing small business trust' has the
meaning given such term by section 1361(e)(1).''
Subtitle C--Other Provisions
SEC. 121. EXPANSION OF POST-DEATH QUALIFICATION FOR CERTAIN
TRUSTS.
Subparagraph (A) of section 1361(c)(2) (relating to certain
trusts permitted as shareholders) is amended--
(1) by striking ``60-day period'' each place it appears in
clauses (ii) and (iii) and inserting ``2-year period'', and
(2) by striking the last sentence in clause (ii).
TITLE II--QUALIFICATION AND ELIGIBILITY REQUIREMENTS FOR S CORPORATIONS
Subtitle A--One Class of Stock
SEC. 201. ISSUANCE OF PREFERRED STOCK PERMITTED.
(a) In General.--Section 1361(c), as amended by section
111(a)(2), is amended by adding at the end the following new
paragraph:
``(8) Treatment of qualified preferred stock.--
``(A) In general.--Notwithstanding subsection (b)(1)(D), an
S corporation may issue qualified preferred stock.
``(B) Qualified preferred stock defined.--For purposes of
this paragraph, the term `qualified preferred stock' means
stock described in section 1504(a)(4) which is issued to a
person eligible to hold common stock of an S corporation.
``(C) Distributions.--A distribution (not in part or full
payment in exchange for stock) made by the corporation with
respect to qualified preferred stock shall be includible as
interest income of the holder and deductible to the
corporation as interest expense in computing taxable income
under section 1363(b) in the year such distribution is
received.''
(b) Conforming Amendments.--
(1) Subparagraph (C) of section 1361(b)(1), as redesignated
by section 113(a)(1)(C), is
[[Page S6174]] amended by inserting ``except as provided in
paragraph (8),'' before ``have''.
(2) Subsection (a) of section 1366 is amended by adding at
the end the following new paragraph:
``(3) Allocation with respect to qualified preferred
stock.--The holders of qualified preferred stock shall not,
with respect to such stock, be allocated any of the items
described in paragraph (1).''
SEC. 202. FINANCIAL INSTITUTIONS PERMITTED TO HOLD SAFE
HARBOR DEBT.
Subparagraph (B) of section 1361(c)(5) (defining straight
debt) is amended by adding ``and'' at the end of clause (i)
and by striking clauses (ii) and (iii) and inserting the
following:
``(ii) 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
``(iii) the creditor is--
``(I) an individual,
``(II) an estate,
``(III) a trust described in paragraph (2), or
``(IV) a person which is actively and regularly engaged in
the business of lending money.''
Subtitle B--Elections and Terminations
SEC. 211. RULES RELATING TO INADVERTENT TERMINATIONS AND
INVALID ELECTIONS.
(a) General Rule.--Subsection (f) of section 1362 (relating
to inadvertent terminations) is amended to read as follows:
``(f) Inadvertent Invalid Elections or Terminations.--If--
``(1) an election under subsection (a) by any corporation--
``(A) was not effective for the taxable year for which made
(determined without regard to subsection (b)(2)) by reason of
a failure to meet the requirements of section 1361(b) or to
obtain shareholder consents, or
``(B) was terminated under paragraph (2) of subsection (d),
``(2) the Secretary determines that the circumstances
resulting in such ineffectiveness or termination were
inadvertent,
``(3) no later than a reasonable period of time after
discovery of the circumstances resulting in such
ineffectiveness or termination, steps were taken--
``(A) so that the corporation is a small business
corporation, or
``(B) to acquire the required shareholder consents, and
``(4) the corporation, and each person who was a
shareholder in the corporation at any time during the period
specified pursuant to this subsection, agrees to make such
adjustments (consistent with the treatment of the corporation
as an S corporation) as may be required by the Secretary with
respect to such period,
then, notwithstanding the circumstances resulting in such
ineffectiveness or termination, such corporation shall be
treated as an S corporation during the period specified by
the Secretary.''
(b) Late Elections.--Subsection (b) of section 1362 is
amended by adding at the end thereof the following new
paragraph:
``(5) Authority to treat late elections as timely.--If--
``(A) an election under subsection (a) is made for any
taxable year (determined without regard to paragraph (3))
after the date prescribed by this subsection for making such
election for such taxable year, and
``(B) the Secretary determines that there was reasonable
cause for the failure to timely make such election,
the Secretary may treat such election as timely made for such
taxable year (and paragraph (3) shall not apply).''
(c) Automatic Waivers.--The Secretary of the Treasury shall
provide for an automatic waiver procedure under section
1362(f) of the Internal Revenue Code of 1986 in cases in
which the Secretary determines appropriate.
(d) Effective Date.--The amendments made by subsection (a)
and (b) shall apply with respect to elections for taxable
years beginning after December 31, 1982.
SEC. 212. AGREEMENT TO TERMINATE YEAR.
Paragraph (2) of section 1377(a) (relating to pro rata
share) is amended to read as follows:
``(2) Election to terminate year.--
``(A) In general.--Under regulations prescribed by the
Secretary, if any shareholder terminates the shareholder's
interest in the corporation during the taxable year and all
affected shareholders agree to the application of this
paragraph, paragraph (1) shall be applied to the affected
shareholders as if the taxable year consisted of 2 taxable
years the first of which ends on the date of the termination.
``(B) Affected shareholders.--For purposes of subparagraph
(A), the term `affected shareholders' means the shareholder
whose interest is terminated and all shareholders to whom
such shareholder has transferred shares during the taxable
year. If such shareholder has transferred shares to the
corporation, the term `affected shareholders' shall include
all persons who are shareholders during the taxable year.''
SEC. 213. EXPANSION OF POST-TERMINATION TRANSITION PERIOD.
(a) In General.--Paragraph (1) of section 1377(b) (relating
to post-termination transition period) is amended by striking
``and'' at the end of subparagraph (A), by redesignating
subparagraph (B) as subparagraph (C), and by inserting after
subparagraph (A) the following new subparagraph:
``(B) the 120-day period beginning on the date of any
determination pursuant to an audit of the taxpayer which
follows the termination of the corporation's election and
which adjusts a subchapter S item of income, loss, or
deduction of the corporation arising during the S period (as
defined in section 1368(e)(2)), and''.
(b) Determination Defined.--Paragraph (2) of section
1377(b) is amended by striking subparagraphs (A) and (B), by
redesignating subparagraph (C) as subparagraph (B), and by
inserting before subparagraph (B) (as so redesignated) the
following new subparagraph:
``(A) a determination as defined in section 1313(a), or''.
(c) Repeal of Special Audit Provisions for Subchapter S
Items.--
(1) General rule.--Subchapter D of chapter 63 (relating to
tax treatment of subchapter S items) is hereby repealed.
(2) Consistent treatment required.--Section 6037 (relating
to return of S corporation), as amended by section 111(c)(2),
is amended by adding at the end the following new subsection:
``(d) Shareholder's Return Must Be Consistent With
Corporate Return or Secretary Notified of Inconsistency.--
``(1) In general.--A shareholder of an S corporation shall,
on such shareholder's return, treat a subchapter S item in a
manner which is consistent with the treatment of such item on
the corporate return.
``(2) Notification of inconsistent treatment.--
``(A) In general.--In the case of any subchapter S item,
if--
``(i)(I) the corporation has filed a return but the
shareholder's treatment on his return is (or may be)
inconsistent with the treatment of the item on the corporate
return, or
``(II) the corporation has not filed a return, and
``(ii) the shareholder files with the Secretary a statement
identifying the inconsistency,
paragraph (1) shall not apply to such item.
``(B) Shareholder receiving incorrect information.--A
shareholder shall be treated as having complied with clause
(ii) of subparagraph (A) with respect to a subchapter S item
if the shareholder--
``(i) demonstrates to the satisfaction of the Secretary
that the treatment of the subchapter S item on the
shareholder's return is consistent with the treatment of the
item on the schedule furnished to the shareholder by the
corporation, and
``(ii) elects to have this paragraph apply with respect to
that item.
``(3) Effect of failure to notify.--In any case--
``(A) described in subparagraph (A)(i)(I) of paragraph (2),
and
``(B) in which the shareholder does not comply with
subparagraph (A)(ii) of paragraph (2),
any adjustment required to make the treatment of the items by
such shareholder consistent with the treatment of the items
on the corporate return shall be treated as arising out of
mathematical or clerical errors and assessed according to
section 6213(b)(1). Paragraph (2) of section 6213(b) shall
not apply to any assessment referred to in the preceding
sentence.
``(4) Subchapter s item.--For purposes of this subsection,
the term `subchapter S item' means any item of an S
corporation to the extent that regulations prescribed by the
Secretary provide that, for purposes of this subtitle, such
item is more appropriately determined at the corporation
level than at the shareholder level.
``(5) Addition to tax for failure to comply with section.--
``For addition to tax in the case of a shareholder's negligence in
connection with, or disregard of, the requirements of this section, see
part II of subchapter A of chapter 68.''
(3) Conforming amendments.--
(A) Section 1366 is amended by striking subsection (g).
(B) Subsection (b) of section 6233 is amended to read as
follows:
``(b) Similar Rules in Certain Cases.--If a partnership
return is filed for any taxable year but it is determined
that there is no entity for such taxable year, to the extent
provided in regulations, rules similar to the rules of
subsection (a) shall apply.''
(C) The table of subchapters for chapter 63 is amended by
striking the item relating to subchapter D.
SEC. 214. REPEAL OF EXCESSIVE PASSIVE INVESTMENT INCOME AS A
TERMINATION EVENT.
(a) In General.--Section 1362(d) (relating to termination)
is amended by striking paragraph (3).
(b) Modification of Tax Imposed on Excessive Passive
Investment Income.--
(1) Increase in threshold.--Subsections (a)(2) and
(b)(1)(A)(i) of section 1375 (relating to tax imposed when
passive investment income of corporation having subchapter C
earnings and profits exceeds 25 percent of gross receipts)
are each amended by striking ``25 percent'' and inserting
``50 percent''.
(2) Tax rate increase after third consecutive year.--
Section 1375 is amended by redesignating subsections (c) and
(d) as subsections (d) and (e), respectively, and by
inserting after subsection (b) the following new subsection:
[[Page S6175]] ``(c) Tax Rate Increase After Third
Consecutive Year.--
``(1) In general.--If an S corporation is described in
subsection (a) for more than 3 consecutive taxable years,
then the rate of tax imposed under subsection (a) with
respect to each succeeding consecutive taxable year (if any)
shall be determined under the following table:
The rate of tax imposed under subsection (a) shall be equal to such
rate of tax for the 3rd taxable year, plus the following percentage
points:
4th taxable year...............................................10....
5th taxable year...............................................20....
6th taxable year...............................................30....
7th taxable year...............................................40....
8th taxable year and thereafter...............................50.....
``(2) Years taken into account.--No tax shall be increased
under paragraph (1) for any taxable year beginning before
January 1, 1996.''
(c) Conforming Amendments.--
(1) Section 1362(f)(1) is amended by striking ``or (3)''.
(2) Subsection (b) of section 1375 is amended by striking
paragraphs (3) and (4) and inserting the following new
paragraphs:
``(3) Subchapter c earnings and profits.--The term
`subchapter C earnings and profits' means earnings and
profits of any corporation for any taxable year with respect
to which an election under section 1362(a) (or under section
1372 of prior law) was not in effect.
``(4) Gross receipts from sales of capital assets (other
than stock and securities).--In the case of dispositions of
capital assets (other than stock and securities), gross
receipts from such dispositions shall be taken into account
only to the extent of the capital gain net income therefrom.
``(5) Passive investment income defined.--
``(A) In general.--Except as otherwise provided in this
paragraph, the term `passive investment income' means gross
receipts derived from royalties, rents, dividends, interest,
and annuities.
``(B) 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(1).
``(C) 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)).
``(D) Special rule for options and commodity dealings.--
``(i) In general.--In the case of any options dealer or
commodities dealer, passive investment income shall be
determined by not taking into account any gain or loss (in
the normal course of the taxpayer' activity of dealing in or
trading section 1256 contracts) from any section 1256
contract or property related to such a contract.
``(ii) Definitions.--For purposes of this subparagraph--
``(I) Options dealer.--The term `options dealer' has the
meaning given such term by section 1256(g)(8).
``(II) Commodities dealer.--The term `commodities dealer'
means a person who is actively engaged in trading section
1256 contracts and is registered with a domestic board of
trade which is designated as a contract market by the
Commodities Futures Trading Commission.
``(III) Section 1256 contract.--The term `section 1256
contract' has the meaning given to such term by section
1256(b).
``(E) Coordination with section 1374.--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.''
(3) The heading for section 1375 is amended by striking
``25'' and inserting ``50''.
(4) The table of sections for part III of subchapter S of
chapter 1 is amended by striking ``25'' in the item relating
to section 1375 and inserting ``50''.
(5) Clause (i) of section 1042(c)(4)(A) is amended by
striking ``section 1362(d)(3)(D)'' and inserting ``section
1375(b)(5)''.
Subtitle C--Other Provisions
SEC. 221. S CORPORATIONS PERMITTED TO HOLD SUBSIDIARIES.
(a) In General.--Paragraph (2) of section 1361(b) (defining
ineligible corporation), as amended by section 112, is
amended by striking subparagraph (A) and by redesignating
subparagraphs (B), (C), (D), and (E) as subparagraphs (A),
(B), (C), and (D), respectively.
(b) Treatment of Certain Wholly Owned S Corporation
Subsidiaries.--Section 1361(b) (defining small business
corporation) is amended by adding at the end thereof the
following new subsection:
``(3) Treatment of certain wholly owned subsidiaries.--
``(A) In general.--For purposes of this title--
``(i) a corporation which is a qualified subchapter S
subsidiary shall not be treated as a separate corporation,
and
``(ii) all assets, liabilities, and items of income,
deduction, and credit of a qualified subchapter S subsidiary
shall be treated as assets, liabilities, and such items (as
the case may be) of the S corporation.
``(B) Qualified subchapter s subsidiary.--For purposes of
this subsection, the term `qualified subchapter S subsidiary'
means any corporation 100 percent of the stock of which is
held by an S corporation as of the later of the effective
date of the S election of the S corporation or the
acquisition of the subsidiary, and at all times thereafter.
``(C) Treatment of terminations of qualified subchapter s
subsidiary status.--For purposes of this subtitle, if any
corporation which was a qualified subchapter S subsidiary
ceases to meet the requirements of subparagraph (B), such
corporation shall be treated as a new corporation acquiring
all of its assets (and assuming all of its liabilities)
immediately before such cessation from the S corporation in
exchange for its stock.''.
(c) Certain Dividends Not Treated as Passive Investment
Income.--Section 1375(b)(5) (defining passive investment
income), as added by section 214(c)(2), is amended by adding
at the end the following new subparagraph:
``(F) 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.''
(d) Conforming Amendments.--
(1) Subsection (c) of section 1361, as amended by sections
111(a)(2) and 201(a), is amended by striking paragraph (6)
and redesignating paragraphs (7) and (8) as paragraphs (6)
and (7), respectively.
(2) Subsection (b) of section 1504 (defining includible
corporation) is amended by adding at the end the following
new paragraph:
``(8) An S corporation.''
SEC. 222. TREATMENT OF DISTRIBUTIONS DURING LOSS YEARS.
(a) Adjustments for Distributions Taken Into Account Before
Losses.--
(1) Subparagraph (A) of section 1366(d)(1) (relating to
losses and deductions cannot exceed shareholder's basis in
stock and debt) is amended by striking ``paragraph (1)'' and
inserting ``paragraphs (1) and (2)(A)''.
(2) Subsection (d) of section 1368 (relating to certain
adjustments taken into account) is amended by adding at the
end the following new sentence:
``In the case of any distribution made during any taxable
year, the adjusted basis of the stock shall be determined
with regard to the adjustments provided in paragraph (1) of
section 1367(a) for the taxable year.''
(b) Accumulated Adjustments Account.--Paragraph (1) of
section 1368(e) (relating to accumulated adjustments account)
is amended by adding at the end the following new
subparagraph:
``(C) Net loss for year disregarded.--
``(i) In general.--In applying this section to
distributions made during any taxable year, the amount in the
accumulated adjustments account as of the close of such
taxable year shall be determined without regard to any net
negative adjustment for such taxable year.
``(ii) Net negative adjustment.--For purposes of clause
(i), the term `net negative adjustment' means, with respect
to any taxable year, the excess (if any) of--
``(I) the reductions in the account for the taxable year
(other than for distributions), over
``(II) the increases in such account for such taxable
year.''
(c) Conforming Amendments.--Subparagraph (A) of section
1368(e)(1) is amended--
(1) by striking ``as provided in subparagraph (B)'' and
inserting ``as otherwise provided in this paragraph'', and
(2) by striking ``section 1367(b)(2)(A)'' and inserting
``section 1367(a)(2)''.
SEC. 223. CONSENT DIVIDEND FOR AAA BYPASS ELECTION.
Section 1368(e)(3) (relating to election to distribute
earnings first) is amended by adding at the end the following
new subparagraph:
``(C) Consent dividend.--Under regulations prescribed by
the Secretary, an S corporation may, subject to the election
under this paragraph, consent to treat as a distribution the
amount specified in such consent, to the extent such amount
does not exceed the accumulated earnings and profits of such
corporation. The amount so specified shall be considered--
``(i) as distributed in money by the corporation to its
shareholders on the last day of the taxable year of the
corporation and as contributed to the capital of the
corporation by the shareholders on such day, and
``(ii) if any such shareholder is an organization described
in section 511(a)(2), as unrelated business taxable income
(as defined in section 512) to such shareholder.''
SEC. 224. TREATMENT OF S CORPORATIONS UNDER SUBCHAPTER C.
Subsection (a) of section 1371 (relating to application of
subchapter C rules) is amended to read as follows:
``(a) Application of Subchapter C Rules.--Except as
otherwise provided in this title, and except to the extent
inconsistent with this subchapter, subchapter C shall
[[Page S6176]] apply to an S corporation and its
shareholders.''
SEC. 225. ELIMINATION OF PRE-1983 EARNINGS AND PROFITS.
(a) In General.--If--
(1) 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, and
(2) such corporation is an S corporation under subchapter S
of chapter 1 of such Code for its first taxable year
beginning after December 31, 1995,
the amount of such corporation's accumulated earnings and
profits (as of the beginning of such first taxable year)
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.
(b) Conforming Amendments.--
(1)(A) Subsection (a) of section 1375 is amended by
striking ``subchapter C'' in paragraph (1) and inserting
``accumulated''.
(B) Subsection (b) of section 1375, as amended by section
214(c)(2), is amended by striking paragraph (3) and by
redesignating paragraphs (4) and (5) as paragraphs (3) and
(4), respectively.
(C) The section heading for section 1375 is amended by
striking ``subchapter c'' and inserting ``accumulated''.
(D) The table of sections for part III of subchapter S of
chapter 1 is amended by striking ``subchapter C'' in the item
relating to section 1375 and inserting ``accumulated''.
(2) Clause (i) of section 1042(c)(4)(A), as amended by
section 214(c)(5), is amended by striking ``section
1375(b)(5)'' and inserting ``section 1375(b)(4)''.
SEC. 226. ALLOWANCE OF CHARITABLE CONTRIBUTIONS OF INVENTORY
AND SCIENTIFIC PROPERTY.
(a) In General.--Section 170(e) (relating to certain
contributions of ordinary income and capital gain property)
is amended--
(1) by striking ``(other than a corporation which is an S
corporation)'' in paragraph (3)(A), and
(2) by striking clause (i) of paragraph (4)(D) and by
redesignating clauses (ii) and (iii) of such paragraph as
clauses (i) and (ii), respectively.
(b) Stock Basis Adjustment.--Paragraph (1) of section
1367(a) (relating to adjustments to basis of stock of
shareholders, etc.) is amended by striking ``and'' at the end
of subparagraph (B), by striking the period at the end of
subparagraph (C) and inserting ``, and'', and by adding at
the end the following new subparagraph:
``(D) the excess of the deductions for charitable
contributions over the basis of the property contributed.''
SEC. 227. C CORPORATION RULES TO APPLY FOR FRINGE BENEFIT
PURPOSES.
(a) In General.--Section 1372 (relating to partnership
rules to apply for fringe benefit purposes) is repealed.
(b) Partnership Rules To Apply For Health Insurance Costs
of Certain S Corporation Shareholders.--Paragraph (5) of
section 162(l) is amended to read as follows:
``(5) Treatment of certain S corporation shareholders.--
``(A) In general.--This subsection shall apply in the case
of any 2-percent shareholder of an S corporation, except
that--
``(i) for purposes of this subsection, such shareholder's
wages (as defined in section 3121) from the S corporation
shall be treated as such shareholder's earned income (within
the meaning of section 401(c)(1)), and
``(ii) there shall be such adjustments in the application
of this subsection as the Secretary may by regulations
prescribe.
``(B) 2-percent shareholder defined.--For purposes of this
paragraph, the term `2-percent shareholder' means any person
who owns (or is considered as owning within the meaning of
section 318) on any day during the taxable year of the S
corporation more than 2 percent of the outstanding stock of
such corporation or stock possessing more than 2 percent of
the total combined voting power of all stock of such
corporation.''
(b) Conforming Amendment.--The table of sections for part
III of subchapter S of chapter 1 is amended by striking the
item relating to section 1372.
TITLE III--TAXATION OF S CORPORATION SHAREHOLDERS
SEC. 301. UNIFORM TREATMENT OF OWNER-EMPLOYEES UNDER
PROHIBITED TRANSACTION RULES.
The last sentence of section 4975(d) (relating to
exemptions from prohibited transactions) is amended by
striking ``a shareholder-employee (as defined in section
1379, as in effect on the day before the date of the
enactment of the Subchapter S Revision Act of 1982),''.
SEC. 302. TREATMENT OF LOSSES TO SHAREHOLDERS.
(a) Treatment of Losses in Liquidations.--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:
``(c) Losses on Liquidations of S Corporation.--
``(1) In general.--The portion of any loss recognized by a
shareholder of an S corporation (as defined in section
1361(a)(1)) on amounts received by such shareholder in a
distribution in complete liquidation of such S corporation
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.
``(2) Ordinary income basis.--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.''
(b) Carryover of Disallowed Losses and Deductions Under At-
Risk Rules Allowed.--Paragraph (3) of section 1366(d)
(relating to carryover of disallowed losses and deductions to
post-termination transition period) is amended by adding at
the end the following new subparagraph:
``(D) At-risk limitations.--To the extent that any increase
in adjusted basis described in subparagraph (B) would have
increased the shareholder's amount at risk under section 465
if such increase had occurred on the day preceding the
commencement of the post-termination transition period, rules
similar to the rules described in subparagraphs (A) through
(C) shall apply to any losses disallowed by reason of section
465(a).''
TITLE IV--EFFECTIVE DATE
SEC. 401. EFFECTIVE DATE.
(a) In General.--Except as otherwise provided in this Act,
the amendments made by this Act shall apply to taxable years
beginning after December 31, 1995.
(b) Treatment of Certain Elections Under Prior Law.--For
purposes of section 1362(g) of the Internal Revenue Code of
1986 (relating to election after termination), any
termination under section 1362(d) of such Code (as in effect
on the day before the date of the enactment of this Act)
shall not be taken into account.
Mr. HATCH. Mr. President, I also want to pay specific tribute to our
distinguished colleague from Arkansas, Senator Pryor. Not only has he
been a great Senator here but he has been the leader on this particular
issue for years and he deserves the credit for these changes in the S
corporation law. I have agreed to assistance this year in trying to get
this done and we intend to get it done this year. It is something that
is long overdue, and thanks to his leadership and his intellectual
prowess I think we will be able to get it done. So I want to personally
compliment him.
Mr. PRYOR. Mr. President, first I would like to thank my very good
friend, my long-time friend and distinguished colleague from Utah,
Senator Hatch.
Senator Hatch and I have worked on this proposal for a long time and
we are very proud today to be able to introduce it as a bill and to
also announce our 23 cosponsors from each side of the aisle in support
of the S Corporation Reform Act of 1995.
Senator Hatch has been, certainly, a teacher for me in this whole
process. I thank him. He has been a great ally. Truly, serving on the
Finance Committee together, working with this legislation and working
with a number of colleagues that we have in support, and also the
number of organizations that I will list in a moment, we think truly in
1995 we can make this reform of S corporation law become a reality.
This legislation is truly the culmination of the efforts of many,
many individuals and groups. It is a bipartisan effort, and certainly
represents, I think, a step that Congress can and should take in order
to capitalize on one of our country's most valuable resources, small
business, as Senator Hatch has just so eloquently stated.
I want to thank all of the businessmen and women, attorneys,
accountants, and small business organizations who have worked with me
and my staff to help us to understand the unique problems of subchapter
S corporations. They have helped us arrive at solutions that we think
are easily administered and targeted to encourage economic growth.
The interest and enthusiasm for this effort is of special mention. At
this date, the bill is endorsed by the :
Members of the S Corp Subcommittee of the American Bar Association's
tax section; the U.S. Chamber of Commerce; National Federation of
Independent Businesses Small Business Legislative Council; American
Institute of Certified Public Accountants; American Vintners
Association; American Consulting Engineers Council;
[[Page S6177]] American Electronics Association; Associated Builders
and Contractors; Associated Equipment Distributors; National
Association of Life Underwriters; National Association of Realtors;
National Association of Wholesale-Distributors; National Business
Owners Association; National Society of Public Accountants; and the S
Corp Reform Project.
Mr. President, these fine organizations we think represent hundreds
of thousands of businesses across this country that will be impacted in
a good way across our country. It is quite a team, and a team that I
think is very rarely put together. It is quite a team that has worked
thoughtfully and diligently, and I must say, patiently, through this
system to help produce a bill that Congress can pass and we should pass
overwhelmingly.
Mr. President, I would like to point out to my colleagues that I
introduced similar legislation in the last session of Congress. On
November 19, 1993, S. 1690 was introduced with our former colleague,
Senator John Danforth, who retired from the U.S. Senate. Working
together, we were joined by a strongly bipartisan group of 40 of our
colleagues who cosponsored that bill at that time.
Today, once again, I am so proud to be able to join my friend and
colleague, Senator Hatch, with whom I very much look forward to working
in order that we might take the next step and move this bill into law.
The S Corporation Reform Act of 1995 contains 27 provisions designed
to usher sub-S corporations into the financial environment of the
1990's.
Subchapter S was first enacted in 1958. In fact, I think it might
have been about the year that the distinguished occupant of our chair
was born. On that particular date that subchapter S was passed into
law, it was enacted to remove tax considerations from small business
owners' decisions to incorporate. This tax treatment has proved helpful
to small business over the years, especially to startup businesses, to
new businesses. But subchapter S, as originally enacted in 1958, was
very limiting and contained a large number of pitfalls. Today, hundreds
of thousands of U.S. businesses are S corporations. These businesses
are still subject to many of the oppressive restraints which date back
to its original enactment in 1958.
Mr. President, it goes without saying that times have changed a great
deal since that year. The financial environment is far more complex
than the 1950's. Sub S limitations restrict growth opportunities, and
frankly sub S needs an overhaul, and it needs an overhaul now.
This legislation we think is the overhaul we need. It is an overhaul
that is doable. It is an overhaul that can give a boost to our economic
recovery by creating more opportunities for capital growth and jobs
throughout every segment of American economic activity.
Mr. President, these objectives are met by this legislation in ways
that have been carefully thought through. There may well be other ways
to encourage these goals that Senator Hatch and I share this afternoon.
But I hope and expect my colleagues respectfully will come forward with
their ideas should they see areas where we might improve upon this
proposal. I look forward to this dialog. I urge my colleagues to
examine this bill closely and to join with Senator Hatch and myself in
this effort.
Mr. President, I ask unanimous consent that a copy of a summary
description of the major provisions of this bill be printed in the
Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
S Corporation Reform Act of 1995
accelerating capital formation
Shareholder limitations
Increase the number of permitted shareholders from 35 to
50. Currently a corporation is not eligible to be an S
corporation if it has more than 35 shareholders. Increasing
the number of permitted shareholders to 50 will make S
corporation status available to additional closely-held
businesses, allowing them the benefits of limited liability.
Further, increasing the number of permitted shareholders will
enable S corporations to raise more capital.
Permit tax-exempt organizations to be shareholders. This
would permit charities and pension plans to be eligible
shareholders of an S corporation, thereby increasing an S
corporation's access to certain capital markets.
Specifically, an S corporation would be able to establish an
employee stock ownership plan and would have access to
additional capital from charitable organizations and pension
funds. The bill further provides that the flow-through income
of an S corporation would be treated as unrelated business
taxable income to a tax-exempt shareholder as if the S
corporation's activities were conducted directly by the tax-
exempt shareholder.
Allow nonresident alien shareholders to own S corporation
stock. By permitting non-resident aliens to be eligible
shareholders of an S corporation, the bill expands an S
corporation's access to capital. In addition, it enhances an
S corporation's ability to expand into international markets
because it provides them the ability to offer an equity
interest to individuals they are trying to recruit to grow
their business overseas. To ensure collection of tax on
nonresident aliens, the bill subjects these shareholders to
U.S. withholding tax on S corporation income.
Preferred Stock and Convertible Debt
Permit S corporations to issue preferred stock. Currently,
S corporations may not issue more than one class of stock. By
permitting S corporations to issue preferred stock, the bill
increases access to capital from investors who insist on
having a preferential return. The provision also facilitates
family succession by permitting the older generation of
shareholders to relinquish control of the corporation but
maintain an equity interest. The bill also provides that a
distribution made with respect to qualified preferred stock
will be considered interest income to the shareholder and
deductible interest expense to the S corp.
Expand Safe Harbor Debt to permit convertible debt. This
provision permits S corporations to issue debt that may be
converted into stock of the corporation provided that the
terms of the debt are substantially the same as the terms
that could have been obtained from an unrelated party. The
provision will also permit the debt to be held not only by
qualified shareholders, but also by a person who is actively
and regularly engaged in the business of lending money. The
current law provision, which prohibits conversion of the debt
into stock, unnecessarily impairs the ability of an S
corporation to raise investment capital.
Subsidiaries
Permit an S corporation to own greater that 80% of another
corporation. Currently, S corporations may not own more than
79% of a C corporation. This provision removes this
limitation to allow S corporations to hold more than 80% of
the stock of a subsidiary C corporations, which will greatly
enhance an S corporation's ability to achieve significant
non-tax objectives in structuring their operations. In
reality, taxpayers get around current rules through complex
arrangements used by expensive tax planners. So, this
provision allows S corporation to do directly, what they now
do indirectly.
Permit S Corporations to own wholly-owned S Corporation
Subsidiaries. The provision would permit an S corporation to
serve as a holding company for the various operating S
corporations, which would simplify management of the group.
The holding company could enter into contracts on behalf of
the group, serve as a common paymaster, perform other
centralized management services, and facilitate obtaining
financing for the group.
preserving family-owned businesses
Expand the types of trusts that can own S corporation stock
to include certain complex trusts that qualify as ``electing
small business trusts.'' This provision would enable S
corporation shareholders to accomplish many estate planning
goals not currently available because of current law
limitations on the types of trusts that can be S corporation
shareholders. Specifically, this provision would enable S
corporation shareholders to establish complex trusts with
multiple beneficiaries and permit the trustee to have
discretion as to which beneficiary to make distributions.
Providing this type of flexibility is consistent with a major
underlying purpose of the S corporation--to provide a vehicle
for family-owned corporations.
Count all members of a single family that own an S
corporation's stock as a single shareholder. An election
could be made with the consent of all shareholders to count
family members that are not more than six generations removed
from a common ancestor as one shareholder for purposes of the
number of shareholder limitation.
removing traps for the unwary
Elections
Permit the Secretary of the Treasury to treat invalid
elections as effective and permit late elections. This
provision permits the IRS to retroactively validate an
invalid S corporation election in cases where the corporation
inadvertently failed to meet the definition of a small
business corporation or to obtain the required shareholder
consents. The bill sets forth the criteria under which the
IRS should validate such elections. The bill also provides
for an automatic waiver procedure for certain inadvertent
terminations. In addition, the bill provides that if a
corporation fails to make a timely S election (i.e., by the
15th day of the third month of the first S corporation year)
and the Secretary determines that there was reasonable cause
for the failure to make such election, the Secretary may
treat the election as timely made.
[[Page S6178]] Passive Investment Income
Repeal excessive passive income as a termination event.
Under current law, if more than 25 percent of the gross
receipts of an S corporation are passive investment income, a
corporate level tax will be imposed on the excess passive
income. In addition, en election of S corporation status will
be terminated if at the close of three consecutive years a
corporation has subchapter C earnings and profits and more
than 25 percent of gross receipts are from passive investment
income. The provision would increase the threshold for taxing
excess passive income from 25 percent to 50 percent.
Importantly, the provision would also provide that an S
corporation would not lose its S corporation status if it has
excess passive income for three consecutive years. Instead,
the corporate level tax rate applied to the excess passive
income would increase by 10 percent for each successive year.
The provision also makes it clear that items of income
connected with an S corp's trade or business will not be
considered passive income.
fringe benefits
Place S corporation shareholders in the same position as
regular corporations with respect to fringe benefits such as
life insurance premiums.
Repeal restrictions on qualified plan loans made to S
corporation shareholders.
technical proposals
Treat losses on liquidation of S corporations as ordinary
to the extent the loss created by ordinary income passthrough
triggered the liquidation. In the case of a liquidation of an
S corporation, current law can result in double taxation
because of a mismatch of ordinary income (realized at the
corporate level and passed through to the shareholder) and a
capital loss (recognized at the shareholder level on the
liquidating distribution). Although careful tax planning can
avoid this result, many S corporations do not have the
benefit of sophisticated tax counsel. The provision in the
bill would eliminate this potential trap.
Allow interim closing of the books in termination of
shareholder interest with consent of corporation and affected
shareholder. Current law requires that if a shareholder
terminates his interest in an S corporation during the
taxable year, the corporation and all persons who are
shareholders during the taxable year must agree to close the
books on the date of termination. The bill would eliminate
the requirement that all shareholders consent to the closing
and instead requires only that the ``affected shareholders''
(the shareholder whose interest is terminated and all
shareholders to whom such shareholder transferred shares
during the year) consent to the closing. This change will
ease procedural problems in preparing and filing timely
corporate tax returns.
Allow charitable contributions of inventory and scientific
property to be the same for S corporations as for regular
corporations. S corporations would be permitted an increased
charitable contribution, equivalent to the deduction amount
allowed to regular corporations.
______
By Mr. BRADLEY (for himself and Mr. Hollings):
S. 759. A bill to amend the Immigration and Nationality Act to limit
the adjustment of status of aliens who are unlawfully residing in the
United States; to the Committee on the Judiciary.
THE ILLEGAL IMMIGRATION ENFORCEMENT ACT OF 1995
Mr. BRADLEY. Madam President, I am pleased to introduce, for myself
and Senator Hollings, the Illegal Immigration Enforcement Act of 1995.
This is a bill to improve the Federal Government's ability to deter
illegal immigration by enhancing enforcement of existing laws that
prohibit employment of illegal aliens and bar overstays by legally
admitted visitors.
Madam President, I have been watching the unfolding immigration
debate with real concern. As I followed California's proposition 187
campaign, I realized the arguments over illegal immigration are
occurring in a vacuum. We are trying to address the impact of
immigration without understanding how it relates to the deeper
transformations that are shaping our society. We find ourselves
susceptible to the demagogic quick fix, and risk undermining the
diversity that underlies our strength as an American people.
Peter Drucker once said:
Every few hundred years throughout Western history, a sharp
transformation has occurred. In a matter of decades, society
rearranges itself--its world view, its basic values; its
social and political structures; its art; its key
institutions. Fifty years later, there is a new world. And
the people born into that world cannot even imagine the world
in which their grandparents lived and into which their own
parents were born.
Madam President, we are currently living through such a period of
transformation. Not since the age of democratic revolution coincided
with the industrial revolution has our world undergone such sweeping
change as we are having today. The forces at work in our lives today
are as dramatic and powerful as the Declaration of Independence and the
steam engine were two centuries ago.
We face today a rapidly transforming world full of new opportunities.
But those opportunities are accompanied by profound uncertainties and
painful adaptations. Progress creates losers as well as winners. For
example, the death of the Soviet Union has ended our fear of nuclear
annihilation. At the same time, the resulting military downsizing has
cost over 1.1 million jobs in the defense sector alone since 1987. As a
result, and not for the first time in our history, politicians and
voters have seized upon immigration, especially illegal immigration, as
a scapegoat for the deeper uncertainties we feel.
Illegal immigration has also become a lightning rod for worries about
the budget crises we face at all levels of Government. There is no
doubt that illegal immigrants impose a cost on taxpayers. According to
the estimates by the Urban Institute, the seven most affected States
pay approximately $3.1 billion yearly on education, $471 million on
incarceration, and $313 million on providing medical treatment for
undocumented aliens. The Urban Institute's fiscal year 1993 estimates
for my own State of New Jersey, which has the sixth largest population
of illegal aliens, are $146 million for education, $6.6 million for
incarceration, and $0.5-3.9 million for Medicaid, for a total of
$153.1-156.5 million.
Anger over illegal immigration inevitably creates a backlash against
legal immigrants and even citizens of different ethnic backgrounds.
However, this is a self-defeating response. Our country is increasingly
a mixture of races, languages, and religions, as new immigrants arrive
in search of economic promise and political freedom. By the year 2000,
only 57 percent of the people who enter the work force in America will
be native-born white Americans. That means that the economic future of
all Americans will depend increasingly on the talents of nonwhite
Americans. We will all either advance together or each of us will be
diminished.
We most need to appreciate the remarkable opportunity that our racial
and ethnic diversity represents for the future of our country. Our
immigrants and new citizens can be our guide to the cultural rhythms in
the fastest growing areas of the world economy. Given high-quality and
price-competitive goods, the cultural knowledge they have can American
the advantage.
Our diversity can mean more jobs, more prosperity for all Americans,
if we can seize the moment and not run away from it.
To do so, we must reinvigorate the institutions and organizations
which integrate new arrivals into American society. I have spoken
elsewhere of the crisis afflicting civil society in this country. One
of the effects of the decline of the institutions of civil society is
the weakening of the lodges, clubs, churches, Scout troops, and other
organizations which used to give immigrants entree into American
society. As a result, we all too often see groups of teenage immigrants
operating on the fringes of society instead of productive new members
integrating into the heart of American society.
We cannot realize the opportunity presented by our diversity if we
let frustration over the Federal Government's inability to control its
borders spill over into action against those who are here legally. We
must control illegal immigration in order to make our country safe for
legal immigration. We must control illegal immigration if we are to
make our country safe for diversity.
There is no shortage of laws on the books to control illegal
immigration. There are laws to punish employers and smugglers of
illegal aliens, to deny illegal aliens most Government benefits and
even to compensate the States for some of the costs associated with
illegal immigration.
The primary problem, however, is enforcement. The Immigration and
Naturalization Service is underfunded and hindered by a history of
incompetence that the current management is hard put to reverse. The
INS cannot keep illegal aliens out of the country, track them once they
enter, or remove them once they are identified. Its various databases
are, frankly, a shambles.
[[Page S6179]] At the same time, certain economic interests benefit
from the labor of illegal aliens. They profit from the general climate
of neglect in which they can demand long hours of labor for low wages
and few benefits.
Madam President, sweatshops manned by illegal men, women, and
children are a disgrace to America and a drag on the fortunes of legal
immigrant and American workers. These are the very inhumane labor
conditions and practices we try to improve in countries abroad, but
they are here, in America, today. American workers and honest American
employers should not have to compete against this exploited labor
force.
That brings me, Madam President, to my bill, the Illegal Immigration
Enforcement Act of 1995. This legislation contains three major
provisions which can help end this gentleman's agreement and will
enforce the laws that are on the books. The gentleman's agreement is:
pass tough legislation, but do not enforce it. Talk about being tough
on illegal immigrants, but allow certain economic interests to benefit
from illegal immigrant labor.
The first provision goes to, I think, the root problem, which is
employment. Most illegal aliens do not come to the United States for
health care or welfare or even education. They come to work. That means
that the way to discourage them is not to punish their children by
denying them medical care or education, as proposition 187 tries to do,
but instead remove the employment magnet and remove the incentive that
attracts them to the United States.
Existing law, starting with the Immigration Reform and Control Act of
1986, contains provisions which would reduce employment opportunities
for illegal immigrants if they were simply enforced. Before enacting
fundamental changes in this bedrock piece of legislation, we should try
enforcing the laws already on the books. Empty legislating is no
substitute for enforcement.
The place to start is employer sanctions. The 1986 act, better known
as the Simpson-Mazzoli Act, imposes civil penalties on employers of
illegal aliens of up to $10,000 per alien for repeat offenders. There
is also a criminal penalty of up to 6 months imprisonment and a $3,000
fine for pattern or practice violations.
Madam President, enforcement of employer sanctions is a low priority
at INS. In part, this is because the labor regulatory function is
different from the policing function usually done by the investigative
branch of the Immigration and Naturalization Service. As in any
bureaucracy, ``different'' means ``low priority.''
In addition, this branch has a mandate to focus on antismuggling and
removal of criminal aliens. By implication, everything else has low
priority.
This low priority shows up in the figures. The 1986 act authorized
$100 million per year to enforce employer sanctions, and even that was
probably too little, but by fiscal year 1994, the appropriation had
shrunk to $23 million. Funding has recovered somewhat since 1994, but
remains well under the amount necessary to implement the law properly.
As a result, the number of cases investigated has declined by nearly
50 percent from 1989 to 1994. In particular, the number of
investigations resulting from leads, the most productive
investigations, declined from 5,118 in 1989 to 2,240 in 1994.
It is clear that as long as the same INS branch tries to perform
investigative and employer sanctions functions, the latter will have to
take a back seat. The way it is currently structured, employer
sanctions will always take a back seat.
My bill fixes this problem by creating a separate Office for the
Enforcement of Employer Sanctions and authorizing it for $100 million,
the figure that was contained in the 1986 Act.
This first provision of my bill also addresses the potential for
employment discrimination that exists in any employment eligibility
legislation. For example, in 1990, a GAO study found that the 1986
act's employer sanctions provisions resulted in employment
discrimination. The study suggested three causes for this:
First, the employers do not understand the law's requirements;
second, employers do not understand how to determine employment
eligibility; and third, the prevalence of counterfeit documents
increases employer confusion.
As the GAO study implies, the problem is not with the law but with
the INS's failure to educate employers about what the law requires them
to do. Most employers, for example, still do not know that they must
fill out an I-9 employment eligibility form for every employee, whether
that employee is white, African-American, Hispanic, Asian, or
otherwise. This is the key to combating discrimination, educating
employers that this form applies to all.
Note that the GAO study reports that an estimated 346,000 employers
said that they applied the 1986 act's verification system only to
persons who had a foreign appearance or accent,
and recommends, among other steps, increasing employer understanding
through effective education efforts.
Madam President, my bill takes this problem head on by mandating that
the INS Office for the Enforcement of Employer Sanctions be charged
with ``educating employers on the requirements of the law, and in other
ways as is necessary to prevent employment discrimination.''
The bottom line, then, is that my bill does not add to employers'
burdens; it does not add one single form to the mountain of paperwork
they must already fill out when they hire a new legal worker. Instead,
it requires the Federal Government to explain the existing law to them.
In this way, it will reduce the burden of uncertainty employers now
bear.
Let me point out as well that the bill complements other efforts by
the administration, Senator Feinstein, Senator Simpson--the coauthor of
the 1986 act--and others, to reduce the number of documents that can be
used to confirm employment eligibility, make it more difficult to
counterfeit the documents and develop a more reliable national
employment eligibility data base.
So, Madam President, the first initiative in the bill is to tighten
up employer sanctions.
Second, the bill prevents illegal aliens from reaping the rewards of
their illegal entry into the United States. It prohibits adjustment of
status within the United States for those seeking employment-based
legal immigrant status. Further, it disqualifies those who have worked
illegally in the United States from becoming legal immigrants.
Currently, those in the United States illegally can try to adjust to a
legal status, based upon family relationship or employment in a hard-
to-fill job.
While I do not advocate separating families, we can and should go
after those who come to the United States illegally and expect to find
an employer who will sponsor them for adjustment to legal status.
My bill does this by forcing those who want to adjust for work-
related reasons to do so outside the United States. So that, if they
are denied, they cannot simply melt back into the population. In
addition, by making previous illegal employment a disqualification for
adjustment of status for work-related reasons, this bill denies illegal
workers the benefit of their lawbreaking.
Finally, Madam President, the bill addresses the problem of overstays
by visitors admitted to this country legally. The debate on illegal
immigration is focused on the United States-Mexican border. This is
understandable, given the flow of illegal aliens across the border and
the impact of this flow on border States. However, even sealing off the
United States-Mexican border would not solve the problem of illegal
immigration.
Indeed, Madam President, the United States-Mexican border is less
than half of the problem. The Immigration and Naturalization Service
estimates that 52 percent of all illegal aliens residing in the United
States do not sneak across the U.S. border. Instead, they enter legally
on visitor's visas and then overstay their visas. The percentage in my
State of New Jersey is even higher, given its distance from Mexico and
the sources of our illegal alien population. The INS estimates that 60
percent of New Jersey's illegal aliens enter the country legally on a
visitor's visa and then just overstay, convinced that the
[[Page S6180]] INS will never find them. And most times they are right.
The administration and Congress, fixated on the Mexican border, are
ignoring this very substantial problem. My bill addresses it by
requiring the INS to develop an entry and exit data base that will
alert it to overstays by legally admitted nonimmigrants. It is pretty
simple. We cannot hope to control our borders unless we know who is
inside them. Once we know who is overstaying his or her visa and where
that person is staying, we can easily take steps to remove that person
from our country. It is a very simple step. It is not taken today, so
you have 52 percent of the people who come on legitimate visas
disappearing into the society as a whole.
Madam President, the terrorist atrocity in Oklahoma City reminded us
that we live in a dangerous world. Of course, non-Americans have no
monopoly on terrorism. That is what Oklahoma City said as well. The
evidence indicates that the Oklahoma City bombing was not perpetrated
by an illegal alien. However, illegal aliens overstaying tourism visas
have been implicated in terrorism in this country. For example, take
Mohammad Salameh, who is accused of having rented the van used in the
World Trade Center bombing. He was living in the United States
illegally at the time of that crime. He entered this country legally,
on a 6-month tourist visa, on February 17, 1988. And he still had not
departed at the time the World Trade Center bombing on February 26,
1993--5 years later.
Under current procedures, the INS had no idea of Salameh's failure to
depart or his whereabouts in the United States. Under this bill, the
INS would have been alerted to Salameh's overstay and illegal residence
in the United States nearly 4\1/2\ years before the crime.
So, Madam President, there you have it. Enforcement of employer
sanctions, restrictions on rewarding aliens for illegal work, and
measures to discourage overstays by legally admitted visitors. With
these steps toward enforcing existing law, we can help to build common
ground here at home, to parlay our diversity into strength, to protect
legal immigration, and to lead the world by the power of our example.
Mr. President, I ask unanimous consent that the text of the bill be
printed in the Record.
There being no objection, the bill was ordered to be printed in the
Record, as follows:
S. 759
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Illegal Immigration
Enforcement Act of 1995''.
SEC. 2. FINDINGS.
The Congress makes the following findings:
(1) The Government of the United States has failed to curb
the influx of undocumented aliens into the United States.
(2) The social and economic costs of illegal immigration
create a backlash against legal immigrants and citizens of
different ethnic backgrounds.
(3) The primary magnet for illegal aliens is work.
(4) Existing law contains provisions to prevent the
employment of undocumented aliens.
(5) Properly enforced, these provisions could reduce
employment opportunities for illegal immigrants and thereby
reduce the incentive for illegal immigration.
(6) With proper enforcement and employer education, the
employer sanctions laws should not result in employment
discrimination.
(7) However, these laws are not now adequately enforced.
(8) This is in part because Immigration and Naturalization
Service inspectors have other, legislatively mandated,
priorities that have first call on their limited resources.
(9) Many illegal immigrants adjust their status to become
legal residents.
(10) This prospect is another encouragement to illegal
immigration.
(11) Statistics show that approximately one-half of all
illegal aliens living in the United States arrived legally on
nonimmigrant visas, then failed to depart.
(12) The Immigration and Naturalization Service (INS) is
currently unable to identify or locate such visa overstayers
in a systematic fashion.
SEC. 3. ENFORCEMENT OF EMPLOYER SANCTIONS.
(a) Establishment of New Office.--There shall be in the
Immigration and Naturalization Service of the Department of
Justice an Office for the Enforcement of Employer Sanctions
(in this section referred to as the ``Office'').
(b) Functions.--The functions of the Office established
under subsection (a) shall be--
(1) to investigate and prosecute violations of section
274A(a) of the Immigration and Nationality Act (8 U.S.C.
1324a(a)); and
(2) to educate employers on the requirements of the law and
in other ways as necessary to prevent employment
discrimination.
(c) Authorization of Appropriations.--There are authorized
to be appropriated to the Attorney General $100,000,000 to
carry out the functions of the Office established under
subsection (a).
SEC. 4. LIMITATION ON ADJUSTMENT OF STATUS.
Section 245(c) of the Immigration and Nationality Act (8
U.S.C. 1255(c)) is amended--
(1) by striking ``or (4)'' and inserting ``(4)''; and
(2) by inserting before the period at the end the
following: ``(5) any alien who seeks adjustment of status as
an employment-based immigrant; or (6) any alien who was
employed while the alien was an unauthorized alien, as
defined in section 274(h)(3)''.
SEC. 5. MONITORING OF OVERSTAYS.
The Attorney General shall develop an entry and exit data
base that will permit the Attorney General to identify
lawfully admitted nonimmigrants who overstay their visas.
______
By Mr. ROCKEFELLER:
S. 760. A bill to establish the National Commission on the Long-Term
Solvency of the Medicare Program; to the Committee on Finance.
THE MEDICARE COMMISSION ACT OF 1995
Mr. ROCKEFELLER. Mr. President, I ask unanimous consent that
the text of the bill be printed in the Record.
There being no objection, the bill was ordered to be printed in the
Record, as follows:
S. 760
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Medicare Commission Act of
1995''.
SEC. 2. ESTABLISHMENT.
(a) Establishment.--There is established a commission to be
known as the National Commission on the Long-Term Solvency of
the Medicare Program (hereafter in this Act referred to as
the ``Commission'').
(b) Membership.--The Commission shall be composed of 15
members appointed as follows:
(1) Five members shall be appointed by the President from
among officers or employees of the executive branch, private
citizens of the United States, or both. Not more than 3
members selected by the President shall be members of the
same political party.
(2) Five members shall be appointed by the Majority Leader
of the Senate from among members of the Senate, private
citizens of the United States, or both. Not more than 3 of
the members selected by the Majority Leader shall be members
of the same political party.
(3) Five members shall be appointed by the Speaker of the
House of Representatives from among members of the House of
Representatives, private citizens of the United States, or
both. Not more than 3 of the members selected by the Speaker
shall be members of the same political party.
(4) Date.--The appointments of the members of the
Commission shall be made no later than November 30, 1995.
(c) Period of Appointment; Vacancies.--Members shall be
appointed for the life of the Commission. Any vacancy in the
Commission shall not affect its powers, but shall be filled
in the same manner as the original appointment.
(d) Initial Meeting.--No later than 30 days after the date
on which all members of the Commission have been appointed,
the Commission shall hold its first meeting.
(e) Meetings.--The Commission shall meet at the call of the
Chairman.
(f) Quorum.--A majority of the members of the Commission
shall constitute a quorum, but a lesser number of members may
hold hearings.
(g) Chairman.--The Commission shall select a Chairman from
among its members.
SEC. 3. DUTIES OF THE COMMISSION.
(a) Analyses and Recommendations.--
(1) In general.--The Commission shall--
(A) review relevant analyses of the current and long-term
financial condition of the medicare trust funds;
(B) identify problems that may threaten the long-term
solvency of such trust funds;
(C) analyze potential solutions to such problems that will
both assure the financial integrity of the medicare program
under title XVIII of the Social Security Act (42 U.S.C. 1395
et seq.) and the provision of appropriate health benefits;
and
(D) provide appropriate recommendations to the Secretary of
Health and Human Services, the President, and the Congress.
(2) Definition of medicare trust funds.--For purposes of
this subsection, the term ``medicare trust funds'' means the
Federal Hospital Insurance Trust Fund established under
section 1817 of the Social Security Act (42 U.S.C. 1395i) and
the Federal Supplementary Medical Insurance Trust Fund
established under section 1841 of such Act (42 U.S.C. 1395t).
(b) Report.--The Commission shall submit its report to the
President and the Congress not later than December 31, 1996.
[[Page S6181]] SEC. 4. POWERS OF THE COMMISSION.
(a) Hearings.--The Commission may hold such hearings, sit
and act at such times and places, take such testimony, and
receive such evidence as the Commission considers advisable
to carry out the purposes of this Act.
(b) Information From Federal Agencies.--The Commission may
secure directly from any Federal department or agency such
information as the Commission considers necessary to carry
out the provisions of this Act. Upon request of the Chairman
of the Commission, the head of such department or agency
shall furnish such information to the Commission.
(c) Postal Services.--The Commission may use the United
States mails in the same manner and under the same conditions
as other departments and agencies of the Federal Government.
SEC. 5. COMMISSION PERSONNEL MATTERS.
(a) Compensation of Members.--
(1) Officers and employees of the federal government.--All
members of the Commission who are officers or employees of
the Federal Government shall serve without compensation in
addition to that received for their services as officers or
employees of the United States.
(2) Private citizens of the united states.--
(A) In general.--Subject to subparagraph (B), all members
of the Commission who are not officers or employees of the
Federal Government shall serve without compensation for their
work on the Commission.
(B) Travel expenses.--The members of the Commission who are
not officers or employees of the Federal Government shall be
allowed travel expenses, including per diem in lieu of
subsistence, at rates authorized for employees of agencies
under subchapter I of chapter 57 of title 5, United States
Code, while away from their homes or regular places of
business in the performance of services for the Commission,
to the extent funds are available therefor.
(b) Staff.--
(1) In general.--The Chairman of the Commission may,
without regard to the civil service laws and regulations,
appoint and terminate an executive director and such other
additional personnel as may be necessary to enable the
Commission to perform its duties. At the request of the
Chairman, the Secretary of Health and Human Services shall
provide the Commission with any necessary administrative and
support services. The employment of an executive director
shall be subject to confirmation by the Commission.
(2) Compensation.--The Chairman of the Commission may fix
the compensation of the executive director and other
personnel without regard to the provisions of chapter 51 and
subchapter III of chapter 53 of title 5, United States Code,
relating to classification of positions and General Schedule
pay rates, except that the rate of pay for the executive
director and other personnel may not exceed the rate payable
for level V of the Executive Schedule under section 5316 of
such title.
(c) Detail of Government Employees.--Any Federal Government
employee may be detailed to the Commission without
reimbursement, and such detail shall be without interruption
or loss of civil service status or privilege.
(d) Procurement of Temporary and Intermittent Services.--
The Chairman of the Commission may procure temporary and
intermittent services under section 3109(b) of title 5,
United States Code, at rates for individuals which do not
exceed the daily equivalent of the annual rate of basic pay
prescribed for level V of the Executive Schedule under
section 5316 of such title.
SEC. 6. TERMINATION OF THE COMMISSION.
The Commission shall terminate 30 days after the date on
which the Commission submits its report under section 2(b).
SEC. 7. FUNDING FOR THE COMMISSION.
Any expenses of the Commission shall be paid from such
funds as may be otherwise available to the Secretary of
Health and Human Services.
____________________