[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.
     

                          ____________________