[Congressional Record Volume 144, Number 100 (Thursday, July 23, 1998)]
[Senate]
[Pages S8920-S8921]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. ALLARD (for himself, Mr. D'Amato, Mr. Faircloth, Mr. 
        Hagel, Mr. Enzi, Mr. Bennett, Mr. Mack, Mr. Shelby, and Mr. 
        Grams):
  S. 2346. A bill to amend the Internal Revenue Code of 1986 to expand 
S corporation eligibility for banks, and for other purposes; to the 
Committee on Finance.


  the small business and financial institutions tax relief act of 1998

 Mr. ALLARD. Mr. President, today I am pleased to introduce 
legislation that will expand and improve Subchapter S of the Internal 
Revenue Code. I am joined in this effort by Senators D'Amato, 
Faircloth, Hagel, Enzi, Bennett, Mack, Shelby, and Grams.
  The Subchapter S provisions of the Internal Revenue Code reflect the 
desire of Congress to eliminate the double tax burden on small business 
corporations. Pursuant to that desire, Subchapter S has been 
liberalized a number of times, most recently in 1996. This legislation 
contains several provisions that will make the Subchapter S election 
more widely available to small businesses in all sectors. It also 
contains several provisions of particular benefit to community banks 
that may be contemplating a conversion to Subchapter S. Financial 
institutions were first made eligible for the Subchapter S election in 
1996. This legislation builds on and clarifies the Subchapter S 
provisions applicable to financial institutions.
  Mr. President, as Congress considers credit union legislation and 
financial modernization legislation, it is important that we explore 
ways in which we can ensure that the tax and regulatory burden on our 
community bankers remains reasonable. This legislation is reflective of 
that desire.
  Mr. President, I ask unanimous consent that the text of the bill and 
the attached explanation of the provisions of the bill be printed in 
the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                S. 2346

       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 ``Small Business and Financial 
     Institutions Tax Relief Act of 1998''.

     SEC. 2. EXPANSION OF S CORPORATION ELIGIBLE SHAREHOLDERS TO 
                   INCLUDE IRAS.

       (a) In General.--Section 1361(c)(2)(A) of the Internal 
     Revenue Code of 1986 (relating to certain trusts permitted as 
     shareholders) is amended by inserting after clause (v) the 
     following:
       ``(vi) A trust described in section 408(a).''
       (b) Treatment as Shareholder.--Section 1361(c)(2)(B) of the 
     Internal Revenue Code of 1986 (relating to treatment as 
     shareholders) is amended by adding at the end the following:
       ``(vi) In the case of a trust described in clause (vi) of 
     subparagraph (A), the individual for whose benefit the trust 
     was created shall be treated as a shareholder.''
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1998.

     SEC. 3. EXCLUSION OF INVESTMENT SECURITIES INCOME FROM 
                   PASSIVE INCOME TEST FOR BANK S CORPORATIONS.

       (a) In General.--Section 1362(d)(3)(C) of the Internal 
     Revenue Code of 1986 (relating to passive investment income 
     defined) is amended by adding at the end the following:
       ``(v) Exception for bank investment securities income.--In 
     the case of a bank (as defined in section 581), the term 
     `passive investment income' shall not include interest on 
     investment securities held by a bank.''
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     1998.

     SEC. 4. INCREASE IN NUMBER OF ELIGIBLE SHAREHOLDERS TO 150.

       (a) In General.--Section 1361(b)(1)(A) of the Internal 
     Revenue Code of 1986 (defining small business corporation) is 
     amended by striking ``75'' and inserting ``150''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     1998.

     SEC. 5. TREATMENT OF DIRECTOR QUALIFYING STOCK.

       (a) In General.--Section 1361(c) of the Internal Revenue 
     Code of 1986 (relating to special rules for applying 
     subsection (b)) is amended by adding at the end the 
     following:
       ``(7) Director qualifying stock.--
       ``(A) In general.--For purposes of subsection (b)(1)(D), 
     director qualifying stock shall not be treated as a second 
     class of stock.
       ``(B) Director qualifying stock defined.--For purposes of 
     this paragraph, the term `director qualifying stock' means 
     any stock held by any director of a bank (as defined in 
     section 581) as mandated by banking regulatory 
     requirements.''
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     1998.

     SEC. 6. BAD DEBT CHARGE OFFS IN YEARS AFTER ELECTION YEAR 
                   TREATED AS ITEMS OF BUILT IN LOSS.

       The Secretary of the Treasury shall modify Regulation 
     1.1374-4(f) for taxable years beginning after December 31, 
     1998, with respect to bad debt deductions under section 166 
     of the Internal Revenue Code of 1986 by allowing such 
     deductions to be properly taken into account throughout the 
     recognition period (as defined in section 1374(d)(7) of such 
     Code).

     SEC. 7. INCLUSION OF BANKS IN 3-YEAR S CORPORATION RULE FOR 
                   CORPORATE PREFERENCE ITEMS.

       (a) In General.--Section 1363(b) of the Internal Revenue 
     Code of 1986 (relating to computation of corporation's 
     taxable income) is amended by adding at the end the following 
     new flush sentence:

     ``Paragraph (4) shall apply to any bank whether such bank is 
     an S corporation or a qualified subchapter S subsidiary.''
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     1998.
                                  ____



   Small Business and Financial Institutions Tax Relief Act of 1998--
             Legislation to expand and improve Subchapter S

       Subchapter S of the Internal Revenue Code was first enacted 
     in 1958 to reduce the tax burden on small business 
     corporations. The Subchapter S provisions have been 
     liberalized a number of times over the last two decades, most 
     significantly in 1982, and again in 1996. This liberalization 
     reflects a desire on the part of Congress to relieve the tax 
     burden on small business. S corporations do not pay corporate 
     level income taxes, earnings are passed through to the 
     shareholder level where income taxes are paid, thus 
     eliminating the double taxation of corporations. By contrast, 
     Subchapter C corporations pay corporate level income taxes on 
     earnings, and shareholders pay income taxes again on those 
     same earnings when they are passed through as dividends.
       This proposed S corporation improvement legislation would 
     be helpful to many small

[[Page S8921]]

     businesses, but a number of its provisions are particularly 
     applicable to banks.
       Congress made S corporation status available to small banks 
     for the first time in the 1996 ``Small Business Job 
     Protection Act'' but many small banks are having trouble 
     qualifying under the current rules. The proposed legislation:
       Increases the number of S corporation eligible shareholders 
     from 75 to 150.
       Permits S corporation shares to be held as Individual 
     Retirement Accounts (IRAs).
       S corporations are restricted in the amount of passive 
     investment income they may generate. This bill makes clear 
     that any interest on investments maintained by a bank for 
     liquidity and safety and soundness purposes shall not be 
     ``passive'' income.
       S corporations may only have one class of stock. This bill 
     provides that any stock that bank directors must hold under 
     banking regulations shall not be a disqualifying second class 
     of stock.
       Banks that are converting to S corporations must recapture 
     any accumulated bad debt reserve. This bill permits banks to 
     deduct bad debt charge offs over the same number of years 
     that the accumulated bad debt reserve must be recaptured.
       S corporations that convert from C corporations are denied 
     certain interest deductions (preference items) for up to 
     three years following the conversion, at the end of three 
     years the deductions are allowed. The bill clarifies that 
     this Three Year S Corporation Rule for certain interest 
     deduction preference items applies to S corporation banks, 
     thereby providing equitable treatment for S corporation 
     banks.
                                 ______