[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[S. 3838 Introduced in Senate (IS)]
109th CONGRESS
2d Session
S. 3838
To amend the Internal Revenue Code of 1986 to provide for S corporation
reform, and for other purposes.
_______________________________________________________________________
IN THE SENATE OF THE UNITED STATES
August 3, 2006
Mr. Hatch (for himself and Mrs. Lincoln) introduced the following bill;
which was read twice and referred to the Committee on Finance
_______________________________________________________________________
A BILL
To amend the Internal Revenue Code of 1986 to provide for S corporation
reform, and for other purposes.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE; REFERENCE; TABLE OF CONTENTS.
(a) Short Title.--This Act may be cited as the ``S Corporation
Reform Act of 2006''.
(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 for this Act is as
follows:
Sec. 1. Short title; reference; table of contents.
TITLE I--ELIGIBLE SHAREHOLDERS OF AN S CORPORATION
Sec. 101. Nonresident aliens allowed to be shareholders.
Sec. 102. Expansion of S corporation eligible shareholders to include
IRAS.
TITLE II--QUALIFICATION AND ELIGIBILITY REQUIREMENTS OF S CORPORATIONS
Sec. 201. Issuance of preferred stock permitted.
Sec. 202. Safe harbor expanded to include convertible debt.
Sec. 203. Repeal of excessive passive investment income as a
termination event.
Sec. 204. Modifications to passive income rules.
Sec. 205. Adjustment to basis of s corporation stock for certain
charitable contributions.
TITLE III--TREATMENT OF S CORPORATION SHAREHOLDERS
Sec. 301. Treatment of losses to shareholders.
Sec. 302. Deductibility of interest expense incurred by an electing
small business trust to acquire S
corporation stock.
Sec. 303. Back to back loans as indebtedness.
TITLE IV--EXPANSION OF S CORPORATION ELIGIBILITY FOR BANKS
Sec. 401. Treatment of qualifying director shares.
Sec. 402. Recapture of bad debt reserves.
TITLE V--QUALIFIED SUBCHAPTER S SUBSIDIARIES
Sec. 501. Treatment of the sale of interest in a qualified subchapter S
subsidiary.
TITLE VI--ADDITIONAL PROVISIONS
Sec. 601. Elimination of all earnings and profits attributable to pre-
1983 years.
Sec. 602. Repeal of LIFO recapture tax.
Sec. 603. Expansion of post-termination transition period.
Sec. 604. Reduction in tax rate on excess net passive income.
Sec. 605. Increase in cap on qualified small issue bonds.
Sec. 606. Special rules of application.
TITLE I--ELIGIBLE SHAREHOLDERS OF AN S CORPORATION
SEC. 101. NONRESIDENT ALIENS ALLOWED TO BE SHAREHOLDERS.
(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.--
(A) Paragraph (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) Clause (i) of section 280G(b)(5)(A) (relating
to general rule for exemption for small business
corporations, etc.) is amended by striking ``but
without regard to paragraph (1)(C) thereof''.
(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),
(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) Pro rata share of s corporation income.--The last
sentence of section 1441(b) (relating to income items) is
amended to read as follows: ``In the case of a nonresident
alien individual who is a member of a domestic partnership or a
shareholder of an S corporation, the items of income referred
to in subsection (a) shall be treated as referring to items
specified in this subsection included in his distributive share
of the income of such partnership or in his pro rata share of
the income of such S corporation.''.
(3) 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,
``(3) any reference to section 704 shall be treated as a
reference to section 1366, and
``(4) no withholding tax under subsection (a) shall be
required in the case of any income realized by such corporation
and allocable to a shareholder which is an electing small
business trust (as defined in section 1361(e)).''.
(4) 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 CORPORATION
SHAREHOLDERS' SHARE OF EFFECTIVELY CONNECTED INCOME.''.
(5) 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 corporation
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 redesignating
subsection (c) as subsection (d) and by inserting after
subsection (b) 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.''.
(c) Application of Other Withholding Tax Rules on Nonresident Alien
Shareholders.--
(1) Section 1441.--Section 1441 (relating to withholding of
tax on nonresident aliens) is amended by redesignating
subsection (g) as subsection (h) and by inserting after
subsection (f) the following new subsection:
``(g) 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) no deduction or withholding under subsection (a)
shall be required in the case of any item of income realized by
such corporation and allocable to a shareholder which is an
electing small business trust (as defined in section
1361(e)).''.
(2) Section 1445.--Section 1445(e) (relating to special
rules relating to distributions, etc., by corporations,
partnerships, trusts, or estates) is amended by redesignating
paragraph (6) as paragraph (7) and by inserting after paragraph
(5) the following new paragraph:
``(6) S corporation treated as partnership, etc.--For
purposes of this section--
``(A) an S corporation shall be treated as a
partnership, and
``(B) the shareholders of such corporation shall be
treated as partners of such partnership, and
``(C) no deduction or withholding under subsection
(a) shall be required in the case of any gain realized
by such corporation and allocable to a shareholder
which is an electing small business trust (as defined
in section 1361(e)).''.
(d) Additional Conforming Amendments.--
(1) Section 1361(c)(2)(A)(i) is amended by striking ``who
is a citizen or resident of the United States''.
(2) Section 1361(d)(3)(B) is amended by striking ``who is a
citizen or resident of the United States''.
(3) Section 1361(e)(2) is amended by inserting ``(including
a nonresident alien)'' after ``person'' the first place it
appears.
(e) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2006.
SEC. 102. EXPANSION OF S CORPORATION ELIGIBLE SHAREHOLDERS TO INCLUDE
IRAS.
(a) In General.--Clause (vi) of section 1361(c)(2)(A) (relating to
certain trusts permitted as shareholders) is amended to read as
follows:
``(vi) A trust which constitutes an
individual retirement account under section
408(a), including one designated as a Roth IRA
under section 408A.''.
(b) Sale of Stock in IRA Relating to S Corporation Election Exempt
From Prohibited Transaction Rules.--Paragraph (16) of section 4975(d)
(relating to exemptions) is amended to read as follows:
``(16) a sale of stock held by a trust which constitutes an
individual retirement account under section 408(a) to the
individual for whose benefit such account is established if
``(A) such sale is pursuant to an election under
section 1362(a) by the issuer of such stock,
``(B) such sale is for fair market value at the
time of sale (as established by an independent
appraiser) and the terms of the sale are otherwise at
least as favorable to such trust as the terms that
would apply on a sale to an unrelated party,
``(C) such trust does not pay any commissions,
costs, or other expenses in connection with the sale,
and
``(D) the stock is sold in a single transaction for
cash not later than 120 days after the S corporation
election is made.''.
(c) Effective Date.--The amendments made by this section shall take
effect on the date of the enactment of this Act.
TITLE II--QUALIFICATION AND ELIGIBILITY REQUIREMENTS OF S CORPORATIONS
SEC. 201. ISSUANCE OF PREFERRED STOCK PERMITTED.
(a) In General.--Section 1361 (defining S corporation) is amended
by adding at the end the following new subsection:
``(f) Treatment of Qualified Preferred Stock.--
``(1) In general.--For purposes of this subchapter--
``(A) qualified preferred stock shall not be
treated as a second class of stock, and
``(B) no person shall be treated as a shareholder
of the corporation by reason of holding qualified
preferred stock.
``(2) Qualified preferred stock defined.--For purposes of
this subsection, the term `qualified preferred stock' means
stock which meets the requirements of subparagraphs (A), (B),
and (C) of section 1504(a)(4). Stock shall not fail to be
treated as qualified preferred stock merely because it is
convertible into other stock.
``(3) 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
ordinary income of the holder and deductible to the corporation
as an expense in computing taxable income under section 1363(b)
in the year such distribution is received.''.
(b) Conforming Amendments.--
(1) Paragraph (1) of section 1361(b) is amended by
inserting ``, except as provided in subsection (f),'' before
``which does not''.
(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 (as defined in
section 1361(f)) shall not, with respect to such stock, be
allocated any of the items described in paragraph (1).''.
(3) So much of clause (ii) of section 354(a)(2)(C) as
precedes subclause (II) is amended to read as follows:
``(ii) Recapitalization of family-owned
corporations and s corporations.--
``(I) In general.--Clause (i) shall
not apply in the case of a
recapitalization under section
368(a)(I)(E) of a family-owned
corporation or S corporation.''.
(4) Subsection (a) of section 1373 is amended by striking
``and'' at the end of paragraph (1), by striking the period at
the end of paragraph (2) and inserting ``, and'', and by adding
at the end the following new paragraph:
``(3) no amount of an expense deductible under this
subchapter by reason of section 1361(f)(3) shall be apportioned
or allocated to such income.''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2006.
SEC. 202. SAFE HARBOR EXPANDED TO INCLUDE CONVERTIBLE DEBT.
(a) In General.--Subparagraph (B) of section 1361(c)(5) (defining
straight debt) is amended by striking clauses (ii) and (iii) and
inserting the following new clauses:
``(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),
``(IV) an exempt organization
described in paragraph (6), or
``(V) a person which is actively
and regularly engaged in the business
of lending money.''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2006.
SEC. 203. 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) Conforming Amendments.--
(1) Section 1362(f)(1) is amended by striking ``or (3)''.
(2) Clause (i) of section 1042(c)(4)(A) is amended by
striking ``section 1362(d)(3)(C)'' and inserting ``section
1375(b)(3)''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2006.
SEC. 204. MODIFICATIONS TO PASSIVE INCOME RULES.
(a) Increased Limit.--
(1) In general.--Subsection (a)(2) of section 1375
(relating to tax imposed when passive investment income of
corporation having accumulated earnings and profits exceeds 25
percent of gross receipts) is amended by striking ``25
percent'' and inserting ``60 percent''.
(2) Conforming amendments.--
(A) Subparagraph (J) of section 26(b)(2) is amended
by striking ``25 percent'' and inserting ``60
percent''.
(B) Clause (i) of section 1375(b)(1)(A) is amended
by striking ``25 percent'' and inserting ``60
percent''.
(C) The heading for section 1375 is amended by
striking ``25 percent'' and inserting ``60 percent''.
(D) The table of sections for part III of
subchapter S of chapter 1 is amended by striking ``25
percent'' in the item relating to section 1375 and
inserting ``60 percent''.
(b) Repeal of Passive Income Capital Gain Category.--
(1) In general.--Subsection (b) of section 1375 (relating
to tax imposed when passive investment income of corporation
having accumulated earnings and profits exceeds 60 percent of
gross receipts), as amended by subsection (a), is amended by
striking paragraphs (3) and (4) and inserting the following new
paragraph:
``(3) 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(a)(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) 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.
``(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.''.
(2) Conforming amendments.--Section 1375(d) is amended by
striking ``subchapter C'' both places it appears and inserting
``accumulated''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2006.
SEC. 205. ADJUSTMENT TO BASIS OF S CORPORATION STOCK FOR CERTAIN
CHARITABLE CONTRIBUTIONS.
(a) In General.--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 amount of the shareholder's
proportionate share of any charitable contribution made
by the S corporation over the shareholder's
proportionate share of the adjusted basis of the
property contributed.''.
(b) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2006.
TITLE III--TREATMENT OF S CORPORATION SHAREHOLDERS
SEC. 301. TREATMENT OF LOSSES TO SHAREHOLDERS.
(a) 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) Loss on Liquidations of S Corporation.--
``(1) In general.--The portion of any net loss recognized
by a shareholder of an S corporation (as defined in section
1361(a)(1))--
``(A) on amounts received by such shareholder in a
distribution in complete liquidation of such S
corporation, or
``(B) on an installment obligation received by such
shareholder with respect to a sale or exchange by the
corporation during the 12-month period beginning on the
date a plan of complete liquidation is adopted if the
liquidation is completed during such 12-month period,
which does not exceed the ordinary income basis of
stock of such S corporation in the hands of such
shareholder shall not be treated as a loss from the
sale or exchange of a capital asset but shall be
treated as an ordinary loss.
``(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) Suspended Passive Activity Losses.--Paragraph (3) of section
1371(b) is amended to read as follows:
``(3) Treatment of s year as elapsed year; passive
losses.--Nothing in paragraphs (1) and (2) shall prevent
treating a taxable year for which a corporation is an S
corporation as a taxable year for purposes of determining the
number of taxable years to which an item may be carried back or
carried forward nor prevent the allowance of a passive activity
loss deduction to the extent provided by section 469(g).''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2006.
SEC. 302. DEDUCTIBILITY OF INTEREST EXPENSE INCURRED BY AN ELECTING
SMALL BUSINESS TRUST TO ACQUIRE S CORPORATION STOCK.
(a) In General.--Subparagraph (C) of section 641(c)(2) (relating to
modifications) is amended by inserting after clause (iii) the following
new clause:
``(iv) Any interest expense incurred to
acquire stock in an S corporation.''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2006.
SEC. 303. BACK TO BACK LOANS AS INDEBTEDNESS.
(a) In General.--Section 1366(d) (relating to special rules for
losses and deductions) is amended by adding at the end the following
new paragraph:
``(4) Loans included in indebtedness of an s corporation.--
For purposes of subsection (d), the indebtedness of an S
corporation to the shareholder shall include any loans made or
acquired (by purchase, gift, or distribution from another
person) by a shareholder to the S corporation, regardless of
whether the funds loaned by the shareholder to the S
corporation were obtained by the shareholder by means of a
recourse loan from another person (whether related or unrelated
to the shareholder).''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2006.
TITLE IV--EXPANSION OF S CORPORATION ELIGIBILITY FOR BANKS
SEC. 401. TREATMENT OF QUALIFYING DIRECTOR SHARES.
(a) In General.--Section 1361 (defining S corporation), as amended
by section 201(a), is amended by adding at the end the following new
subsection:
``(g) Treatment of Qualifying Director Shares.--
``(1) In general.--For purposes of this subchapter--
``(A) qualifying director shares shall not be
treated as a second class of stock, and
``(B) no person shall be treated as a shareholder
of the corporation by reason of holding qualifying
director shares.
``(2) Qualifying director shares defined.--For purposes of
this subsection, the term `qualifying director shares' means
any shares of stock in a bank (as defined in section 581) or in
a bank holding company registered as such with the Federal
Reserve System--
``(A) which are held by an individual solely by
reason of status as a director of such bank or company
or its controlled subsidiary; and
``(B) which are subject to an agreement pursuant to
which the holder is required to dispose of the shares
of stock upon termination of the holder's status as a
director at the same price as the individual acquired
such shares of stock.
``(3) Distributions.--A distribution (not in part or full
payment in exchange for stock) made by the corporation with
respect to qualifying director shares shall be includible as
ordinary income of the holder and deductible to the corporation
as an expense in computing taxable income under section 1363(b)
in the year such distribution is received.''.
(b) Conforming Amendments.--
(1) Section 1361(b)(1), as amended by section 201(b), is
amended by striking ``subsection (f)'' and inserting
``subsections (f) and (g)''.
(2) Section 1366(a), as amended by section 201(b), is
amended by adding at the end the following new paragraph:
``(4) Allocation with respect to qualifying director
shares.--The holders of qualifying director shares (as defined
in section 1361(g)) shall not, with respect to such shares of
stock, be allocated any of the items described in paragraph
(1).''.
(3) Section 1373(a), as amended by section 201(b), is
amended by striking ``and'' at the end of paragraph (2), by
striking the period at the end of paragraph (3) and inserting
``, and'', and adding at the end the following new paragraph:
``(4) no amount of an expense deductible under this
subchapter by reason of section 1361(g)(3) shall be apportioned
or allocated to such income.''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 1996.
SEC. 402. RECAPTURE OF BAD DEBT RESERVES.
Notwithstanding section 481 of the Internal Revenue Code of 1986,
with respect to any S corporation election made by any bank in taxable
years beginning after December 31, 1996, such bank may recognize built-
in gains from changing its accounting method for recognizing bad debts
from the reserve method under section 585 or 593 of such Code to the
charge-off method under section 166 of such Code either in the taxable
year ending with or beginning with such an election.
TITLE V--QUALIFIED SUBCHAPTER S SUBSIDIARIES
SEC. 501. TREATMENT OF THE SALE OF INTEREST IN A QUALIFIED SUBCHAPTER S
SUBSIDIARY.
(a) In General.--Section 1361(b)(3) (relating to treatment of
certain wholly owned subsidiaries) is amended by adding at the end the
following new subparagraph:
``(F) Special rule on termination.--The tax
treatment of the disposition of the stock of the
qualified subchapter S subsidiary shall be determined
as if such disposition were--
``(i) a sale of the undivided interest in
the subsidiary's assets based on the percentage
of the stock transferred, and
``(ii) followed by a deemed contribution by
the S corporation and the transferee in a
section 351 transaction.''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 1996.
TITLE VI--ADDITIONAL PROVISIONS
SEC. 601. ELIMINATION OF ALL EARNINGS AND PROFITS ATTRIBUTABLE TO PRE-
1983 YEARS.
(a) In General.--Subsection (a) of section 1311 of the Small
Business Job Protection Act of 1996 is amended to read as follows:
``(a) In General.--If a corporation was an electing small business
corporation under subchapter S of chapter 1 of the Internal Revenue
Code of 1986 for any taxable year beginning before January 1, 1983, the
amount of such corporation's accumulated earnings and profits (as of
the beginning of any taxable year beginning after December 31, 1982)
shall be reduced by an amount equal to the portion (if any) of such
accumulated earnings and profits which were accumulated in any taxable
year beginning before January 1, 1983, for which such corporation was
an electing small business corporation under such subchapter S.''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 1996.
SEC. 602. REPEAL OF LIFO RECAPTURE TAX.
(a) In General.--Section 1363 (relating to effect on election on
corporations) is amended by striking subsection (d).
(b) Effective Date.--The amendment made by this section shall apply
to elections made after the date of the enactment of this Act.
SEC. 603. EXPANSION OF POST-TERMINATION TRANSITION PERIOD.
(a) In General.--Clause (ii) of section 1377(b)(1)(A) (defining
post-termination transition period) is amended to read as follows:
``(ii) the date on which any refund or
credit of any overpayment of tax with respect
to the return for such last year as an S
corporation is prevented by the operation of
any law or rule of law (including res
judicata),''.
(b) Effective Date.--The amendment made by this section shall apply
to periods beginning after the date of the enactment of this Act.
SEC. 604. REDUCTION IN TAX RATE ON EXCESS NET PASSIVE INCOME.
(a) In General.--Section 1375(a) (relating to tax imposed when
passive investment income of corporation having accumulated earnings
and profits exceeds 25 percent of gross receipts) is amended by
striking ``computed by multiplying the excess net passive income by the
highest rate of tax specified in section 11(b)'' and inserting ``15
percent of the excess net passive income''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2006.
SEC. 605. INCREASE IN CAP ON QUALIFIED SMALL ISSUE BONDS.
(a) In General.--Section 144(a)(4)(A)(i) (relating to general rule
for $10,000,000 limit in certain cases) is amended by striking
``$10,000,000'' and inserting ``$10,000,000($30,000,000 in the case of
any bank (as defined in section 581) or any depository institution
holding company (as defined in section 3(w)(1) of the Federal Deposit
Insurance Act (12 U.S.C. 1813(w)(1)) which is an S corporation)''.
(b) Adjustment of Cap for Inflation.--Section 144(a) (relating to
qualified small issue bond) is amended--
(1) by redesignating paragraph (12) as paragraph (13); and
(2) by inserting after paragraph (11) the following new
paragraph:
``(12) Inflation adjustment.--
``(A) In general.--In the case of any calendar year
after 2006, the $30,000,000 amount contained in
paragraph (4)(A)(i) shall be increased by an amount
equal to--
``(i) such dollar amount, multiplied by
``(ii) the cost-of-living adjustment
determined under section 1(f)(3) for such
calendar year by substituting `calendar year
2005' for `calendar year 1992' in subparagraph
(B) thereof.
``(B) Rounding.--Any increase under subparagraph
(A) which is not a multiple of $100,000 shall be
rounded to the next lowest multiple of $100,000.''.
(c) Effective Date.--The amendments made by this section shall
apply to--
(1) obligations issued after the date of the enactment of
this Act; and
(2) capital expenditures made after such date with respect
to obligations issued on or before such date.
SEC. 606. SPECIAL RULES OF APPLICATION.
(a) Waiver of Limitations.--If refund or credit of any overpayment
of tax resulting from the application of any amendment made by this Act
is prevented at any time before the close of the 1-year period
beginning on the date of the enactment of this Act by the operation of
any law or rule of law (including res judicata), such refund or credit
may nevertheless be made or allowed if claimed therefor is filed before
the close of such period.
(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 or revocation under
section 1362(d) of such Code (as in effect on the day before enactment
of this Act) shall not be taken into account.
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