S Corporation Reform Act of 1995

TABLE OF CONTENTS:

Title I: Eligible Shareholders of S Corporation

Subtitle A: Number of Shareholders

Subtitle B: Persons Allowed as Shareholders

Subtitle C: Other Provisions

Title II: Qualification and Eligibility Requirements for S

Corporations

Subtitle A: One Class of Stock

Subtitle B: Elections and Terminations

Subtitle C: Other Provisions

Title III: Taxation of S Corporation Shareholders

Title IV: Effective Date

S Corporation Reform Act of 1995 - Title I: Eligible Shareholders of S Corporation - Subtitle A: Number of Shareholders - Amends the Internal Revenue Code to increase from 35 to 50 the maximum number of shareholders of an S corporation (electing small business corporation). Allows members of a family to be treated as one shareholder.

Subtitle B: Persons Allowed as Shareholders - Allows the following entities to be shareholders of S corporations: (1) certain tax-exempt organizations; (2) financial institutions that do not use the reserve method of accounting for bad debts; (3) nonresident aliens; and (4) certain small business trusts.

Subtitle C: Other Provisions - Extends the post-death qualification for certain trusts to be permitted as shareholders from 60 days to two years.

Title II: Qualification and Eligibility Requirements for S Corporations - Subtitle A: One Class of Stock - Allows an S corporation to issue qualified preferred stock.

Permits financial institutions to hold safe harbor debt.

Subtitle B: Elections and Terminations - Revises the rules on inadvertent terminations by certain trusts of the election to be an S corporation. Authorizes the Secretary of the Treasury to treat certain late elections as timely and to provide an automatic waiver procedure for certain inadvertent terminations.

Expands the post-termination transition period until 120 days after a determination is made that the election had terminated in a prior year.

Repeals the characterization of excessive passive investment income as a termination event.

Increases the tax imposed on such excessive income.

Subtitle C: Other Provisions - Permits an S corporation to wholly own the stock of a subsidiary.

Provides for the treatment of distributions during loss years.

Provides a consent dividend for S corporation elections to by-pass amounts in the accumulated adjustments account when making distributions.

Eliminates the rule treating an S corporation as an individual in its capacity as shareholder of another corporation for purposes of subchapter C.

Eliminates the pre-1983 earnings and profits accumulated by a corporation that was an S corporation for any taxable year beginning before January 1, 1983, and is so characterized for its first taxable year after December 31, 1995.

Allows S corporations to make charitable contributions of inventory and scientific property.

Repeals the requirement that partnership rules apply for fringe benefit purposes (making C corporation rules applicable). Provides for the application to two-percent shareholders of S corporations of the rules regarding deduction of health insurance costs of self-employed individuals.

Title III: Taxation of S Corporation Shareholders - Applies the exemption from the excise tax on pension plan prohibited transactions to plans providing benefits for S corporation shareholder-employees (as defined before the effective date of the Subchapter S Revision Act of 1982). Treats losses on liquidations of S corporations as ordinary to the extent the loss created by ordinary income pass-through triggered the liquidation.

Title IV: Effective Date - Makes this Act effective for taxable years beginning after December 31, 1995.