CHANGES IN SUBCHAPTER S RULES.

SEC. 902. CHANGES IN SUBCHAPTER S RULES. (a) Number of Shareholders.— (1) In general.— Subsection (a)(1) of section 1371 (relating to the definition of small business corporation) is amended to read as follows: “(1) have (except as provided in subsection (e)) more than 10 shareholder’s (2) Special share holder rules.— Section 1371 is amended by adding at the end thereof the following new subsection: “(e) Special Shareholder Rules.— “(1) A small business corporation which has been an electing small business corporation for a period of five consecutive taxable years may not have more than 15 shareholders. “(2) If, during the 5-year period set forth in paragraph (1), the number of shareholder of an electing small business corporation increases to an amount in excess of 10 (but not in excess of 15) solely by reason of additional shareholder who acquired their stock through inheritance, the corporation may have a number of additional shareholders equal to the number by which the inheriting shareholders cause the total number of shareholders of such corporation to exceed 10.” (3) Effective date.— The amendments made by this subsection shall apply to taxable years beginning after December 31, 1976. (b) Distributions by Subchapter S Corporations.— (1) In general.— Section 1377 (relating to special rules applicable to earnings and profits of electing small business corporations) is amended by adding at the end thereof the following new subsection: “(d) Distributions of Undistributed Taxable Income Previously Taxed to Shareholders.— For purposes of determining whether a distribution by an electing small business corporation constitutes a distribution of such corporation’s undistributed taxable income previously taxed to shareholders (as provided for in section 1375(d)), the earnings and profits of such corporation for the taxable year in which the distribution is made shall be computed without regard to section 312(m). Such computation shall be made without, regard to section 312(m) only for such purposes.” (2) Effective date.— The amendment made by this subsection shall apply to taxable years beginning after December 31, 1975. (c) Additional Changes in Subchapter S Rules.— (1) Estate of deceased spouse not to be treated as shareholder.— Subsection (c) of section 1371 (relating to stock owned by husband and wife) is amended to read as follows: “(c) Stock Owned by Husband and Wife.— For purposes of subsection (a)(1) stock which— “(1) is community property of a husband and wife (or the income from which is community income) under the applicable community property law of a State, “(2) is held by a husband and wife as joint tenants, tenants by the entirety, or tenants in common, “(3) was, on the date of death of a spouse, stock described in paragraph (I) or (2), and is, by reason of such death held by the estate of the deceased spouse and the surviving spouse, or by the estates of both spouses (by reason of their deaths on the same 90 STAT. 1609date), in the same proportion as held by the spouses before such death, or “(4) was, on the date of the death of a surviving spouse, stock described in paragraph (3). and is, by reason of such death, held by the estates of both spouses in the same proportion as held by the spouses before their deaths, shall be treated as owned by one shareholder.” (2) Broadening classes of permissible shareholders to include certain trusts.— (A) Section 1371 (relating to definitions for purposes of subchapter S) is amended by adding at the end thereof the following new subsection: “(f) Certain Trusts Permitted as Share holders.— For purposes of subsection (a), the following trusts may be shareholders: “(1) A trust all of which is treated as owned by the grantor under subpart E of part I of subchapter J of this chapter. “(2) A trust created primarily to exercise the voting power of stock transferred to it. “(3) Any trust with respect to stock transferred to it pursuant to the terms of a will, but only for the 60day period beginning on the day on which such stock is transferred to it. In the ease of a trust described in paragraph (2), each beneficiary of the trust shall, for purposes of subsection (a)(1), be treated as a shareholder.”. (B) Paragraph (2) of section 1371(a) is amended by striking out “(other than an estate)” and inserting in lieu thereof “(other than an estate and other than a trust described in subsection (f))” (3) New shareholders must affirmatively elect to terminate ejection.— Paragraph (1) of section 1372(e) (relating to termination of election) is amended to read as follows: “(1) New shareholders.— “(A) An election under subsection (a) made by a small business corporation shall terminate if any person who was not a shareholder in such corporation— “(i) on the first day of the first taxable year of the corporation for which the election is effective, if such election is made on or before such first day, or “(ii) on the day on which the election is made, if such election is made after such first day, becomes a shareholder in such corporation and affirmatively refuses (in such manner as the Secretary shall by regulations prescribe) to consent to such election on or before the 60th day after the day on which he acquires the stock. “(B) If the person acquiring the stock is the estate of a decedent, the period under subparagraph (A) for affirmatively refusing to consent to the election shall expire on the 60th day after whichever of the following is the earlier: “(i) The day on which the executor or administrator of the estate qualifies; or “(ii) The last day of the taxable year of the corporation in which the decedent, died. “(C) Any termination of an election under subparagraph (A) by reason of the affirmative refusal of any person tn consent to such election shall be effective for the taxable year of the corporation in which such person becomes a shareholder 90 STAT. 1610in the corporation and for all succeeding taxable years of the corporation?’. (4) Effective date.— The amendments made by this subsection shall apply to taxable years beginning after December 31, 1976.