S CORPORATIONS PERMITTED TO HOLD SUBSIDIARIES.

SEC. 1308. S CORPORATIONS PERMITTED TO HOLD SUBSIDIARIES. (a) In General.— Paragraph (2) of section 1361(b) (defining ineligible corporation) 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 the following new paragraph: “(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 paragraph, the term ‘qualified subchapter S subsidiary’ means any domestic corporation which is not an ineligible corporation (as defined in paragraph (2)), if— “(i) 100 percent of the stock of such corporation is held by the S corporation, and “(ii) the S corporation elects to treat such corporation as a qualified subchapter S subsidiary. “(C) Treatment of terminations of qualified subchapter s subsidiary status.— For purposes of this title, 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. “(D) Election after termination.— If a corporation’s status as a qualified subchapter S subsidiary terminates, such corporation (and any successor corporation) shall not be eligible to make— 110 STAT. 1783 “(i) an election under subparagraph (B)(ii) to be treated as a qualified subchapter S subsidiary, or “(ii) an election under section 1362(a) to be treated as an S corporation, before its 5th taxable year which begins after the 1st taxable year for which such termination was effective, unless the Secretary consents to such election.”. (c) Certain Dividends Not Treated as Passive Investment Income.— Paragraph (3) of section 1362(d) is amended by adding at the end the following new subparagraph: “(F) Treatment of certain dividends.— If an 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 is amended by striking paragraph (6). “(2) Subsection (b) of section 1504 (defining includible corporation) is amended by adding at the end the following new paragraph: “(8) An S corporation.”.