House Introduces Legislation to Modify S Corporation Regulations

Article excerpt

A bill was introduced in the House that would ease regulations governing S corporations. HR 2039, sponsored by E. Clay Shaw (R-Fla.), is designed to expand access to capital as well as protect the ability to leave closely held businesses to heirs.

In June, witnesses testifying at hearings on the Senate bill to modify S corporation legislation (S 758) strongly supported the legislation's reforms. Senator Orrin Hatch (R-Utah), chair of the Taxation and Internal Revenue Service Subcommittee, said S 758 was designed to help small businesses get started, grow and create jobs and "ease outdated, unreasonable or burdensome tax compliance requirements."

Samuel P. Starr, partner of Coopers & Lybrand in Washington, D.C., and a member of the American Institute of CPAs tax executive committee, told the Journal that although S corporation reform legislation provided some benefits to larger businesses, its primary beneficiaries would be small businesses. "S 758 would give small businesses flexibility when structuring their businesses and accessing different kinds of capital," Starr said.

Starr, who testified before the Senate hearing, said S corporations currently were not permitted to issue preferred stock, making it difficult for them to seek venture capital. "Venture capitalists making an investment in a closely held business like to take an equity interest in the form of convertible preferred stock. This legislation would level the playing field for S corporations competing with limited liability companies, which do not have to face the same obstacles when accessing venture capital."

Besides expanding available capital formation techniques, S corporation reform packages in both the House and the Senate would modernize the current law by accomplishing three other broad goals:

* Preserve family-owned businesses by increasing the 35-shareholder limitation to 50 shareholders (Senate bill) or 75 shareholders (House bill).

* Reform S corporation fringe benefit rules, placing S corporation shareholders in the same position as owners of C corporations.

* Remove undesirable tax traps by expanding the period of post-death S qualification for certain trusts and provide for automatic waiver of certain inadvertent terminations, for example.

Glen A. Kohl of the Treasury Department told the Senate subcommittee that the Clinton administration supported S corporation reform and simplification but was concerned it would create undue complexity and increase opportunities for large regular corporations to escape taxation. (For more on this issue, see Highlights on page 4.)

Assets and Income

Percentage of assets and income of the 1.9 million S corporations registered in the United States compared with the assets and income of all corporations in 1993

Net income   11.1%
Assets        4%

Source: Senate Committee on Finance, Subcommittee on Taxation and IRS Oversight

RELATED ARTICLE: Highlights

TREASURY'S S CORPORATION REFORM PROPOSAL: GOOD FOR SMALL BUSINESSES, BUT

HARD ON LARGER ONES

The U.S. Treasury Department has come up with a proposal to allow S corporations to convert to partnerships on a simple, tax-free basis. …