S corporation reform bill introduced in Senate.


The long-awaited Subchapter S Reform Act (S 1690) was introduced by Senate Finance Committee members David Pryor (D-Ark.) and John Danforth (R-Mo.). The bill's sponsors are hopeful the measure will receive support from the Clinton administration and that a companion bill will be introduced in the House shortly (see "Subchapter S Reform at Hand?" JofA, Sept.93, page 33).

"I'm delighted the bill was introduced," said Samuel P. Starr, chairman of the American Institute of CPAs S corporation taxation committee and a partner of Coopers & Lybrand, Washington, D.C. He said the bill was the result of over a year of bipartisan efforts by Senators Pryor and Danforth and their staffs and was based largely on recommendations by the AICPA, the U.S. Chamber of Commerce and the American Bar Association's committee on S corporations.

"Subchapter S currently includes many unnecessary complexities and restrictions left over from the 1950s when it was first created," said Gerald W. Padwe, AICPA vice-president-taxation. "By making it easier for S corporations to attract capital investments," he added, "the Pryor-Danforth proposal should usher in a new period of growth for the nearly two million small businesses operating as S corporations."

On introducing the legislation, Danforth described current tax rules for small businesses as increasingly out of touch with economic reality. "One of the most worrisome effects of current law is the restriction on small business flexibility imposed by provisions that haven't been updated in more than a decade," he said, adding that current law hampers the ability of new businesses to raise capital and make decisions about estates.

"In ordinary times, small businesses account for 50% of the new jobs in this country," Pryor said. "However, in times of recovery that number jumps to 75%. Our bill capitalizes on this phenomenon." The bill's 26 provisions include

  1. Broadening eligibility rules for S corporations by increasing the shareholder limit from 35 to 50 while permitting tax-exempt organizations, financial institutions and nonresident aliens (among others) to be shareholders.

  2. Simplifying complex S corporation rules by removing technical provisions that, its sponsors say, amount to compliance traps for the unwary.

  3. Expanding capital-formation techniques available to S corporations to create a more level playing field with C corporations, limited liability companies and partnerships.

  4. Helping to preserve family-owned businesses by permitting...

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