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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 S corporation owners to place their stock in a variety of trust arrangements and by counting all members of a single family who own an S corporation's stock as a single shareholder. Currently, a trust holding S corporation shares cannot accumulate income and cannot benefit more than a single person, making it difficult to bequeath an S corporation to multiple heirs.

The bill primarily will affect the 1.6 million to 2 million U.S. corporations that currently have elected S corporation status, Pryor said. S corporations make up more than 42 percent of all U.S. corporations. (See "S Corporations: The Rising Tide," page 29.)

More business for CPAs. According to Sam Starr, the legislation "will allow our members to go to their S corporation clients and provide opportunities for expanded planning and greater flexibility in structuring. It's going to generate more business." For example, he noted, planning for S corporations has more or less "maxed out" in term of what can be provided under strictures currently imposed by subchapter S, whereas the proposed reforms "will open new possibilities."

The bill, when introduced, had nine cosponsors, five of whom sit on the Senate Finance Committee-- considered a good sign of support. Both Senators Pryor and Danforth said they would try to attach the proposal to any tax bill that comes from the House this year.

Looking forward, Padwe said, "We're very pleased we are where we are, but we recognize there's still a long way to go. We don't have revenue projections yet," he added, "which will be critical for any tax bill. Clearly, part of our job is going to be getting the support of the Treasury Department."

Starr said supporters of the measure would coordinate efforts between the Finance Committee and House Ways and Means Committee majority and minority staff members, representatives of the Joint Taxation Committee and the Treasury Department, the American Bar Association, the Chamber of Commerce and the AICPA to promote the bill's passage

SIX AICPA MEMBERS TO SERVE ON TASK FORCES FOR WHITE HOUSE SMALL BUSINESS CONFERENCE

President Clinton called for a series of state and regional small business conferences to elect delegates to a national White House Conference on Small Business scheduled for June 1995. The state and regional conferences, to be held starting in April 1994, also will identify issues and make specific recommendations for consideration at the national conference.

To lay the groundwork for the conferences, task forces of 8 to 10 individuals each will prepare issue papers and recommendations for Congress and the executive branch covering 13 broad policy areas. The papers and recommendations will cover topics selected for the state conferences, including capital formation, community revitalization, defense conversion, diversity, education and training, environment, health care, information technology, innovation, international trade, procurement, regulation and paperwork and taxation. Six AICPA members were chosen to serve on four of the task forces.

Jay Fukushima, CPA, will serve on the defense conversion and taxation task forces. He is the principal of Jay Y. Fukushima & Associates in Orange, California. Fukushima, who once worked for a defense contractor, said he hoped to formulate policies that would help prepare small companies in his community for further cutbacks in defense spending.

Melanie H. Griffin, CPA, will serve on the education and training task force. She is a vice-president and shareholder of Fields, Nemec & Co., P.C. in Corpus Christi, Texas. Griffin said she would focus attention on the need to educate small business owners and managers about changes in competitive conditions, especially those associated with the North American Free Trade Agreement.

Daryl W. Jackson, CPA, will serve on the taxation task force. He is managing partner of Halt, Jackson & Thrasher in Alexandria, Virginia. Jackson, who was a tax policy advocate for the Small Business Administration, said serving on the task force offered an opportunity to prepare conference delegates and participants for the complicated tax issues affecting them.

Michael J. Knight, CPA, will serve on the taxation task force. He is a principal in Michael J. Knight & Co. in Fairfield, Connecticut. Knight said he looked forward to identifying issues and choosing the most important ones for discussion on state, regional and national levels.

Brian W. Rowe, CPA, will serve on the information revolution task force. He is director of bankruptcy and business services for Rowe & Rowe, P.C. in Albuquerque, New Mexico. Rowe said he would draw attention to the long-term implications of information technology, particularly in areas such as privacy and confidentiality.

Lisa A. Winton, CPA, will serve on the taxation task force. She is a technical manager in the AICPA tax division.

Two previous White House Conferences on Small Business received widespread support from small business owners. Over 5,000 owners and managers attended a 1980 conference at which 60 recommendations for congressional and executive branch action were formulated. Over 30,000 entrepreneurs participated in state meetings preceding the national conference.

In 1986, over 4,000 owners and managers attended the second White House Conference on Small Business and formulated another 60 recommendations for action by Congress and the administration. State conferences preceding the national conference drew 20,000 participants.
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Publication:Journal of Accountancy
Date:Feb 1, 1994
Words:1238
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