H.R. 1697 (112th): Communities First Act

112th Congress, 2011–2013. Text as of May 03, 2011 (Introduced).

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I

112th CONGRESS

1st Session

H. R. 1697

IN THE HOUSE OF REPRESENTATIVES

May 3, 2011

introduced the following bill; which was referred to the Committee on Ways and Means, and in addition to the Committees on Financial Services and Agriculture, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned

A BILL

To enhance the ability of community banks to foster economic growth and serve their communities, boost small businesses, increase individual savings, and for other purposes.

1.

Short title; table of contents

(a)

Short title

This Act may be cited as the Community Banks Serving Their Communities First Act or the Communities First Act.

(b)

Table of contents

The table of contents for this Act is as follows:

Sec. 1. Short title; table of contents.

Title I—Targeted Regulatory Relief for Community Banks

Sec. 101. Short form reports of condition for certain community banks.

Sec. 102. Community bank exemption from annual management assessment of internal controls requirement of the Sarbanes-Oxley Act of 2002.

Sec. 103. Changes required to small bank holding company policy statement on assessment of financial and managerial factors.

Sec. 104. Accounting principles shall reflect business models.

Sec. 105. Accounting principles cost-benefit requirements.

Sec. 106. Increase in shareholder registration threshold.

Sec. 107. FSOC review of Bureau regulations.

Sec. 108. Federal Reserve examination authority.

Title II—Regulatory Relief for Community Banks and Their Customers

Sec. 201. Escrow requirements.

Sec. 202. Exception to annual privacy notice requirement under the Gramm-Leach-Bliley Act.

Sec. 203. Fees for agriculture loans.

Sec. 204. Reimbursement for production of mandated records.

Sec. 205. Loan amortization.

Sec. 206. Loan appraisals.

Sec. 207. Credit ratings.

Sec. 208. Small business data collection exclusion.

Title III—Tax Relief for Bank Depositors, Rural Banks, Municipalities, Banks Organized As Limited Liability Companies, and Young Savers

Sec. 301. Reduced rate and deferral of income recognition on long-term certificates of deposit.

Sec. 302. Exclusion for interest on loans secured by agricultural real property.

Sec. 303. Update in cap on qualified small issue bonds.

Sec. 304. Limited liability company tax treatment for FDIC-insured limited liability companies.

Sec. 305. Young savers’ accounts.

Title IV—Tax Relief for Community Banks and Holding Companies

Sec. 401. Limited tax credit.

Sec. 402. Qualifying investments in small bank issuers.

Sec. 403. 5-year NOL carryback for certain banks.

Title V—Small Business Subchapter S Reforms

Sec. 501. Increasing shareholder limit for subchapter S to 200.

Sec. 502. Issuance of preferred stock permitted for subchapter S corporations.

Sec. 503. IRA shareholders.

I

Targeted Regulatory Relief for Community Banks

101.

Short form reports of condition for certain community banks

(a)

In general

Section 7(a) of the Federal Deposit Insurance Act (12 U.S.C. 1817(a)) is amended by inserting at the end the following new paragraph:

(12)

Short form reports of condition for community banks

(A)

In general

With respect to reports of condition required under paragraph (3) for each calendar quarter, an insured depository institution described in subparagraphs (A), (B), (C), and (D) of section 10(d)(4) may submit a short form of any such report of condition in 2 nonsequential quarters of any calendar year.

(B)

Asset adjustments

For purposes of this paragraph, the asset levels for section 10(d)(4) shall be $10,000,000,000 in the case of subparagraph (A) and $1,000,000,000 in the case of subparagraph (C).

(C)

Short form defined

The term short form, when used in connection with any report of condition required under paragraph (3), means a report of condition in a format established by the appropriate Federal banking agency, after notice and opportunity for comment, that—

(i)

is significantly and materially less burdensome for the insured depository institution to prepare than the format of the report of condition required under paragraph (3); and

(ii)

provides sufficient material information for the appropriate Federal banking agency to assure the maintenance of the safe and sound condition of the depository institution and safe and sound practices.

.

(b)

Regulations

Any regulation required to carry out the amendment made by subsection (a) shall be published in final form before the end of the 6-month period beginning on the date of the enactment of this Act.

102.

Community bank exemption from annual management assessment of internal controls requirement of the Sarbanes-Oxley Act of 2002

Section 404 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7262) is amended by adding the following new subsection:

(d)

Community bank exemption

(1)

In general

This section shall not apply in any year to any insured depository institution which, as of the close of the preceding year, had total assets, as determined on a consolidated basis, of $1,000,000,000 or less.

(2)

Adjustment of amount

The Commission shall annually adjust the dollar amount in paragraph (1) by an amount equal to the percentage increase, for the most recent year, in total assets held by all depository institutions, as reported by the Federal Deposit Insurance Corporation.

.

103.

Changes required to small bank holding company policy statement on assessment of financial and managerial factors

(a)

Small bank holding company policy statement on assessment of financial and managerial factors

(1)

In general

Before the end of the 6-month period beginning on the date of the enactment of this Act, the Board of Governors of the Federal Reserve System shall publish in the Federal Register proposed revisions to the Small Bank Holding Company Policy Statement on Assessment of Financial and Managerial Factors (12 C.F.R. part 225—appendix C) that provide that the policy shall apply to a bank holding company which has pro forma consolidated assets of less than $1,000,000,000 and that—

(A)

is not engaged in any nonbanking activities involving significant leverage; and

(B)

does not have a significant amount of outstanding debt that is held by the general public.

(2)

Adjustment of amount

The Board of Governors of the Federal Reserve System shall annually adjust the dollar amount referred to in paragraph (1) in the Small Bank Holding Company Policy Statement on Assessment of Financial and Managerial Factors by an amount equal to the percentage increase, for the most recent year, in total assets held by all insured depository institutions, as determined by the Board.

(b)

Increase in debt-to-Equity ratio of small bank holding company

Before the end of the 6-month period beginning on the date of the enactment of this Act, the Board of Governors of the Federal Reserve System shall publish in the Federal Register proposed revisions to the Small Bank Holding Company Policy Statement on Assessment of Financial and Managerial Factors (12 C.F.R. part 225—appendix C) such that the debt-to-equity ratio allowable for a small bank holding company in order to remain eligible to pay a corporate dividend and to remain eligible for expedited processing procedures under Regulation Y of the Board of Governors of the Federal Reserve System would increase from 1:1 to 3:1.

104.

Accounting principles shall reflect business models

(a)

Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m) is redesignated as paragraph (a)(1) and paragraphs (1) and (2) are redesignated as subparagraphs (A) and (B).

(b)

Section 13(a) is further amended by adding the following new paragraph—

(2)

The Commission shall ensure that information, documents, and reports accurately and appropriately reflect the business model of the issuer.

.

105.

Accounting principles cost-benefit requirements

The Securities Exchange Act of 1934 is amended by inserting after section 13A the following new section:

13B.

Generally accepted accounting principles cost-benefit requirements

The Commission shall conduct analyses of the costs and benefits (including economic benefits) of any new or amended generally accepted accounting principle and may not approve any new or amended generally accepted accounting principle unless the Commission determines that—

(1)

the benefits of such principle significantly outweigh its costs; and

(2)

such principle would not have a negative economic impact on insured depository institutions with total assets of $10,000,000,000 or less.

.

106.

Increase in shareholder registration threshold

(a)

Registration

Section 12(g) of the Securities Exchange Act of 1934 (15 U.S.C. 78l(g)) is amended—

(1)

in paragraph (1), by striking subparagraphs (A) and (B) and inserting the following:

(A)

in the case of an issuer that is a bank or a bank holding company, as such term is defined in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841), 2000 persons or more; and

(B)

in the case of an issuer that is not a bank or bank holding company, 500 persons or more,

; and

(2)

in paragraph (4), by striking three hundred and inserting 300 persons, or, in the case of a bank or a bank holding company, as such term is defined in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841), 1700.

(b)

Suspension

Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)) is amended, in the third sentence, by striking three hundred and inserting 300 persons, or, in the case of bank or a bank holding company, as such term is defined in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841), 1700.

107.

FSOC review of Bureau regulations

Section 1023(a) of the Consumer Financial Protection Act of 2010 is amended—

(1)

by striking provision would put the safety and soundness of the United States banking system or the stability of the financial system of the United States at risk.; and

(2)

by inserting the following:

provision—

(1)

is inconsistent with the safe and sound operation of United States financial institutions; or

(2)

could adversely impact a subset of the banking industry disproportionately.

.

108.

Federal Reserve examination authority

Section 1012(c) of the Consumer Financial Protection Act of 2010 is amended—

(1)

by striking paragraph (1); and

(2)

by redesignating paragraphs (2), (3), (4), and (5) as paragraphs (1), (2), (3), and (4), respectively.

II

Regulatory Relief for Community Banks and Their Customers

201.

Escrow requirements

(a)

In general

Section 129D(c) of the Truth in Lending Act, as added by section 1461(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, is amended—

(1)

by redesignating paragraphs (1), (2), (3), and (4) as subparagraph (A), (B), (C), and (D) and moving such subparagraphs 2ems to the right;

(2)

striking The Board and inserting the following:

(1)

In general

The Board

; and

(3)

by adding at the end the following new paragraph:

(2)

Treatment of loans held by smaller creditors

The Board shall, by regulation, exempt from the requirements of subsection (a) any loan secured by a first lien on a consumer’s principle dwelling, if such loan is held by a creditor with assets of $10,000,000,000 or less.

.

202.

Exception to annual privacy notice requirement under the Gramm-Leach-Bliley Act

Section 503 of the Gramm-Leach-Bliley Act (15 U.S.C. 6803) is amended by adding the following new subsections:

(f)

Exception to annual notice requirement

A financial institution that—

(1)

provides nonpublic personal information only in accordance with the provisions of subsection (b)(2) or (e) of section 502 or regulations prescribed under section 504(b),

(2)

does not share information with affiliates under section 603(d)(2)(A) of the Fair Credit Reporting Act, and

(3)

has not changed its policies and practices with regard to disclosing nonpublic personal information from the policies and practices that were disclosed in the most recent disclosure sent to consumers in accordance with this subsection,

shall not be required to provide an annual disclosure under this subsection until such time as the financial institution fails to comply with any criteria described in paragraph (1), (2), or (3).
(g)

Exception to notice requirement

A financial institution shall not be required to provide any disclosure under this section if—

(1)

the financial institution is licensed by a State and is subject to existing regulation of consumer confidentiality that prohibits disclosure of nonpublic personal information without knowing and expressed consent of the consumer in the form of laws, rules, or regulation of professional conduct or ethics promulgated either by the court of highest appellate authority or by the principal legislative body or regulatory agency or body of any State of the United States, the District of Columbia, or any territory of the United States; or

(2)

the financial institution is licensed by a State and becomes subject to future regulation of consumer confidentiality that prohibits disclosure of nonpublic personal information without knowing and expressed consent of the consumer in the form of laws, rules, or regulation of professional conduct or ethics promulgated either by the court of highest appellate authority or by the principal legislative body or regulatory agency or body of any State of the United States, the District of Columbia, any territory of the United States.

.

203.

Agriculture loan guarantees

(a)

Fees

Section 310B(g)(5) of the Consolidated Farm and Rural Development Act (7 U.S.C. 1932(g)(5)) is amended by inserting before the period the following: , except that for loans under $5,000,000, the Secretary may assess a 1-time fee of 1 percent or less of the guaranteed principal portion of the loan.

(b)

Guarantee amounts

Section 364 of the Consolidated Farm and Rural Development Act (7 U.S.C. 2006f) is amended—

(1)

in subsection (a)—

(A)

in paragraph (3)—

(i)

by striking may and inserting shall; and

(ii)

by striking standards that are not less stringent than;

(B)

in paragraph (4), by inserting before the period the following: except that the Secretary may guarantee not more than 90 percent of a loan made by a certified lender if such loan is in an amount of less than $5,000,000; and

(C)

in paragraph (6); and

(2)

in subsection (b)—

(A)

by amending paragraph (1) to read as follows:

(1)

In general

The Secretary may establish a preferred certified lender’s program for lenders who—

(A)

establish their—

(i)

knowledge of, and experience under, the program established under subsection (a);

(ii)

knowledge of the regulations concerning the particular guaranteed loan program; and

(iii)

proficiency related to the certified lender program requirement; or

(B)

in the absence of a demand for or experience with guaranteed loans having been made under a rural development program, establish their proven experience in having made small business loans.

; and

(B)

in paragraph (5)(A), by inserting before the semicolon the following: except that the Secretary may guarantee not more than 90 percent of a loan made by a certified lender if such loan is in an amount of less than $5,000,000.

204.

Reimbursement for production of mandated records

(a)

Corporate records

Section 1101(4) of the Right to Financial Privacy Act of 1978 (12 U.S.C. 3401(4)) is amended by inserting before the semicolon the following: , except that, for purposes of section 1115, such term includes any entity.

(b)

Clarification of scope

Section 1115 of the Right to Financial Privacy Act of 1978 (12 U.S.C. 3415) is amended by adding at the end the following new subsection:

(c)

Clarification of scope

Notwithstanding subsection (a), the fee for reimbursement described under such subsection shall by paid by a Government authority for all records required to be assembled or provided for any Federal law enforcement or investigative purpose by any financial institution with total assets of $10,000,000,000 or less.

.

205.

Loan amortization

(a)

In general

For purposes of capital calculation under the Financial Institutions Examination Council’s Consolidated Reports of Condition, an eligible institution may choose to amortize any loss or write-down, on a quarterly straight-line basis over the 10-year period beginning with the month in which such loss or write-down occurs, resulting from the application of FASB Statement 114 or 144 to—

(1)

other real estate owned (as defined under section 34.81 of title 12, Code of Federal Regulations); or

(2)

an impaired loan secured by real estate, provided that the institution discloses the difference in the amount of the institution’s capital, when calculated taking into account the temporary amortization, from the amount of the institution’s capital when calculated without taking into account the temporary amortization on the Financial Institutions Examination Council’s Consolidated Reports of Condition.

(b)

Eligible institution defined

For purposes of this section, the term eligible institution has the meaning given such term under section 4102(11) of the Small Business Jobs Act of 2010.

(c)

Effective date

The provisions of this section shall apply to loan originations that occurred on or after January 1, 2003, and before January 1, 2008.

206.

Loan appraisals

For purposes of determining capital requirements or measuring capital of an insured depository institution under section 38 of the Federal Deposit Insurance Act (12 U.S.C. 1831o) or any other provision of law, an insured depository institution may average, over a five-year period, the appraised value of any real estate securing a loan held by the institution.

207.

Credit ratings

Section 939A(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act is amended by striking the first sentence and inserting: Each such agency shall modify any such regulations identified by the review conducted under subsection (a) and require that ratings-based determinations be confirmed by an analysis of the probability of a loss from holding such an asset, but only in circumstances where external credit ratings present an incomplete picture of the risks presented to an institution, or where those risks are heightened due to concentrations in particular assets classes..

208.

Small business data collection exclusion

Section 704B(h)(1) of the Equal Credit Opportunity Act is amended by inserting before the period the following: and that has assets of more than $1,000,000,000.

III

Tax Relief for Bank Depositors, Rural Banks, Municipalities, Banks Organized As Limited Liability Companies, and Young Savers

301.

Reduced rate and deferral of income recognition on long-term certificates of deposit

(a)

Deferral of income recognition

Section 451 of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsection:

(j)

Certificates of deposits held by cash basis individuals

In the case of an individual on the cash receipts and disbursements method of accounting who holds a nonnegotiable certificate of deposit, interest income which is not made available for withdrawal before maturity of the certificate without penalty shall not be includible in gross income before the certificate is redeemed or matures.

.

(b)

Interest Income on Long-Term Certificates of Deposit

Subparagraph (A) of section 1(h)(11) of such Code is amended by striking increased by qualified dividend income and inserting the following:

increased by—

(i)

qualified dividend income, and

(ii)

interest income on any nonnegotiable certificate of deposit—

(I)

with a fixed maturity date which is 1 year or more from the date of issue, and

(II)

the interest on which is not made available for withdrawal before maturity without penalty.

.

(c)

Effective date

The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

302.

Exclusion for interest on loans secured by agricultural real property

(a)

In general

Part III of subchapter B of chapter 1 of the Internal Revenue Code of 1986 is amended by inserting after section 139D the following new section:

139E.

Interest on loans secured by agricultural real property

(a)

Exclusion

Gross income shall not include interest received by a qualified lender on any qualified real estate loan.

(b)

Definitions

For purposes of this section—

(1)

Qualified lender

The term qualified lender means any bank or savings association the deposits of which are insured under the Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.).

(2)

Qualified real estate loan

The term qualified real estate loan means any loan secured by agricultural real estate or by a leasehold mortgage (with a status as a lien) on agricultural real estate. For purposes of the preceding sentence, the determination of whether property securing such loan is agricultural real estate shall be made as of the time the interest income on such loan is accrued.

(3)

Agricultural real estate

The term agricultural real estate means—

(A)

real property used for the production of 1 or more agricultural products, and

(B)

any single family residence—

(i)

which is the principal residence (within the meaning of section 121) of its occupant,

(ii)

which is located in a rural area (as determined by the Secretary of Agriculture), which is not within a Metropolitan Statistical Area (as defined by the Office of Management and Budget) and which has a population (determined on the basis of the most recent decennial census for which data are available) of 2,500 or less, and

(iii)

which is purchased or improved with the proceeds of the qualified real estate loan.

(c)

Coordination with section 265

Qualified real estate loans shall be treated as obligations described in section 265(a)(2) the interest on which is wholly exempt from the taxes imposed by this subtitle.

.

(b)

Clerical amendment

The table of sections for such part III is amended by inserting after the item relating to section 139D the following new item:

Sec. 139E. Interest on loans secured by agricultural real property.

.

(c)

Effective date

The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

303.

Update in cap on qualified small issue bonds

(a)

In general

Clause (i) of section 144(a)(4)(A) of the Internal Revenue Code of 1986 is amended by striking $10,000,000 and inserting $30,000,000.

(b)

Adjustment of cap for inflation

Subsection (a) of section 144 of such Code is amended by redesignating paragraph (12) as paragraph (13) and by inserting after paragraph (11) the following new paragraph:

(12)

Inflation adjustment

In the case of any issue issued during a calendar year after 2011, the $30,000,000 amount contained in paragraph (4)(A)(i) shall be increased by an amount equal to—

(A)

such dollar amount, multiplied by

(B)

the cost-of-living adjustment determined under section 1(f)(3) for such calendar year by substituting calendar year 2010 for calendar year 1992 in subparagraph (B) thereof.

Any increase under the preceding sentence which is not a multiple of $100,000 shall be rounded to the next lowest multiple of $100,000.

.

(c)

Conforming amendment

The heading of paragraph (4) of section 144(a) of such Code is amended by striking $10,000,000 limit and inserting Increased limitation.

(d)

Effective date

The amendments made by this section shall apply to—

(1)

obligations issued after the date of the enactment of this Act, and

(2)

capital expenditures made after such date with respect to obligations issued on or before such date.

304.

Limited liability company tax treatment for FDIC-insured limited liability companies

(a)

In general

Paragraph (2) of section 7701(a) of the Internal Revenue Code of 1986 (defining partnership and partner) is amended to read as follows:

(2)

Partner and partnership

(A)

In general

The term partnership includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a trust or estate or a corporation; and the term partner includes a member in such a syndicate, group, pool, joint venture, or organization.

(B)

Election by certain banks to be taxed as partnerships

(i)

In general

An eligible corporation may elect to be treated as a partnership for purposes of this title.

(ii)

Tax treatment

In the case of an eligible corporation making an election under clause (i)—

(I)

no gain or loss shall be recognized to the corporation or the shareholders by reason of an election under clause (i), and

(II)

section 1374 shall apply to the entity after such election.

(iii)

Eligible corporation

The term eligible corporation means any entity described in clause (iv) if—

(I)

such entity would (but for this subparagraph) be treated as a C corporation for purposes of this title, and

(II)

the gross assets of such entity (determined under the rules of section 1202(d)) are $10,000,000,000 or less.

(iv)

Entities described

The entities described in this clause are the following:

(I)

Any bank (as defined in section 581).

(II)

Any bank holding company (as defined in section 2(a) of the Bank Holding Company Act of 1956 (12 U.S.C. 1841(a))).

(III)

Any savings association (as defined in section 3(b) of the Federal Deposit Insurance Act (12 U.S.C. 1813)).

(IV)

Any savings and loan holding company (as defined in section 10(a)(1)(D) of the Home Owners Loan Act).

.

(b)

Effective date

The amendment made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

305.

Young savers’ accounts

(a)

In general

Section 408A of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsection:

(g)

Special rules for Roth IRAs for children

(1)

General rule

In the case of a Roth IRA maintained for the benefit of an individual who has not attained age 26 before the close of the taxable year, the limitation on contributions under paragraph (2) shall apply in lieu of paragraphs (2) and (3) of subsection (c).

(2)

Limitation on contributions

The aggregate amount of contributions for any taxable year to all Roth IRAs maintained for the benefit of an individual described in paragraph (1) with respect to such taxable year shall not exceed the maximum amount allowable as a deduction under subsection (b)(1) of section 219 for such taxable year (computed without regard to subsections (b)(1)(B), (d)(1), and (g) of such section).

.

(b)

Enforcement of contribution limits

Paragraphs (1)(B) and (2)(B) of section 4973(f) of such Code are each amended by striking and (c)(3) and inserting , (c)(3), and (g)(2).

(c)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2011.

IV

Tax Relief for Community Banks and Holding Companies

401.

Limited tax credit

(a)

C corporations

Section 11 of the Internal Revenue Code of 1986 (relating to tax imposed) is amended by adding at the end the following new subsection:

(e)

Reduction of tax on community banks

(1)

In general

In the case of a C corporation which is a community bank, the aggregate tax imposed by this section, section 55, and section 1201 shall be 80 percent of the aggregate tax which would (but for this subsection) be imposed by such sections.

(2)

Maximum reduction

The reduction in tax by reason of this subsection shall not exceed $250,000. Corporations treated as 1 corporation under section 1202(d)(3) shall be so treated under this subsection, and the limitation under the preceding sentence shall be allocated among such corporations in such manner as the Secretary shall prescribe.

(3)

Increased benefit for banks operating in distressed areas, etc

(A)

In general

In the case of a bank operating in an area referred to in subparagraph (B)—

(i)

paragraph (1) shall be applied by substituting 50 percent for 80 percent, and

(ii)

paragraph (2) shall be applied by substituting $500,000 for $250,000.

(B)

Areas described

The areas referred to in this subparagraph are—

(i)

empowerment zones and enterprise communities designated under section 1391,

(ii)

renewal communities designated under section 1400E,

(iii)

low-income communities (as defined in section 45D(e)), and

(iv)

distressed communities (within the meaning of section 233 of the Bank Enterprise Act of 1991 (12 U.S.C. 1834a(b)).

(4)

Community bank

For purposes of this section, the term community bank means any of the following entities the gross assets of which (determined under the rules of section 1202(d)) are $10,000,000,000 or less:

(A)

Any bank (as defined in section 581).

(B)

Any bank holding company (as defined in section 2(a) of the Bank Holding Company Act of 1956 (12 U.S.C. 1841(a))).

(C)

Any savings association (as defined in section 3(b) of the Federal Deposit Insurance Act (12 U.S.C. 1813)).

(D)

Any savings and loan holding company (as defined in section 10(a)(1)(D) of the Home Owners Loan Act).

.

(b)

S corporations

Subsection (a) of section 1366 of such Code is amended by adding at the end the following new paragraph:

(3)

Reduction of tax on community banks

(A)

In general

In the case of a S corporation which is a community bank (as defined in section 11(e)(4)), the net amount required to be taken into account by shareholders (without regard to this paragraph) shall be reduced by the lesser of—

(i)

20 percent of such net amount, or

(ii)

$1,250,000.

(B)

Increased benefit for banks operating in distressed areas, etc

In the case of a bank operating in an area referred to in section 11(e)(3)(B)—

(i)

subparagraph (A)(i) shall be applied by substituting 50 percent for 20 percent, and

(ii)

subparagraph (A)(ii) shall be applied by substituting $2,500,000 for $1,250,000.

.

(c)

Effective date

The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

402.

Qualifying investments in small bank issuers

(a)

Generally

The principles of Internal Revenue Service Notice 2010–2 shall apply to any qualifying investment by any person in a small bank issuer in the same manner as if such investment had been made by the Treasury Department pursuant to any of the Programs (as defined in Notice 2010–2).

(b)

Definitions

For purposes of this section—

(1)

The term qualifying investment means any investment in the equity of a small bank issuer that otherwise would have constituted an ownership change under section 382(g) of the Internal Revenue Code of 1986 (relating to limitations on net operating loss carryforwards and certain built-in losses following an ownership change).

(2)

The term small bank issuer means any insured depository institution as defined in section 3(c)(2) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)(2)) which—

(A)

was required under a Prompt Corrective Action order issued pursuant to section 38 of the Federal Deposit Insurance Act (12 U.S.C. 1831o), or a formal or informal enforcement order, to raise capital as a result of an examination that took place during calendar years 2008 through 2012 by the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, or the Federal Deposit Insurance Corporation, and

(B)

at the time of the order referred to in subparagraph (A), had total consolidated assets of $10,000,000,000 or less.

403.

5-year NOL carryback for certain banks

(a)

In general

Subparagraph (H) of section 172(b)(1) of the Internal Revenue Code of 1986 is amended to read as follows:

(H)

Carryback for 2010 and 2011 net operating losses of certain banks

(i)

In general

In the case of an applicable 2010 or 2011 net operating loss of a specified bank with respect to which the taxpayer has elected the application of this subparagraph—

(I)

subparagraph (A)(i) shall be applied by substituting any whole number elected by the taxpayer which is more than 2 and less than 6 for 2,

(II)

subparagraph (E)(ii) shall be applied by substituting the whole number which is one less than the whole number substituted under subclause (I) for 2, and

(III)

subparagraph (F) shall not apply.

(ii)

Applicable 2010 or 2011 net operating loss

For purposes of this subparagraph, the term applicable 2010 or 2011 net operating loss means—

(I)

the specified bank’s net operating loss for any taxable year ending in 2010 or 2011, or

(II)

if the specified bank elects to have this subclause apply in lieu of subclause (I), the specified bank’s net operating loss for any taxable year beginning in 2010 or 2011.

(iii)

Specified bank

For purposes of this subparagraph, the term specified bank means a community bank (as defined in section 11(e)(4)) and any entity which would be a community bank (as so defined) if section 11(e)(4) were applied by substituting $15,000,000,000 for $10,000,000,000.

(iv)

Election

Any election under this subparagraph shall be made in such manner as may be prescribed by the Secretary, and shall be made by the due date (including extension of time) for filing the taxpayer’s return for the taxable year of the net operating loss. Any such election, once made, shall be irrevocable.

.

(b)

Anti-Abuse rules

The Secretary of Treasury or the Secretary’s designee shall prescribe such rules as are necessary to prevent the abuse of the purposes of the amendments made by this section, including anti-stuffing rules, antichurning rules (including rules relating to sale-leasebacks), and rules similar to the rules under section 1091 of the Internal Revenue Code of 1986 relating to losses from wash sales.

(c)

Effective date

The amendments made by this section shall apply to net operating losses arising in taxable years ending after December 31, 2009.

V

Small Business Subchapter S Reforms

501.

Increasing shareholder limit for subchapter S to 200

(a)

In general

Subparagraph (A) of section 1361(b)(1) of the Internal Revenue Code of 1986 is amended by striking 100 and inserting 200.

(b)

Effective date

The amendment made by this section shall apply to taxable years beginning after December 31, 2011.

502.

Issuance of preferred stock permitted for subchapter S corporations

(a)

In general

Section 1361 (defining S corporation) is amended by adding at the end the following new subsection:

(h)

Treatment of qualified preferred stock

(1)

In general

For purposes of this subchapter—

(A)

qualified preferred stock shall not be treated as a second class of stock, and

(B)

no person shall be treated as a shareholder of the corporation by reason of holding qualified preferred stock.

(2)

Qualified preferred stock defined

For purposes of this subsection, the term qualified preferred stock means stock which meets the requirements of subparagraphs (A), (B), and (C) of section 1504(a)(4). Stock shall not fail to be treated as qualified preferred stock merely because it is convertible into other stock.

(3)

Distributions

A distribution (not in part or full payment in exchange for stock) made by the corporation with respect to qualified preferred stock shall be includible as ordinary income of the holder and deductible to the corporation as an expense in computing taxable income under section 1363(b) in the year such distribution is received.

.

(b)

Conforming amendments

(1)

Paragraph (1) of section 1361(b) is amended by inserting , except as provided in subsection (f), before which does not.

(2)

Subsection (a) of section 1366 is amended by adding at the end the following new paragraph:

(3)

Allocation with respect to qualified preferred stock

The holders of qualified preferred stock (as defined in section 1361(h)) shall not, with respect to such stock, be allocated any of the items described in paragraph (1).

.

(3)

So much of clause (ii) of section 354(a)(2)(C) as precedes subclause (II) is amended to read as follows:

(ii)

Recapitalization of family-owned corporations and s corporations

(I)

In general

Clause (i) shall not apply in the case of a recapitalization under section 368(a)(I)(E) of a family-owned corporation or S corporation.

.

(4)

Subsection (a) of section 1373 is amended by striking and at the end of paragraph (1), by striking the period at the end of paragraph (2) and inserting , and, and by adding at the end the following new paragraph:

(3)

no amount of an expense deductible under this subchapter by reason of section 1361(h)(3) shall be apportioned or allocated to the income referred to in such section.

.

(c)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2011.

503.

IRA shareholders

Clause (vi) of section 1361(c)(2)(A) of the Internal Revenue Code of 1986 is amended by striking as of the date of the enactment of this clause.