Title VII, SEC. 7141. MODIFICATION TO SELF-EMPLOYMENT TAX TREATMENT OF CERTAIN S CORPORATION SHAREHOLDERS AND PARTNERS. (a) Treatment of Certain S Corporation Shareholders. (1) Amendment to internal revenue code. Section 1402 (relating to definitions) is amended by adding at the end thereof the following new subsection: ``(k) Treatment of Certain S Corporation Shareholders. ``(1) In general. In the case of any individual ``(A) who is a 2-percent shareholder (as defined in section 1372(b)) of an S corporation for any taxable year of such corporation, and ``(B) who materially participates in the activities of such S corporation during such taxable year, such shareholder's net earnings from self-employment for such shareholder's taxable year in which the taxable year of the S corporation ends shall include such shareholder's pro rata share (as determined under section 1366(a)) of the taxable income or loss of such corporation from service-related businesses carried on by such corporation. ``(2) Certain exceptions to apply. In determining the amount to be taken into account under paragraph (1), the exceptions provided in subsection (a) shall apply, except that, in the case of the exceptions provided in subsection (a)(5), the rules of subparagraph (B) thereof shall apply to shareholders in S corporations. ``(3) Service-related business. For purposes of this subsection, the term `service-related business' means any trade or business described in subparagraph (A) of section 1202(e)(3).'' (2) Amendment to social security act. Section 211 of the Social Security Act is amended by adding at the end the following new subsection: ``Treatment of Certain S Corporation Shareholders ``(k)(1) In the case of any individual ``(A) who is a 2-percent shareholder (as defined in section 1372(b) of the Internal Revenue Code of 1986) of an S corporation for any taxable year of such corporation, and ``(B) who materially participates in the activities of such S corporation during such taxable year, such shareholder's net earnings from self-employment for such shareholder's taxable year in which the taxable year of the S corporation ends shall include such shareholder's pro rata share (as determined under section 1366(a) of such Code) of the taxable income or loss of such corporation from service-related businesses (as defined in section 1402(k)(3) of such Code) carried on by such corporation. ``(2) In determining the amount to be taken into account under paragraph (1), the exceptions provided in subsection (a) shall apply, except that, in the case of the exceptions provided in subsection (a)(5), the rules of subparagraph (B) thereof shall apply to shareholders in S corporations.''. (b) Treatment of Certain Limited Partners. (1) Amendment of internal revenue code. Paragraph (13) of section 1402(a) is amended by striking ``limited partner, as such'' and inserting ``limited partner who does not materially participate in the activities of the partnership''. (2) Amendment of social security act. Paragraph (12) of section 211(a) of the Social Security Act is amended by striking ``limited partner, as such'' and inserting ``limited partner who does not materially participate in the activities of the partnership''. (c) Effective Date. The amendments made by this section shall apply to taxable years of individuals beginning after December 31, 1995, and to taxable years of S corporations and partnerships ending with or within such taxable years of individuals.