HR 4840 IHCommentsClose CommentsPermalink

To amend the Internal Revenue Code of 1986 to provide for S corporation reform, and for other purposes.CommentsClose CommentsPermalink

December 19, 2007

Mr. KIND (for himself, Mr. RAMSTAD, Mrs. JONES of Ohio, Mr. ENGLISH of Pennsylvania, Ms. SCHWARTZ, Mr. SAM JOHNSON of Texas, and Mr. KAGEN) introduced the following bill; which was referred to the Committee on Ways and MeansCommentsClose CommentsPermalink

To amend the Internal Revenue Code of 1986 to provide for S corporation reform, and for other purposes.CommentsClose CommentsPermalink

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,CommentsClose CommentsPermalink

SECTION 1. SHORT TITLE, REFERENCE.

(a) Short Title- This Act may be cited as the `S Corporation Modernization Act of 2007'.CommentsClose CommentsPermalink





(b) Amendment of 1986 Code- Except as otherwise expressly provided, whenever in this Act an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the Internal Revenue Code of 1986.CommentsClose CommentsPermalink

SEC. 2. REDUCED RECOGNITION PERIOD FOR BUILT-IN GAINS.

(a) In General- Paragraph (7) of section 1374(d) (relating to definitions and special rules) is amended as follows:CommentsClose CommentsPermalink





`(7) RECOGNITION PERIOD- The term `recognition period' means the 7-year period beginning with the 1st day of the 1st taxable year for which the corporation was an S corporation. For purposes of applying this section to any amount includible in income by reason of distributions to shareholders pursuant to section 593(e), the preceding sentence shall be applied without regard to the duration of the recognition period in effect on the date of such distribution.'.CommentsClose CommentsPermalink





(b) Effective Date- The amendment made by this section--CommentsClose CommentsPermalink





(1) shall apply for purposes of determining the recognition period with respect to 1st days referred to in section 1374(d)(7) of the Internal Revenue Code of 1986 occurring before, on, or after the date of the enactment of this Act, butCommentsClose CommentsPermalink





(2) shall not apply for purposes of determining the tax imposed by section 1374 of such Code for taxable years ending before such date.CommentsClose CommentsPermalink

SEC. 3. EXPANSION OF QUALIFYING BENEFICIARIES OF AN ELECTING SMALL BUSINESS TRUST.

(a) No Look Through for Eligibility Purposes- Clause (v) of section 1361(c)(2)(B) (relating to treatment as shareholders) is amended by adding at the end the following new sentence: `This clause shall not apply for purposes of subsection (b)(1)(C).'.CommentsClose CommentsPermalink





(b) Effective Date- The amendment made by this section shall take effect on the date of the enactment of this Act.CommentsClose CommentsPermalink

SEC. 4. REPEAL OF EXCESSIVE PASSIVE INVESTMENT INCOME AS A TERMINATION EVENT.

(a) In General- Section 1362(d) (relating to termination) is amended by striking paragraph (3).CommentsClose CommentsPermalink





(b) Conforming Amendments-CommentsClose CommentsPermalink





(1) Section 1362(f)(1) is amended by striking `or (3)'.CommentsClose CommentsPermalink





(2) Clause (i) of section 1042(c)(4)(A) is amended by striking `section 1362(d)(3)(C)' and inserting `section 1375(b)(3)'.CommentsClose CommentsPermalink





(c) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2007.CommentsClose CommentsPermalink

SEC. 5. MODIFICATIONS TO PASSIVE INCOME RULES.

(a) Increased Limit-CommentsClose CommentsPermalink





(1) IN GENERAL- Paragraph (2) of section 1375(a) (relating to tax imposed when passive investment income of corporation having accumulated earnings and profits exceeds 25 percent of gross receipts) is amended by striking `25 percent' and inserting `60 percent'.CommentsClose CommentsPermalink





(2) CONFORMING AMENDMENTS-CommentsClose CommentsPermalink





(A) Subparagraph (J) of section 26(b)(2) is amended by striking `25 percent' and inserting `60 percent'.CommentsClose CommentsPermalink





(B) Clause (i) of section 1375(b)(1)(A) is amended by striking `25 percent' and inserting `60 percent'.CommentsClose CommentsPermalink





(C) The heading for section 1375 is amended by striking `25 percent' and inserting `60 percent'.CommentsClose CommentsPermalink





(D) The table of sections for part III of subchapter S of chapter 1 is amended by striking `25 percent' in the item relating to section 1375 and inserting `60 percent'.CommentsClose CommentsPermalink





(b) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2007.CommentsClose CommentsPermalink

SEC. 6. EXPANSION OF S CORPORATION ELIGIBLE SHAREHOLDERS TO INCLUDE IRAS.

(a) In General- Clause (vi) of section 1361(c)(2)(A) (relating to certain trusts permitted as shareholders) is amended to read as follows:CommentsClose CommentsPermalink





`(vi) A trust which constitutes an individual retirement account under section 408(a), including one designated as a Roth IRA under section 408A.'.CommentsClose CommentsPermalink





(b) Sale of Stock in IRA Relating to S Corporation Election Exempt From Prohibited Transaction Rules- Paragraph (16) of section 4975(d) (relating to exemptions) is amended to read as follows:CommentsClose CommentsPermalink





`(16) a sale of stock held by a trust which constitutes an individual retirement account under section 408(a) to the individual for whose benefit such account is established if--CommentsClose CommentsPermalink





`(A) such sale is pursuant to an election under section 1362(a) by the issuer of such stock,CommentsClose CommentsPermalink





`(B) such sale is for fair market value at the time of sale (as established by an independent appraiser) and the terms of the sale are otherwise at least as favorable to such trust as the terms that would apply on a sale to an unrelated party,CommentsClose CommentsPermalink





`(C) such trust does not pay any commissions, costs, or other expenses in connection with the sale, andCommentsClose CommentsPermalink





`(D) the stock is sold in a single transaction for cash not later than 120 days after the S corporation election is made.'.CommentsClose CommentsPermalink





(c) Effective Date- The amendments made by this section shall take effect on the date of the enactment of this Act.CommentsClose CommentsPermalink

SEC. 7. ALLOWANCE OF DEDUCTION FOR CHARITABLE CONTRIBUTIONS FOR ELECTING SMALL BUSINESS TRUSTS.

(a) In General- Section 641(c)(2)(C) (relating to modifications) is amended by adding at the end the following new sentence: `The deduction for charitable contributions allowed under clause (i) shall be determined without regard to section 642(c), and the limitations imposed by section 170(b)(1) on the amount of the deduction shall be applied to the electing small business trust as if it were an individual.'.CommentsClose CommentsPermalink





(b) Effective Date- The amendment made by this section shall apply to taxable years beginning after the date of the enactment of this Act.CommentsClose CommentsPermalink

SEC. 8. ENTITY NEUTRALITY STUDY.

Not later than December 31, 2009, the Comptroller General of the United States shall conduct a study on entity neutrality under the Internal Revenue Code of 1986 and shall submit a report to the Committee on Ways and Means of the House of Representatives which--CommentsClose CommentsPermalink





(1) discusses the challenges to providing equal treatment between S corporations and limited liability companies under the Internal Revenue Code of 1986,CommentsClose CommentsPermalink





(2) identifies the differences under the Internal Revenue Code of 1986 between the various pass-through entity rules, andCommentsClose CommentsPermalink





(3) discusses why entities would prefer one set of rules over another.CommentsClose CommentsPermalink