[Congressional Bills 116th Congress]
[From the U.S. Government Publishing Office]
[H.R. 5643 Introduced in House (IH)]
<DOC>
116th CONGRESS
2d Session
H. R. 5643
To amend the Internal Revenue Code of 1986 to provide for S corporation
reform, and for other purposes.
_______________________________________________________________________
IN THE HOUSE OF REPRESENTATIVES
January 16, 2020
Mr. Kind (for himself and Mr. Wenstrup) introduced the following bill;
which was referred to the Committee on Ways and Means
_______________________________________________________________________
A BILL
To amend the Internal Revenue Code of 1986 to provide for S corporation
reform, and for other purposes.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE; REFERENCE.
(a) Short Title.--This Act may be cited as the ``S Corporation
Modernization Act of 2020''.
(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.
SEC. 2. MODIFICATIONS TO S CORPORATION PASSIVE INVESTMENT INCOME RULES.
(a) Increased Percentage Limit.--Section 1375(a)(2) is amended by
striking ``25 percent'' and inserting ``60 percent''.
(b) Repeal of Excessive Passive Income as a Termination Event.--
Section 1362(d) is amended by striking paragraph (3).
(c) Conforming Amendments.--
(1) Section 1375(b) is amended by striking paragraphs (3)
and (4) and inserting the following new paragraph:
``(3) Passive investment income defined.--
``(A) In general.--Except as otherwise provided in
this paragraph, the term `passive investment income'
means gross receipts derived from royalties, rents,
dividends, interest, and annuities.
``(B) Exception for interest on notes from sales of
inventory.--The term `passive investment income' shall
not include interest on any obligation acquired in the
ordinary course of the corporation's trade or business
from its sale of property described in section
1221(a)(1).
``(C) Treatment of certain lending or finance
companies.--If the S corporation meets the requirements
of section 542(c)(6) for the taxable year, the term
`passive investment income' shall not include gross
receipts for the taxable year which are derived
directly from the active and regular conduct of a
lending or finance business (as defined in section
542(d)(1)).
``(D) Treatment of certain dividends.--If an S
corporation holds stock in a C corporation meeting the
requirements of section 1504(a)(2), the term `passive
investment income' shall not include dividends from
such C corporation to the extent such dividends are
attributable to the earnings and profits of such C
corporation derived from the active conduct of a trade
or business.
``(E) Exception for banks, etc.--In the case of a
bank (as defined in section 581) or a depository
institution holding company (as defined in section
3(w)(1) of the Federal Deposit Insurance Act (12 U.S.C.
1813(w)(1))), the term `passive investment income'
shall not include--
``(i) interest income earned by such bank
or company, or
``(ii) dividends on assets required to be
held by such bank or company, including stock
in the Federal Reserve Bank, the Federal Home
Loan Bank, or the Federal Agricultural Mortgage
Bank or participation certificates issued by a
Federal Intermediate Credit Bank.
``(F) Gross receipts from the sales of certain
assets.--For purposes of this paragraph--
``(i) Capital assets other than stock and
securities.--In the case of dispositions of
capital assets (other than stock and
securities), gross receipts from such
dispositions shall be taken into account only
to the extent of capital gain net income
therefrom.
``(ii) Stock and securities.--In the case
of sales or exchanges of stock or securities,
gross receipts shall be taken into account only
to the extent of the gain therefrom.
``(G) Coordination with section 1374.--The amount
of passive investment income shall be determined by not
taking into account any recognized built-in gain or
loss of the S corporation for any taxable year in the
recognition period. Terms used in the preceding
sentence shall have the same respective meanings as
when used in section 1374.''.
(2)(A) Section 26(b)(2)(J) is amended by striking ``25
percent'' and inserting ``60 percent''.
(B) Section 1375(b)(1)(A)(i) is amended by striking ``25
percent'' and inserting ``60 percent''.
(C) The heading for section 1375 is amended by striking
``25 percent'' and inserting ``60 percent''.
(D) The item relating to section 1375 in the table of
sections for part III of subchapter S of chapter 1 is amended
by striking ``25 percent'' and inserting ``60 percent''.
(3) Section 1042(c)(4)(A)(i) is amended by striking
``section 1362(d)(3)(C)'' and inserting ``section 1375(b)(3)''.
(4) Section 1362(f)(1)(B) is amended by striking
``paragraph (2) or (3) of subsection (d)'' and inserting
``subsection (d)(2)''.
(d) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2020.
SEC. 3. EXPANSION OF S CORPORATION ELIGIBLE SHAREHOLDERS TO INCLUDE
IRAS.
(a) In General.--Section 1361(c)(2)(A)(vi) is amended to read as
follows:
``(vi) A trust which constitutes an
individual retirement account under section
408(a), including one designated as a Roth IRA
under section 408A.''.
(b) Sale of Stock in IRA Relating to S Corporation Election Exempt
From Prohibited Transaction Rules.--Section 4975(d)(16) is amended--
(1) by striking subparagraphs (A) and (B) and by
redesignating subparagraphs (C), (D), (E), and (F) as
subparagraphs (A), (B), (C), and (D), respectively, and
(2) by striking ``such bank or company'' in subparagraph
(A) (as so redesignated) and inserting ``the issuer of such
stock''.
(c) Effective Date.--The amendments made by this section shall take
effect on January 1, 2021.
SEC. 4. TREATMENT OF S CORPORATION BUILT-IN GAIN AMOUNT UPON DEATH OF
SHAREHOLDER.
(a) In General.--Part II of subchapter S of chapter 1 is amended by
adding at the end the following:
``SEC. 1369. AMORTIZATION OF BUILT-IN GAIN AMOUNT UPON DEATH OF
SHAREHOLDER.
``(a) In General.--A person holding stock in an electing S
corporation the basis of which is determined under section 1014(a)
(hereafter in this section referred to as the `shareholder') shall be
allowed a deduction with respect to the S corporation built-in gain
amount. The amount of such deduction for any taxable year shall be
determined by amortizing the S corporation built-in gain amount over
the 15-year period beginning with the month which includes the
applicable valuation date.
``(b) S Corporation Built-In Gain Amount.--For purposes of this
section, the term `S corporation built-in gain amount' means the lesser
of--
``(1) the excess (if any) of--
``(A) the basis of the stock referred to in
subsection (a) as determined under section 1014(a),
over
``(B) the adjusted basis of such stock immediately
before the death of the decedent, or
``(2) the pro rata share (determined as of the applicable
valuation date) of--
``(A) the aggregate fair market value of all
property held by the S corporation which is of a
character subject to depreciation or amortization, over
``(B) the aggregate adjusted basis of all such
property held by the S corporation as of such date.
``(c) Electing S Corporation.--For purposes of this section, the
term `electing S corporation' means, with respect to any shareholder,
any S corporation which elects the application of this section with
respect to such shareholder at such time and in such form and manner as
the Secretary may prescribe.
``(d) Applicable Valuation Date.--For purposes of this section, the
term `applicable valuation date' means--
``(1) in the case of a decedent with respect to which the
executor of the decedent's estate elects the application of
section 2032, the date 6 months after the decedent's death, and
``(2) in the case of any other decedent, the date of the
decedent's death.
``(e) Accelerated Deduction in Case of Disposition of S Corporation
Property.--
``(1) In general.--If the electing S corporation disposes
of any property which was taken into account under subsection
(b)(2), then the deduction allowed under subsection (a) with
respect to any stock, for the taxable year of the shareholder
in which or with which the taxable year of the S corporation
which includes the date of such disposition ends, shall (except
as otherwise provided in this section) not be less than the
lesser of--
``(A) the pro rata share of the gain recognized on
such disposition, or
``(B) the amount determined under subsection (b)(2)
by only taking into account such property.
``(2) Overall allowance not increased.--No deduction shall
be allowed under subsection (a) with respect to any stock for
any taxable year to the extent that such deduction (when added
to the deductions so allowed for all prior taxable years)
exceeds the S corporation built-in gain amount with respect to
such stock.
``(f) Recharacterization of Gains as Ordinary Income to Extent of
Deduction.--If--
``(1) stock of an S corporation with respect to which a
deduction was allowed under this section, or
``(2) property which was taken into account under
subsection (b)(2) with respect to such stock,
is disposed of at a gain (determined without regard to whether or not
such gain is recognized and reduced by any amount of gain which is
treated as ordinary income under any other provision of this subtitle),
the amount of such gain (or the shareholder's pro rata share of such
gain in the case of property described in paragraph (2)) shall be
treated as gain which is ordinary income (and shall be recognized
notwithstanding any other provision of this subtitle) to the extent of
the excess of the aggregate deductions allowable under this section
with respect to such stock for the taxable year of such disposition and
all prior taxable years over the amounts taken into account under this
subsection for all prior taxable years.
``(g) Termination of Amortization.--No deduction shall be allowed
under subsection (a) with respect to any stock in an electing S
corporation with respect to any period beginning after the earlier of--
``(1) the date on which the corporation's election under
section 1362 terminates, or
``(2) the date on which the shareholder transfers such
stock to any other person.
``(h) Treatment of Certain Transfers.--
``(1) Distributions from estates or trusts.--
Notwithstanding any other provision of this section, in the
case of a distribution of stock from an estate or trust to a
beneficiary, the beneficiary (and not the estate or trust)
shall be treated as the shareholder to which this section
applies with respect to periods after such distribution.
``(2) Certain transfers involving spouses.--Notwithstanding
any other provision of this section, in the case of a transfer
described in section 1041, the transferee (and not the
transferor) shall be treated as the shareholder to which this
section applies with respect to periods after such transfer.
``(i) Treatment of Income in Respect of the Decedent.--
``(1) Adjustment to built-in gain of property held by s
corporation.--For purposes of subsection (b)(2), the fair
market value of any property taken into account under
subparagraph (A) thereof shall be decreased by any amount of
income in respect of the decedent with respect to such property
to which section 691 applies. For purposes of subsection
(e)(1)(A), the gain recognized on the disposition of such
property shall be reduced by such amount.
``(2) Adjustment to basis of s corporation stock.--For
adjustment to basis of S corporation stock, see section
1367(b)(4)(B).
``(j) Reporting.--Except as otherwise provided by the Secretary,
for purposes of section 6037, the amounts determined under subsections
(b)(2), (e)(1), and (f)(2) shall be treated as items of the corporation
and the pro rata share determined under such subsection shall be
furnished to the shareholder under section 6037(b).''.
(b) Adjustment to Basis of Stock.--
(1) In general.--Section 1367(a)(2) is amended by striking
``and'' at the end of subparagraph (D), by striking the period
at the end of subparagraph (E) and inserting ``, and'', and by
inserting after subparagraph (E) the following new
subparagraph:
``(F) the amount of the shareholder's deduction
allowable under section 1369.''.
(2) Adjustment not taken into account in determining
treatment of distributions.--Section 1368 is amended--
(A) in subsection (d)(1), by inserting ``(other
than subsection (a)(2)(F) thereof)'' after ``section
1367'', and
(B) in subsection (e)(1)(A)--
(i) by striking ``this title and the
phrase'' and inserting ``this title, the
phrase'', and
(ii) by inserting ``, and no adjustment
shall be made under section 1367(a)(2)(F)''
after ``section 1367(a)(2)''.
(c) Clerical Amendment.--The table of sections for part II of
subchapter S of chapter 1 is amended by adding at the end the following
new item:
``Sec. 1369. Amortization of built-in gain amount upon death of
shareholder.''.
(d) Effective Date.--The amendments made by this section shall
apply with respect to decedents dying after the date of the enactment
of this Act, in taxable years ending after such date.
<all>
S Corporation Modernization Act of 2020
#5643 | HR Congress #116
Policy Area: Taxation
Last Action: Referred to the House Committee on Ways and Means. (1/16/2020)
Bill Text Source: Congress.gov
Summary and Impacts
Original Text