[Congressional Bills 118th Congress]
[From the U.S. Government Publishing Office]
[H.R. 8619 Introduced in House (IH)]
<DOC>
118th CONGRESS
2d Session
H. R. 8619
To amend the Internal Revenue Code of 1986 to provide for S corporation
reform, and for other purposes.
_______________________________________________________________________
IN THE HOUSE OF REPRESENTATIVES
June 4, 2024
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 2024''.
(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. 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. TREATMENT OF S CORPORATION 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 amortizable S corporation
built-in gain amount. Except as provided under subsection (b), the
amount of such deduction for any taxable year shall be determined by
amortizing the amortizable S corporation built-in gain amount over the
15-year period beginning with the month which includes the applicable
valuation date.
``(b) Deduction in Case of Disposition of S Corporation Property.--
``(1) Accelerated deduction in case of disposition of
amortizable s corporation built-in gain property.--
``(A) In general.--If there is a disposition of any
amortizable S corporation built-in gain property, then
the deduction allowed under subsection (a) with respect
to any stock (determined without regard to paragraph
(2)) 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--
``(i) the pro rata share of the gain
recognized on such disposition, or
``(ii) the amount determined under
subsection (c)(1)(B) by only taking into
account such property.
``(B) Overall allowance not increased.--Except as
provided in paragraph (2), 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 attributable to
amortizable S corporation built-in gain property so
allowed for all prior taxable years) exceeds the
amortizable S corporation built-in gain amount with
respect to such stock.
``(2) Additional deduction in case of disposition of
nonamortizable s corporation built-in gain property.--
``(A) In general.--If there is a disposition of any
nonamortizable S corporation built-in gain property,
then the amount allowable as deduction 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
disposition ends, shall be increased by the lesser of--
``(i) the pro-rata share of the gain
recognized on such disposition, or
``(ii) the amount determined under
subsection (c)(1)(B) by only taking into
account such property.
``(B) Limitation.--Subparagraph (A) shall not apply
with respect to any stock for any taxable year to the
extent that such increase (when added to the increased
deductions so allowed under subparagraph (A) for all
prior taxable years) exceeds the non-amortizable S
corporation built-in gain amount with respect to such
stock.
``(c) Definitions and Special Rules.--For purposes of this
section--
``(1) S corporation built-in gain amount.--The term `S
corporation built-in gain amount' means the lesser of--
``(A) the excess (if any) of--
``(i) the basis of the stock referred to in
subsection (a) as determined under section
1014(a), over
``(ii) the adjusted basis of such stock
immediately before the death of the decedent,
or
``(B) the pro rata share (determined as of the
applicable valuation date) of--
``(i) the aggregate fair market value of
all property held by the S corporation which is
amortizable S corporation built-in gain
property or nonamortizable S corporation built-
in gain property, over
``(ii) the aggregate adjusted basis of all
such property held by the S corporation as of
such date.
``(2) Amortizable s corporation built-in gain property.--
The term `amortizable S corporation built-in gain property'
means, as of the applicable valuation date, the S corporation
property that is of a character subject to depreciation or
amortization.
``(3) Amortizable s corporation built-in gain amount.--The
term `amortizable S corporation built-in gain amount' means the
pro rata share of the portion of the S corporation built-in
gain amount that is attributable to amortizable S corporation
built-in gain property.
``(4) Non-amortizable s corporation built-in gain
property.--The term `non-amortizable S corporation built-in
gain property' means, as of the applicable valuation date, the
S corporation property that is not of a character subject to
depreciation or amortization (other than an equity interest in
an electing S corporation partnership).
``(5) Non-amortizable s corporation built-in gain amount.--
The term `non-amortizable S corporation built-in gain amount'
means the pro rata share of the portion of the S corporation
built-in gain amount that is attributable to non-amortizable S
corporation built-in gain property.
``(6) Special rule for partnership interests.--If an
electing S corporation owns, directly or indirectly, an equity
interest in an electing S corporation partnership, including a
lower-tier electing S corporation partnership, the amortizable
S corporation built-in gain property and the non-amortizable S
corporation built-in gain property shall include the electing S
corporation's distributive share of such property held by the
partnership. Rules similar to the rules under paragraphs (1),
(2), (3), (4), and (5) of this subsection shall apply to
determine the electing S corporation's distributive share of
the amortizable S corporation built-in gain property and the
non-amortizable S corporation built-in gain property held by
such partnership for purposes of this section. For purposes of
subsection (b), a disposition of an interest in an electing S
corporation partnership shall be treated as a disposition of
the electing S corporation's distributive share of the property
held by such partnership.
``(7) Electing s corporation.--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.
``(8) Electing s corporation partnership.--The term
`electing S corporation partnership' means, with respect to any
shareholder, any equity interest in a partnership owned
directly or indirectly by the electing S corporation, including
a lower-tier partnership, for which the S corporation 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.
``(9) Applicable valuation date.--The term `applicable
valuation date' means--
``(A) 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 months after the
decedent's death, and
``(B) in the case of any other decedent, the date
of the decedent's death.
``(d) 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,
``(2) amortizable S corporation built-in gain property with
respect to which a deduction was allowed under subsection
(b)(1), or
``(3) nonamortizable S corporation built-in gain property
with respect to which a deduction was allowed under subsection
(b)(2),
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) or (3)) 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.
``(e) Termination of Deduction.--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.
``(f) 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 , the transferee (and not the transferor)
shall be treated as the shareholder to which this section
applies with respect to periods after such transfer.
``(3) Gifts.--Notwithstanding any other provision of this
section, in the case of a gift, the donee (and not the donor)
shall be treated as the shareholder to which this section
applies with respect to periods after such gift.
``(4) Transfers to trusts.--Notwithstanding any other
provision of this section, in the case of a transfer to a
trust, the trust (and not the transferor) shall be treated as
the shareholder to which this section applies with respect to
periods after such transfer.
``(g) Treatment of Income in Respect of the Decedent.--
``(1) Adjustment to built-in gain of property held by s
corporation.--For purposes of subsection (c)(1)(B), the fair
market value of any property taken into account under
subparagraph (B)(i) 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 subsections
(b)(1)(A) and (b)(2)(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).
``(h) Reporting.--Except as otherwise provided by the Secretary,
for purposes of section 6037, the amounts determined under subsections
(b)(1), (b)(2), (c)(1)(B), (c)(3), (c)(5), (c)(6), (d)(2), and (d)(3)
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
under section __.''.
(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. Treatment of S corporation 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.
SEC. 3. 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 c