[Congressional Record Volume 145, Number 158 (Wednesday, November 10, 1999)]
[Senate]
[Pages S14551-S14552]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. THOMAS (for himself and Mr. Enzi):
  S. 1904. A bill to amend the Internal Revenue Code of 1986 to provide 
for an election for special tax treatment of certain S corporation 
conversions; to the Committee on Finance.


election for special tax treatment of certain s corporation conversions

 Mr. THOMAS. Mr. President, today I join Senator Enzi in 
introducing legislation that will give small businesses more 
flexibility in how they choose to operate.

  One of the most important decisions for the founder of a business is 
``choice of entity,'' whether to operate the business through a 
corporation, partnership, limited liability company or other form of 
business. This choice is plainly important for reaching business goals, 
and may be critical to the survival of the business. For the family 
business, the choice also is inseparable from the owner's preferences 
as to how the owner wants to relate to family co-owners. Choice of 
entity is therefore potentially one of the most important decisions for 
an owner.
  The law concerning choice of entity has changed enormously in the 
last decade, particularly with the widespread adoption of laws 
authorizing the limited liability company (LLC). As a result, business 
owners have more flexibility in this area than ever before. Even so, 
older family businesses operated as S corporations may be ``locked'' 
into the corporate form, simply because of the tax cost of changing to 
another form. These businesses are thus unable to take advantages of 
the recent advancements in choice of entity.
  In order to help these older businesses remain competitive with their 
younger rivals, the bill Senator Enzi and I introduce today will allow 
a one-time election for an S corporation to change to another form of 
business without incurring the normal tax cost of doing so.
  Thousands of corporations have elected subchapter S status since 
President Eisenhower signed into law the Technical Amendments Act of 
1958, which added subchapter S to the code. The legislative history 
makes clear that the purpose of subchapter S was to offer simplified 
tax rules for the small and family-owned business operating in the 
corporate form.
  Until the rise of the LLC in the mid 1990's, the S corporation 
remained, for all practical purposes, the sole means for a small or 
family business to obtain the benefits of limited liability without the 
complex corporate tax. For many years, a change to another form of 
business was relatively easy. But by the time an alternative to the S 
corporation became widely available, this avenue had been foreclosed by 
changes to the tax code. Thus thousands of S corporations are saddled 
with the cumbersome and inflexible rules of the corporate form.
  The Internal Revenue Code itself reflects a policy of respecting 
economic reality over form in the conduct of a trade or business. For 
example, Section 1031, which existed even in 1939, allows 
nonrecognition of gain or loss in the exchange of property used in a 
trade or business, or for investment, on the theory that the taxpayer 
has not cashed out his investment. Code Sections 351 and 721 allow 
nonrecognition on the contribution of property to a corporation or a 
partnership, on the rationale that the taxpayer is only changing the 
form of his investment.
  The S election itself was a giant stride in removing tax 
considerations in choice of entity. More recently, the Internal Revenue 
Service has done much to remove tax considerations from the choice of 
business form through the check the box regulations.

[[Page S14552]]

The Service should be commended for taking this step.
  The next step in the process is allowing those S corporations that 
can more efficiently function as an LLC the one-time chance to make the 
conversion, without tax cost being the controlling factor. Until these 
conversions can be accomplished, the task of reducing the role of taxes 
in choosing a business form will remain unfinished.
  I look forward to working with Senator Roth and the other members of 
the Senate Finance Committee so we may take action on this measure as 
soon as possible.
                                 ______