[Congressional Record Volume 151, Number 54 (Thursday, April 28, 2005)]
[Senate]
[Pages S4580-S4581]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. SMITH (for himself and Mrs. Lincoln):
  S. 965. A bill to amend the Internal Revenue Code of 1986 to reduce 
the recognition period for built-in gains for subchapter S 
corporations; to the Committee on Finance.
  Mr. SMITH. Mr. President, I am pleased today to introduce the Small 
Business Growth and Opportunity Act of 2004 along with my Finance 
Committee colleague, Senator Blanche Lincoln.
  This legislation will allow S corporations to liquidate unproductive 
assets freeing up capital to be used to grow the business and create 
new jobs.
  There are about 2.9 million of these small and family-owned 
businesses in all 50 States. Over the past few years, many of these 
small businesses have been forced to lay off workers and delay capital 
investment. At the same time, the tax code forces them to hold on to 
unproductive and inefficient assets or face the double tax period of 
the corporate ``built-in gains'' tax.
  Under current law, businesses that convert from a C corporation to S 
corporation status are penalized by a double tax burden for a period of 
10 years if they sell assets they owned as a C corporation. This tax 
penalty is imposed at the corporate level on top of normal shareholder-
level taxes, making the sale and reinvestment of these assets 
prohibitively expensive. In some States, this double-tax burden can 
exceed 70 percent of the built-in gain.
  Clearly this tax penalty is neither justifiable nor sustainable as a 
reasonable business matter. The built-in gains tax 1. limits cash flow 
and availability, 2. encourages excess borrowing because the S 
corporation cannot access the locked-in value of its own assets, and 3. 
prevents these small businesses from growing and creating jobs.
  While I would like to see even more generous relaxation of these 
rules, for revenue considerations this legislation will reduce the 
built-in gains recognition period (the holding period) from 10

[[Page S4581]]

years to 7 years. And, this three-year reduction would be a significant 
start in easing this unproductive tax burden on these small and family-
owned businesses.
  I look forward to working with my colleagues on the Senate Finance 
Committee and hope the Committee will consider this proposal this year.
  I ask unanimous consent that the text of the bill be printed in the 
Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                 S. 965

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

     SECTION 1. REDUCED RECOGNITION PERIOD FOR BUILT-IN GAINS.

       (a) In General.--Paragraph (7) of section 1374(d) of the 
     Internal Revenue Code of 1986 (relating to definitions and 
     special rules) is amended to read as follows:
       ``(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 such 
     distribution.''.
       (b) Effective Date.--
       (1) General rule.--The amendment made by this section shall 
     apply to any recognition period in effect on or after the 
     date of the enactment of this Act.
       (2) Special application to existing periods exceeding 7 
     years.--Any recognition period in effect on the date of the 
     enactment of this Act, the length of which is greater than 7 
     years, shall end on such date.
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