[Congressional Record Volume 165, Number 121 (Thursday, July 18, 2019)]
[Senate]
[Pages S4950-S4952]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. THUNE (for himself, Mr. Cardin, and Mr. Roberts):
  S. 2156. A bill to amend the Internal Revenue Code of 1986 to provide 
for S corporation reform, and for other purposes; to the Committee on 
Finance.
  Mr. THUNE Mr. President, I ask unanimous consent that the text of the 
bill be printed in the Record.
  There being no objection, the text of the bill was ordered to be 
printed in the Record, as follows:

                                S. 2156

       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 2019''.
       (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

[[Page S4951]]

     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, 
     2019.

     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, 2020.

     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.

     SEC. 5. REVOCATIONS OF S CORPORATION ELECTIONS.

       (a) Revocations.--Paragraph (1) of section 1362(d) is 
     amended--
       (1) by striking ``subparagraph (D)'' in subparagraph (C) 
     and inserting ``subparagraphs (D) and (E)'', and
       (2) by adding at the end the following new subparagraph:
       ``(E) Authority to treat late revocations as timely.--If--

[[Page S4952]]

       ``(i) a revocation under subparagraph (A) is made for any 
     taxable year after the date prescribed by this paragraph for 
     making such revocation for such taxable year or no such 
     revocation is made for any taxable year, and
       ``(ii) the Secretary determines that there was reasonable 
     cause for the failure to timely make such revocation,
     the Secretary may treat such a revocation as timely made for 
     such taxable year.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to revocations after December 31, 2019.
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