[House Report 114-15]
[From the U.S. Government Publishing Office]


114th Congress      }                               {   Report
                        HOUSE OF REPRESENTATIVES
 1st Session        }                               {    114-15
======================================================================
 
  PERMANENT S CORPORATION BUILT-IN GAIN RECOGNITION PERIOD ACT OF 2015

                                _______
                                

February 9, 2015.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

Mr. Ryan of Wisconsin, from the Committee on Ways and Means, submitted 
                             the following

                              R E P O R T

                             together with

                            DISSENTING VIEWS

                        [To accompany H.R. 629]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Ways and Means, to whom was referred the 
bill (H.R. 629) to amend the Internal Revenue Code of 1986 to 
make permanent the reduced recognition period for built-in 
gains of S corporations, having considered the same, report 
favorably thereon with an amendment and recommend that the bill 
as amended do pass.

                                CONTENTS

                                                                   Page
  I. SUMMARY AND BACKGROUND...........................................2
          A. Purpose and Summary.................................     2
          B. Background and Need for Legislation.................     2
          C. Legislative History.................................     2
 II. EXPLANATION OF THE BILL..........................................3
          A. Reduced Recognition Period for Built-In Gains of S 
              Corporations Made Permanent (sec. 1374 of the Code)     3
III. VOTES OF THE COMMITTEE...........................................5
 IV. BUDGET EFFECTS OF THE BILL.......................................6
          A. Committee Estimate of Budgetary Effects.............     6
          B. Statement Regarding New Budget Authority and Tax 
              Expenditures Budget Authority......................     8
          C. Cost Estimate Prepared by the Congressional Budget 
              Office.............................................     8
  V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE......11
          A. Committee Oversight Findings and Recommendations....    11
          B. Statement of General Performance Goals and 
              Objectives.........................................    11
          C. Information Relating to Unfunded Mandates...........    11
          D. Applicability of House Rule XXI 5(b)................    11
          E. Tax Complexity Analysis.............................    11
          F. Congressional Earmarks, Limited Tax Benefits, and 
              Limited Tariff Benefits............................    12
          G. Duplication of Federal Programs.....................    12
          H. Disclosure of Directed Rule Makings.................    12
 VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED...........12
VII. DISSENTING VIEWS................................................18
    The amendment is as follows:
      Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Permanent S Corporation Built-in Gain 
Recognition Period Act of 2015''.

SEC. 2. REDUCED RECOGNITION PERIOD FOR BUILT-IN GAINS OF S CORPORATIONS 
                    MADE PERMANENT.

  (a) In General.--Paragraph (7) of section 1374(d) of the Internal 
Revenue Code of 1986 is amended to read as follows:
          ``(7) Recognition period.--
                  ``(A) In general.--The term `recognition period' 
                means the 5-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 phrase `5-year'.
                  ``(B) Installment sales.--If an S corporation sells 
                an asset and reports the income from the sale using the 
                installment method under section 453, the treatment of 
                all payments received shall be governed by the 
                provisions of this paragraph applicable to the taxable 
                year in which such sale was made.''.
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2014.

                       I. SUMMARY AND BACKGROUND


                         A. Purpose and Summary

    H.R. 629, reported by the Committee on Ways and Means, 
amends section 1374 of the Internal Revenue Code of 1986 (``the 
Code'') to make permanent the five-year reduced recognition 
period for built-in gains of S corporations.

                 B. Background and Need for Legislation

    H.R. 629, reported by the Committee on Ways and Means, 
provides a permanent five-year recognition period for built-in 
gains of an S corporation. A temporary provision, which expired 
for taxable years beginning after December 31, 2014, also 
provided a five-year recognition period for built-in gains of 
an S corporation. With the expiration of that temporary 
provision, however, that recognition period is currently ten 
years for taxable years beginning after December 31, 2014.

                         C. Legislative History


Background

    H.R. 629 was introduced on January 30, 2015, and was 
referred to the Committee on Ways and Means.

Committee action

    The Committee on Ways and Means marked up H.R. 629, the 
Permanent S Corporation Built-in Gains Recogniton Period Act of 
2015, on February 4, 2015, and ordered the bill, as amended, 
favorably reported (with a quorum being present).

Committee hearings

    The need for a permanent five-year recognition period for 
built-in gains of S corporations was discussed at no fewer than 
four hearings during the 112th and 113th Congresses:
           Full Committee hearing on Fundamental Tax 
        Reform (January 20, 2011);
           Full Committee hearing on the Treatment of 
        Closely-Held Businesses in the Context of Tax Reform 
        (March 7, 2012);
           Full Committee hearing on the Small Business 
        and Pass-Through Entity Tax Reform Discussion Draft 
        (May 15, 2013); and
           Full Committee hearing on the Benefits of 
        Permanent Tax Policy for America's Job Creators (April 
        8, 2014).

                      II. EXPLANATION OF THE BILL


A. Reduced Recognition Period for Built-In Gains of S Corporations Made 
                   Permanent (sec. 1374 of the Code)


                              PRESENT LAW

In general

            S corporations
    A small business corporation\1\ may elect to be treated as 
an S corporation. Unlike C corporations, S corporations 
generally pay no corporate-level tax. Instead, items of income 
and loss of an S corporation pass through to its shareholders. 
Each shareholder takes into account separately its share of 
these items on its own income tax return.\2\
---------------------------------------------------------------------------
    \1\This term is defined in section 1361(b).
    \2\Sec. 1366.
---------------------------------------------------------------------------
    A corporate level built-in gains tax, at the highest 
marginal rate applicable to corporations (currently 35 
percent), is imposed on an S corporation's net recognized 
built-in gain\3\ that arose prior to the conversion of the C 
corporation to an S corporation and is recognized by the S 
corporation during the recognition period, (i.e., the 10-year 
period beginning with the first day of the first taxable year 
for which the S election is in effect).\4\ If the taxable 
income of the S corporation is less than the amount of net 
recognized built-in gain in the year such built-in gain is 
recognized (for example, because of post-conversion losses), no 
built-in gain tax is imposed on the excess of such built-in 
gain over taxable income for that year. However, the untaxed 
excess of net recognized built-in gain over taxable income for 
that year is treated as recognized built-in gain in the 
succeeding taxable year.\5\ Treasury regulations provide that 
if a corporation sells an asset before or during the 
recognition period and reports the income from the sale using 
the installment method\6\ during or after the recognition 
period, that income is subject to the built-in gain tax.\7\
---------------------------------------------------------------------------
    \3\Certain built-in income items are treated as recognized built-in 
gain for this purpose. Sec. 1374(d)(5).
    \4\Sec. 1374(d)(7)(A). The 10-year period refers to ten calendar 
years from the first day of the first taxable year for which the 
corporation was an S corporation. Treas. Reg. sec. 1.1374-1(d).
    \5\Sec. 1374(d)(2).
    \6\Sec. 453.
    \7\Treas. Reg. sec. 1.1374-4(h).
---------------------------------------------------------------------------
    The built-in gain tax also applies to net recognized built-
in gain attributable to any asset received by an S corporation 
from a C corporation in a transaction in which the S 
corporation's basis in the asset is determined (in whole or in 
part) by reference to the basis of such asset (or other 
property) in the hands of the C corporation.\8\ In the case of 
such a transaction, the recognition period for any asset 
transferred by the C corporation starts on the date the asset 
was acquired by the S corporation in lieu of the beginning of 
the first taxable year for which the corporation was an S 
corporation.\9\
---------------------------------------------------------------------------
    \8\Sec. 1374(d)(8).
    \9\Sec. 1374(d)(8)(B).
---------------------------------------------------------------------------
    The amount of the built-in gains tax is treated as a loss 
by each of the S corporation shareholders in computing its own 
income tax.\10\
---------------------------------------------------------------------------
    \10\Sec. 1366(f)(2). Shareholders continue to take into account all 
items of gain and loss under section 1366.
---------------------------------------------------------------------------
    For any taxable year beginning in 2009 and 2010, no tax was 
imposed on the net recognized built-in gain of an S corporation 
under section 1374 if the seventh taxable year in the 
corporation's recognition period preceded such taxable 
year.\11\ Thus, with respect to gain that arose prior to the 
conversion of a C corporation to an S corporation, no tax was 
imposed under section 1374 if the seventh taxable year that the 
S corporation election was in effect preceded the taxable year 
beginning in 2009 or 2010.
---------------------------------------------------------------------------
    \11\Sec. 1374(d)(7)(B).
---------------------------------------------------------------------------
    For any taxable year beginning in 2011, no tax was imposed 
on the net recognized built-in gain of an S corporation under 
section 1374 if the fifth year in the corporation's recognition 
period preceded such taxable year.\12\ Thus, with respect to 
gain that arose prior to the conversion of a C corporation to 
an S corporation, no tax was imposed under section 1374 if the 
S corporation election was in effect for five years preceding 
the taxable year beginning in 2011.
---------------------------------------------------------------------------
    \12\Sec. 1374(d)(7)(C).
---------------------------------------------------------------------------
    For taxable years beginning in 2012, 2013, and 2014 the 
term ``recognition period'' in section 1374, for purposes of 
determining the net recognized built-in gain, is applied by 
substituting a five-year period\13\ for the otherwise 
applicable 10-year period. Thus, for such taxable years, the 
recognition period is the five-year period beginning with the 
first day of the first taxable year for which the corporation 
was an S corporation (or beginning with the date of acquisition 
of assets if the rules applicable to assets acquired from a C 
corporation apply). If an S corporation with assets subject to 
section 1374 disposes of such assets in a taxable year 
beginning in 2012, 2013, or 2014 and the disposition occurs 
more than five years after the first day of the relevant 
recognition period, gain or loss on the disposition will not be 
taken into account in determining the net recognized built-in 
gain.
---------------------------------------------------------------------------
    \13\The five-year period refers to five calendar years from the 
first day of the first taxable year for which the corporation was an S 
corporation.
---------------------------------------------------------------------------
    If an S corporation subject to section 1374 sells a built-
in gain asset and reports the income from the sale using the 
installment method under section 453, the treatment of all 
payments received will be governed by the provisions of section 
1374(d)(7) applicable to the taxable year in which the sale was 
made.
            Application to real estate investment trusts and regulated 
                    investment companies
    Under Treasury regulations, a regulated investment company 
(``RIC'') or a real estate investment trust (``REIT'') that was 
formerly a C corporation not taxed as a REIT or RIC (or that 
acquired assets from such a C corporation) generally is subject 
to the built-in gain tax rules as if the RIC or REIT were an S 
corporation, unless the relevant C corporation elects ``deemed 
sale'' treatment, requiring recognition of all C corporation 
built-in gain and loss at the time of the conversion or asset 
acquisition.\14\ Deemed sale treatment is not permitted if its 
application would result in the recognition of a net loss.\15\ 
For this purpose, net loss is the excess of aggregate losses 
over aggregate gains (including items of income), without 
regard to character.\16\
---------------------------------------------------------------------------
    \14\Treas. Reg. secs. 1.337(d)-7(a) and 1.337(d)-7(b).
    \15\Treas. Reg. sec. 1.337(d)-7(c)(1).
    \16\Treas. Reg. sec. 1.337(d)-7(c)(1).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that a five-year recognition period 
for built-in gains adequately protects the corporate tax base 
while allowing greater flexibility for S corporations to 
replace and reposition assets, allowing S corporations to 
access capital to expand business operations and create jobs. 
The Committee also believes that making the five-year 
recognition period permanent will provide needed certainty and 
removes a significant deterrent that often discourages C 
corporations from electing to be S corporations.

                        EXPLANATION OF PROVISION

    The provision makes permanent the five-year recognition 
period for built-in gains of S corporations. Under current 
Treasury regulations, this five-year recognition period also 
will apply to real estate investment trusts and regulated 
investment companies that do not elect ``deemed sale'' 
treatment.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2014.

                      III. VOTES OF THE COMMITTEE

    In compliance with clause 3(b) of rule XIII of the Rules of 
the House of Representatives, the following statement is made 
concerning the vote of the Committee on Ways and Means in its 
consideration of H.R. 629, the Permanent S Corporation Built-in 
Gains Recognition Period Act of 2015.
    The bill, H.R. 629, was ordered favorably reported as 
amended by a rollcall vote of 24 yeas to 14 nays (with a quorum 
being present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Ryan.......................        X   ........  .........  Mr. Levin........  ........        X   .........
Mr. Johnson....................        X   ........  .........  Mr. Rangel.......  ........        X   .........
Mr. Brady......................        X   ........  .........  Mr. McDermott....  ........        X   .........
Mr. Nunes......................        X   ........  .........  Mr. Lewis........  ........        X   .........
Mr. Tiberi.....................        X   ........  .........  Mr. Neal.........  ........        X   .........
Mr. Reichert...................        X   ........  .........  Mr. Becerra......  ........        X   .........
Mr. Boustany...................        X   ........  .........  Mr. Doggett......  ........        X   .........
Mr. Roskam.....................        X   ........  .........  Mr. Thompson.....  ........        X   .........
Mr. Price......................        X   ........  .........  Mr. Larson.......  ........        X   .........
Mr. Buchanan...................        X   ........  .........  Mr. Blumenauer...  ........  ........  .........
Mr. Smith (NE).................        X   ........  .........  Mr. Kind.........  ........        X   .........
Mr. Schock.....................        X   ........  .........  Mr. Pascrell.....  ........        X   .........
Ms. Jenkins....................        X   ........  .........  Mr. Crowley......  ........        X   .........
Mr. Paulsen....................        X   ........  .........  Mr. Davis........  ........        X   .........
Mr. Marchant...................        X   ........  .........  Ms. Sanchez......  ........        X   .........
Ms. Black......................        X   ........  .........  .................  ........  ........  .........
Mr. Reed.......................        X   ........  .........  .................  ........  ........  .........
Mr. Young......................        X   ........  .........  .................  ........  ........  .........
Mr. Kelly......................        X   ........  .........  .................  ........  ........  .........
Mr. Renacci....................        X   ........  .........  .................  ........  ........  .........
Mr. Meehan.....................        X   ........  .........  .................  ........  ........  .........
Ms. Noem.......................        X   ........  .........  .................  ........  ........  .........
Mr. Holding....................        X   ........  .........  .................  ........  ........  .........
Mr. Smith (MO).................        X   ........  .........  .................  ........  ........  .........
----------------------------------------------------------------------------------------------------------------

                     IV. BUDGET EFFECTS OF THE BILL


               A. Committee Estimate of Budgetary Effects

    In compliance with clause 3(d) of rule XIII of the Rules of 
the House of Representatives, the following statement is made 
concerning the effects on the budget of the bill, H.R. 629, as 
reported.
    The bill, as reported, is estimated to have the following 
effects on Federal budget receipts for fiscal years 2015-2025:

                                                                      FISCAL YEARS
                                                                  [Millions of Dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
   2015        2016        2017        2018        2019        2020        2021        2022        2023        2024        2025      2015-20    2015-25
--------------------------------------------------------------------------------------------------------------------------------------------------------
      -70        -218        -283        -222        -147        -103         -84         -81         -86         -92         -99      -1,043    -1,485
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Details do not add to totals due to rounding.

    Pursuant to clause 8 of rule XIII of the Rules of the House 
of Representatives, the following statement is made by the 
Joint Committee on Taxation with respect to the provisions of 
the bill amending the Internal Revenue Code of 1986: the gross 
budgetary effect (before incorporating macroeconomic effects) 
in any fiscal year is less than 0.25 percent of the current 
projected gross domestic product of the United States for that 
fiscal year; therefore, the bill is not ``major legislation'' 
for purposes of requiring that the estimate include the 
budgetary effects of changes in economic output, employment, 
capital stock and other macroeconomic variables.

B. Statement Regarding New Budget Authority and Tax Expenditures Budget 
                               Authority

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee states that the 
bill involves no new or increased budget authority. The 
Committee states further that the bill involves no new or 
increased tax expenditures.

      C. Cost Estimate Prepared by the Congressional Budget Office

    In compliance with clause 3(c)(3) of rule XIII of the Rules 
of the House of Representatives, requiring a cost estimate 
prepared by the CBO, the following statement by CBO is 
provided.

                                     U.S. Congress,
                               Congressional Budget Office,
                                  Washington, DC, February 5, 2015.
Hon. Paul Ryan,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 629, the Permanent 
S Corporation Built-in Gains Recognition Period Act of 2015.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Nate Frentz.
            Sincerely,
                                              Douglas W. Elmendorf.
    Enclosure.

H.R. 629--Permanent S Corporation Built-in Gains Recognition Period Act 
        of 2015

    H.R. 629 would amend the Internal Revenue Code to make 
permanent a five-year recognition period for built-in gains of 
S corporations, retroactive to January 1, 2015. Under current 
law, a corporation that meets certain requirements may elect to 
be taxed as an S corporation, which generally pays no 
corporate-level tax, unlike a C corporation. For corporations 
that convert from C corporations to S corporations, or S 
corporations that receive assets under certain conditions from 
C corporations, there is a corporate-level tax on certain 
built-in gains of certain assets, with a 10-year recognition 
period. This legislation would make permanent the five-year 
recognition period for S corporation built-in gains that was 
generally in effect for taxable years from 2011 through 2014. 
The legislation also would apply to regulated investment 
companies and real estate investment trusts.
    The staff of the Joint Committee on Taxation (JCT) 
estimates that enacting H.R. 629 would reduce revenues, thus 
increasing federal deficits, by $1.5 billion over the 2015-2025 
period.
    The Statutory Pay-As-You-Go Act of 2010 establishes budget-
reporting and enforcement procedures for legislation affecting 
direct spending and revenues. Enacting H.R. 629 would result in 
revenue losses in each year beginning in 2015. The estimated 
increases in the deficit are shown in the following table.
    JCT has determined that the bill contains no 
intergovernmental or private-sector mandates as defined in the 
Unfunded Mandates Reform Act.
    The CBO staff contact for this estimate is Nathaniel 
Frentz. The estimate was approved by David Weiner, Assistant 
Director for Tax Analysis.

          CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 629, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON WAYS AND MEANS ON FEBRUARY 4, 2015
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      By fiscal year, in millions of dollars 2015--
                               -------------------------------------------------------------------------------------------------------------------------
                                  2015     2016     2017     2018     2019     2020     2021     2022     2023     2024     2025    2015-2020  2015-2025
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               NET INCREASE IN THE DEFICIT
 
Statutory Pay-As-You-Go Impact       70      218      283      222      147      103       84       81       86       92       99      1,043      1,485
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Staff of the Joint Committee on Taxation.