S Corporation Modernization Act of 2019

II 116TH CONGRESS 1ST SESSION S. 2156 To amend the Internal Revenue Code of 1986 to provide for S corporation reform, and for other purposes. IN THE SENATE OF THE UNITED STATES JULY 18, 2019 Mr. THUNE (for himself, Mr. CARDIN, and Mr. ROBERTS) introduced the following bill; which was read twice and referred to the Committee on Finance 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 Representa- 1 tives of the United States of America in Congress assembled, 2 SECTION 1. SHORT TITLE; REFERENCE. 3 (a) SHORT TITLE.—This Act may be cited as the ‘‘S 4 Corporation Modernization Act of 2019’’. 5 (b) AMENDMENT OF 1986 CODE.—Except as other- 6 wise expressly provided, whenever in this Act an amend- 7 ment or repeal is expressed in terms of an amendment 8 to, or repeal of, a section or other provision, the reference 9 VerDate Sep 11 2014 21:01 Jul 23, 2019 Jkt 089200 PO 00000 Frm 00001 Fmt 6652 Sfmt 6201 E:\BILLS\S2156.IS S2156 pamtmann on DSKBFK8HB2PROD with BILLS 2 •S 2156 IS shall be considered to be made to a section or other provi- 1 sion of the Internal Revenue Code of 1986. 2 SEC. 2. MODIFICATIONS TO S CORPORATION PASSIVE IN- 3 VESTMENT INCOME RULES. 4 (a) INCREASED PERCENTAGE LIMIT.—Section 5 1375(a)(2) is amended by striking ‘‘25 percent’’ and in- 6 serting ‘‘60 percent’’. 7 (b) REPEAL OF EXCESSIVE PASSIVE INCOME AS A 8 TERMINATION EVENT.—Section 1362(d) is amended by 9 striking paragraph (3). 10 (c) CONFORMING AMENDMENTS.— 11 (1) Section 1375(b) is amended by striking 12 paragraphs (3) and (4) and inserting the following 13 new paragraph: 14 ‘‘(3) PASSIVE INVESTMENT INCOME DE- 15 FINED.— 16 ‘‘(A) IN GENERAL.—Except as otherwise 17 provided in this paragraph, the term ‘passive 18 investment income’ means gross receipts de- 19 rived from royalties, rents, dividends, interest, 20 and annuities. 21 ‘‘(B) EXCEPTION FOR INTEREST ON 22 NOTES FROM SALES OF INVENTORY.—The term 23 ‘passive investment income’ shall not include in- 24 terest on any obligation acquired in the ordi- 25 VerDate Sep 11 2014 21:01 Jul 23, 2019 Jkt 089200 PO 00000 Frm 00002 Fmt 6652 Sfmt 6201 E:\BILLS\S2156.IS S2156 pamtmann on DSKBFK8HB2PROD with BILLS 3 •S 2156 IS nary course of the corporation’s trade or busi- 1 ness from its sale of property described in sec- 2 tion 1221(a)(1). 3 ‘‘(C) TREATMENT OF CERTAIN LENDING 4 OR FINANCE COMPANIES.—If the S corporation 5 meets the requirements of section 542(c)(6) for 6 the taxable year, the term ‘passive investment 7 income’ shall not include gross receipts for the 8 taxable year which are derived directly from the 9 active and regular conduct of a lending or fi- 10 nance business (as defined in section 11 542(d)(1)). 12 ‘‘(D) TREATMENT OF CERTAIN DIVI- 13 DENDS.—If an S corporation holds stock in a 14 C corporation meeting the requirements of sec- 15 tion 1504(a)(2), the term ‘passive investment 16 income’ shall not include dividends from such C 17 corporation to the extent such dividends are at- 18 tributable to the earnings and profits of such C 19 corporation derived from the active conduct of 20 a trade or business. 21 ‘‘(E) EXCEPTION FOR BANKS, ETC.—In 22 the case of a bank (as defined in section 581) 23 or a depository institution holding company (as 24 defined in section 3(w)(1) of the Federal De- 25 VerDate Sep 11 2014 21:01 Jul 23, 2019 Jkt 089200 PO 00000 Frm 00003 Fmt 6652 Sfmt 6201 E:\BILLS\S2156.IS S2156 pamtmann on DSKBFK8HB2PROD with BILLS 4 •S 2156 IS posit Insurance Act (12 U.S.C. 1813(w)(1))), 1 the term ‘passive investment income’ shall not 2 include— 3 ‘‘(i) interest income earned by such 4 bank or company, or 5 ‘‘(ii) dividends on assets required to 6 be held by such bank or company, includ- 7 ing stock in the Federal Reserve Bank, the 8 Federal Home Loan Bank, or the Federal 9 Agricultural Mortgage Bank or participa- 10 tion certificates issued by a Federal Inter- 11 mediate Credit Bank. 12 ‘‘(F) GROSS RECEIPTS FROM THE SALES 13 OF CERTAIN ASSETS.—For purposes of this 14 paragraph— 15 ‘‘(i) CAPITAL ASSETS OTHER THAN 16 STOCK AND SECURITIES.—In the case of 17 dispositions of capital assets (other than 18 stock and securities), gross receipts from 19 such dispositions shall be taken into ac- 20 count only to the extent of capital gain net 21 income therefrom. 22 ‘‘(ii) STOCK AND SECURITIES.—In the 23 case of sales or exchanges of stock or secu- 24 rities, gross receipts shall be taken into ac- 25 VerDate Sep 11 2014 21:01 Jul 23, 2019 Jkt 089200 PO 00000 Frm 00004 Fmt 6652 Sfmt 6201 E:\BILLS\S2156.IS S2156 pamtmann on DSKBFK8HB2PROD with BILLS 5 •S 2156 IS count only to the extent of the gain there- 1 from. 2 ‘‘(G) COORDINATION WITH SECTION 3 1374.—The amount of passive investment in- 4 come shall be determined by not taking into ac- 5 count any recognized built-in gain or loss of the 6 S corporation for any taxable year in the rec- 7 ognition period. Terms used in the preceding 8 sentence shall have the same respective mean- 9 ings as when used in section 1374.’’. 10 (2)(A) Section 26(b)(2)(J) is amended by strik- 11 ing ‘‘25 percent’’ and inserting ‘‘60 percent’’. 12 (B) Section 1375(b)(1)(A)(i) is amended by 13 striking ‘‘25 percent’’ and inserting ‘‘60 percent’’. 14 (C) The heading for section 1375 is amended 15 by striking ‘‘25 PERCENT’’ and inserting ‘‘60 PER- 16 CENT’’. 17 (D) The item relating to section 1375 in the 18 table of sections for part III of subchapter S of 19 chapter 1 is amended by striking ‘‘25 percent’’ and 20 inserting ‘‘60 percent’’. 21 (3) Section 1042(c)(4)(A)(i) is amended by 22 striking ‘‘section 1362(d)(3)(C)’’ and inserting ‘‘sec- 23 tion 1375(b)(3)’’. 24 VerDate Sep 11 2014 21:01 Jul 23, 2019 Jkt 089200 PO 00000 Frm 00005 Fmt 6652 Sfmt 6201 E:\BILLS\S2156.IS S2156 pamtmann on DSKBFK8HB2PROD with BILLS 6 •S 2156 IS (4) Section 1362(f)(1)(B) is amended by strik- 1 ing ‘‘paragraph (2) or (3) of subsection (d)’’ and in- 2 serting ‘‘subsection (d)(2)’’. 3 (d) EFFECTIVE DATE.—The amendments made by 4 this section shall apply to taxable years beginning after 5 December 31, 2019. 6 SEC. 3. EXPANSION OF S CORPORATION ELIGIBLE SHARE- 7 HOLDERS TO INCLUDE IRAS. 8 (a) IN GENERAL.—Section 1361(c)(2)(A)(vi) is 9 amended to read as follows: 10 ‘‘(vi) A trust which constitutes an in- 11 dividual retirement account under section 12 408(a), including one designated as a Roth 13 IRA under section 408A.’’. 14 (b) SALE OF STOCK IN IRA RELATING TO S COR- 15 PORATION ELECTION EXEMPT FROM PROHIBITED 16 TRANSACTION RULES.—Section 4975(d)(16) is amend- 17 ed— 18 (1) by striking subparagraphs (A) and (B) and 19 by redesignating subparagraphs (C), (D), (E), and 20 (F) as subparagraphs (A), (B), (C), and (D), respec- 21 tively, and 22 (2) by striking ‘‘such bank or company’’ in sub- 23 paragraph (A) (as so redesignated) and inserting 24 ‘‘the issuer of such stock’’. 25 VerDate Sep 11 2014 21:01 Jul 23, 2019 Jkt 089200 PO 00000 Frm 00006 Fmt 6652 Sfmt 6201 E:\BILLS\S2156.IS S2156 pamtmann on DSKBFK8HB2PROD with BILLS 7 •S 2156 IS (c) EFFECTIVE DATE.—The amendments made by 1 this section shall take effect on January 1, 2020. 2 SEC. 4. TREATMENT OF S CORPORATION BUILT-IN GAIN 3 AMOUNT UPON DEATH OF SHAREHOLDER. 4 (a) IN GENERAL.—Part II of subchapter S of chapter 5 1 is amended by adding at the end the following: 6 ‘‘SEC. 1369. AMORTIZATION OF BUILT-IN GAIN AMOUNT 7 UPON DEATH OF SHAREHOLDER. 8 ‘‘(a) IN GENERAL.—A person holding stock in an 9 electing S corporation the basis of which is determined 10 under section 1014(a) (hereafter in this section referred 11 to as the ‘shareholder’) shall be allowed a deduction with 12 respect to the S corporation built-in gain amount. The 13 amount of such deduction for any taxable year shall be 14 determined by amortizing the S corporation built-in gain 15 amount over the 15-year period beginning with the month 16 which includes the applicable valuation date. 17 ‘‘(b) S CORPORATION BUILT-IN GAIN AMOUNT.— 18 For purposes of this section, the term ‘S corporation built- 19 in gain amount’ means the lesser of— 20 ‘‘(1) the excess (if any) of— 21 ‘‘(A) the basis of the stock referred to in 22 subsection (a) as determined under section 23 1014(a), over 24 VerDate Sep 11 2014 21:01 Jul 23, 2019 Jkt 089200 PO 00000 Frm 00007 Fmt 6652 Sfmt 6201 E:\BILLS\S2156.IS S2156 pamtmann on DSKBFK8HB2PROD with BILLS 8 •S 2156 IS ‘‘(B) the adjusted basis of such stock im- 1 mediately before the death of the decedent, or 2 ‘‘(2) the pro rata share (determined as of the 3 applicable valuation date) of— 4 ‘‘(A) the aggregate fair market value of all 5 property held by the S corporation which is of 6 a character subject to depreciation or amortiza- 7 tion, over 8 ‘‘(B) the aggregate adjusted basis of all 9 such property held by the S corporation as of 10 such date. 11 ‘‘(c) ELECTING S CORPORATION.—For purposes of 12 this section, the term ‘electing S corporation’ means, with 13 respect to any shareholder, any S corporation which elects 14 the application of this section with respect to such share- 15 holder at such time and in such form and manner as the 16 Secretary may prescribe. 17 ‘‘(d) APPLICABLE VALUATION DATE.—For purposes 18 of this section, the term ‘applicable valuation date’ 19 means— 20 ‘‘(1) in the case of a decedent with respect to 21 which the executor of the decedent’s estate elects the 22 application of section 2032, the date 6 months after 23 the decedent’s death, and 24 VerDate Sep 11 2014 21:01 Jul 23, 2019 Jkt 089200 PO 00000 Frm 00008 Fmt 6652 Sfmt 6201 E:\BILLS\S2156.IS S2156 pamtmann on DSKBFK8HB2PROD with BILLS 9 •S 2156 IS ‘‘(2) in the case of any other decedent, the date 1 of the decedent’s death. 2 ‘‘(e) ACCELERATED DEDUCTION IN CASE OF DIS- 3 POSITION OF S CORPORATION PROPERTY.— 4 ‘‘(1) IN GENERAL.—If the electing S corpora- 5 tion disposes of any property which was taken into 6 account under subsection (b)(2), then the deduction 7 allowed under subsection (a) with respect to any 8 stock, for the taxable year of the shareholder in 9 which or with which the taxable year of the S cor- 10 poration which includes the date of such disposition 11 ends, shall (except as otherwise provided in this sec- 12 tion) not be less than the lesser of— 13 ‘‘(A) the pro rata share of the gain recog- 14 nized on such disposition, or 15 ‘‘(B) the amount determined under sub- 16 section (b)(2) by only taking into account such 17 property. 18 ‘‘(2) OVERALL ALLOWANCE NOT INCREASED.— 19 No deduction shall be allowed under subsection (a) 20 with respect to any stock for any taxable year to the 21 extent that such deduction (when added to the de- 22 ductions so allowed for all prior taxable years) ex- 23 ceeds the S corporation built-in gain amount with 24 respect to such stock. 25 VerDate Sep 11 2014 21:01 Jul 23, 2019 Jkt 089200 PO 00000 Frm 00009 Fmt 6652 Sfmt 6201 E:\BILLS\S2156.IS S2156 pamtmann on DSKBFK8HB2PROD with BILLS 10 •S 2156 IS ‘‘(f) RECHARACTERIZATION OF GAINS AS ORDINARY 1 INCOME TO EXTENT OF DEDUCTION.—If— 2 ‘‘(1) stock of an S corporation with respect to 3 which a deduction was allowed under this section, or 4 ‘‘(2) property which was taken into account 5 under subsection (b)(2) with respect to such stock, 6 is disposed of at a gain (determined without regard to 7 whether or not such gain is recognized and reduced by 8 any amount of gain which is treated as ordinary income 9 under any other provision of this subtitle), the amount of 10 such gain (or the shareholder’s pro rata share of such gain 11 in the case of property described in paragraph (2)) shall 12 be treated as gain which is ordinary income (and shall be 13 recognized notwithstanding any other provision of this 14 subtitle) to the extent of the excess of the aggregate de- 15 ductions allowable under this section with respect to such 16 stock for the taxable year of such disposition and all prior 17 taxable years over the amounts taken into account under 18 this subsection for all prior taxable years. 19 ‘‘(g) TERMINATION OF AMORTIZATION.—No deduc- 20 tion shall be allowed under subsection (a) with respect to 21 any stock in an electing S corporation with respect to any 22 period beginning after the earlier of— 23 ‘‘(1) the date on which the corporation’s elec- 24 tion under section 1362 terminates, or 25 VerDate Sep 11 2014 21:01 Jul 23, 2019 Jkt 089200 PO 00000 Frm 00010 Fmt 6652 Sfmt 6201 E:\BILLS\S2156.IS S2156 pamtmann on DSKBFK8HB2PROD with BILLS 11 •S 2156 IS ‘‘(2) the date on which the shareholder trans- 1 fers such stock to any other person. 2 ‘‘(h) TREATMENT OF CERTAIN TRANSFERS.— 3 ‘‘(1) DISTRIBUTIONS FROM ESTATES OR 4 TRUSTS.—Notwithstanding any other provision of 5 this section, in the case of a distribution of stock 6 from an estate or trust to a beneficiary, the bene- 7 ficiary (and not the estate or trust) shall be treated 8 as the shareholder to which this section applies with 9 respect to periods after such distribution. 10 ‘‘(2) CERTAIN TRANSFERS INVOLVING 11 SPOUSES.—Notwithstanding any other provision of 12 this section, in the case of a transfer described in 13 section 1041, the transferee (and not the transferor) 14 shall be treated as the shareholder to which this sec- 15 tion applies with respect to periods after such trans- 16 fer. 17 ‘‘(i) TREATMENT OF INCOME IN RESPECT OF THE 18 DECEDENT.— 19 ‘‘(1) ADJUSTMENT TO BUILT-IN GAIN OF PROP- 20 ERTY HELD BY S CORPORATION.—For purposes of 21 subsection (b)(2), the fair market value of any prop- 22 erty taken into account under subparagraph (A) 23 thereof shall be decreased by any amount of income 24 in respect of the decedent with respect to such prop- 25 VerDate Sep 11 2014 21:01 Jul 23, 2019 Jkt 089200 PO 00000 Frm 00011 Fmt 6652 Sfmt 6201 E:\BILLS\S2156.IS S2156 pamtmann on DSKBFK8HB2PROD with BILLS 12 •S 2156 IS erty to which section 691 applies. For purposes of 1 subsection (e)(1)(A), the gain recognized on the dis- 2 position of such property shall be reduced by such 3 amount. 4 ‘‘(2) ADJUSTMENT TO BASIS OF S CORPORA- 5 TION STOCK.—For adjustment to basis of S corpora- 6 tion stock, see section 1367(b)(4)(B). 7 ‘‘(j) REPORTING.—Except as otherwise provided by 8 the Secretary, for purposes of section 6037, the amounts 9 determined under subsections (b)(2), (e)(1), and (f)(2) 10 shall be treated as items of the corporation and the pro 11 rata share determined under such subsection shall be fur- 12 nished to the shareholder under section 6037(b).’’. 13 (b) ADJUSTMENT TO BASIS OF STOCK.— 14 (1) IN GENERAL.—Section 1367(a)(2) is 15 amended by striking ‘‘and’’ at the end of subpara- 16 graph (D), by striking the period at the end of sub- 17 paragraph (E) and inserting [Text truncated for display. Full text available on Congress.gov.]