S Corporation Modernization Act of 2016

Summary: S Corporation Modernization Act of 2016  This bill amends the Internal Revenue Code, with respect to the tax treatment of S corporations, to:    allow a nonresident alien to be a qualifying beneficiary of an electing small business trust (ESBT), which is a type of trust that is permitted to hold shares in an S corporation;  allow S corporations to increase passive investment income from 25% to 60% without incurring additional taxes;   eliminate a provision terminating the S corporation status of corporations with excessive passive income for three consecutive years;   allow any S corporation bank to have individual retirement account shareholders;  allow ESBTs to claim expanded tax deductions for charitable contributions; and  allow an adjustment to the basis of an S corporation's assets upon the death of a shareholder, in the form of a 15-year amortization deduction.  

SECTION 1. SHORT TITLE; REFERENCE; TABLE OF CONTENTS.

    (a) Short Title.--This Act may be cited as the ``S Corporation 
Modernization Act of 2016''.
    (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.
    (c) Table of Contents.--The table of contents for this Act is as 
follows:

Sec. 1. Short title; reference; table of contents.
Sec. 2. Expansion of qualifying beneficiaries of an electing small 
                            business trust.
Sec. 3. Modifications to S corporation passive investment income rules.
Sec. 4. Expansion of S corporation eligible shareholders to include 
                            IRAs.
Sec. 5. Charitable contribution deduction for electing small business 
                            trusts.
Sec. 6. Amortization of S corporation built-in gain amount upon death 
                            of shareholder.

SEC. 2. EXPANSION OF QUALIFYING BENEFICIARIES OF AN ELECTING SMALL 
              BUSINESS TRUST.

    (a) No Look-Through for Eligibility Purposes.--Section 
1361(c)(2)(B)(v) is amended by adding at the end the following new 
sentence: ``This clause shall not apply for purposes of subsection 
(b)(1)(C).''.
    (b) Effective Date.--The amendment made by this section shall take 
effect on January 1, 2016.

SEC. 3. 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 
                        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, 2015.

SEC. 4. 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, 2016.

SEC. 5. CHARITABLE CONTRIBUTION DEDUCTION FOR ELECTING SMALL BUSINESS 
              TRUSTS.

    (a) In General.--Section 641(c)(2) is amended by inserting after 
subparagraph (D) the following new subparagraph:
                    ``(E)(i) Section 642(c) shall not apply.
                    ``(ii) For purposes of section 170(b)(1)(G), 
                adjusted gross income shall be computed in the same 
                manner as in the case of an individual, except that the 
                deductions for costs which are paid or incurred in 
                connection with the administration of the trust and 
                which would not have been incurred if the property were 
                not held in such trust shall be treated as allowable in 
                arriving at adjusted gross income.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2015.

SEC. 6. AMORTIZATION 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. In the 
        case of a distribution of stock from an estate or trust to an 
        electing small business trust (as defined in section 1361(e)), 
        such electing small business trust shall be treated as a 
        beneficiary for purposes of the preceding sentence.
            ``(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 
                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 to with respect to decedents dying after the date of the 
enactment of this Act, in taxable years ending after such date.