To amend the Internal Revenue Code of 1986 to provide an election for a special tax treatment of certain S corporation conversions.

SECTION 1. ELECTION FOR SPECIAL TAX TREATMENT OF CERTAIN S CORPORATION 
              CONVERSIONS.

    (a) In General.--Part I of subchapter S of chapter 1 of the 
Internal Revenue Code of 1986 (relating to tax treatment of S 
corporations and their shareholders) is amended by adding at the end 
the following new section:

``SEC. 1364. ELECTION FOR SPECIAL TAX TREATMENT OF CERTAIN S 
              CORPORATION CONVERSIONS.

    ``(a) In General.--A qualified electing S corporation may elect the 
special tax treatment provided in subsection (b) for an eligible 
corporate conversion in the manner set forth in subsection (e).
    ``(b) Special Tax Treatment.--
            ``(1) Transfers to partnership.--In the case of transfers 
        by a qualified electing S corporation to a partnership in 
        connection with an eligible corporate conversion, no gain or 
        loss shall be recognized by shareholders of such corporation 
        with respect to money or property received by the partnership.
            ``(2) Other transfers.--All other distributions of money or 
        property by the qualified electing S corporation shall be 
        treated as a distribution in part or full payment in exchange 
        for the stock of such corporation.
    ``(c) Qualified Electing S Corporation.--For purposes of this 
section, the term `qualified electing S corporation' means a domestic 
corporation which--
            ``(1) has had a valid S election continuously in effect for 
        the 10 taxable years of the corporation ending before the 
        taxable year in which the election under this section is made, 
        and
            ``(2) has never made an election under this section.
    ``(d) Eligible Corporate Conversion.--For purposes of this 
section--
            ``(1) In general.--The term `eligible corporate conversion' 
        means (however effected)--
                    ``(A) a transfer by a qualified electing S 
                corporation of substantially all of its assets to a 
                partnership (as defined in section 7701(a)(2)) for not 
                less than 80 percent of the capital and profits of the 
                partnership in any taxable year of the corporation 
                ending on or before December 31, 2007,
                    ``(B) the meeting of the requirement described in 
                paragraph (2) by the partnership, and
                    ``(C) the subsequent liquidation and dissolution of 
                the qualified S corporation within the same taxable 
                year as the transfer.
            ``(2) Continuity of business requirement.--
                    ``(A) In general.--The requirement described in 
                this paragraph is met if the partnership described in 
                paragraph (1)(A) either--
                            ``(i) maintains the continuity of the 
                        qualified electing S corporation's business for 
                        5 consecutive taxable years following the year 
                        in which the corporate conversion occurs, or
                            ``(ii) pays a corporate conversion 
                        recapture tax in the taxable year in which the 
                        failure to maintain such continuity first 
                        occurs.
                    ``(B) Continuity of the qualified electing s 
                corporation's business.--For purposes of subparagraph 
                (A)(i), the term `continuity of the qualified electing 
                S corporation's business' means, under all the facts 
                and circumstances, either--
                            ``(i) the continuation of 1 or more of the 
                        S corporation's historic lines of business, or
                            ``(ii) the use of a significant portion of 
                        the S corporation's historic business assets, 
                        whether or not such assets have a taxable 
                        basis, in the conduct of an active trade or 
                        business.
                    ``(C) Corporate conversion recapture tax.--For 
                purposes of subparagraph (A)(ii), the term `corporate 
                conversion recapture tax' means--
                            ``(i) a recomputation of the tax under this 
                        subtitle of the partnership and the partners as 
                        if--
                                    ``(I) the partnership were an S 
                                corporation,
                                    ``(II) the stock of such S 
                                corporation was owned in the same 
                                manner as the capital of the 
                                partnership, and
                                    ``(III) the S corporation were 
                                dissolved and its assets distributed to 
                                its shareholders in complete 
                                liquidation on the last day of the 
                                taxable year, multiplied by
                            ``(ii) a fraction--
                                    ``(I) the numerator of which is the 
                                excess (if any) of 5 over the number of 
                                complete taxable years in which the 
                                partnership maintains continuity of the 
                                qualified electing S corporation's 
                                business, and
                                    ``(II) the denominator of which
                                is 5.
    ``(d) Basis Rules.--In the case of an eligible corporate 
conversion, property in the hands of the partnership shall have the 
same basis as in the hands of the qualified electing S corporation 
immediately prior to the eligible corporate conversion.
    ``(e) Method of Making Election.--In order to elect the special tax 
treatment provided in subsection (b) for an eligible corporate 
conversion, the qualified electing S corporation shall file a written 
election claiming such treatment with the timely-filed information 
return of the S corporation for the taxable year in which the eligible 
corporate conversion occurs.''
    (b) Clerical Amendment.--The table of sections for such part I is 
amended by adding at the end the following new item:

                              ``Sec. 1364. Election for special tax 
                                        treatment of certain S 
                                        corporation conversions.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years ending after the date of the enactment of this 
Act.

Summary: Amends the Internal Revenue Code to authorize a qualified S corporation to make a one-time corporate conversion under special tax treatment which shall: (1) in the case of a transfer to partnership form result in no shareholder gain or loss recognition on transferred money or property. And (2) treat other money or property transfers as payment for such corporation's stock. Requires the partnership to maintain a five-year continuity of business in order to avoid a conversion recapture tax.