49–006 

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 


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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. 


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1This term is defined in section 1361(b). 

2Sec. 1366. 

3 Certain built-in income items are treated as recognized built-in gain for this purpose. Sec. 

1374(d)(5). 4Sec. 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). 

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 builtin 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 PassThrough 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

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 


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5Sec. 1374(d)(2). 

6Sec. 453. 

7Treas. Reg. sec. 1.1374–4(h). 

8Sec. 1374(d)(8). 

9Sec. 1374(d)(8)(B). 

10Sec. 1366(f)(2). Shareholders continue to take into account all items of gain and loss under 

section 1366. 11Sec. 1374(d)(7)(B). 12Sec. 1374(d)(7)(C). 13The 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. 

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

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

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

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. 

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. 

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 fiveyear 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 


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14Treas. Reg. secs. 1.337(d)–7(a) and 1.337(d)–7(b). 15Treas. Reg. sec. 1.337(d)–7(c)(1). 16Treas. Reg. sec. 1.337(d)–7(c)(1). 

on the disposition will not be taken into account in determining the 

net recognized built-in gain. 

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 builtin 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

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. 


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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: 


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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. 


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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 fiveyear recognition period for S corporation built-in gains that was 

generally in effect for taxable years from 2011 through 2014. The 


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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. 


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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. 


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V. OTHER MATTERS TO BE DISCUSSED UNDER THE 

RULES OF THE HOUSE 

A. COMMITTEE OVERSIGHT FINDINGS AND RECOMMENDATIONS

With respect to clause 3(c)(1) of rule XIII of the Rules of the 

House of Representatives (relating to oversight findings), the Committee advises that it was as a result of the Committee’s review of 

the provisions of H.R. 629 that the Committee concluded that it is 

appropriate to report the bill, as amended, favorably to the House 

of Representatives with the recommendation that the bill do pass. 

B. STATEMENT OF GENERAL PERFORMANCE GOALS AND OBJECTIVES

With respect to clause 3(c)(4) of rule XIII of the Rules of the 

House of Representatives, the Committee advises that the bill contains no measure that authorizes funding, so no statement of general performance goals and objectives for which any measure authorizes funding is required. 

C. INFORMATION RELATING TO UNFUNDED MANDATES

This information is provided in accordance with section 423 of 

the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104–4). 

The Committee has determined that the bill does not contain 

Federal mandates on the private sector. The Committee has determined that the bill does not impose a Federal intergovernmental 

mandate on State, local, or tribal governments. 

D. APPLICABILITY OF HOUSE RULE XXI 5(b) 

Rule XXI 5(b) of the Rules of the House of Representatives provides, in part, that ‘‘A bill or joint resolution, amendment, or conference report carrying a Federal income tax rate increase may not 

be considered as passed or agreed to unless so determined by a 

vote of not less than three-fifths of the Members voting, a quorum 

being present.’’ The Committee has carefully reviewed the bill, and 

states that the bill does not involve any Federal income tax rate 

increases within the meaning of the rule. 

E. TAX COMPLEXITY ANALYSIS

Section 4022(b) of the Internal Revenue Service Restructuring 

and Reform Act of 1998 (the ‘‘IRS Reform Act’’) requires the staff 

of the Joint Committee on Taxation (in consultation with the Internal Revenue Service and the Treasury Department) to provide a 

tax complexity analysis. The complexity analysis is required for all 

legislation reported by the Senate Committee on Finance, the 

House Committee on Ways and Means, or any committee of conference if the legislation includes a provision that directly or indirectly amends the Internal Revenue Code and has widespread applicability to individuals or small businesses. 

Pursuant to clause 3(h)(1) of rule XIII of the Rules of the House 

of Representatives, the staff of the Joint Committee on Taxation 

has determined that a complexity analysis is not required under 

section 4022(b) of the IRS Reform Act because the bill contains no 

provisions that amend the Code and that have ‘‘widespread appliVerDate Sep 11 2014 14:01 Feb 10, 2015 Jkt 049006 PO 00000 Frm 00011 Fmt 6659 Sfmt 6602 E:\HR\OC\HR015.XXX HR015

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cability’’ to individuals or small businesses, within the meaning of 

the rule. 

F. CONGRESSIONAL EARMARKS, LIMITED TAX BENEFITS, AND

LIMITED TARIFF BENEFITS

With respect to clause 9 of rule XXI of the Rules of the House 

of Representatives, the Committee has carefully reviewed the provisions of the bill, and states that the provisions of the bill do not 

contain any congressional earmarks, limited tax benefits, or limited 

tariff benefits within the meaning of the rule. 

G. DUPLICATION OF FEDERAL PROGRAMS

In compliance with Sec. 3(g)(2) of H. Res. 5 (114th Congress), the 

Committee states that no provision of the bill establishes or reauthorizes: (1) a program of the Federal Government known to be duplicative of another Federal program, (2) a program included in any 

report from the Government Accountability Office to Congress pursuant to section 21 of Public Law 111–139, or (3) a program related 

to a program identified in the most recent Catalog of Federal Domestic Assistance, published pursuant to the Federal Program Information Act (Public Law 95–220, as amended by Public Law 98– 

169). 

H. DISCLOSURE OF DIRECTED RULE MAKINGS

In compliance with Sec. 3(i) of H. Res. 5 (114th Congress), the 

following statement is made concerning directed rule makings: The 

Committee estimates that the bill requires no directed rule makings within the meaning of such section. 

VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS 

REPORTED 

In compliance with clause 3(e) of rule XIII of the Rules of the 

House of Representatives, changes in existing law made by the bill, 

as reported, are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italic, 

existing law in which no change is proposed is shown in roman): 

INTERNAL REVENUE CODE OF 1986 

* * * * * * * 

Subtitle A—Income Taxes 

* * * * * * * 

CHAPTER 1—NORMAL TAXES AND SURTAXES 

* * * * * * * 

Subchapter S—Tax Treatment of S Corporations 

and Their Shareholders 

* * * * * * * 


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PART III—SPECIAL RULES 

* * * * * * * 

SEC. 1374. TAX IMPOSED ON CERTAIN BUILT-IN GAINS. 

(a) GENERAL RULE.—If for any taxable year beginning in the 

recognition period an S corporation has a net recognized built-in 

gain, there is hereby imposed a tax (computed under subsection (b)) 

on the income of such corporation for such taxable year. 

(b) AMOUNT OF TAX.— (1) IN GENERAL.—The amount of the tax imposed by subsection (a) shall be computed by applying the highest rate of 

tax specified in section 11(b) to the net recognized built-in gain 

of the S corporation for the taxable year. 

(2) NET OPERATING LOSS CARRYFORWARDS FROM C YEARS

ALLOWED.—Notwithstanding section 1371(b)(1), any net operating loss carryforward arising in a taxable year for which the 

corporation was a C corporation shall be allowed for purposes 

of this section as a deduction against the net recognized builtin gain of the S corporation for the taxable year. For purposes 

of determining the amount of any such loss which may be carried to subsequent taxable years, the amount of the net recognized built-in gain shall be treated as taxable income. Rules 

similar to the rules of the preceding sentences of this paragraph shall apply in the case of a capital loss carryforward 

arising in a taxable year for which the corporation was a C corporation. 

(3) CREDITS.— (A) IN GENERAL.—Except as provided in subparagraph 

(B), no credit shall be allowable under part IV of subchapter A of this chapter (other than under section 34) 

against the tax imposed by subsection (a). 

(B) BUSINESS CREDIT CARRYFORWARDS FROM C YEARS

ALLOWED.—Notwithstanding section 1371(b)(1), any business credit carryforward under section 39 arising in a taxable year for which the corporation was a C corporation 

shall be allowed as a credit against the tax imposed by 

subsection (a) in the same manner as if it were imposed 

by section 11. A similar rule shall apply in the case of the 

minimum tax credit under section 53 to the extent attributable to taxable years for which the corporation was a C 

corporation. 

(4) COORDINATION WITH SECTION 1201(A).—For purposes of 

section 1201(a)— 

(A) the tax imposed by subsection (a) shall be treated 

as if it were imposed by section 11, and 

(B) the amount of the net recognized built-in gain 

shall be treated as the taxable income. 

(c) LIMITATIONS.— 

(1) CORPORATIONS WHICH WERE ALWAYS S CORPORATIONS.— Subsection (a) shall not apply to any corporation if an election 

under section 1362(a) has been in effect with respect to such 

corporation for each of its taxable years. Except as provided in 

regulations, an S corporation and any predecessor corporation 

shall be treated as 1 corporation for purposes of the preceding 

sentence. 


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(2) LIMITATION ON AMOUNT OF RECOGNIZED BUILT-IN

GAINS.—The amount of the net recognized built-in gain taken 

into account under this section for any taxable year shall not 

exceed the excess (if any) of— 

(A) the net unrealized built-in gain, over 

(B) the net recognized built-in gain for prior taxable 

years beginning in the recognition period. 

(d) DEFINITIONS AND SPECIAL RULES.—For purposes of this section— 

(1) NET UNREALIZED BUILT-IN GAIN.—The term ‘‘net unrealized built-in gain’’ means the amount (if any) by which— 

(A) the fair market value of the assets of the S corporation as of the beginning of its 1st taxable year for 

which an election under section 1362(a) is in effect, exceeds 

(B) the aggregate adjusted bases of such assets at such 

time. 

(2) NET RECOGNIZED BUILT-IN GAIN.— (A) IN GENERAL.—The term ‘‘net recognized built-in 

gain’’ means, with respect to any taxable year in the recognition period, the lesser of— 

(i) the amount which would be the taxable income 

of the S corporation for such taxable year if only recognized built-in gains and recognized built-in losses were 

taken into account, or 

(ii) such corporation’s taxable income for such taxable year (determined as provided in section 

1375(b)(1)(B)). 

(B) CARRYOVER.—If, for any taxable year described in 

subparagraph (A), the amount referred to in clause (i) of 

subparagraph (A) exceeds the amount referred to in clause 

(ii) of subparagraph (A), such excess shall be treated as a 

recognized built-in gain in the succeeding taxable year. 

The preceding sentence shall apply only in the case of a 

corporation treated as an S corporation by reason of an 

election made on or after March 31, 1988. 

(3) RECOGNIZED BUILT-IN GAIN.—The term ‘‘recognized 

built-in gain’’ means any gain recognized during the recognition period on the disposition of any asset except to the extent 

that the S corporation establishes that— 

(A) such asset was not held by the S corporation as of 

the beginning of the 1st taxable year for which it was an 

S corporation, or 

(B) such gain exceeds the excess (if any) of— 

(i) the fair market value of such asset as of the beginning of such 1st taxable year, over 

(ii) the adjusted basis of the asset as of such time. 

(4) RECOGNIZED BUILT-IN LOSSES.—The term ‘‘recognized 

built-in loss’’ means any loss recognized during the recognition 

period on the disposition of any asset to the extent that the S 

corporation establishes that— 

(A) such asset was held by the S corporation as of the 

beginning of the 1st taxable year referred to in paragraph 

(3), and 

(B) such loss does not exceed the excess of— 


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(i) the adjusted basis of such asset as of the beginning of such 1st taxable year, over 

(ii) the fair market value of such asset as of such 

time. 

(5) TREATMENT OF CERTAIN BUILT-IN ITEMS.— 

(A) INCOME ITEMS.—Any item of income which is properly taken into account during the recognition period but 

which is attributable to periods before the 1st taxable year 

for which the corporation was an S corporation shall be 

treated as a recognized built-in gain for the taxable year 

in which it is properly taken into account. 

(B) DEDUCTION ITEMS.—Any amount which is allowable as a deduction during the recognition period (determined without regard to any carryover) but which is attributable to periods before the 1st taxable year referred to 

in subparagraph (A) shall be treated as a recognized builtin loss for the taxable year for which it is allowable as a 

deduction. 

(C) ADJUSTMENT TO NET UNREALIZED BUILT-IN GAIN.— 

The amount of the net unrealized built-in gain shall be 

properly adjusted for amounts which would be treated as 

recognized built-in gains or losses under this paragraph if 

such amounts were properly taken into account (or allowable as a deduction) during the recognition period. 

(6) TREATMENT OF CERTAIN PROPERTY.—If the adjusted 

basis of any asset is determined (in whole or in part) by reference to the adjusted basis of any other asset held by the S 

corporation as of the beginning of the 1st taxable year referred 

to in paragraph (3)— 

(A) such asset shall be treated as held by the S corporation as of the beginning of such 1st taxable year, and 

(B) any determination under paragraph (3)(B) or (4)(B) 

with respect to such asset shall be made by reference to 

the fair market value and adjusted basis of such other 

asset as of the beginning of such 1st taxable year. 

ø(7) RECOGNITION PERIOD.— 

ø(A) IN GENERAL.—The term ‘‘recognition period’’ 

means the 10-year period beginning with the 1st day of the 

1st taxable year for which the corporation was an S corporation. 

ø(B) SPECIAL RULES FOR 2009, 2010, AND 2011.—No tax 

shall be imposed on the net recognized built-in gain of an 

S corporation— 

ø(i) in the case of any taxable year beginning in 

2009 or 2010, if the 7th taxable year in the recognition 

period preceded such taxable year, or 

ø(ii) in the case of any taxable year beginning in 

2011, if the 5th year in the recognition period preceded such taxable year. 

The preceding sentence shall be applied separately with 

respect to any asset to which paragraph (8) applies. 

ø(C) SPECIAL RULE FOR 2012, 2013, AND 2014.—For purposes of determining the net recognized built-in gain for 

taxable years beginning in 2012, 2013, or 2014, subparaVerDate Sep 11 2014 14:01 Feb 10, 2015 Jkt 049006 PO 00000 Frm 00015 Fmt 6659 Sfmt 6601 E:\HR\OC\HR015.XXX HR015

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graphs (A) and (D) shall be applied by substituting ‘‘5- 

year’’ for ‘‘10-year’’. 

ø(D) SPECIAL RULE FOR DISTRIBUTIONS TO SHARE- HOLDERS.—For purposes of applying this section to any 

amount includible in income by reason of distributions to 

shareholders pursuant to section 593(e)— 

ø(i) subparagraph (A) shall be applied without regard to the phrase ‘‘10-year’’, and 

ø(ii) subparagraph (B) shall not apply. 

ø(E) 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.¿ 

(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. 

(8) TREATMENT OF TRANSFER OF ASSETS FROM C CORPORA- TION TO S CORPORATION.— (A) IN GENERAL.—Except to the extent provided in regulations, if— 

(i) an S corporation acquires any asset, and 

(ii) the S corporation’s basis in such asset is determined (in whole or in part) by reference to the basis 

of such asset (or any other property) in the hands of 

a C corporation, then a tax is hereby imposed on any 

net recognized built-in gain attributable to any such 

assets for any taxable year beginning in the recognition period. The amount of such tax shall be determined under the rules of this section as modified by 

subparagraph (B). 

(B) MODIFICATIONS.—For purposes of this paragraph, 

the modifications of this subparagraph are as follows: 

(i) IN GENERAL.—The preceding paragraphs of this 

subsection shall be applied by taking into account the 

day on which the assets were acquired by the S corporation in lieu of the beginning of the 1st taxable 

year for which the corporation was an S corporation. 

(ii) SUBSECTION (C)(1) NOT TO APPLY.—Subsection 

(c)(1) shall not apply. 

(9) REFERENCE TO 1ST TAXABLE YEAR.—Any reference in 

this section to the 1st taxable year for which the corporation 

was an S corporation shall be treated as a reference to the 1st 


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taxable year for which the corporation was an S corporation 

pursuant to its most recent election under section 1362. 

(e) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section 

including regulations providing for the appropriate treatment of 

successor corporations. 

* * * * * * * 


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(18) 

VII. DISSENTING VIEWS 

The seven bills approved by the Republicans at the markup 

would add more than $93 billion to the deficit—and if history is our 

guide, this is merely the start of the approach the Republicans embraced last Congress. In the 113th Congress, Ways and Means 

Committee Republicans approved $825 billion worth of deficit-financed, permanent tax cuts. The bills marked up by the Committee 

set us down a partisan path, when we should be embracing bipartisanship and working in a responsible, bipartisan manner on tax reform. 

Even though some of these bills were introduced individually 

with some bipartisan support, the opposition to these bills was 

based on the position that these tax provisions should not be made 

permanent by adding to the deficit without any revenue offset. Our 

nation’s small businesses play a vital role in the economy. They are 

the backbone of our communities, creating jobs, economic growth, 

and harnessing the American entrepreneurial spirit—this is undeniable. Both the approach that the Committee Republicans are taking with respect to this and other important legislation undermines 

the bipartisan support that the provisions enjoy. The American 

people expect a tax code that maintains and supports our shared 

priorities, and each time the Committee considers these bills in a 

piecemeal approach, it is taking a step in the wrong direction and 

away from comprehensive tax reform. 

We all support the small businesses in our communities and 

across the nation. The markup was not to debate the economic 

growth driven by small businesses, or the merits of H.R. 629, 

which would make permanent the reduced recognition period for 

built-in gains of S-corporations. 

Finally, we also oppose the manner in which Republicans were 

proceeding—selecting seven provisions to make permanent at a 

cost of nearly $100 billion without an offset from the approximately 

60 tax provisions that expired at the end of last year. This approach is both fiscally irresponsible and contrary to the goals of bipartisan, comprehensive tax reform. 

Expired provisions must be dealt with in a comprehensive manner. The Republicans did not take up other tax extenders that also 

are important to Democratic Committee Members. Left to an uncertain fate are provisions like the Work Opportunity Tax Credit, 

the New Markets Tax Credit, and the renewable energy tax credits, 

as well as the long-term status of the Earned Income Tax Credit, 

the Child Tax Credit, and the American Opportunity Tax Credit. 

SANDER M. LEVIN. 

Æ 


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