I 

108TH CONGRESS 

1ST SESSION H. R. 1498

To amend the Internal Revenue Code of 1986 to provide that the tax on 

recognized built-in gain of an S corporation shall not apply to amounts 

reinvested in the business. 

IN THE HOUSE OF REPRESENTATIVES 

MARCH 27, 2003

Mr. RAMSTAD (for himself, Mr. CRANE, Mrs. JOHNSON of Connecticut, Mr. 

HERGER, Mr. CAMP, Mr. SAM JOHNSON of Texas, Mr. ENGLISH, Mr. 

WELLER, Mr. MCINNIS, Mr. FOLEY, Mr. BRADY of Texas, and Mr. COX) 

introduced the following bill; which was referred to the Committee on 

Ways and Means 

A BILL

To amend the Internal Revenue Code of 1986 to provide 

that the tax on recognized built-in gain of an S corporation shall not apply to amounts reinvested in the business.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Small Business Oppor5 tunity and Growth Act of 2003’’. 
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1 SEC. 2. EXCEPTION FROM TAX ON RECOGNIZED BUILT-IN 

2 GAIN OF S CORPORATIONS. 

3 (a) IN GENERAL.—Section 1374 of the Internal Rev4 enue Code of 1986 (relating to tax imposed on certain 

5 built-in gains) is amended by redesignating subsection (e) 

6 as subsection (f) and by inserting after subsection (d) the 

7 following new subsection: 

8 ‘‘(e) EXCEPTION FOR REINVESTED AMOUNTS.—

9 ‘‘(1) IN GENERAL.—If an existing S corporation 

10 has a net recognized built-in gain for any taxable 

11 year in the recognition period (determined by taking 

12 into account only assets held on March 27, 2003) 

13 and elects the application of this subsection, the 

14 amount of such gain on which tax is imposed by 

15 subsection (a) shall not exceed the amount equal to 

16 the excess of—

17 ‘‘(A) the amount realized on the disposi18 tion of those assets that resulted in such gain, 

19 over 

20 ‘‘(B) the excess of—

21 ‘‘(i) the aggregate qualified expendi22 tures made by the S corporation during 

23 the nonrecognition period, over 

24 ‘‘(ii) the portion (if any) of such ex25 penditures previously taken into account 

26 under this subsection. 
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1 ‘‘(2) PAYMENT OF TAX.—If—

2 ‘‘(A) the return of an S corporation shows 

3 that no tax is required to be paid on an amount 

4 of recognized built-in gain for any taxable year 

5 by reason of paragraph (1) because the S cor6 poration anticipates making qualified expendi7 tures during the succeeding taxable year, and 

8 ‘‘(B) as of the close of such succeeding 

9 taxable year, tax is required to be paid on such 

10 amount because of the failure to make such ex11 penditures, 

12 then the tax imposed by this chapter for the first 

13 taxable year of the nonrecognition period shall be in14 creased by 10 percent of the increase in tax (deter15 mined without regard to this paragraph) for such 

16 year by reason of the failure to make such expendi17 tures. 

18 ‘‘(3) QUALIFIED EXPENDITURES.—For pur19 poses of this subsection, the term ‘qualified expendi20 tures’ means—

21 ‘‘(A) amounts chargeable to capital ac22 count for property used in a trade or business 

23 of the S corporation, 

24 ‘‘(B) payments of principal and interest on 

25 pre-effective date debt of the S corporation, and 
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1 ‘‘(C) amounts distributed to shareholders 

2 to the extent such amounts do not exceed the 

3 aggregate of such shareholders’ tax imposed by 

4 this chapter (and State and local taxes) on 

5 amounts attributable to the disposition of those 

6 assets that resulted in such net recognized 

7 built-in gain. 

8 Payments of principal as part of a refinancing of 

9 pre-effective date debt shall not be taken into ac10 count under subparagraph (B). 

11 ‘‘(4) NONRECOGNITION PERIOD.—For purposes 

12 of this subsection, the term ‘nonrecognition period’ 

13 means, with respect to a taxable year for which an 

14 S corporation has a net recognized built-in gain, 

15 such taxable year and the succeeding taxable year. 

16 ‘‘(5) PRE-EFFECTIVE DATE DEBT.—For pur17 poses of paragraph (2)(B), the term ‘pre-effective 

18 date debt’ means—

19 ‘‘(A) debt incurred before March 27, 2003, 

20 and 

21 ‘‘(B) debt incurred on or after such date to 

22 refinance debt described in subparagraph (A) 

23 (or refinanced indebtedness meeting the re24 quirements of this subparagraph) to the extent 

25 that (immediately after the refinancing) the 
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1 principal amount of the indebtedness resulting 

2 from the refinancing does not exceed the prin3 cipal amount of the refinanced indebtedness 

4 (immediately before the refinancing). 

5 ‘‘(6) ANTI-ABUSE RULE.—Solely for purposes of 

6 determining the treatment of distributions to share7 holders under section 1368 during the recognition 

8 period—

9 ‘‘(A) any increase in the accumulated ad10 justment account and shareholder basis by rea11 son of the disposition of those assets that re12 sulted in the net recognized built-in gain shall 

13 not exceed the amounts described in paragraph 

14 (2)(C), and 

15 ‘‘(B) any increase in such account and 

16 shareholder basis which is not permitted under 

17 subparagraph (A) shall occur immediately after 

18 the recognition period. 

19 ‘‘(7) EXISTING S CORPORATION.—The term ‘ex20 isting S corporation’ means any S corporation for 

21 which an election under section 1362 is filed before 

22 March 27, 2003.’’

23 (b) EFFECTIVE DATE.—The amendment made by 

24 this section shall apply to taxable years beginning during 

25 or after the calendar year which includes the date of the 
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1 enactment of this Act but only with respect to built-in gain 

2 recognized after such date.

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