I 

108TH CONGRESS 

1ST SESSION H. R. 1791

To amend the Internal Revenue Code of 1986 to provide an election for 

a special tax treatment of certain S corporation conversions. 

IN THE HOUSE OF REPRESENTATIVES 

APRIL 11, 2003

Mrs. CUBIN (for herself and Mr. MCINNIS) 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 

an election for a special tax treatment of certain S 

corporation conversions.

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

3 SECTION 1. ELECTION FOR SPECIAL TAX TREATMENT OF 

4 CERTAIN S CORPORATION CONVERSIONS. 

5 (a) IN GENERAL.—Part I of subchapter S of chapter 

6 1 of the Internal Revenue Code of 1986 (relating to tax 

7 treatment of S corporations and their shareholders) is 

8 amended by adding at the end the following new section: 
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1 ‘‘SEC. 1364. ELECTION FOR SPECIAL TAX TREATMENT OF 

2 CERTAIN S CORPORATION CONVERSIONS. 

3 ‘‘(a) IN GENERAL.—A qualified electing S corpora4 tion may elect the special tax treatment provided in sub5 section (b) for an eligible corporate conversion in the man6 ner set forth in subsection (e). 

7 ‘‘(b) SPECIAL TAX TREATMENT.—

8 ‘‘(1) TRANSFERS TO PARTNERSHIP.—In the 

9 case of transfers by a qualified electing S corpora10 tion to a partnership in connection with an eligible 

11 corporate conversion, no gain or loss shall be recog12 nized by shareholders of such corporation with re13 spect to money or property received by the partner14 ship. 

15 ‘‘(2) OTHER TRANSFERS.—All other distribu16 tions of money or property by the qualified electing 

17 S corporation shall be treated as a distribution in 

18 part or full payment in exchange for the stock of 

19 such corporation. 

20 ‘‘(c) QUALIFIED ELECTING S CORPORATION.—For 

21 purposes of this section, the term ‘qualified electing S cor22 poration’ means a domestic corporation which—

23 ‘‘(1) has had a valid S election continuously in 

24 effect for the 10 taxable years of the corporation 

25 ending before the taxable year in which the election 

26 under this section is made, and 
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1 ‘‘(2) has never made an election under this sec2 tion. 

3 ‘‘(d) ELIGIBLE CORPORATE CONVERSION.—For pur4 poses of this section—

5 ‘‘(1) IN GENERAL.—The term ‘eligible cor6 porate conversion’ means (however effected)—

7 ‘‘(A) a transfer by a qualified electing S 

8 corporation of substantially all of its assets to 

9 a partnership (as defined in section 7701(a)(2)) 

10 for not less than 80 percent of the capital and 

11 profits of the partnership in any taxable year of 

12 the corporation ending on or before December 

13 31, 2007, 

14 ‘‘(B) the meeting of the requirement de15 scribed in paragraph (2) by the partnership, 

16 and 

17 ‘‘(C) the subsequent liquidation and dis18 solution of the qualified S corporation within 

19 the same taxable year as the transfer. 

20 ‘‘(2) CONTINUITY OF BUSINESS REQUIRE21 MENT.—

22 ‘‘(A) IN GENERAL.—The requirement de23 scribed in this paragraph is met if the partner24 ship described in paragraph (1)(A) either—
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1 ‘‘(i) maintains the continuity of the 

2 qualified electing S corporation’s business 

3 for 5 consecutive taxable years following 

4 the year in which the corporate conversion 

5 occurs, or 

6 ‘‘(ii) pays a corporate conversion re7 capture tax in the taxable year in which 

8 the failure to maintain such continuity 

9 first occurs. 

10 ‘‘(B) CONTINUITY OF THE QUALIFIED

11 ELECTING S CORPORATION’S BUSINESS.—For 

12 purposes of subparagraph (A)(i), the term ‘con13 tinuity of the qualified electing S corporation’s 

14 business’ means, under all the facts and cir15 cumstances, either—

16 ‘‘(i) the continuation of 1 or more of 

17 the S corporation’s historic lines of busi18 ness, or 

19 ‘‘(ii) the use of a significant portion of 

20 the S corporation’s historic business assets, 

21 whether or not such assets have a taxable 

22 basis, in the conduct of an active trade or 

23 business. 

24 ‘‘(C) CORPORATE CONVERSION RECAPTURE

25 TAX.—For purposes of subparagraph (A)(ii), 
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1 the term ‘corporate conversion recapture tax’ 

2 means—

3 ‘‘(i) a recomputation of the tax under 

4 this subtitle of the partnership and the 

5 partners as if—

6 ‘‘(I) the partnership were an S 

7 corporation, 

8 ‘‘(II) the stock of such S corpora9 tion was owned in the same manner 

10 as the capital of the partnership, and 

11 ‘‘(III) the S corporation were dis12 solved and its assets distributed to its 

13 shareholders in complete liquidation 

14 on the last day of the taxable year, 

15 multiplied by 

16 ‘‘(ii) a fraction—

17 ‘‘(I) the numerator of which is 

18 the excess (if any) of 5 over the num19 ber of complete taxable years in which 

20 the partnership maintains continuity 

21 of the qualified electing S corpora22 tion’s business, and 

23 ‘‘(II) the denominator of which

24 is 5. 
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1 ‘‘(d) BASIS RULES.—In the case of an eligible cor2 porate conversion, property in the hands of the partner3 ship shall have the same basis as in the hands of the quali4 fied electing S corporation immediately prior to the eligible 

5 corporate conversion. 

6 ‘‘(e) METHOD OF MAKING ELECTION.—In order to 

7 elect the special tax treatment provided in subsection (b) 

8 for an eligible corporate conversion, the qualified electing 

9 S corporation shall file a written election claiming such 

10 treatment with the timely-filed information return of the 

11 S corporation for the taxable year in which the eligible 

12 corporate conversion occurs.’’

13 (b) CLERICAL AMENDMENT.—The table of sections 

14 for such part I is amended by adding at the end the fol15 lowing new item:

‘‘Sec. 1364. Election for special tax treatment of certain S corporation conversions.’’

16 (c) EFFECTIVE DATE.—The amendments made by 

17 this section shall apply to taxable years ending after the 

18 date of the enactment of this Act.

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