II 

115TH CONGRESS 

1ST SESSION S. 711 

To amend the Internal Revenue Code of 1986 to provide for S corporation 

reform, and for other purposes. 

IN THE SENATE OF THE UNITED STATES 

MARCH 23, 2017 

Mr. THUNE (for himself, Mr. CARDIN, and Mr. ROBERTS) introduced the 

following bill; which was read twice and referred to the Committee on Finance 

A BILL 

To amend the Internal Revenue Code of 1986 to provide 

for S corporation reform, and for other purposes. 

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; REFERENCE; TABLE OF CON4 TENTS. 

5 (a) SHORT TITLE.—This Act may be cited as the ‘‘S 

6 Corporation Modernization Act of 2017’’. 

7 (b) AMENDMENT OF 1986 CODE.—Except as other8 wise expressly provided, whenever in this Act an amend9 ment or repeal is expressed in terms of an amendment 

10 to, or repeal of, a section or other provision, the reference 


lotter on DSK5VPTVN1PROD with BILLS
2 

•S 711 IS

1 shall be considered to be made to a section or other provi2 sion of the Internal Revenue Code of 1986. 

3 (c) TABLE OF CONTENTS.—The table of contents for 

4 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. 7. Extension of time for making S corporation elections. 

5 SEC. 2. EXPANSION OF QUALIFYING BENEFICIARIES OF AN 

6 ELECTING SMALL BUSINESS TRUST. 

7 (a) NO LOOK-THROUGH FOR ELIGIBILITY PUR8 POSES.—Section 1361(c)(2)(B)(v) is amended by adding 

9 at the end the following new sentence: ‘‘This clause shall 

10 not apply for purposes of subsection (b)(1)(C).’’. 

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

12 this section shall take effect on January 1, 2018. 

13 SEC. 3. MODIFICATIONS TO S CORPORATION PASSIVE IN14 VESTMENT INCOME RULES. 

15 (a) INCREASED PERCENTAGE LIMIT.—Section 

16 1375(a)(2) is amended by striking ‘‘25 percent’’ and in17 serting ‘‘60 percent’’. 

18 (b) REPEAL OF EXCESSIVE PASSIVE INCOME AS A

19 TERMINATION EVENT.—Section 1362(d) is amended by 

20 striking paragraph (3). 

21 (c) CONFORMING AMENDMENTS.— 


lotter on DSK5VPTVN1PROD with BILLS
3 

•S 711 IS

1 (1) Section 1375(b) is amended by striking 

2 paragraphs (3) and (4) and inserting the following 

3 new paragraph: 

4 ‘‘(3) PASSIVE INVESTMENT INCOME DE5 FINED.— 

6 ‘‘(A) IN GENERAL.—Except as otherwise 

7 provided in this paragraph, the term ‘passive 

8 investment income’ means gross receipts de9 rived from royalties, rents, dividends, interest, 

10 and annuities. 

11 ‘‘(B) EXCEPTION FOR INTEREST ON

12 NOTES FROM SALES OF INVENTORY.—The term 

13 ‘passive investment income’ shall not include in14 terest on any obligation acquired in the ordi15 nary course of the corporation’s trade or busi16 ness from its sale of property described in sec17 tion 1221(a)(1). 

18 ‘‘(C) TREATMENT OF CERTAIN LENDING

19 OR FINANCE COMPANIES.—If the S corporation 

20 meets the requirements of section 542(c)(6) for 

21 the taxable year, the term ‘passive investment 

22 income’ shall not include gross receipts for the 

23 taxable year which are derived directly from the 

24 active and regular conduct of a lending or fiVerDate Sep 11 2014 02:01 Mar 28, 2017 Jkt 069200 PO 00000 Frm 00003 Fmt 6652 Sfmt 6201 E:\BILLS\S711.IS S711

lotter on DSK5VPTVN1PROD with BILLS
4 

•S 711 IS

1 nance business (as defined in section 

2 542(d)(1)). 

3 ‘‘(D) TREATMENT OF CERTAIN DIVI4 DENDS.—If an S corporation holds stock in a 

5 C corporation meeting the requirements of sec6 tion 1504(a)(2), the term ‘passive investment 

7 income’ shall not include dividends from such C 

8 corporation to the extent such dividends are at9 tributable to the earnings and profits of such C 

10 corporation derived from the active conduct of 

11 a trade or business. 

12 ‘‘(E) EXCEPTION FOR BANKS, ETC.—In 

13 the case of a bank (as defined in section 581) 

14 or a depository institution holding company (as 

15 defined in section 3(w)(1) of the Federal De16 posit Insurance Act (12 U.S.C. 1813(w)(1))), 

17 the term ‘passive investment income’ shall not 

18 include— 

19 ‘‘(i) interest income earned by such 

20 bank or company, or 

21 ‘‘(ii) dividends on assets required to 

22 be held by such bank or company, includ23 ing stock in the Federal Reserve Bank, the 

24 Federal Home Loan Bank, or the Federal 

25 Agricultural Mortgage Bank or participaVerDate Sep 11 2014 02:01 Mar 28, 2017 Jkt 069200 PO 00000 Frm 00004 Fmt 6652 Sfmt 6201 E:\BILLS\S711.IS S711

lotter on DSK5VPTVN1PROD with BILLS
5 

•S 711 IS

1 tion certificates issued by a Federal Inter2 mediate Credit Bank. 

3 ‘‘(F) GROSS RECEIPTS FROM THE SALES

4 OF CERTAIN ASSETS.—For purposes of this 

5 paragraph— 

6 ‘‘(i) CAPITAL ASSETS OTHER THAN

7 STOCK AND SECURITIES.—In the case of 

8 dispositions of capital assets (other than 

9 stock and securities), gross receipts from 

10 such dispositions shall be taken into ac11 count only to the extent of capital gain net 

12 income therefrom. 

13 ‘‘(ii) STOCK AND SECURITIES.—In the 

14 case of sales or exchanges of stock or secu15 rities, gross receipts shall be taken into ac16 count only to the extent of the gain there17 from. 

18 ‘‘(G) COORDINATION WITH SECTION

19 1374.—The amount of passive investment in20 come shall be determined by not taking into ac21 count any recognized built-in gain or loss of the 

22 S corporation for any taxable year in the rec23 ognition period. Terms used in the preceding 

24 sentence shall have the same respective mean25 ings as when used in section 1374.’’. 


lotter on DSK5VPTVN1PROD with BILLS
6 

•S 711 IS

1 (2)(A) Section 26(b)(2)(J) is amended by strik2 ing ‘‘25 percent’’ and inserting ‘‘60 percent’’. 

3 (B) Section 1375(b)(1)(A)(i) is amended by 

4 striking ‘‘25 percent’’ and inserting ‘‘60 percent’’. 

5 (C) The heading for section 1375 is amended 

6 by striking ‘‘25 PERCENT’’ and inserting ‘‘60 PER7 CENT’’. 

8 (D) The item relating to section 1375 in the 

9 table of sections for part III of subchapter S of 

10 chapter 1 is amended by striking ‘‘25 percent’’ and 

11 inserting ‘‘60 percent’’. 

12 (3) Section 1042(c)(4)(A)(i) is amended by 

13 striking ‘‘section 1362(d)(3)(C)’’ and inserting ‘‘sec14 tion 1375(b)(3)’’. 

15 (4) Section 1362(f)(1)(B) is amended by strik16 ing ‘‘paragraph (2) or (3) of subsection (d)’’ and in17 serting ‘‘subsection (d)(2)’’. 

18 (d) EFFECTIVE DATE.—The amendments made by 

19 this section shall apply to taxable years beginning after 

20 December 31, 2017. 

21 SEC. 4. EXPANSION OF S CORPORATION ELIGIBLE SHARE22 HOLDERS TO INCLUDE IRAS. 

23 (a) IN GENERAL.—Section 1361(c)(2)(A)(vi) is 

24 amended to read as follows: 


lotter on DSK5VPTVN1PROD with BILLS
7 

•S 711 IS

1 ‘‘(vi) A trust which constitutes an in2 dividual retirement account under section 

3 408(a), including one designated as a Roth 

4 IRA under section 408A.’’. 

5 (b) SALE OF STOCK IN IRA RELATING TO S COR6 PORATION ELECTION EXEMPT FROM PROHIBITED

7 TRANSACTION RULES.—Section 4975(d)(16) is amend8 ed— 

9 (1) by striking subparagraphs (A) and (B) and 

10 by redesignating subparagraphs (C), (D), (E), and 

11 (F) as subparagraphs (A), (B), (C), and (D), respec12 tively, and 

13 (2) by striking ‘‘such bank or company’’ in sub14 paragraph (A) (as so redesignated) and inserting 

15 ‘‘the issuer of such stock’’. 

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

17 this section shall take effect on January 1, 2018. 

18 SEC. 5. CHARITABLE CONTRIBUTION DEDUCTION FOR 

19 ELECTING SMALL BUSINESS TRUSTS. 

20 (a) IN GENERAL.—Section 641(c)(2) is amended by 

21 inserting after subparagraph (D) the following new sub22 paragraph: 

23 ‘‘(E)(i) Section 642(c) shall not apply. 

24 ‘‘(ii) For purposes of section 170(b)(1)(G), 

25 adjusted gross income shall be computed in the 


lotter on DSK5VPTVN1PROD with BILLS
8 

•S 711 IS

1 same manner as in the case of an individual, 

2 except that the deductions for costs which are 

3 paid or incurred in connection with the admin4 istration of the trust and which would not have 

5 been incurred if the property were not held in 

6 such trust shall be treated as allowable in arriv7 ing at adjusted gross income.’’. 

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

9 this section shall apply to taxable years beginning after 

10 December 31, 2017. 

11 SEC. 6. AMORTIZATION OF S CORPORATION BUILT-IN GAIN 

12 AMOUNT UPON DEATH OF SHAREHOLDER. 

13 (a) IN GENERAL.—Part II of subchapter S of chapter 

14 1 is amended by adding at the end the following: 

15 ‘‘SEC. 1369. AMORTIZATION OF BUILT-IN GAIN AMOUNT 

16 UPON DEATH OF SHAREHOLDER. 

17 ‘‘(a) IN GENERAL.—A person holding stock in an 

18 electing S corporation the basis of which is determined 

19 under section 1014(a) (hereafter in this section referred 

20 to as the ‘shareholder’) shall be allowed a deduction with 

21 respect to the S corporation built-in gain amount. The 

22 amount of such deduction for any taxable year shall be 

23 determined by amortizing the S corporation built-in gain 

24 amount over the 15-year period beginning with the month 

25 which includes the applicable valuation date. 


lotter on DSK5VPTVN1PROD with BILLS
9 

•S 711 IS

1 ‘‘(b) S CORPORATION BUILT-IN GAIN AMOUNT.— 

2 For purposes of this section, the term ‘S corporation built3 in gain amount’ means the lesser of— 

4 ‘‘(1) the excess (if any) of— 

5 ‘‘(A) the basis of the stock referred to in 

6 subsection (a) as determined under section 

7 1014(a), over 

8 ‘‘(B) the adjusted basis of such stock im9 mediately before the death of the decedent, or 

10 ‘‘(2) the pro rata share (determined as of the 

11 applicable valuation date) of— 

12 ‘‘(A) the aggregate fair market value of all 

13 property held by the S corporation which is of 

14 a character subject to depreciation or amortiza15 tion, over 

16 ‘‘(B) the aggregate adjusted basis of all 

17 such property held by the S corporation as of 

18 such date. 

19 ‘‘(c) ELECTING S CORPORATION.—For purposes of 

20 this section, the term ‘electing S corporation’ means, with 

21 respect to any shareholder, any S corporation which elects 

22 the application of this section with respect to such share23 holder at such time and in such form and manner as the 

24 Secretary may prescribe. 


lotter on DSK5VPTVN1PROD with BILLS
10 

•S 711 IS

1 ‘‘(d) APPLICABLE VALUATION DATE.—For purposes 

2 of this section, the term ‘applicable valuation date’ 

3 means— 

4 ‘‘(1) in the case of a decedent with respect to 

5 which the executor of the decedent’s estate elects the 

6 application of section 2032, the date 6 months after 

7 the decedent’s death, and 

8 ‘‘(2) in the case of any other decedent, the date 

9 of the decedent’s death. 

10 ‘‘(e) ACCELERATED DEDUCTION IN CASE OF DIS11 POSITION OF S CORPORATION PROPERTY.— 

12 ‘‘(1) IN GENERAL.—If the electing S corpora13 tion disposes of any property which was taken into 

14 account under subsection (b)(2), then the deduction 

15 allowed under subsection (a) with respect to any 

16 stock, for the taxable year of the shareholder in 

17 which or with which the taxable year of the S cor18 poration which includes the date of such disposition 

19 ends, shall (except as otherwise provided in this sec20 tion) not be less than the lesser of— 

21 ‘‘(A) the pro rata share of the gain recog22 nized on such disposition, or 

23 ‘‘(B) the amount determined under sub24 section (b)(2) by only taking into account such 

25 property. 


lotter on DSK5VPTVN1PROD with BILLS
11 

•S 711 IS

1 ‘‘(2) OVERALL ALLOWANCE NOT INCREASED.— 

2 No deduction shall be allowed under subsection (a) 

3 with respect to any stock for any taxable year to the 

4 extent that such deduction (when added to the de5 ductions so allowed for all prior taxable years) ex6 ceeds the S corporation built-in gain amount with 

7 respect to such stock. 

8 ‘‘(f) RECHARACTERIZATION OF GAINS AS ORDINARY

9 INCOME TO EXTENT OF DEDUCTION.—If— 

10 ‘‘(1) stock of an S corporation with respect to 

11 which a deduction was allowed under this section, or 

12 ‘‘(2) property which was taken into account 

13 under subsection (b)(2) with respect to such stock, 

14 is disposed of at a gain (determined without regard to 

15 whether or not such gain is recognized and reduced by 

16 any amount of gain which is treated as ordinary income 

17 under any other provision of this subtitle), the amount of 

18 such gain (or the shareholder’s pro rata share of such gain 

19 in the case of property described in paragraph (2)) shall 

20 be treated as gain which is ordinary income (and shall be 

21 recognized notwithstanding any other provision of this 

22 subtitle) to the extent of the excess of the aggregate de23 ductions allowable under this section with respect to such 

24 stock for the taxable year of such disposition and all prior 


lotter on DSK5VPTVN1PROD with BILLS
12 

•S 711 IS

1 taxable years over the amounts taken into account under 

2 this subsection for all prior taxable years. 

3 ‘‘(g) TERMINATION OF AMORTIZATION.—No deduc4 tion shall be allowed under subsection (a) with respect to 

5 any stock in an electing S corporation with respect to any 

6 period beginning after the earlier of— 

7 ‘‘(1) the date on which the corporation’s elec8 tion under section 1362 terminates, or 

9 ‘‘(2) the date on which the shareholder trans10 fers such stock to any other person. 

11 ‘‘(h) TREATMENT OF CERTAIN TRANSFERS.— 

12 ‘‘(1) DISTRIBUTIONS FROM ESTATES OR

13 TRUSTS.—Notwithstanding any other provision of 

14 this section, in the case of a distribution of stock 

15 from an estate or trust to a beneficiary, the bene16 ficiary (and not the estate or trust) shall be treated 

17 as the shareholder to which this section applies with 

18 respect to periods after such distribution. 

19 ‘‘(2) CERTAIN TRANSFERS INVOLVING

20 SPOUSES.—Notwithstanding any other provision of 

21 this section, in the case of a transfer described in 

22 section 1041, the transferee (and not the transferor) 

23 shall be treated as the shareholder to which this sec24 tion applies with respect to periods after such trans25 fer. 


lotter on DSK5VPTVN1PROD with BILLS
13 

•S 711 IS

1 ‘‘(i) TREATMENT OF INCOME IN RESPECT OF THE

2 DECEDENT.— 

3 ‘‘(1) ADJUSTMENT TO BUILT-IN GAIN OF PROP4 ERTY HELD BY S CORPORATION.—For purposes of 

5 subsection (b)(2), the fair market value of any prop6 erty taken into account under subparagraph (A) 

7 thereof shall be decreased by any amount of income 

8 in respect of the decedent with respect to such prop9 erty to which section 691 applies. For purposes of 

10 subsection (e)(1)(A), the gain recognized on the dis11 position of such property shall be reduced by such 

12 amount. 

13 ‘‘(2) ADJUSTMENT TO BASIS OF S CORPORA14 TION STOCK.—For adjustment to basis of S corpora15 tion stock, see section 1367(b)(4)(B). 

16 ‘‘(j) REPORTING.—Except as otherwise provided by 

17 the Secretary, for purposes of section 6037, the amounts 

18 determined under subsections (b)(2), (e)(1), and (f)(2) 

19 shall be treated as items of the corporation and the pro 

20 rata share determined under such subsection shall be fur21 nished to the shareholder under section 6037(b).’’. 

22 (b) ADJUSTMENT TO BASIS OF STOCK.— 

23 (1) IN GENERAL.—Section 1367(a)(2) is 

24 amended by striking ‘‘and’’ at the end of subpara25 graph (D), by striking the period at the end of subVerDate Sep 11 2014 02:01 Mar 28, 2017 Jkt 069200 PO 00000 Frm 00013 Fmt 6652 Sfmt 6201 E:\BILLS\S711.IS S711

lotter on DSK5VPTVN1PROD with BILLS
14 

•S 711 IS

1 paragraph (E) and inserting ‘‘, and’’, and by insert2 ing after subparagraph (E) the following new sub3 paragraph: 

4 ‘‘(F) the amount of the shareholder’s de5 duction under section 1369.’’. 

6 (2) ADJUSTMENT NOT TAKEN INTO ACCOUNT

7 IN DETERMINING TREATMENT OF DISTRIBUTIONS.— 

8 Section 1368 is amended— 

9 (A) in subsection (d)(1), by inserting 

10 ‘‘(other than subsection (a)(2)(F) thereof)’’ 

11 after ‘‘section 1367’’, and 

12 (B) in subsection (e)(1)(A)— 

13 (i) by striking ‘‘this title and the 

14 phrase’’ and inserting ‘‘this title, the 

15 phrase’’, and 

16 (ii) by inserting ‘‘, and no adjustment 

17 shall be made under section 

18 1367(a)(2)(F)’’ after ‘‘section 1367(a)(2)’’. 

19 (c) CLERICAL AMENDMENT.—The table of sections 

20 for part II of subchapter S of chapter 1 is amended by 

21 adding at the end the following new item: 

‘‘Sec. 1369. Amortization of built-in gain amount upon death of shareholder.’’. 

22 (d) EFFECTIVE DATE.—The amendments made by 

23 this section shall apply to with respect to decedents dying 

24 after the date of the enactment of this Act, in taxable 

25 years ending after such date. 


lotter on DSK5VPTVN1PROD with BILLS
15 

•S 711 IS

1 SEC. 7. EXTENSION OF TIME FOR MAKING S CORPORATION 

2 ELECTIONS. 

3 (a) IN GENERAL.—Subsection (b) of section 1362 is 

4 amended to read as follows: 

5 ‘‘(b) WHEN MADE.— 

6 ‘‘(1) IN GENERAL.—An election under sub7 section (a) may be made by a small business cor8 poration for any taxable year not later than the due 

9 date for filing the return of the S corporation for 

10 such taxable year (including extensions). 

11 ‘‘(2) CERTAIN ELECTIONS TREATED AS MADE

12 FOR NEXT TAXABLE YEAR.—If— 

13 ‘‘(A) an election under subsection (a) is 

14 made for any taxable year within the period de15 scribed in paragraph (1), but 

16 ‘‘(B) either— 

17 ‘‘(i) on 1 or more days in such taxable 

18 year and before the day on which the elec19 tion was made the corporation did not 

20 meet the requirements of subsection (b) of 

21 section 1361, or 

22 ‘‘(ii) 1 or more of the persons who 

23 held stock in the corporation during such 

24 taxable year and before the election was 

25 made did not consent to the election, 


lotter on DSK5VPTVN1PROD with BILLS
16 

•S 711 IS

1 then such election shall be treated as made for 

2 the following taxable year. 

3 ‘‘(3) AUTHORITY TO TREAT LATE ELECTIONS, 

4 ETC., AS TIMELY.—If— 

5 ‘‘(A) an election under subsection (a) is 

6 made for any taxable year after the date pre7 scribed by this subsection for making such elec8 tion for such taxable year or no such election is 

9 made for any taxable year, and 

10 ‘‘(B) the Secretary determines that there 

11 was reasonable cause for the failure to timely 

12 make such election, 

13 the Secretary may treat such an election as timely 

14 made for such taxable year. 

15 ‘‘(4) ELECTION ON TIMELY FILED RETURNS.— 

16 Except as otherwise provided by the Secretary, an 

17 election under subsection (a) for any taxable year 

18 may be made on a timely filed return of the S cor19 poration for such taxable year. 

20 ‘‘(5) SECRETARIAL AUTHORITY.—The Secretary 

21 may prescribe such regulations, rules, or other guid22 ance as may be necessary or appropriate for pur23 poses of applying this subsection.’’. 

24 (b) COORDINATION WITH CERTAIN OTHER PROVI25 SIONS.— 


lotter on DSK5VPTVN1PROD with BILLS
17 

•S 711 IS

1 (1) QUALIFIED SUBCHAPTER S SUBSIDI2 ARIES.—Section 1361(b)(3)(B) is amended by add3 ing at the end the following flush sentence: 

4 ‘‘Rules similar to the rules of section 1362(b) 

5 shall apply with respect to any election under 

6 clause (ii).’’. 

7 (2) QUALIFIED SUBCHAPTER S TRUSTS.—Sec8 tion 1361(d)(2) is amended by striking subpara9 graph (D). 

10 (c) REVOCATIONS.—Paragraph (1) of section 

11 1362(d) is amended— 

12 (1) by striking ‘‘subparagraph (D)’’ in subpara13 graph (C) and inserting ‘‘subparagraphs (D) and 

14 (E)’’, and 

15 (2) by adding at the end the following new sub16 paragraph: 

17 ‘‘(E) AUTHORITY TO TREAT LATE REVOCA18 TIONS AS TIMELY.—If— 

19 ‘‘(i) a revocation under subparagraph 

20 (A) is made for any taxable year after the 

21 date prescribed by this paragraph for mak22 ing such revocation for such taxable year 

23 or no such revocation is made for any tax24 able year, and 


lotter on DSK5VPTVN1PROD with BILLS
18 

•S 711 IS

1 ‘‘(ii) the Secretary determines that 

2 there was reasonable cause for the failure 

3 to timely make such revocation, 

4 the Secretary may treat such a revocation as 

5 timely made for such taxable year.’’. 

6 (d) EFFECTIVE DATE.— 

7 (1) IN GENERAL.—Except as otherwise pro8 vided in this subsection, the amendments made by 

9 this section shall apply to elections for taxable years 

10 beginning after December 31, 2017. 

11 (2) REVOCATIONS.—The amendments made by 

12 subsection (c) shall apply to revocations after De13 cember 31, 2017. 

Æ 


lotter on DSK5VPTVN1PROD with BILLS