I 

109TH CONGRESS 

1ST SESSION H. R. 1557

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 12, 2005

Mrs. CUBIN 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. SHORT TITLE. 

4 This Act may be cited as the ‘‘Small Business Tax 

5 Flexibility Act of 2005’’. 

6 SEC. 2. ELECTION FOR SPECIAL TAX TREATMENT OF CER7 TAIN S CORPORATION CONVERSIONS. 

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

9 1 of the Internal Revenue Code of 1986 (relating to tax 
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1 treatment of S corporations and their shareholders) is 

2 amended by adding at the end the following new section: 

3 ‘‘SEC. 1364. ELECTION FOR SPECIAL TAX TREATMENT OF 

4 CERTAIN S CORPORATION CONVERSIONS. 

5 ‘‘(a) IN GENERAL.—A qualified electing S corpora6 tion may elect the special tax treatment provided in sub7 section (b) for an eligible corporate conversion in the man8 ner set forth in subsection (f). 

9 ‘‘(b) SPECIAL TAX TREATMENT.—

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

11 case of transfers by a qualified electing S corpora12 tion to a partnership in connection with an eligible 

13 corporate conversion, no gain or loss shall be recog14 nized by shareholders of such corporation with re15 spect to money or property received by the partner16 ship. 

17 ‘‘(2) OTHER TRANSFERS.—All other distribu18 tions of money or property by the qualified electing 

19 S corporation shall be treated as a distribution in 

20 part or full payment in exchange for the stock of 

21 such corporation. 

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

23 purposes of this section, the term ‘qualified electing S cor24 poration’ means a domestic corporation which—
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1 ‘‘(1) has had a valid S election continuously in 

2 effect for the 10 taxable years of the corporation 

3 ending before the taxable year in which the election 

4 under this section is made, and 

5 ‘‘(2) has never made an election under this sec6 tion. 

7 ‘‘(d) ELIGIBLE CORPORATE CONVERSION.—For pur8 poses of this section—

9 ‘‘(1) IN GENERAL.—The term ‘eligible cor10 porate conversion’ means (however affected)—

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

12 corporation of substantially all of its assets to 

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

14 for not less than 80 percent of the capital and 

15 profits of the partnership in any taxable year of 

16 the corporation ending on or before December 

17 31, 2009, 

18 ‘‘(B) the meeting of the requirement de19 scribed in paragraph (2) by the partnership, 

20 and 

21 ‘‘(C) the subsequent liquidation and dis22 solution of the qualified S corporation within 

23 the same taxable year as the transfer. 

24 ‘‘(2) CONTINUITY OF BUSINESS REQUIRE25 MENT.—
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1 ‘‘(A) IN GENERAL.—The requirement de2 scribed in this paragraph is met if the partner3 ship described in paragraph (1)(A) either—

4 ‘‘(i) maintains the continuity of the 

5 qualified electing S corporation’s business 

6 for 5 consecutive taxable years following 

7 the year in which the corporate conversion 

8 occurs, or 

9 ‘‘(ii) pays a corporate conversion re10 capture tax in the taxable year in which 

11 the failure to maintain such continuity 

12 first occurs. 

13 ‘‘(B) CONTINUITY OF THE QUALIFIED

14 ELECTING S CORPORATION’S BUSINESS.—For 

15 purposes of subparagraph (A)(i), the term ‘con16 tinuity of the qualified electing S corporation’s 

17 business’ means, under all the facts and cir18 cumstances, either—

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

20 the S corporation’s historic lines of busi21 ness, or 

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

23 the S corporation’s historic business assets, 

24 whether or not such assets have a taxable 
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1 basis, in the conduct of an active trade or 

2 business. 

3 ‘‘(C) CORPORATE CONVERSION RECAPTURE

4 TAX.—For purposes of subparagraph (A)(ii), 

5 the term ‘corporate conversion recapture tax’ 

6 means—

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

8 this subtitle of the partnership and the 

9 partners as if—

10 ‘‘(I) a recomputation of the tax 

11 under this subtitle of the partnership 

12 and the partners as if 

13 ‘‘(II) the stock of such S corpora14 tion was owned in the same manner 

15 as the capital of the partnership, and 

16 ‘‘(III) the S corporation were dis17 solved and its assets distributed to its 

18 shareholders in complete liquidation 

19 on the last day of the taxable year, 

20 multiplied by 

21 ‘‘(ii) a fraction—

22 ‘‘(I) the numerator of which is 

23 the excess (if any) of 5 over the num24 ber of complete taxable years in which 

25 the partnership maintains continuity 
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1 of the qualified electing S corpora2 tion’s business, and 

3 ‘‘(II) the denominator of which is 

4 5. 

5 ‘‘(e) BASIS RULES.—In the case of an eligible cor6 porate conversion, property in the hands of the partner7 ship shall have the same basis as in the hands of the quali8 fied electing S corporation immediately prior to the eligible 

9 corporate conversion. 

10 ‘‘(f) METHOD OF MAKING ELECTION.—In order to 

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

12 for an eligible corporate conversion, the qualified electing 

13 S corporation shall file a written election claiming such 

14 treatment with the timely-filed information return of the 

15 S corporation for the taxable year in which the eligible 

16 corporate conversion occurs.’’. 

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

18 for such part I is amended by adding at the end the fol19 lowing new item:

‘‘Sec 1363. Election for special tax treatment of certain s corporation conversions.’’.

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

21 this section shall apply to taxable years ending after the 

22 date of the enactment of this Act.

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