I 

110TH CONGRESS 

1ST SESSION H. R. 4840 

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

reform, and for other purposes. 

IN THE HOUSE OF REPRESENTATIVES 

DECEMBER 19, 2007 

Mr. KIND (for himself, Mr. RAMSTAD, Mrs. JONES of Ohio, Mr. ENGLISH of 

Pennsylvania, Ms. SCHWARTZ, Mr. SAM JOHNSON of Texas, and Mr. 

KAGEN) 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 

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. 

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

5 Corporation Modernization Act of 2007’’. 

6 (b) AMENDMENT OF 1986 CODE.—Except as other7 wise expressly provided, whenever in this Act an amend8 ment or repeal is expressed in terms of an amendment 

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


bajohnson on PROD1PC71 with BILLS
2 

•HR 4840 IH

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

3 SEC. 2. REDUCED RECOGNITION PERIOD FOR BUILT-IN 

4 GAINS. 

5 (a) IN GENERAL.—Paragraph (7) of section 1374(d) 

6 (relating to definitions and special rules) is amended as 

7 follows: 

8 ‘‘(7) RECOGNITION PERIOD.—The term ‘rec9 ognition period’ means the 7-year period beginning 

10 with the 1st day of the 1st taxable year for which 

11 the corporation was an S corporation. For purposes 

12 of applying this section to any amount includible in 

13 income by reason of distributions to shareholders 

14 pursuant to section 593(e), the preceding sentence 

15 shall be applied without regard to the duration of 

16 the recognition period in effect on the date of such 

17 distribution.’’. 

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

19 this section— 

20 (1) shall apply for purposes of determining the 

21 recognition period with respect to 1st days referred 

22 to in section 1374(d)(7) of the Internal Revenue 

23 Code of 1986 occurring before, on, or after the date 

24 of the enactment of this Act, but 


bajohnson on PROD1PC71 with BILLS
3 

•HR 4840 IH

1 (2) shall not apply for purposes of determining 

2 the tax imposed by section 1374 of such Code for 

3 taxable years ending before such date. 

4 SEC. 3. EXPANSION OF QUALIFYING BENEFICIARIES OF AN 

5 ELECTING SMALL BUSINESS TRUST. 

6 (a) NO LOOK THROUGH FOR ELIGIBILITY PUR7 POSES.—Clause (v) of section 1361(c)(2)(B) (relating to 

8 treatment as shareholders) is amended by adding at the 

9 end the following new sentence: ‘‘This clause shall not 

10 apply for purposes of subsection (b)(1)(C).’’. 

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

12 this section shall take effect on the date of the enactment 

13 of this Act. 

14 SEC. 4. REPEAL OF EXCESSIVE PASSIVE INVESTMENT IN15 COME AS A TERMINATION EVENT. 

16 (a) IN GENERAL.—Section 1362(d) (relating to ter17 mination) is amended by striking paragraph (3). 

18 (b) CONFORMING AMENDMENTS.— 

19 (1) Section 1362(f)(1) is amended by striking 

20 ‘‘or (3)’’. 

21 (2) Clause (i) of section 1042(c)(4)(A) is 

22 amended by striking ‘‘section 1362(d)(3)(C)’’ and 

23 inserting ‘‘section 1375(b)(3)’’. 


bajohnson on PROD1PC71 with BILLS
4 

•HR 4840 IH

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

2 this section shall apply to taxable years beginning after 

3 December 31, 2007. 

4 SEC. 5. MODIFICATIONS TO PASSIVE INCOME RULES. 

5 (a) INCREASED LIMIT.— 

6 (1) IN GENERAL.—Paragraph (2) of section 

7 1375(a) (relating to tax imposed when passive in8 vestment income of corporation having accumulated 

9 earnings and profits exceeds 25 percent of gross re10 ceipts) is amended by striking ‘‘25 percent’’ and in11 serting ‘‘60 percent’’. 

12 (2) CONFORMING AMENDMENTS.— 

13 (A) Subparagraph (J) of section 26(b)(2) 

14 is amended by striking ‘‘25 percent’’ and insert15 ing ‘‘60 percent’’. 

16 (B) Clause (i) of section 1375(b)(1)(A) is 

17 amended by striking ‘‘25 percent’’ and inserting 

18 ‘‘60 percent’’. 

19 (C) The heading for section 1375 is 

20 amended by striking ‘‘25 PERCENT’’ and in21 serting ‘‘60 PERCENT’’. 

22 (D) The table of sections for part III of 

23 subchapter S of chapter 1 is amended by strik24 ing ‘‘25 percent’’ in the item relating to section 

25 1375 and inserting ‘‘60 percent’’. 


bajohnson on PROD1PC71 with BILLS
5 

•HR 4840 IH

1 (b) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to taxable years beginning after 

3 December 31, 2007. 

4 SEC. 6. EXPANSION OF S CORPORATION ELIGIBLE SHARE5 HOLDERS TO INCLUDE IRAS. 

6 (a) IN GENERAL.—Clause (vi) of section 

7 1361(c)(2)(A) (relating to certain trusts permitted as 

8 shareholders) is amended to read as follows: 

9 ‘‘(vi) A trust which constitutes an in10 dividual retirement account under section 

11 408(a), including one designated as a Roth 

12 IRA under section 408A.’’. 

13 (b) SALE OF STOCK IN IRA RELATING TO S COR14 PORATION ELECTION EXEMPT FROM PROHIBITED

15 TRANSACTION RULES.—Paragraph (16) of section 

16 4975(d) (relating to exemptions) is amended to read as 

17 follows: 

18 ‘‘(16) a sale of stock held by a trust which con19 stitutes an individual retirement account under sec20 tion 408(a) to the individual for whose benefit such 

21 account is established if— 

22 ‘‘(A) such sale is pursuant to an election 

23 under section 1362(a) by the issuer of such 

24 stock, 


bajohnson on PROD1PC71 with BILLS
6 

•HR 4840 IH

1 ‘‘(B) such sale is for fair market value at 

2 the time of sale (as established by an inde3 pendent appraiser) and the terms of the sale 

4 are otherwise at least as favorable to such trust 

5 as the terms that would apply on a sale to an 

6 unrelated party, 

7 ‘‘(C) such trust does not pay any commis8 sions, costs, or other expenses in connection 

9 with the sale, and 

10 ‘‘(D) the stock is sold in a single trans11 action for cash not later than 120 days after 

12 the S corporation election is made.’’. 

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

14 this section shall take effect on the date of the enactment 

15 of this Act. 

16 SEC. 7. ALLOWANCE OF DEDUCTION FOR CHARITABLE 

17 CONTRIBUTIONS FOR ELECTING SMALL BUSI18 NESS TRUSTS. 

19 (a) IN GENERAL.—Section 641(c)(2)(C) (relating to 

20 modifications) is amended by adding at the end the fol21 lowing new sentence: ‘‘The deduction for charitable con22 tributions allowed under clause (i) shall be determined 

23 without regard to section 642(c), and the limitations im24 posed by section 170(b)(1) on the amount of the deduction 


bajohnson on PROD1PC71 with BILLS
7 

•HR 4840 IH

1 shall be applied to the electing small business trust as if 

2 it were an individual.’’. 

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

4 this section shall apply to taxable years beginning after 

5 the date of the enactment of this Act. 

6 SEC. 8. ENTITY NEUTRALITY STUDY. 

7 Not later than December 31, 2009, the Comptroller 

8 General of the United States shall conduct a study on enti9 ty neutrality under the Internal Revenue Code of 1986 

10 and shall submit a report to the Committee on Ways and 

11 Means of the House of Representatives which— 

12 (1) discusses the challenges to providing equal 

13 treatment between S corporations and limited liabil14 ity companies under the Internal Revenue Code of 

15 1986, 

16 (2) identifies the differences under the Internal 

17 Revenue Code of 1986 between the various pass18 through entity rules, and 

19 (3) discusses why entities would prefer one set 

20 of rules over another. 

Æ 


bajohnson on PROD1PC71 with BILLS