II 

110TH CONGRESS 

2D SESSION S. 3063 

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 

MAY 22, 2008 

Mrs. LINCOLN (for herself, Mr. HATCH, Mr. CARDIN, and Mr. SMITH) 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. 

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

5 Corporation Modernization Act of 2008’’. 

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 


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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 January 

24 1, 2008, but 


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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. REPEAL OF EXCESSIVE PASSIVE INVESTMENT IN5 COME AS A TERMINATION EVENT. 

6 (a) IN GENERAL.—Paragraph (3) of section 1362(d) 

7 (relating to termination) is amended by adding at the end 

8 the following new subparagraph: 

9 ‘‘(D) TERMINATION.—This paragraph 

10 shall not apply to taxable years beginning after 

11 December 31, 2007.’’. 

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

13 this section shall apply to taxable years beginning after 

14 December 31, 2007. 

15 SEC. 4. MODIFICATIONS TO PASSIVE INCOME RULES. 

16 (a) INCREASED LIMIT.— 

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

18 1375(a) (relating to tax imposed when passive in19 vestment income of corporation having accumulated 

20 earnings and profits exceeds 25 percent of gross re21 ceipts) is amended by striking ‘‘25 percent’’ and in22 serting ‘‘60 percent’’. 

23 (2) CONFORMING AMENDMENTS.— 


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

2 is amended by striking ‘‘25 percent’’ and insert3 ing ‘‘60 percent’’. 

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

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

6 ‘‘60 percent’’. 

7 (C) The heading for section 1375 is 

8 amended by striking ‘‘25 PERCENT’’ and in9 serting ‘‘60 PERCENT’’. 

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

11 subchapter S of chapter 1 is amended by strik12 ing ‘‘25 percent’’ in the item relating to section 

13 1375 and inserting ‘‘60 percent’’. 

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

15 this section shall apply to taxable years beginning after 

16 December 31, 2007. 

17 SEC. 5. EXPANSION OF QUALIFYING BENEFICIARIES OF AN 

18 ELECTING SMALL BUSINESS TRUST. 

19 (a) NO LOOK THROUGH FOR ELIGIBILITY PUR20 POSES.—Clause (v) of section 1361(c)(2)(B) (relating to 

21 treatment as shareholders) is amended by adding at the 

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

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

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

25 this section shall take effect on January 1, 2008. 


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1 SEC. 6. EXPANSION OF S CORPORATION ELIGIBLE SHARE2 HOLDERS TO INCLUDE IRAS. 

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

4 1361(c)(2)(A) (relating to certain trusts permitted as 

5 shareholders) is amended to read as follows: 

6 ‘‘(vi) A trust which constitutes an in7 dividual retirement account under section 

8 408(a), including one designated as a Roth 

9 IRA under section 408A.’’. 

10 (b) SALE OF STOCK IN IRA RELATING TO S COR11 PORATION ELECTION EXEMPT FROM PROHIBITED

12 TRANSACTION RULES.—Paragraph (16) of section 

13 4975(d) (relating to exemptions) is amended to read as 

14 follows: 

15 ‘‘(16) a sale of stock held by a trust which con16 stitutes an individual retirement account under sec17 tion 408(a) to the individual for whose benefit such 

18 account is established if— 

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

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

21 stock, 

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

23 the time of sale (as established by an inde24 pendent appraiser) and the terms of the sale 

25 are otherwise at least as favorable to such trust 


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

2 unrelated party, 

3 ‘‘(C) such trust does not pay any commis4 sions, costs, or other expenses in connection 

5 with the sale, and 

6 ‘‘(D) the stock is sold in a single trans7 action for cash not later than 120 days after 

8 the S corporation election is made.’’. 

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

10 this section shall take effect on January 1, 2008. 

11 SEC. 7. ALLOWANCE OF DEDUCTION FOR CHARITABLE 

12 CONTRIBUTIONS FOR ELECTING SMALL BUSI13 NESS TRUSTS. 

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

15 modifications) is amended by adding at the end the fol16 lowing new sentence: ‘‘The deduction for charitable con17 tributions allowed under clause (i) shall be determined 

18 without regard to section 642(c), and the limitations im19 posed by section 170(b)(1) on the amount of the deduction 

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

21 it were an individual.’’. 

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

23 this section shall apply to taxable years beginning after 

24 December 31, 2007. 

Æ 


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