II 

116TH CONGRESS 

1ST SESSION S. 2156 

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 

JULY 18, 2019 

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. 

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

5 Corporation Modernization Act of 2019’’. 

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. MODIFICATIONS TO S CORPORATION PASSIVE IN4 VESTMENT INCOME RULES. 

5 (a) INCREASED PERCENTAGE LIMIT.—Section 

6 1375(a)(2) is amended by striking ‘‘25 percent’’ and in7 serting ‘‘60 percent’’. 

8 (b) REPEAL OF EXCESSIVE PASSIVE INCOME AS A

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

10 striking paragraph (3). 

11 (c) CONFORMING AMENDMENTS.— 

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

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

14 new paragraph: 

15 ‘‘(3) PASSIVE INVESTMENT INCOME DE16 FINED.— 

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

18 provided in this paragraph, the term ‘passive 

19 investment income’ means gross receipts de20 rived from royalties, rents, dividends, interest, 

21 and annuities. 

22 ‘‘(B) EXCEPTION FOR INTEREST ON

23 NOTES FROM SALES OF INVENTORY.—The term 

24 ‘passive investment income’ shall not include in25 terest on any obligation acquired in the ordiVerDate Sep 11 2014 21:01 Jul 23, 2019 Jkt 089200 PO 00000 Frm 00002 Fmt 6652 Sfmt 6201 E:\BILLS\S2156.IS S2156

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1 nary course of the corporation’s trade or busi2 ness from its sale of property described in sec3 tion 1221(a)(1). 

4 ‘‘(C) TREATMENT OF CERTAIN LENDING

5 OR FINANCE COMPANIES.—If the S corporation 

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

7 the taxable year, the term ‘passive investment 

8 income’ shall not include gross receipts for the 

9 taxable year which are derived directly from the 

10 active and regular conduct of a lending or fi11 nance business (as defined in section 

12 542(d)(1)). 

13 ‘‘(D) TREATMENT OF CERTAIN DIVI14 DENDS.—If an S corporation holds stock in a 

15 C corporation meeting the requirements of sec16 tion 1504(a)(2), the term ‘passive investment 

17 income’ shall not include dividends from such C 

18 corporation to the extent such dividends are at19 tributable to the earnings and profits of such C 

20 corporation derived from the active conduct of 

21 a trade or business. 

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

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

24 or a depository institution holding company (as 

25 defined in section 3(w)(1) of the Federal DeVerDate Sep 11 2014 21:01 Jul 23, 2019 Jkt 089200 PO 00000 Frm 00003 Fmt 6652 Sfmt 6201 E:\BILLS\S2156.IS S2156

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1 posit Insurance Act (12 U.S.C. 1813(w)(1))), 

2 the term ‘passive investment income’ shall not 

3 include— 

4 ‘‘(i) interest income earned by such 

5 bank or company, or 

6 ‘‘(ii) dividends on assets required to 

7 be held by such bank or company, includ8 ing stock in the Federal Reserve Bank, the 

9 Federal Home Loan Bank, or the Federal 

10 Agricultural Mortgage Bank or participa11 tion certificates issued by a Federal Inter12 mediate Credit Bank. 

13 ‘‘(F) GROSS RECEIPTS FROM THE SALES

14 OF CERTAIN ASSETS.—For purposes of this 

15 paragraph— 

16 ‘‘(i) CAPITAL ASSETS OTHER THAN

17 STOCK AND SECURITIES.—In the case of 

18 dispositions of capital assets (other than 

19 stock and securities), gross receipts from 

20 such dispositions shall be taken into ac21 count only to the extent of capital gain net 

22 income therefrom. 

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

24 case of sales or exchanges of stock or secu25 rities, gross receipts shall be taken into acVerDate Sep 11 2014 21:01 Jul 23, 2019 Jkt 089200 PO 00000 Frm 00004 Fmt 6652 Sfmt 6201 E:\BILLS\S2156.IS S2156

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1 count only to the extent of the gain there2 from. 

3 ‘‘(G) COORDINATION WITH SECTION

4 1374.—The amount of passive investment in5 come shall be determined by not taking into ac6 count any recognized built-in gain or loss of the 

7 S corporation for any taxable year in the rec8 ognition period. Terms used in the preceding 

9 sentence shall have the same respective mean10 ings as when used in section 1374.’’. 

11 (2)(A) Section 26(b)(2)(J) is amended by strik12 ing ‘‘25 percent’’ and inserting ‘‘60 percent’’. 

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

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

15 (C) The heading for section 1375 is amended 

16 by striking ‘‘25 PERCENT’’ and inserting ‘‘60 PER17 CENT’’. 

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

19 table of sections for part III of subchapter S of 

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

21 inserting ‘‘60 percent’’. 

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

23 striking ‘‘section 1362(d)(3)(C)’’ and inserting ‘‘sec24 tion 1375(b)(3)’’. 


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1 (4) Section 1362(f)(1)(B) is amended by strik2 ing ‘‘paragraph (2) or (3) of subsection (d)’’ and in3 serting ‘‘subsection (d)(2)’’. 

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

5 this section shall apply to taxable years beginning after 

6 December 31, 2019. 

7 SEC. 3. EXPANSION OF S CORPORATION ELIGIBLE SHARE8 HOLDERS TO INCLUDE IRAS. 

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

10 amended to read as follows: 

11 ‘‘(vi) A trust which constitutes an in12 dividual retirement account under section 

13 408(a), including one designated as a Roth 

14 IRA under section 408A.’’. 

15 (b) SALE OF STOCK IN IRA RELATING TO S COR16 PORATION ELECTION EXEMPT FROM PROHIBITED

17 TRANSACTION RULES.—Section 4975(d)(16) is amend18 ed— 

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

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

21 (F) as subparagraphs (A), (B), (C), and (D), respec22 tively, and 

23 (2) by striking ‘‘such bank or company’’ in sub24 paragraph (A) (as so redesignated) and inserting 

25 ‘‘the issuer of such stock’’. 


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

2 this section shall take effect on January 1, 2020. 

3 SEC. 4. TREATMENT OF S CORPORATION BUILT-IN GAIN 

4 AMOUNT UPON DEATH OF SHAREHOLDER. 

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

6 1 is amended by adding at the end the following: 

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

8 UPON DEATH OF SHAREHOLDER. 

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

10 electing S corporation the basis of which is determined 

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

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

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

14 amount of such deduction for any taxable year shall be 

15 determined by amortizing the S corporation built-in gain 

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

17 which includes the applicable valuation date. 

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

19 For purposes of this section, the term ‘S corporation built20 in gain amount’ means the lesser of— 

21 ‘‘(1) the excess (if any) of— 

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

23 subsection (a) as determined under section 

24 1014(a), over 


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1 ‘‘(B) the adjusted basis of such stock im2 mediately before the death of the decedent, or 

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

4 applicable valuation date) of— 

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

6 property held by the S corporation which is of 

7 a character subject to depreciation or amortiza8 tion, over 

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

10 such property held by the S corporation as of 

11 such date. 

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

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

14 respect to any shareholder, any S corporation which elects 

15 the application of this section with respect to such share16 holder at such time and in such form and manner as the 

17 Secretary may prescribe. 

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

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

20 means— 

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

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

23 application of section 2032, the date 6 months after 

24 the decedent’s death, and 


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

2 of the decedent’s death. 

3 ‘‘(e) ACCELERATED DEDUCTION IN CASE OF DIS4 POSITION OF S CORPORATION PROPERTY.— 

5 ‘‘(1) IN GENERAL.—If the electing S corpora6 tion disposes of any property which was taken into 

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

8 allowed under subsection (a) with respect to any 

9 stock, for the taxable year of the shareholder in 

10 which or with which the taxable year of the S cor11 poration which includes the date of such disposition 

12 ends, shall (except as otherwise provided in this sec13 tion) not be less than the lesser of— 

14 ‘‘(A) the pro rata share of the gain recog15 nized on such disposition, or 

16 ‘‘(B) the amount determined under sub17 section (b)(2) by only taking into account such 

18 property. 

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

20 No deduction shall be allowed under subsection (a) 

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

22 extent that such deduction (when added to the de23 ductions so allowed for all prior taxable years) ex24 ceeds the S corporation built-in gain amount with 

25 respect to such stock. 


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1 ‘‘(f) RECHARACTERIZATION OF GAINS AS ORDINARY

2 INCOME TO EXTENT OF DEDUCTION.—If— 

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

4 which a deduction was allowed under this section, or 

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

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

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

8 whether or not such gain is recognized and reduced by 

9 any amount of gain which is treated as ordinary income 

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

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

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

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

14 recognized notwithstanding any other provision of this 

15 subtitle) to the extent of the excess of the aggregate de16 ductions allowable under this section with respect to such 

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

18 taxable years over the amounts taken into account under 

19 this subsection for all prior taxable years. 

20 ‘‘(g) TERMINATION OF AMORTIZATION.—No deduc21 tion shall be allowed under subsection (a) with respect to 

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

23 period beginning after the earlier of— 

24 ‘‘(1) the date on which the corporation’s elec25 tion under section 1362 terminates, or 


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1 ‘‘(2) the date on which the shareholder trans2 fers such stock to any other person. 

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

4 ‘‘(1) DISTRIBUTIONS FROM ESTATES OR

5 TRUSTS.—Notwithstanding any other provision of 

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

7 from an estate or trust to a beneficiary, the bene8 ficiary (and not the estate or trust) shall be treated 

9 as the shareholder to which this section applies with 

10 respect to periods after such distribution. 

11 ‘‘(2) CERTAIN TRANSFERS INVOLVING

12 SPOUSES.—Notwithstanding any other provision of 

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

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

15 shall be treated as the shareholder to which this sec16 tion applies with respect to periods after such trans17 fer. 

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

19 DECEDENT.— 

20 ‘‘(1) ADJUSTMENT TO BUILT-IN GAIN OF PROP21 ERTY HELD BY S CORPORATION.—For purposes of 

22 subsection (b)(2), the fair market value of any prop23 erty taken into account under subparagraph (A) 

24 thereof shall be decreased by any amount of income 

25 in respect of the decedent with respect to such propVerDate Sep 11 2014 21:01 Jul 23, 2019 Jkt 089200 PO 00000 Frm 00011 Fmt 6652 Sfmt 6201 E:\BILLS\S2156.IS S2156

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1 erty to which section 691 applies. For purposes of 

2 subsection (e)(1)(A), the gain recognized on the dis3 position of such property shall be reduced by such 

4 amount. 

5 ‘‘(2) ADJUSTMENT TO BASIS OF S CORPORA6 TION STOCK.—For adjustment to basis of S corpora7 tion stock, see section 1367(b)(4)(B). 

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

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

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

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

12 rata share determined under such subsection shall be fur13 nished to the shareholder under section 6037(b).’’. 

14 (b) ADJUSTMENT TO BASIS OF STOCK.— 

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

16 amended by striking ‘‘and’’ at the end of subpara17 graph (D), by striking the period at the end of sub18 paragraph (E) and inserting ‘‘, and’’, and by insert19 ing after subparagraph (E) the following new sub20 paragraph: 

21 ‘‘(F) the amount of the shareholder’s de22 duction allowable under section 1369.’’. 

23 (2) ADJUSTMENT NOT TAKEN INTO ACCOUNT

24 IN DETERMINING TREATMENT OF DISTRIBUTIONS.— 

25 Section 1368 is amended— 


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

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

3 after ‘‘section 1367’’, and 

4 (B) in subsection (e)(1)(A)— 

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

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

7 phrase’’, and 

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

9 shall be made under section 

10 1367(a)(2)(F)’’ after ‘‘section 1367(a)(2)’’. 

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

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

13 adding at the end the following new item: 

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

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

15 this section shall apply with respect to decedents dying 

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

17 years ending after such date. 

18 SEC. 5. REVOCATIONS OF S CORPORATION ELECTIONS. 

19 (a) REVOCATIONS.—Paragraph (1) of section 

20 1362(d) is amended— 

21 (1) by striking ‘‘subparagraph (D)’’ in subpara22 graph (C) and inserting ‘‘subparagraphs (D) and 

23 (E)’’, and 

24 (2) by adding at the end the following new sub25 paragraph: 


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1 ‘‘(E) AUTHORITY TO TREAT LATE REVOCA2 TIONS AS TIMELY.—If— 

3 ‘‘(i) a revocation under subparagraph 

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

5 date prescribed by this paragraph for mak6 ing such revocation for such taxable year 

7 or no such revocation is made for any tax8 able year, and 

9 ‘‘(ii) the Secretary determines that 

10 there was reasonable cause for the failure 

11 to timely make such revocation, 

12 the Secretary may treat such a revocation as 

13 timely made for such taxable year.’’. 

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

15 this section shall apply to revocations after December 31, 

16 2019. 

Æ 


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