II

106TH CONGRESS

1ST SESSION S. 1904

To amend the Internal Revenue Code of 1986 to provide for an election

for special tax treatment of certain S corporation conversions.

IN THE SENATE OF THE UNITED STATES

NOVEMBER 10, 1999

Mr. THOMAS (for himself and Mr. ENZI) 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 an election for 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. ELECTION FOR SPECIAL TAX TREATMENT OF

4 CERTAIN S CORPORATION CONVERSIONS.

5 (a) IN GENERAL.—A qualified electing S corporation

6 may elect the special tax treatment provided in subsection

7 (b) for an eligible corporate conversion in the manner set

8 forth in subsection (e).

9 (b) SPECIAL TAX TREATMENT.—
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•S 1904 IS

1 (1) TRANSFERS TO PARTNERSHIP.—In the case

2 of transfers by a qualified electing S corporation to

3 a partnership in connection with an eligible cor4 porate conversion, no gain or loss shall be recognized

5 by shareholders of such corporation with respect to

6 money or property received by the partnership.

7 (2) OTHER TRANSFERS.—All other distribu8 tions of money or property by the qualified electing

9 S corporation shall be treated as a distribution in

10 part or full payment in exchange for the stock of

11 such corporation.

12 (c) QUALIFIED ELECTING S CORPORATION.—For

13 purposes of this section, the term ‘‘qualified electing S cor14 poration’’ means a domestic corporation which—

15 (A) has had a valid S election continuously

16 in effect for all taxable years of the corporation

17 beginning on or after January 1, 1990, and

18 (B) has never made an election under this

19 section.

20 (d) ELIGIBLE CORPORATE CONVERSION.—For pur21 poses of this section—

22 (1) IN GENERAL.—The term ‘‘eligible corporate

23 conversion’’ means (however effected)—

24 (A) a transfer by a qualified electing S cor25 poration of substantially all of its assets to a
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•S 1904 IS

1 partnership (as defined in section 7701(a)(2) of

2 the Internal Revenue Code of 1986) for not less

3 than 80 percent of the capital and profits of the

4 partnership in any taxable year of the corpora5 tion ending on or before December 31, 2005,

6 (B) the meeting of the requirement de7 scribed in paragraph (2) by the partnership,

8 and

9 (C) the subsequent liquidation and dissolu10 tion of the qualified S corporation within the

11 same taxable year as the transfer.

12 (2) CONTINUITY OF BUSINESS REQUIRE13 MENT.—

14 (A) IN GENERAL.—The requirement de15 scribed in this paragraph is met if the partner16 ship described in paragraph (1)(A) either—

17 (i) maintains the continuity of the

18 qualified electing S corporation’s business

19 for 5 consecutive taxable years following

20 the year in which the corporate conversion

21 occurs, or

22 (ii) pays a corporate conversion recap23 ture tax in the taxable year in which the

24 failure to maintain such continuity first oc25 curs.
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•S 1904 IS

1 (B) CONTINUITY OF THE QUALIFIED

2 ELECTING S CORPORATION’S BUSINESS.—For

3 purposes of subparagraph (A)(i), the term

4 ‘‘continuity of the qualified electing S corpora5 tion’s business’’ means, under all the facts and

6 circumstances, either—

7 (i) the continuation of 1 or more of

8 the S corporation’s historic lines of busi9 ness, or

10 (ii) the use of a significant portion of

11 the S corporation’s historic business assets,

12 whether or not such assets have a taxable

13 basis, in the conduct of an active trade or

14 business.

15 (C) CORPORATE CONVERSION RECAPTURE

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

17 the term ‘‘corporate conversion recapture tax’’

18 means—

19 (i) a recomputation of the tax under

20 subtitle A of the Internal Revenue Code of

21 1986 of the partnership and the partners

22 as if—

23 (I) the partnership were an S

24 corporation,
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•S 1904 IS

1 (II) the stock of such S corpora2 tion was owned in the same manner

3 as the capital of the partnership, and

4 (III) the S corporation were dis5 solved and its assets distributed to its

6 shareholders in complete liquidation

7 on the last day of the taxable year,

8 multiplied by

9 (ii) a fraction—

10 (I) the numerator of which is the

11 excess (if any) of 5 over the number

12 of complete taxable years in which the

13 partnership maintains continuity of

14 the qualified electing S corporation’s

15 business, and

16 (II) the denominator of which is

17 5.

18 (d) BASIS RULES.—In the case of an eligible cor19 porate conversion, property in the hands of the partner20 ship shall have the same basis as in the hands of the quali21 fied electing S corporation immediately prior to the eligible

22 corporate conversion.

23 (e) METHOD OF MAKING ELECTION.—In order to

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

25 for an eligible corporate conversion, the qualified electing
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•S 1904 IS

1 S corporation shall file a written election claiming such

2 treatment with the timely-filed information return of the

3 S corporation for the taxable year in which the eligible

4 corporate conversion occurs.

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