I
107TH CONGRESS
2D SESSION
H. R. 4675
To amend the Internal Revenue Code of 1986 to provide that the tax on
recognized built-in gain of an S corporation shall not apply to amounts
reinvested in the business.
IN THE HOUSE OF REPRESENTATIVES
MAY 7, 2002
Mr. RAMSTAD (for himself, Mr. CRANE, Mr. HERGER, Mr. SAM JOHNSON of
Texas, Mr. ENGLISH, Mr. MCINNIS, Mr. FOLEY, and Mr. BRADY of
Texas) 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
that the tax on recognized built-in gain of an S corpora-
tion shall not apply to amounts reinvested in the busi-
ness.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Small Business Oppor-
tunity and Growth Act of 2002’’.
SEC. 2. EXCEPTION FROM TAX ON RECOGNIZED BUILT-IN
GAIN OF S CORPORATIONS.
(a) IN GENERAL.—Section 1374 of the Internal Rev-
enue Code of 1986 (relating to tax imposed on certain
built-in gains) is amended by redesignating subsection (e)
as subsection (f) and by inserting after subsection (d) the
following new subsection:
‘‘(e) EXCEPTION FOR REINVESTED AMOUNTS.—
‘‘(1) IN GENERAL.—If an existing S corporation
has a net recognized built-in gain for any taxable
year in the recognition period and elects the applica-
tion of this subsection—
‘‘(A) the tax (if any) imposed by sub-
section (a) on such gain shall not be imposed
until the second succeeding taxable year, and
‘‘(B) the amount of such gain on which tax
is imposed by subsection (a) for such second
succeeding taxable year shall not exceed the
amount equal to the excess of—
‘‘(i) the amount realized on the dis-
position of those assets that resulted in
such gain, over
‘‘(ii) the excess of—
‘‘(I) the aggregate qualified ex-
penditures made by the S corporation
during the nonrecognition period, over
‘‘(II) the portion (if any) of such
expenditures previously taken into ac-
count under this subsection.
‘‘(2) QUALIFIED
EXPENDITURES.—For pur-
poses of this subsection, the term ‘qualified expendi-
tures’ means—
‘‘(A) amounts chargeable to capital ac-
count for property used in a trade or business
of the S corporation,
‘‘(B) payments of principal and interest on
pre-effective date debt of the S corporation, and
‘‘(C) amounts distributed to shareholders
to the extent such amounts do not exceed the
aggregate of such shareholders’ tax imposed by
this chapter (and State and local taxes) on
amounts attributable to the disposition of those
assets that resulted in such net recognized
built-in gain.
Payments of principal as part of a refinancing of
pre-effective date debt shall not be taken into ac-
count under subparagraph (B).
‘‘(3) NONRECOGNITION PERIOD.—For purposes
of this subsection, the term ‘nonrecognition period’
means, with respect to a taxable year for which an
S corporation has a net recognized built-in gain,
such taxable year and the first and second suc-
ceeding taxable years.
‘‘(4) PRE-EFFECTIVE
DATE
DEBT.—For pur-
poses of paragraph (2)(B), the term ‘pre-effective
date debt’ means—
‘‘(A) debt incurred before the date of the
enactment of this paragraph, and
‘‘(B) debt incurred on or after such date to
refinance debt described in subparagraph (A)
(or refinanced indebtedness meeting the re-
quirements of this subparagraph) to the extent
that (immediately after the refinancing) the
principal amount of the indebtedness resulting
from the refinancing does not exceed the prin-
cipal amount of the refinanced indebtedness
(immediately before the refinancing).
‘‘(5) ANTI-ABUSE RULE.—Solely for purposes of
determining the treatment of distributions to share-
holders under section 1368 during the recognition
period—
‘‘(A) any increase in the accumulated ad-
justment account and shareholder basis by rea-
son of the disposition of those assets that re-
sulted in the net recognized built-in gain shall
not exceed the amounts described in paragraph
(2)(C), and
‘‘(B) any increase in such account and
shareholder basis which is not permitted under
subparagraph (A) shall occur immediately after
the recognition period.
‘‘(6) EXISTING S CORPORATION.—The term ‘ex-
isting S corporation’ means any S corporation for
which an election under section 1362 is filed before
May 7, 2002.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years beginning after
the date of the enactment of this Act.
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