I
107TH CONGRESS
1ST SESSION
H. R. 2337
To amend the Internal Revenue Code of 1986 to provide an election for
a special tax treatment of certain S corporation conversions.
IN THE HOUSE OF REPRESENTATIVES
JUNE 27, 2001
Mrs. CUBIN (for herself and Mr. MCINNIS) 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
an election for a special tax treatment of certain S
corporation conversions.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. ELECTION FOR SPECIAL TAX TREATMENT OF
CERTAIN S CORPORATION CONVERSIONS.
(a) IN GENERAL.—Part I of subchapter S of chapter
1 of the Internal Revenue Code of 1986 (relating to tax
treatment of S corporations and their shareholders) is
amended by adding at the end the following new section:
‘‘SEC. 1364. ELECTION FOR SPECIAL TAX TREATMENT OF
CERTAIN S CORPORATION CONVERSIONS.
‘‘(a) IN GENERAL.—A qualified electing S corpora-
tion may elect the special tax treatment provided in sub-
section (b) for an eligible corporate conversion in the man-
ner set forth in subsection (e).
‘‘(b) SPECIAL TAX TREATMENT.—
‘‘(1) TRANSFERS
TO
PARTNERSHIP.—In the
case of transfers by a qualified electing S corpora-
tion to a partnership in connection with an eligible
corporate conversion, no gain or loss shall be recog-
nized by shareholders of such corporation with re-
spect to money or property received by the partner-
ship.
‘‘(2) OTHER TRANSFERS.—All other distribu-
tions of money or property by the qualified electing
S corporation shall be treated as a distribution in
part or full payment in exchange for the stock of
such corporation.
‘‘(c) QUALIFIED ELECTING S CORPORATION.—For
purposes of this section, the term ‘qualified electing S cor-
poration’ means a domestic corporation which—
‘‘(1) has had a valid S election continuously in
effect for the 10 taxable years of the corporation
ending before the taxable year in which the election
under this section is made, and
‘‘(2) has never made an election under this sec-
tion.
‘‘(d) ELIGIBLE CORPORATE CONVERSION.—For pur-
poses of this section—
‘‘(1) IN
GENERAL.—The term ‘eligible cor-
porate conversion’ means (however effected)—
‘‘(A) a transfer by a qualified electing S
corporation of substantially all of its assets to
a partnership (as defined in section 7701(a)(2))
for not less than 80 percent of the capital and
profits of the partnership in any taxable year of
the corporation ending on or before December
31, 2007,
‘‘(B) the meeting of the requirement de-
scribed in paragraph (2) by the partnership,
and
‘‘(C) the subsequent liquidation and dis-
solution of the qualified S corporation within
the same taxable year as the transfer.
‘‘(2) CONTINUITY
OF
BUSINESS
REQUIRE-
MENT.—
‘‘(A) IN GENERAL.—The requirement de-
scribed in this paragraph is met if the partner-
ship described in paragraph (1)(A) either—
‘‘(i) maintains the continuity of the
qualified electing S corporation’s business
for 5 consecutive taxable years following
the year in which the corporate conversion
occurs, or
‘‘(ii) pays a corporate conversion re-
capture tax in the taxable year in which
the failure to maintain such continuity
first occurs.
‘‘(B) CONTINUITY
OF
THE
QUALIFIED
ELECTING
S
CORPORATION’S
BUSINESS.—For
purposes of subparagraph (A)(i), the term ‘con-
tinuity of the qualified electing S corporation’s
business’ means, under all the facts and cir-
cumstances, either—
‘‘(i) the continuation of 1 or more of
the S corporation’s historic lines of busi-
ness, or
‘‘(ii) the use of a significant portion of
the S corporation’s historic business assets,
whether or not such assets have a taxable
basis, in the conduct of an active trade or
business.
‘‘(C) CORPORATE CONVERSION RECAPTURE
TAX.—For purposes of subparagraph (A)(ii),
the term ‘corporate conversion recapture tax’
means—
‘‘(i) a recomputation of the tax under
this subtitle of the partnership and the
partners as if—
‘‘(I) the partnership were an S
corporation,
‘‘(II) the stock of such S corpora-
tion was owned in the same manner
as the capital of the partnership, and
‘‘(III) the S corporation were dis-
solved and its assets distributed to its
shareholders in complete liquidation
on the last day of the taxable year,
multiplied by
‘‘(ii) a fraction—
‘‘(I) the numerator of which is
the excess (if any) of 5 over the num-
ber of complete taxable years in which
the partnership maintains continuity
of the qualified electing S corpora-
tion’s business, and
‘‘(II) the denominator of which
is 5.
‘‘(d) BASIS RULES.—In the case of an eligible cor-
porate conversion, property in the hands of the partner-
ship shall have the same basis as in the hands of the quali-
fied electing S corporation immediately prior to the eligible
corporate conversion.
‘‘(e) METHOD OF MAKING ELECTION.—In order to
elect the special tax treatment provided in subsection (b)
for an eligible corporate conversion, the qualified electing
S corporation shall file a written election claiming such
treatment with the timely-filed information return of the
S corporation for the taxable year in which the eligible
corporate conversion occurs.’’
(b) CLERICAL AMENDMENT.—The table of sections
for such part I is amended by adding at the end the fol-
lowing new item:
‘‘Sec. 1364. Election for special tax treatment of certain s cor-
poration conversions.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years ending after the
date of the enactment of this Act.
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