I 
108TH CONGRESS 
2D SESSION 
H. R. 4137 
To amend the Internal Revenue Code of 1986 to provide for unified income 
taxation with respect to pass-thru entities. 
IN THE HOUSE OF REPRESENTATIVES 
APRIL 2, 2004 
Mr. HOUGHTON 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 
for unified income taxation with respect to pass-thru entities. 
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 ‘‘Small Business Tax Mod-
ernization Act of 2004’’. 
SEC. 2. UNIFIED PASS-THRU ENTITY REGIME. 
(a) TERMINATION OF S CORPORATION STATUS.— 
(1) NO
NEW
S
CORPORATION
ELECTIONS.— 
Subsection (a) of section 1362 of the Internal Rev-
enue Code of 1986 is amended by adding at the end 
the following new paragraph: 
‘‘(3) TERMINATION
OF
AUTHORITY
TO
MAKE 
ELECTION.—No election may be made under para-
graph (1) for any taxable year beginning after De-
cember 31, 2004.’’. 
(2) TERMINATION OF STATUS.—Subsection (d) 
of section 1362 of such Code (relating to termi-
nation) is amended by adding at the end the fol-
lowing new paragraph: 
‘‘(4) TREATMENT
AS
PARTNERSHIP
AFTER 
2014.—An election under subsection (a)— 
‘‘(A) shall not be effective for any taxable 
year beginning after December 31, 2014, and 
‘‘(B) shall be treated as an election under 
section 7701(a)(2)(B) for taxable years begin-
ning after such date.’’. 
(3) EFFECTIVE DATE.—The amendments made 
by this subsection shall apply to taxable years begin-
ning after December 31, 2004. 
(b) ELECTION BY CERTAIN CORPORATIONS TO BE 
TAXED AS PARTNERSHIP.— 
(1) IN
GENERAL.—Paragraph (2) of section 
7701(a) of such Code (defining partnership and 
partner) is amended to read as follows:
defined in section 1374(d)(7) without 
regard to subparagraph (B) thereof), 
section 1374 shall apply to the entity 
after such election. 
‘‘(iii) ELIGIBLE
CORPORATION.—For 
purposes of clause (i), the term ‘eligible 
corporation’ means an entity— 
‘‘(I) which, without regard to this 
subparagraph, is a domestic corpora-
tion no stock of which is readily 
tradable on an established securities 
market or otherwise, and 
‘‘(II) which is not an ineligible 
corporation (as defined by section 
1361(b)(2)). 
‘‘(iv) ELECTION AND TERMINATION.— 
For purposes of this subparagraph, rules 
similar to the rules of section 1362 (other 
than subsections (a)(3), (d)(3) and (4), 
and (e) thereof) shall apply. 
‘‘(v) 
DISTRIBUTIONS, 
ETC.—Each 
partner shall include in gross income as a 
dividend, any amount that would have been 
so includible had the entity been an S cor-
poration during the period the entity was
treated as a partnership. Notwithstanding 
the preceding sentence, the provisions of 
subchapter K of chapter 1 shall apply to 
determine the basis of any property dis-
tributed and the basis of any interest in 
the partnership. 
‘‘(vi) CROSS
REFERENCE.—For tax 
treatment of S corporation electing unified 
pass-thru regime, see section 1379A.’’. 
(2) TAX
TREATMENT
OF
S
CORPORATION 
ELECTING UNIFIED PASS-THRU REGIME.— 
(A) IN GENERAL.—Part IV of subchapter 
S of chapter 1 of such Code is amended by in-
serting after section 1379 the following new 
section: 
‘‘SEC. 1379A. TAX TREATMENT OF S CORPORATION ELECT-
ING UNIFIED PASS-THRU REGIME. 
‘‘In 
the 
case 
of 
an 
election 
under 
section 
7701(a)(2)(B) by an S corporation before January 1, 
2015, with respect to the corporation— 
‘‘(1) the shareholders shall be treated as if the 
assets were distributed, on the date of such election, 
to the shareholders in exchange for their stock, 
‘‘(2) any gain or loss recognized to the share-
holders by reason of paragraph (1) shall be taken
into account by the shareholders ratably over the 
taxable year in which the distribution is deemed to 
be made under paragraph (1) and the succeeding 4 
taxable years, and 
‘‘(3) proper adjustments to the basis of inter-
ests in the entity shall be made.’’. 
(B) CLERICAL AMENDMENT.—The table of 
sections for part IV of subchapter S of chapter 
1 of such Code is amended by inserting after 
the item relating to section 1379 the following 
new item: 
‘‘Sec. 1379A. Tax treatment of S corporation electing unified pass-thru re-
gime.’’. 
(3) MODIFICATION TO TREATMENT OF SECTION 
1374 TAX FOR EARNINGS AND PROFITS PURPOSES.— 
Paragraph (2) of section 1366(f) of such Code is 
amended to read as follows: 
‘‘(2) TREATMENT OF TAX IMPOSED ON BUILT- 
IN GAINS.— 
‘‘(A) IN
GENERAL.—The amount of the 
items of the net recognized built-in gain taken 
into account under section 1374(b)(1) (reduced 
by 
any 
deduction 
allowed 
under 
section 
1374(b)(2)) shall not be taken into account 
under this section.
‘‘(B) EARNINGS AND PROFITS.—The accu-
mulated earnings and profits of the corporation 
shall be increased at the beginning of the tax-
able year by the amount not taken into account 
under this section by reason of subparagraph 
(A) (determined without regard to section 
1374(b)(2)) reduced by the tax imposed by sec-
tion 1374 (net of credits allowed).’’. 
(4) EFFECT
OF
ELECTION
ON
RECOGNITION 
PERIOD FOR PURPOSES OF TAX IMPOSED ON BUILT- 
IN
GAINS.—Paragraph (7) of section 1374(d) of 
such Code is amended to read as follows: 
‘‘(7) RECOGNITION PERIOD.— 
‘‘(A) IN GENERAL.—The term ‘recognition 
period’ means the 10-year period beginning 
with the 1st day of the 1st taxable year for 
which the corporation was an S corporation. 
For purposes of applying this section to any 
amount includible in income by reason of sec-
tion 593(e), the preceding sentence shall be ap-
plied without regard to the phrase ‘10-year’. 
‘‘(B) SPECIAL RULE RELATING TO ELEC-
TION OF CORPORATION TO BE TAXED AS PART-
NERSHIP.—
‘‘(i) IN GENERAL.—In the case of an 
election under section 7701(a)(2)(B), sub-
paragraph (A) shall be applied by sub-
stituting ‘25-year’ for ‘10-year’ both places 
it appears. 
‘‘(ii) EXCEPTION WHERE 10-YEAR PE-
RIOD EXPIRED.—If, on the date of an elec-
tion referred to in clause (i) by a corpora-
tion, the 10-year period specified in sub-
paragraph (A) with respect to such cor-
poration has expired, clause (i) shall not 
apply to such corporation.’’. 
(5) 
EFFECTIVE
DATES.—The 
amendments 
made by this subsection shall apply to taxable years 
beginning after December 31, 2004. 
(c) STEP TRANSACTION DOCTRINE NOT TO APPLY 
TO PARTNERSHIP INCORPORATION FOLLOWED BY COR-
PORATE REORGANIZATION.— 
(1) IN GENERAL.—Section 351 of such Code is 
amended by redesignating subsection (h) as sub-
section (i) and by inserting after subsection (g) the 
following new subsection: 
‘‘(h) SPECIAL RULE FOR PARTNERSHIPS WHICH IN-
CORPORATE
AND
SUBSEQUENTLY
REORGANIZE.—The 
step transaction doctrine and any similar doctrine shall
not apply for purposes of determining whether the control 
requirement of subsection (a) is met in any case in 
which— 
‘‘(1) a partnership engaged in an active trade 
or business transfers substantially all of the property 
used in carrying on such trade or business to a cor-
poration which is not publicly traded, and 
‘‘(2) such corporation subsequently enters into 
a reorganization under this chapter.’’. 
(2) EFFECTIVE DATE.—The amendment made 
by this subsection shall apply to transactions after 
December 31, 2004. 
SEC. 3. PARTNERSHIP INCOME ATTRIBUTABLE TO CAPITAL 
EXCLUDED 
FROM 
NET 
EARNINGS 
FROM 
SELF-EMPLOYMENT. 
(a) IN
GENERAL.—Paragraph (13) of section 
1402(a) of the Internal Revenue Code of 1986 is amended 
to read as follows: 
‘‘(13) there shall be excluded the distributive 
share of net income of a partner attributable to cap-
ital;’’. 
(b) PARTNERSHIP INCOME ATTRIBUTABLE TO CAP-
ITAL.—Section 1402 of such Code is amended by adding 
at the end the following new subsection: