I 
108TH CONGRESS 
1ST SESSION H. R. 1791
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 
APRIL 11, 2003
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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