I 
116TH CONGRESS 
2D SESSION 
H. R. 5643 
To amend the Internal Revenue Code of 1986 to provide for S corporation 
reform, and for other purposes. 
IN THE HOUSE OF REPRESENTATIVES 
JANUARY 16, 2020 
Mr. KIND (for himself and Mr. WENSTRUP) 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 S corporation reform, and for other purposes. 
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled, 
SECTION 1. SHORT TITLE; REFERENCE. 
(a) SHORT TITLE.—This Act may be cited as the ‘‘S 
Corporation Modernization Act of 2020’’. 
(b) AMENDMENT OF 1986 CODE.—Except as other-
wise expressly provided, whenever in this Act an amend-
ment or repeal is expressed in terms of an amendment 
to, or repeal of, a section or other provision, the reference 
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shall be considered to be made to a section or other provi-
sion of the Internal Revenue Code of 1986. 
SEC. 2. MODIFICATIONS TO S CORPORATION PASSIVE IN-
VESTMENT INCOME RULES. 
(a) 
INCREASED
PERCENTAGE
LIMIT.—Section 
1375(a)(2) is amended by striking ‘‘25 percent’’ and in-
serting ‘‘60 percent’’. 
(b) REPEAL OF EXCESSIVE PASSIVE INCOME AS A 
TERMINATION EVENT.—Section 1362(d) is amended by 
striking paragraph (3). 
(c) CONFORMING AMENDMENTS.— 
(1) Section 1375(b) is amended by striking 
paragraphs (3) and (4) and inserting the following 
new paragraph: 
‘‘(3) 
PASSIVE
INVESTMENT
INCOME
DE-
FINED.— 
‘‘(A) IN GENERAL.—Except as otherwise 
provided in this paragraph, the term ‘passive 
investment income’ means gross receipts de-
rived from royalties, rents, dividends, interest, 
and annuities. 
‘‘(B) 
EXCEPTION
FOR
INTEREST
ON 
NOTES FROM SALES OF INVENTORY.—The term 
‘passive investment income’ shall not include in-
terest on any obligation acquired in the ordi-
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nary course of the corporation’s trade or busi-
ness from its sale of property described in sec-
tion 1221(a)(1). 
‘‘(C) TREATMENT
OF
CERTAIN
LENDING 
OR FINANCE COMPANIES.—If the S corporation 
meets the requirements of section 542(c)(6) for 
the taxable year, the term ‘passive investment 
income’ shall not include gross receipts for the 
taxable year which are derived directly from the 
active and regular conduct of a lending or fi-
nance 
business 
(as 
defined 
in 
section 
542(d)(1)). 
‘‘(D) TREATMENT
OF
CERTAIN
DIVI-
DENDS.—If an S corporation holds stock in a 
C corporation meeting the requirements of sec-
tion 1504(a)(2), the term ‘passive investment 
income’ shall not include dividends from such C 
corporation to the extent such dividends are at-
tributable to the earnings and profits of such C 
corporation derived from the active conduct of 
a trade or business. 
‘‘(E) EXCEPTION
FOR
BANKS, ETC.—In 
the case of a bank (as defined in section 581) 
or a depository institution holding company (as 
defined in section 3(w)(1) of the Federal De-
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