I 
110TH CONGRESS 
1ST SESSION H. R. 4840 
To amend the Internal Revenue Code of 1986 to provide for S corporation 
reform, and for other purposes. 
IN THE HOUSE OF REPRESENTATIVES 
DECEMBER 19, 2007 
Mr. KIND (for himself, Mr. RAMSTAD, Mrs. JONES of Ohio, Mr. ENGLISH of 
Pennsylvania, Ms. SCHWARTZ, Mr. SAM JOHNSON of Texas, and Mr. 
KAGEN) introduced the following bill; which was referred to the Com-
mittee 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 2007’’. 
(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. REDUCED RECOGNITION PERIOD FOR BUILT-IN 
GAINS. 
(a) IN GENERAL.—Paragraph (7) of section 1374(d) 
(relating to definitions and special rules) is amended as 
follows: 
‘‘(7) RECOGNITION
PERIOD.—The term ‘rec-
ognition period’ means the 7-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 distributions to shareholders 
pursuant to section 593(e), the preceding sentence 
shall be applied without regard to the duration of 
the recognition period in effect on the date of such 
distribution.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section— 
(1) shall apply for purposes of determining the 
recognition period with respect to 1st days referred 
to in section 1374(d)(7) of the Internal Revenue 
Code of 1986 occurring before, on, or after the date 
of the enactment of this Act, but 
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(2) shall not apply for purposes of determining 
the tax imposed by section 1374 of such Code for 
taxable years ending before such date. 
SEC. 3. EXPANSION OF QUALIFYING BENEFICIARIES OF AN 
ELECTING SMALL BUSINESS TRUST. 
(a) NO LOOK THROUGH
FOR ELIGIBILITY PUR-
POSES.—Clause (v) of section 1361(c)(2)(B) (relating to 
treatment as shareholders) is amended by adding at the 
end the following new sentence: ‘‘This clause shall not 
apply for purposes of subsection (b)(1)(C).’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall take effect on the date of the enactment 
of this Act. 
SEC. 4. REPEAL OF EXCESSIVE PASSIVE INVESTMENT IN-
COME AS A TERMINATION EVENT. 
(a) IN GENERAL.—Section 1362(d) (relating to ter-
mination) is amended by striking paragraph (3). 
(b) CONFORMING AMENDMENTS.— 
(1) Section 1362(f)(1) is amended by striking 
‘‘or (3)’’. 
(2) Clause (i) of section 1042(c)(4)(A) is 
amended by striking ‘‘section 1362(d)(3)(C)’’ and 
inserting ‘‘section 1375(b)(3)’’. 
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(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2007. 
SEC. 5. MODIFICATIONS TO PASSIVE INCOME RULES. 
(a) INCREASED LIMIT.— 
(1) IN
GENERAL.—Paragraph (2) of section 
1375(a) (relating to tax imposed when passive in-
vestment income of corporation having accumulated 
earnings and profits exceeds 25 percent of gross re-
ceipts) is amended by striking ‘‘25 percent’’ and in-
serting ‘‘60 percent’’. 
(2) CONFORMING AMENDMENTS.— 
(A) Subparagraph (J) of section 26(b)(2) 
is amended by striking ‘‘25 percent’’ and insert-
ing ‘‘60 percent’’. 
(B) Clause (i) of section 1375(b)(1)(A) is 
amended by striking ‘‘25 percent’’ and inserting 
‘‘60 percent’’. 
(C) The heading for section 1375 is 
amended by striking ‘‘25 PERCENT’’ and in-
serting ‘‘60 PERCENT’’. 
(D) The table of sections for part III of 
subchapter S of chapter 1 is amended by strik-
ing ‘‘25 percent’’ in the item relating to section 
1375 and inserting ‘‘60 percent’’. 
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(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2007. 
SEC. 6. EXPANSION OF S CORPORATION ELIGIBLE SHARE-
HOLDERS TO INCLUDE IRAS. 
(a) 
IN
GENERAL.—Clause 
(vi) 
of 
section 
1361(c)(2)(A) (relating to certain trusts permitted as 
shareholders) is amended to read as follows: 
‘‘(vi) A trust which constitutes an in-
dividual retirement account under section 
408(a), including one designated as a Roth 
IRA under section 408A.’’. 
(b) SALE OF STOCK IN IRA RELATING TO S COR-
PORATION
ELECTION
EXEMPT
FROM
PROHIBITED 
TRANSACTION
RULES.—Paragraph 
(16) 
of 
section 
4975(d) (relating to exemptions) is amended to read as 
follows: 
‘‘(16) a sale of stock held by a trust which con-
stitutes an individual retirement account under sec-
tion 408(a) to the individual for whose benefit such 
account is established if— 
‘‘(A) such sale is pursuant to an election 
under section 1362(a) by the issuer of such 
stock, 
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‘‘(B) such sale is for fair market value at 
the time of sale (as established by an inde-
pendent appraiser) and the terms of the sale 
are otherwise at least as favorable to such trust 
as the terms that would apply on a sale to an 
unrelated party, 
‘‘(C) such trust does not pay any commis-
sions, costs, or other expenses in connection 
with the sale, and 
‘‘(D) the stock is sold in a single trans-
action for cash not later than 120 days after 
the S corporation election is made.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall take effect on the date of the enactment 
of this Act. 
SEC. 7. ALLOWANCE OF DEDUCTION FOR CHARITABLE 
CONTRIBUTIONS FOR ELECTING SMALL BUSI-
NESS TRUSTS. 
(a) IN GENERAL.—Section 641(c)(2)(C) (relating to 
modifications) is amended by adding at the end the fol-
lowing new sentence: ‘‘The deduction for charitable con-
tributions allowed under clause (i) shall be determined 
without regard to section 642(c), and the limitations im-
posed by section 170(b)(1) on the amount of the deduction 
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shall be applied to the electing small business trust as if 
it were an individual.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
the date of the enactment of this Act. 
SEC. 8. ENTITY NEUTRALITY STUDY. 
Not later than December 31, 2009, the Comptroller 
General of the United States shall conduct a study on enti-
ty neutrality under the Internal Revenue Code of 1986 
and shall submit a report to the Committee on Ways and 
Means of the House of Representatives which— 
(1) discusses the challenges to providing equal 
treatment between S corporations and limited liabil-
ity companies under the Internal Revenue Code of 
1986, 
(2) identifies the differences under the Internal 
Revenue Code of 1986 between the various pass- 
through entity rules, and 
(3) discusses why entities would prefer one set 
of rules over another. 
Æ 
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