To provide an election for a special tax treatment of certain S corporation conversions.

SECTION 1. ELECTION FOR SPECIAL TAX TREATMENT OF CERTAIN S CORPORATION 
              CONVERSIONS.

    (a) In General.--A qualified electing S corporation may elect the 
special tax treatment provided in subsection (b) for an eligible 
corporate conversion in the manner set forth in subsection (e).
    (b) Special Tax Treatment.--
            (1) Transfers to partnership.--In the case of transfers by 
        a qualified electing S corporation to a partnership in 
        connection with an eligible corporate conversion, no gain or 
        loss shall be recognized by shareholders of such corporation 
        with respect to money or property received by the partnership.
            (2) Other transfers.--All other distributions 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 corporation'' means a domestic 
corporation which--
                    (A) has had a valid S election continuously in 
                effect for all taxable years of the corporation 
                beginning on or after January 1, 1990, and
                    (B) has never made an election under this section.
    (d) Eligible Corporate Conversion.--For purposes of this section--
            (1) In general.--The term ``eligible corporate 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) of the 
                Internal Revenue Code of 1986) 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, 2005,
                    (B) the meeting of the requirement described in 
                paragraph (2) by the partnership, and
                    (C) the subsequent liquidation and dissolution of 
                the qualified S corporation within the same taxable 
                year as the transfer.
            (2) Continuity of business requirement.--
                    (A) In general.--The requirement described in this 
                paragraph is met if the partnership 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 recapture 
                        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 ``continuity of the qualified electing 
                S corporation's business'' means, under all the facts 
                and circumstances, either--
                            (i) the continuation of 1 or more of the S 
                        corporation's historic lines of business, 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 
                        subtitle A of the Internal Revenue Code of 1986 
                        of the partnership and the partners as if--
                                    (I) the partnership were an S 
                                corporation,
                                    (II) the stock of such S 
                                corporation was owned in the same 
                                manner as the capital of the 
                                partnership, and
                                    (III) the S corporation were 
                                dissolved 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 number of 
                                complete taxable years in which the 
                                partnership maintains continuity of the 
                                qualified electing S corporation's 
                                business, and
                                    (II) the denominator of which is 5.
    (d) Basis Rules.--In the case of an eligible corporate conversion, 
property in the hands of the partnership shall have the same basis as 
in the hands of the qualified 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.

Summary: Requires the partnership to maintain a five- year continuity of business in order to avoid a conversion recapture tax.