Small Business Modernization Act of 2004 - Amends the Internal Revenue Code to: (1) terminate subchapter S corporation elections after 2004 and subchapter S status after 2014 and to allow privately-held domestic corporations, in lieu of electing subchapter S treatment, to elect to be treated as partnerships for tax purposes; (2) set forth rules for the tax treatment of former subchapter S corporations electing partnership status; and (3) exclude from net earnings from self-employment partnership income attributable to capital.
[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[H.R. 4137 Introduced in House (IH)]
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 Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as ``Small Business Tax Modernization 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 Revenue 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 paragraph (1) for any taxable year
beginning after December 31, 2004.''.
(2) Termination of status.--Subsection (d) of section 1362
of such Code (relating to termination) is amended by adding at
the end the following 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 beginning after such
date.''.
(3) Effective date.--The amendments made by this subsection
shall apply to taxable years beginning 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:
``(2) Partnership and partner.--
``(A) In general.--The term `partnership' includes
a syndicate, group, pool, joint venture, or other
unincorporated organization, through or by means of
which any business, financial operation, or venture is
carried on, and which is not, within the meaning of
this title, a trust or estate or a corporation; and the
term `partner' includes a member in such a syndicate,
group, pool, joint venture, or organization.
``(B) Election by corporation to be taxed as
partnership.--
``(i) In general.--An eligible corporation
may elect to be treated as a partnership for
purposes of this title.
``(ii) Tax treatment.--Except as provided
in section 1379A--
``(I) no gain or loss shall be
recognized to the corporation or the
shareholders by reason of an election
under clause (i), and
``(II) except in the case of an
election made by a S corporation after
the end of the recognition period (as
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 corporation
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 corporation 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
distributed 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 inserting after section
1379 the following new section:
``SEC. 1379A. TAX TREATMENT OF S CORPORATION ELECTING 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 shareholders 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 interests 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
regime.''.
(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 accumulated
earnings and profits of the corporation shall be
increased at the beginning of the taxable 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
section 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 section
593(e), the preceding sentence shall be applied without
regard to the phrase `10-year'.
``(B) Special rule relating to election of
corporation to be taxed as partnership.--
``(i) In general.--In the case of an
election under section 7701(a)(2)(B),
subparagraph (A) shall be applied by
substituting `25-year' for `10-year' both
places it appears.
``(ii) Exception where 10-year period
expired.--If, on the date of an election
referred to in clause (i) by a corporation, the
10-year period specified in subparagraph (A)
with respect to such corporation 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 Corporate Reorganization.--
(1) In general.--Section 351 of such Code is amended by
redesignating subsection (h) as subsection (i) and by inserting
after subsection (g) the following new subsection:
``(h) Special Rule for Partnerships Which Incorporate 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 corporation 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 capital;''.
(b) Partnership Income Attributable to Capital.--Section 1402 of
such Code is amended by adding at the end the following new subsection:
``(l) Partnership Income Attributable to Capital.--
``(1) In general.--For purposes of subsection (a)(13), the
following amounts shall be treated as income attributable to
capital--
``(A) the amount, if any, in excess of what would
constitute reasonable compensation for services
rendered by such partner to the partnership, and
``(B) an amount equal to a reasonable rate of
return on unreturned capital of the partner determined
as of the beginning of the taxable year.
``(2) Definitions.--For purposes of paragraph (1)--
``(A) Unreturned capital.--The term `unreturned
capital' means the excess of the aggregate amount of
money and the fair market value as of the date of
contribution of other consideration (net of
liabilities) contributed by the partner over the
aggregate amount of money and the fair market value as
of the date of distribution of other consideration (net
of liabilities) distributed by the partnership to the
partner, increased or decreased for the partner's
distributive share of all reportable items as
determined in section 702. If the partner acquires a
partnership interest and the partnership makes an
election under section 754, the partner's unreturned
capital shall take into account appropriate adjustments
under section 743.
``(B) Reasonable rate of return.--A reasonable rate
of return on unreturned capital shall equal 150 percent
(or such higher rate as is established in regulations)
of the highest applicable Federal rate, as determined
under section 1274(d)(1), at the beginning of the
partnership's taxable year.
``(3) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out the purposes of
this subsection.''.
(c) Effective Date.--The amendments made by this section shall
apply with respect to services performed in taxable years beginning
after December 31, 2004.
<all>
Introduced in House
Introduced in House
Sponsor introductory remarks on measure. (CR E518)
Referred to the House Committee on Ways and Means.
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