Small Business Tax Flexibility Act of 2005 - Amends the Internal Revenue Code to allow certain S corporations a one-time election to transfer money or property to a partnership without recognition of gain or loss by the shareholders of such corporation. Treats all distributions of the money or property of an electing S corporation as a distribution in part or full payment in exchange for the stock of such corporation.
Requires transferee partnerships to maintain the continuity of the S corporation's business for five years after the conversion to partnership form or pay a recapture tax in the year in which failure to maintain such continuity first occurs.
[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[H.R. 1557 Introduced in House (IH)]
109th CONGRESS
1st Session
H. R. 1557
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 12, 2005
Mrs. Cubin 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 Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Small Business Tax Flexibility Act
of 2005''.
SEC. 2. 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 corporation may elect the
special tax treatment provided in subsection (b) for an eligible
corporate conversion in the manner set forth in subsection (f).
``(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--
``(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 section.
``(d) Eligible Corporate Conversion.--For purposes of this
section--
``(1) In general.--The term `eligible corporate conversion'
means (however affected)--
``(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, 2009,
``(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 this
subtitle of the partnership and the partners as
if--
``(I) a recomputation of the tax
under this subtitle of the partnership
and the partners as if
``(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.
``(e) 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.
``(f) 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 following new item:
``Sec 1363. Election for special tax treatment of certain s corporation
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.
<all>
Introduced in House
Introduced in House
Sponsor introductory remarks on measure. (CR E612)
Referred to the House Committee on Ways and Means.
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