,,ii  #aafth ,,congress  #ast ,session  
,s4 #baef  ,,in ,,the ,,senate ,,of     
,,the ,,united ,,states  ,july #ah1     
#bjai,mr4 ,thune 7for himself1 ,mr4     
,cardin1 and ,mr4 ,roberts7 introduced  
the following bill2 which was read twice
 and referred to the ,committee on      
,finance  ,a ,,bill  ,to amend the      
,internal ,revenue ,code of #aihf to    
provide for ,s corporation reform1 and  
for other purposes4  #a4 ,short title2  
reference  7a7 ,short ,title ,this ,act 
may be cited as the ,s ,corporation     
,modernization ,act of #bjai4  7b7      
,amendment of #aihf ,code ,except as    
otherwise expressly provided1 whenever  
in this ,act an amendment or repeal is  
expressed in terms of an amendment to1  
or repeal of1 a section or other        
provision1 the reference shall be       
considered to be made to a section or   
other provision of the ,internal        
,revenue ,code of #aihf4  #b4           
,modifications to ,s corporation passive
 investment income rules  7a7 ,increased

 percentage limit ,section #acge7;a77#b7
 is amended by striking #be percent and 
inserting #fj percent4  7b7 ,repeal of  
excessive passive income as a           
termination event ,section #acfb7;d7 is 
amended by striking paragraph 7#c74  7c7
 ,conforming amendments  7#a7 ,section  
#acge7;b7 is amended by striking        
paragraphs 7#c7 and 7#d7 and inserting  
the following new paragraph3  7#c7      
,passive investment income defined  7,a7
 ,in general ,except as otherwise       
provided in this paragraph1 the term    
passive investment income means gross   
receipts derived from royalties1 rents1 
dividends1 interest1 and annuities4     
7,b7 ,exception for interest on notes   
from sales of inventory ,the term       
passive investment income shall not     
include interest on any obligation      
acquired in the ordinary course of the  
corporation's trade or business from its
 sale of property described in section  
#abba7;a77#a74  7,c7 ,treatment of      
certain lending or finance companies ,if

 the ,s corporation meets the           
requirements of section #edb7;c77#f7 for
 the taxable year1 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 finance business 7as defined in      
section #edb7;d77#a774  7,d7 ,treatment 
of certain dividends ,if an ,s          
corporation holds stock in a ,c         
corporation meeting the requirements of 
section #aejd7;a77#b71 the term passive 
investment income shall not include     
dividends from such ,c corporation to   
the extent such dividends are           
attributable to the earnings and profits
 of such ,c corporation derived from the
 active conduct of a trade or business4 
7,e7 ,exception for banks1 etc ,in the  
case of a bank 7as defined in section   
#eha7 or a depository institution       
holding company 7as defined in section  
#c7w77#a7 of the ,federal ,deposit      
,insurance ,act 7#ab ,u4,s4,c4          

#ahac7w77#a7771 the term passive        
investment income shall not include--   
7i7 interest income earned by such bank 
or company1 or  7ii7 dividends on assets
 required to be held by such bank or    
company1 including stock in the ,federal
 ,reserve ,bank1 the ,federal ,home     
,loan ,bank1 or the ,federal            
,agricultural ,mortgage ,bank or        
participation certificates issued by a  
,federal ,intermediate ,credit ,bank4   
7,f7 ,gross receipts from the sales of  
certain assets ,for purposes of this    
paragraph-- 7i7 ,capital assets other   
than stock and securities ,in the case  
of dispositions of capital assets 7other
 than stock and securities71 gross      
receipts from such dispositions shall be
 taken into account only to the extent  
of capital gain net income therefrom4   
7ii7 ,stock and securities ,in the case 
of sales or exchanges of stock or       
securities1 gross receipts shall be     
taken into account only to the extent of
 the gain therefrom4  7,g7 ,coordination

 with section #acgd ,the amount of      
passive investment income shall be      
determined by not taking into account   
any recognized built-in gain or loss of 
the ,s corporation for any taxable year 
in the recognition period4 ,terms used  
in the preceding sentence shall have the
 same respective meanings as when used  
in section #acgd4  4  7#b7 7,a7 ,section
 #bf7;b77#b77;,j7 is amended by striking
 #be percent and inserting #fj percent4 
7,b7 ,section #acge7;b77#a77;,a77i7 is  
amended by striking #be percent and     
inserting #fj percent4  7,c7 ,the       
heading for section #acge is amended by 
striking #be percent and inserting #fj  
percent4  7,d7 ,the item relating to    
section #acge in the table of sections  
for part ,,iii of subchapter ,s of      
chapter #a is amended by striking #be   
percent and inserting #fj percent4  7#c7
 ,section #ajdb7;c77#d77;,a77i7 is      
amended by striking section             
#acfb7;d77#c77;,c7 and inserting section
 #acge7;b77#c74  7#d7 ,section          

#acfb7;f77#a77;,b7 is amended by        
striking paragraph 7#b7 or 7#c7 of      
subsection 7d7 and inserting subsection 
7d77#b74  7d7 ,effective ,date ,the     
amendments made by this section shall   
apply to taxable years beginning after  
,december #ca1 #bjai4  #c4 ,expansion of
 ,s corporation eligible shareholders to
 include ,i,r,as  7a7 ,in ,general      
,section #acfa7;c77#b77;,a77vi7 is      
amended to read as follows3  7vi7 ,a    
trust which constitutes an individual   
retirement account under section        
#djh7;a71 including one designated as a 
,roth ,,ira under section #djh;,a4  4   
7b7 ,sale of ,stock in ,,ira ,relating  
to ,s ,corporation ,election ,exempt    
,from ,prohibited ,transaction ,rules   
,section #dige7;d77#af7 is amended--    
7#a7 by striking subparagraphs 7,a7 and 
7,b7 and by redesignating subparagraphs 
7,c71 7,d71 7,e71 and 7,f7 as           
subparagraphs 7,a71 7,b71 7,c71 and     
7,d71 respectively1 and  7#b7 by        
striking such bank or company in        

subparagraph 7,a7 7as so redesignated7  
and inserting the issuer of such stock4 
7c7 ,effective ,date ,the amendments    
made by this section shall take effect  
on ,january #a1 #bjbj4  #d4 ,treatment  
of ,s corporation built-in gain amount  
upon death of shareholder  7a7 ,in      
general ,part ,,ii of subchapter ,s of  
chapter #a is amended by adding at the  
end the following3  #acfi4 ,amortization
 of built-in gain amount upon death of  
shareholder  7a7 ,in general ,a person  
holding stock in an electing ,s         
corporation the basis of which is       
determined under section #ajad7;a7      
7hereafter in this section referred to  
as the shareholder7 shall be allowed a  
deduction with respect to the ,s        
corporation built-in gain amount4 ,the  
amount of such deduction for any taxable
 year shall be determined by amortizing 
the ,s corporation built-in gain amount 
over the #ae-year period beginning with 
the month which includes the applicable 
valuation date4  7b7 ,s corporation     

built-,in gain amount ,for purposes of  
this section1 the term ,s corporation   
built-in gain amount means the lesser   
of-- 7#a7 the excess 7if any7 of--  7,a7
 the basis of the stock referred to in  
subsection 7a7 as determined under      
section #ajad7;a71 over  7,b7 the       
adjusted basis of such stock immediately
 before the death of the decedent1 or   
7#b7 the pro rata share 7determined as  
of the applicable valuation date7 of--  
7,a7 the aggregate fair market value of 
all property held by the ,s corporation 
which is of a character subject to      
depreciation or amortization1 over  7,b7
 the aggregate adjusted basis of all    
such property held by the ,s corporation
 as of such date4  7c7 ,electing ,s     
corporation ,for purposes of this       
section1 the term electing ,s           
corporation means1 with respect to any  
shareholder1 any ,s corporation which   
elects the application of this section  
with respect to such shareholder at such
 time and in such form and manner as the

 ,secretary may prescribe4  7d7         
,applicable valuation date ,for purposes
 of this section1 the term applicable   
valuation date means-- 7#a7 in the case 
of a decedent with respect to which the 
executor of the decedent's estate elects
 the application of section #bjcb1 the  
date #f months after the decedent's     
death1 and  7#b7 in the case of any     
other decedent1 the date of the         
decedent's death4  7e7 ,accelerated     
deduction in case of disposition of ,s  
corporation property  7#a7 ,in general  
,if the electing ,s corporation disposes
 of any property which was taken into   
account under subsection 7b77#b71 then  
the deduction allowed under subsection  
7a7 with respect to any stock1 for the  
taxable year of the shareholder in which
 or with which the taxable year of the  
,s corporation which includes the date  
of such disposition ends1 shall 7except 
as otherwise provided in this section7  
not be less than the lesser of--  7,a7  
the pro rata share of the gain          

recognized on such disposition1 or  7,b7
 the amount determined under subsection 
7b77#b7 by only taking into account such
 property4  7#b7 ,overall allowance not 
increased ,no deduction shall be allowed
 under subsection 7a7 with respect to   
any stock for any taxable year to the   
extent that such deduction 7when added  
to the deductions so allowed for all    
prior taxable years7 exceeds the ,s     
corporation built-in gain amount with   
respect to such stock4  7f7             
,recharacterization of gains as ordinary
 income to extent of deduction ,if--    
7#a7 stock of an ,s corporation with    
respect to which a deduction was allowed
 under this section1 or  7#b7 property  
which was taken into account under      
subsection 7b77#b7 with respect to such 
stock1  is disposed of at a gain        
7determined without regard to whether or
 not such gain is recognized and reduced
 by any amount of gain which is treated 
as ordinary income under any other      
provision of this subtitle71 the amount 

of such gain 7or the shareholder's pro  
rata share of such gain in the case of  
property described in paragraph 7#b77   
shall be treated as gain which is       
ordinary income 7and shall be recognized
 notwithstanding any other provision of 
this subtitle7 to the extent of the     
excess of the aggregate deductions      
allowable under this section with       
respect to such stock for the taxable   
year of such disposition and all prior  
taxable years over the amounts taken    
into account under this subsection for  
all prior taxable years4  7g7           
,termination of amortization ,no        
deduction shall be allowed under        
subsection 7a7 with respect to any stock
 in an electing ,s corporation with     
respect to any period beginning after   
the earlier of--  7#a7 the date on which
 the corporation's election under       
section #acfb terminates1 or  7#b7 the  
date on which the shareholder transfers 
such stock to any other person4  7h7    
,treatment of certain transfers  7#a7   

,distributions from estates or trusts   
,notwithstanding any other provision of 
this section1 in the case of a          
distribution of stock from an estate or 
trust to a beneficiary1 the beneficiary 
7and not the estate or trust7 shall be  
treated as the shareholder to which this
 section applies with respect to periods
 after such distribution4  7#b7 ,certain
 transfers involving spouses            
,notwithstanding any other provision of 
this section1 in the case of a transfer 
described in section #ajda1 the         
transferee 7and not the transferor7     
shall be treated as the shareholder to  
which this section applies with respect 
to periods after such transfer4  7i7    
,treatment of income in respect of the  
decedent  7#a7 ,adjustment to built-in  
gain of property held by ,s corporation 
,for purposes of subsection 7b77#b71 the
 fair market value of any property taken
 into account under subparagraph 7,a7   
thereof shall be decreased by any amount
 of income in respect of the decedent   

with respect to such property to which  
section #fia applies4 ,for purposes of  
subsection 7e77#a77;,a71 the gain       
recognized on the disposition of such   
property shall be reduced by such       
amount4  7#b7 ,adjustment to basis of ,s
 corporation stock ,for adjustment to   
basis of ,s corporation stock1 see      
section #acfg7;b77#d77;,b74  7j7        
,reporting ,except as otherwise provided
 by the ,secretary1 for purposes of     
section #fjcg1 the amounts determined   
under subsections 7b77#b71 7e77#a71 and 
7f77#b7 shall be treated as items of the
 corporation and the pro rata share     
determined under such subsection shall  
be furnished to the shareholder under   
section #fjcg7;b74  4  7b7 ,adjustment  
to basis of stock  7#a7 ,in general     
,section #acfg7;a77#b7 is amended by    
striking and at the end of subparagraph 
7,d71 by striking the period at the end 
of subparagraph 7,e7 and inserting 1    
and1 and by inserting after subparagraph
 7,e7 the following new subparagraph3   

7,f7 the amount of the shareholder's    
deduction allowable under section #acfi4
  4  7#b7 ,adjustment not taken into    
account in determining treatment of     
distributions ,section #acfh is         
amended--  7,a7 in subsection 7d77#a71  
by inserting 7other than subsection     
7a77#b77;,f7 thereof7 after section     
#acfg1 and  7,b7 in subsection          
7e77#a77;,a7--  7i7 by striking this    
title and the phrase and inserting this 
title1 the phrase1 and  7ii7 by         
inserting 1 and no adjustment shall be  
made under section #acfg7;a77#b77;,f7   
after section #acfg7;a77#b74  7c7       
,clerical amendment ,the table of       
sections for part ,,ii of subchapter ,s 
of chapter #a is amended by adding at   
the end the following new item3  ,sec4  
#acfi4 ,amortization of built-in gain   
amount upon death of shareholder4  4    
7d7 ,effective date ,the amendments made
 by this section shall apply with       
respect to decedents dying after the    
date of the enactment of this ,act1 in  

taxable years ending after such date4   
#e4 ,revocations of ,s corporation      
elections  7a7 ,revocations ,paragraph  
7#a7 of section #acfb7;d7 is amended--  
7#a7 by striking subparagraph 7,d7 in   
subparagraph 7,c7 and inserting         
subparagraphs 7,d7 and 7,e71 and  7#b7  
by adding at the end the following new  
subparagraph3  7,e7 ,authority to treat 
late revocations as timely ,if--  7i7 a 
revocation under subparagraph 7,a7 is   
made for any taxable year after the date
 prescribed by this paragraph for making
 such revocation for such taxable year  
or no such revocation is made for any   
taxable year1 and  7ii7 the ,secretary  
determines that there was reasonable    
cause for the failure to timely make    
such revocation1  the ,secretary may    
treat such a revocation as timely made  
for such taxable year4  4  7b7          
,effective date ,the amendments made by 
this section shall apply to revocations 
after ,december #ca1 #bjai4