[House Report 114-15]
[From the U.S. Government Publishing Office]
114th Congress } { Report
HOUSE OF REPRESENTATIVES
1st Session } { 114-15
======================================================================
PERMANENT S CORPORATION BUILT-IN GAIN RECOGNITION PERIOD ACT OF 2015
_______
February 9, 2015.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Ryan of Wisconsin, from the Committee on Ways and Means, submitted
the following
R E P O R T
together with
DISSENTING VIEWS
[To accompany H.R. 629]
[Including cost estimate of the Congressional Budget Office]
The Committee on Ways and Means, to whom was referred the
bill (H.R. 629) to amend the Internal Revenue Code of 1986 to
make permanent the reduced recognition period for built-in
gains of S corporations, having considered the same, report
favorably thereon with an amendment and recommend that the bill
as amended do pass.
CONTENTS
Page
I. SUMMARY AND BACKGROUND...........................................2
A. Purpose and Summary................................. 2
B. Background and Need for Legislation................. 2
C. Legislative History................................. 2
II. EXPLANATION OF THE BILL..........................................3
A. Reduced Recognition Period for Built-In Gains of S
Corporations Made Permanent (sec. 1374 of the Code) 3
III. VOTES OF THE COMMITTEE...........................................5
IV. BUDGET EFFECTS OF THE BILL.......................................6
A. Committee Estimate of Budgetary Effects............. 6
B. Statement Regarding New Budget Authority and Tax
Expenditures Budget Authority...................... 8
C. Cost Estimate Prepared by the Congressional Budget
Office............................................. 8
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE......11
A. Committee Oversight Findings and Recommendations.... 11
B. Statement of General Performance Goals and
Objectives......................................... 11
C. Information Relating to Unfunded Mandates........... 11
D. Applicability of House Rule XXI 5(b)................ 11
E. Tax Complexity Analysis............................. 11
F. Congressional Earmarks, Limited Tax Benefits, and
Limited Tariff Benefits............................ 12
G. Duplication of Federal Programs..................... 12
H. Disclosure of Directed Rule Makings................. 12
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED...........12
VII. DISSENTING VIEWS................................................18
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Permanent S Corporation Built-in Gain
Recognition Period Act of 2015''.
SEC. 2. REDUCED RECOGNITION PERIOD FOR BUILT-IN GAINS OF S CORPORATIONS
MADE PERMANENT.
(a) In General.--Paragraph (7) of section 1374(d) of the Internal
Revenue Code of 1986 is amended to read as follows:
``(7) Recognition period.--
``(A) In general.--The term `recognition period'
means the 5-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 phrase `5-year'.
``(B) Installment sales.--If an S corporation sells
an asset and reports the income from the sale using the
installment method under section 453, the treatment of
all payments received shall be governed by the
provisions of this paragraph applicable to the taxable
year in which such sale was made.''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2014.
I. SUMMARY AND BACKGROUND
A. Purpose and Summary
H.R. 629, reported by the Committee on Ways and Means,
amends section 1374 of the Internal Revenue Code of 1986 (``the
Code'') to make permanent the five-year reduced recognition
period for built-in gains of S corporations.
B. Background and Need for Legislation
H.R. 629, reported by the Committee on Ways and Means,
provides a permanent five-year recognition period for built-in
gains of an S corporation. A temporary provision, which expired
for taxable years beginning after December 31, 2014, also
provided a five-year recognition period for built-in gains of
an S corporation. With the expiration of that temporary
provision, however, that recognition period is currently ten
years for taxable years beginning after December 31, 2014.
C. Legislative History
Background
H.R. 629 was introduced on January 30, 2015, and was
referred to the Committee on Ways and Means.
Committee action
The Committee on Ways and Means marked up H.R. 629, the
Permanent S Corporation Built-in Gains Recogniton Period Act of
2015, on February 4, 2015, and ordered the bill, as amended,
favorably reported (with a quorum being present).
Committee hearings
The need for a permanent five-year recognition period for
built-in gains of S corporations was discussed at no fewer than
four hearings during the 112th and 113th Congresses:
Full Committee hearing on Fundamental Tax
Reform (January 20, 2011);
Full Committee hearing on the Treatment of
Closely-Held Businesses in the Context of Tax Reform
(March 7, 2012);
Full Committee hearing on the Small Business
and Pass-Through Entity Tax Reform Discussion Draft
(May 15, 2013); and
Full Committee hearing on the Benefits of
Permanent Tax Policy for America's Job Creators (April
8, 2014).
II. EXPLANATION OF THE BILL
A. Reduced Recognition Period for Built-In Gains of S Corporations Made
Permanent (sec. 1374 of the Code)
PRESENT LAW
In general
S corporations
A small business corporation\1\ may elect to be treated as
an S corporation. Unlike C corporations, S corporations
generally pay no corporate-level tax. Instead, items of income
and loss of an S corporation pass through to its shareholders.
Each shareholder takes into account separately its share of
these items on its own income tax return.\2\
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\1\This term is defined in section 1361(b).
\2\Sec. 1366.
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A corporate level built-in gains tax, at the highest
marginal rate applicable to corporations (currently 35
percent), is imposed on an S corporation's net recognized
built-in gain\3\ that arose prior to the conversion of the C
corporation to an S corporation and is recognized by the S
corporation during the recognition period, (i.e., the 10-year
period beginning with the first day of the first taxable year
for which the S election is in effect).\4\ If the taxable
income of the S corporation is less than the amount of net
recognized built-in gain in the year such built-in gain is
recognized (for example, because of post-conversion losses), no
built-in gain tax is imposed on the excess of such built-in
gain over taxable income for that year. However, the untaxed
excess of net recognized built-in gain over taxable income for
that year is treated as recognized built-in gain in the
succeeding taxable year.\5\ Treasury regulations provide that
if a corporation sells an asset before or during the
recognition period and reports the income from the sale using
the installment method\6\ during or after the recognition
period, that income is subject to the built-in gain tax.\7\
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\3\Certain built-in income items are treated as recognized built-in
gain for this purpose. Sec. 1374(d)(5).
\4\Sec. 1374(d)(7)(A). The 10-year period refers to ten calendar
years from the first day of the first taxable year for which the
corporation was an S corporation. Treas. Reg. sec. 1.1374-1(d).
\5\Sec. 1374(d)(2).
\6\Sec. 453.
\7\Treas. Reg. sec. 1.1374-4(h).
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The built-in gain tax also applies to net recognized built-
in gain attributable to any asset received by an S corporation
from a C corporation in a transaction in which the S
corporation's basis in the asset is determined (in whole or in
part) by reference to the basis of such asset (or other
property) in the hands of the C corporation.\8\ In the case of
such a transaction, the recognition period for any asset
transferred by the C corporation starts on the date the asset
was acquired by the S corporation in lieu of the beginning of
the first taxable year for which the corporation was an S
corporation.\9\
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\8\Sec. 1374(d)(8).
\9\Sec. 1374(d)(8)(B).
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The amount of the built-in gains tax is treated as a loss
by each of the S corporation shareholders in computing its own
income tax.\10\
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\10\Sec. 1366(f)(2). Shareholders continue to take into account all
items of gain and loss under section 1366.
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For any taxable year beginning in 2009 and 2010, no tax was
imposed on the net recognized built-in gain of an S corporation
under section 1374 if the seventh taxable year in the
corporation's recognition period preceded such taxable
year.\11\ Thus, with respect to gain that arose prior to the
conversion of a C corporation to an S corporation, no tax was
imposed under section 1374 if the seventh taxable year that the
S corporation election was in effect preceded the taxable year
beginning in 2009 or 2010.
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\11\Sec. 1374(d)(7)(B).
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For any taxable year beginning in 2011, no tax was imposed
on the net recognized built-in gain of an S corporation under
section 1374 if the fifth year in the corporation's recognition
period preceded such taxable year.\12\ Thus, with respect to
gain that arose prior to the conversion of a C corporation to
an S corporation, no tax was imposed under section 1374 if the
S corporation election was in effect for five years preceding
the taxable year beginning in 2011.
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\12\Sec. 1374(d)(7)(C).
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For taxable years beginning in 2012, 2013, and 2014 the
term ``recognition period'' in section 1374, for purposes of
determining the net recognized built-in gain, is applied by
substituting a five-year period\13\ for the otherwise
applicable 10-year period. Thus, for such taxable years, the
recognition period is the five-year period beginning with the
first day of the first taxable year for which the corporation
was an S corporation (or beginning with the date of acquisition
of assets if the rules applicable to assets acquired from a C
corporation apply). If an S corporation with assets subject to
section 1374 disposes of such assets in a taxable year
beginning in 2012, 2013, or 2014 and the disposition occurs
more than five years after the first day of the relevant
recognition period, gain or loss on the disposition will not be
taken into account in determining the net recognized built-in
gain.
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\13\The five-year period refers to five calendar years from the
first day of the first taxable year for which the corporation was an S
corporation.
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If an S corporation subject to section 1374 sells a built-
in gain asset and reports the income from the sale using the
installment method under section 453, the treatment of all
payments received will be governed by the provisions of section
1374(d)(7) applicable to the taxable year in which the sale was
made.
Application to real estate investment trusts and regulated
investment companies
Under Treasury regulations, a regulated investment company
(``RIC'') or a real estate investment trust (``REIT'') that was
formerly a C corporation not taxed as a REIT or RIC (or that
acquired assets from such a C corporation) generally is subject
to the built-in gain tax rules as if the RIC or REIT were an S
corporation, unless the relevant C corporation elects ``deemed
sale'' treatment, requiring recognition of all C corporation
built-in gain and loss at the time of the conversion or asset
acquisition.\14\ Deemed sale treatment is not permitted if its
application would result in the recognition of a net loss.\15\
For this purpose, net loss is the excess of aggregate losses
over aggregate gains (including items of income), without
regard to character.\16\
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\14\Treas. Reg. secs. 1.337(d)-7(a) and 1.337(d)-7(b).
\15\Treas. Reg. sec. 1.337(d)-7(c)(1).
\16\Treas. Reg. sec. 1.337(d)-7(c)(1).
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REASONS FOR CHANGE
The Committee believes that a five-year recognition period
for built-in gains adequately protects the corporate tax base
while allowing greater flexibility for S corporations to
replace and reposition assets, allowing S corporations to
access capital to expand business operations and create jobs.
The Committee also believes that making the five-year
recognition period permanent will provide needed certainty and
removes a significant deterrent that often discourages C
corporations from electing to be S corporations.
EXPLANATION OF PROVISION
The provision makes permanent the five-year recognition
period for built-in gains of S corporations. Under current
Treasury regulations, this five-year recognition period also
will apply to real estate investment trusts and regulated
investment companies that do not elect ``deemed sale''
treatment.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2014.
III. VOTES OF THE COMMITTEE
In compliance with clause 3(b) of rule XIII of the Rules of
the House of Representatives, the following statement is made
concerning the vote of the Committee on Ways and Means in its
consideration of H.R. 629, the Permanent S Corporation Built-in
Gains Recognition Period Act of 2015.
The bill, H.R. 629, was ordered favorably reported as
amended by a rollcall vote of 24 yeas to 14 nays (with a quorum
being present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
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Mr. Ryan....................... X ........ ......... Mr. Levin........ ........ X .........
Mr. Johnson.................... X ........ ......... Mr. Rangel....... ........ X .........
Mr. Brady...................... X ........ ......... Mr. McDermott.... ........ X .........
Mr. Nunes...................... X ........ ......... Mr. Lewis........ ........ X .........
Mr. Tiberi..................... X ........ ......... Mr. Neal......... ........ X .........
Mr. Reichert................... X ........ ......... Mr. Becerra...... ........ X .........
Mr. Boustany................... X ........ ......... Mr. Doggett...... ........ X .........
Mr. Roskam..................... X ........ ......... Mr. Thompson..... ........ X .........
Mr. Price...................... X ........ ......... Mr. Larson....... ........ X .........
Mr. Buchanan................... X ........ ......... Mr. Blumenauer... ........ ........ .........
Mr. Smith (NE)................. X ........ ......... Mr. Kind......... ........ X .........
Mr. Schock..................... X ........ ......... Mr. Pascrell..... ........ X .........
Ms. Jenkins.................... X ........ ......... Mr. Crowley...... ........ X .........
Mr. Paulsen.................... X ........ ......... Mr. Davis........ ........ X .........
Mr. Marchant................... X ........ ......... Ms. Sanchez...... ........ X .........
Ms. Black...................... X ........ ......... ................. ........ ........ .........
Mr. Reed....................... X ........ ......... ................. ........ ........ .........
Mr. Young...................... X ........ ......... ................. ........ ........ .........
Mr. Kelly...................... X ........ ......... ................. ........ ........ .........
Mr. Renacci.................... X ........ ......... ................. ........ ........ .........
Mr. Meehan..................... X ........ ......... ................. ........ ........ .........
Ms. Noem....................... X ........ ......... ................. ........ ........ .........
Mr. Holding.................... X ........ ......... ................. ........ ........ .........
Mr. Smith (MO)................. X ........ ......... ................. ........ ........ .........
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IV. BUDGET EFFECTS OF THE BILL
A. Committee Estimate of Budgetary Effects
In compliance with clause 3(d) of rule XIII of the Rules of
the House of Representatives, the following statement is made
concerning the effects on the budget of the bill, H.R. 629, as
reported.
The bill, as reported, is estimated to have the following
effects on Federal budget receipts for fiscal years 2015-2025:
FISCAL YEARS
[Millions of Dollars]
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2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2015-20 2015-25
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-70 -218 -283 -222 -147 -103 -84 -81 -86 -92 -99 -1,043 -1,485
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Note: Details do not add to totals due to rounding.
Pursuant to clause 8 of rule XIII of the Rules of the House
of Representatives, the following statement is made by the
Joint Committee on Taxation with respect to the provisions of
the bill amending the Internal Revenue Code of 1986: the gross
budgetary effect (before incorporating macroeconomic effects)
in any fiscal year is less than 0.25 percent of the current
projected gross domestic product of the United States for that
fiscal year; therefore, the bill is not ``major legislation''
for purposes of requiring that the estimate include the
budgetary effects of changes in economic output, employment,
capital stock and other macroeconomic variables.
B. Statement Regarding New Budget Authority and Tax Expenditures Budget
Authority
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee states that the
bill involves no new or increased budget authority. The
Committee states further that the bill involves no new or
increased tax expenditures.
C. Cost Estimate Prepared by the Congressional Budget Office
In compliance with clause 3(c)(3) of rule XIII of the Rules
of the House of Representatives, requiring a cost estimate
prepared by the CBO, the following statement by CBO is
provided.
U.S. Congress,
Congressional Budget Office,
Washington, DC, February 5, 2015.
Hon. Paul Ryan,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 629, the Permanent
S Corporation Built-in Gains Recognition Period Act of 2015.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Nate Frentz.
Sincerely,
Douglas W. Elmendorf.
Enclosure.
H.R. 629--Permanent S Corporation Built-in Gains Recognition Period Act
of 2015
H.R. 629 would amend the Internal Revenue Code to make
permanent a five-year recognition period for built-in gains of
S corporations, retroactive to January 1, 2015. Under current
law, a corporation that meets certain requirements may elect to
be taxed as an S corporation, which generally pays no
corporate-level tax, unlike a C corporation. For corporations
that convert from C corporations to S corporations, or S
corporations that receive assets under certain conditions from
C corporations, there is a corporate-level tax on certain
built-in gains of certain assets, with a 10-year recognition
period. This legislation would make permanent the five-year
recognition period for S corporation built-in gains that was
generally in effect for taxable years from 2011 through 2014.
The legislation also would apply to regulated investment
companies and real estate investment trusts.
The staff of the Joint Committee on Taxation (JCT)
estimates that enacting H.R. 629 would reduce revenues, thus
increasing federal deficits, by $1.5 billion over the 2015-2025
period.
The Statutory Pay-As-You-Go Act of 2010 establishes budget-
reporting and enforcement procedures for legislation affecting
direct spending and revenues. Enacting H.R. 629 would result in
revenue losses in each year beginning in 2015. The estimated
increases in the deficit are shown in the following table.
JCT has determined that the bill contains no
intergovernmental or private-sector mandates as defined in the
Unfunded Mandates Reform Act.
The CBO staff contact for this estimate is Nathaniel
Frentz. The estimate was approved by David Weiner, Assistant
Director for Tax Analysis.
CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 629, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON WAYS AND MEANS ON FEBRUARY 4, 2015
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By fiscal year, in millions of dollars 2015--
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2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2015-2020 2015-2025
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NET INCREASE IN THE DEFICIT
Statutory Pay-As-You-Go Impact 70 218 283 222 147 103 84 81 86 92 99 1,043 1,485
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Source: Staff of the Joint Committee on Taxation.