119-s2017

[Congressional Bills 119th Congress]
[From the U.S. Government Publishing Office]
[S. 2017 Introduced in Senate

    (IS) ]

<DOC>

119th CONGRESS
 1st Session
 S. 2017

To amend the Internal Revenue Code of 1986 to provide for S corporation 
 reform, and for other purposes.

_______________________________________________________________________

 IN THE SENATE OF THE UNITED STATES

 June 10, 2025

 Mr. Sheehy introduced the following bill; which was read twice and 
 referred to the Committee on Finance

_______________________________________________________________________

 A BILL

To amend the Internal Revenue Code of 1986 to provide for S corporation 
 reform, and for other purposes.

 Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE; REFERENCE.

    (a) Short Title.--This Act may be cited as the ``S Corporation 
Modernization Act of 2025''.

    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.

SEC. 2. TREATMENT OF S CORPORATION BUILT-IN GAIN AMOUNT UPON DEATH OF 
 SHAREHOLDER.

    (a) In General.--Part II of subchapter S of chapter 1 is amended by 
adding at the end the following:

``

SEC. 1369. TREATMENT OF S CORPORATION BUILT-IN GAIN AMOUNT UPON DEATH 
 OF SHAREHOLDER.

 ``

    (a) In General.--A person holding stock in an electing S 
corporation the basis of which is determined under 

section 1014

    (a) (hereafter in this section referred to as the `shareholder') shall be 
allowed a deduction with respect to the amortizable S corporation 
built-in gain amount. Except as provided under subsection

    (b) , the 
amount of such deduction for any taxable year shall be determined by 
amortizing the amortizable S corporation built-in gain amount over the 
15-year period beginning with the month which includes the applicable 
valuation date.
 ``

    (b) Deduction in Case of Disposition of S Corporation Property.--
 ``

    (1) Accelerated deduction in case of disposition of 
 amortizable s corporation built-in gain property.--
 ``
        (A) In general.--If there is a disposition of any 
 amortizable S corporation built-in gain property, then 
 the deduction allowed under subsection

    (a) with respect 
 to any stock (determined without regard to paragraph

    (2) ) 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 ends, shall 
 (except as otherwise provided in this section) not be 
 less than the lesser of--
 ``
            (i) the pro rata share of the gain 
 recognized on such disposition, or
 ``
            (ii) the amount determined under 
 subsection
            (c) (1)
        (B) by only taking into 
 account such property.
 ``
        (B) Overall allowance not increased.--Except as 
 provided in paragraph

    (2) , no deduction shall be 
 allowed under subsection

    (a) with respect to any stock 
 for any taxable year to the extent that such deduction 
 (when added to the deductions attributable to 
 amortizable S corporation built-in gain property so 
 allowed for all prior taxable years) exceeds the 
 amortizable S corporation built-in gain amount with 
 respect to such stock.
 ``

    (2) Additional deduction in case of disposition of 
 nonamortizable s corporation built-in gain property.--
 ``
        (A) In general.--If there is a disposition of any 
 nonamortizable S corporation built-in gain property, 
 then the amount allowable as deduction under subsection

    (a) with respect to any stock for the taxable year of 
 the shareholder in which or with which the taxable year 
 of the S corporation which includes the date of 
 disposition ends, shall be increased by the lesser of--
 ``
            (i) the pro-rata share of the gain 
 recognized on such disposition, or
 ``
            (ii) the amount determined under 
 subsection
            (c) (1)
        (B) by only taking into 
 account such property.
 ``
        (B) Limitation.--Subparagraph
        (A) shall not apply 
 with respect to any stock for any taxable year to the 
 extent that such increase (when added to the increased 
 deductions so allowed under subparagraph
        (A) for all 
 prior taxable years) exceeds the non-amortizable S 
 corporation built-in gain amount with respect to such 
 stock.
 ``
            (c) Definitions and Special Rules.--For purposes of this 
section--
 ``

    (1) S corporation built-in gain amount.--The term `S 
 corporation built-in gain amount' means the lesser of--
 ``
        (A) the excess (if any) of--
 ``
            (i) the basis of the stock referred to in 
 subsection

    (a) as determined under 

section 1014

    (a) , over
 ``
            (ii) the adjusted basis of such stock 
 immediately before the death of the decedent, 
 or
 ``
        (B) the pro rata share (determined as of the 
 applicable valuation date) of--
 ``
            (i) the aggregate fair market value of 
 all property held by the S corporation which is 
 amortizable S corporation built-in gain 
 property or nonamortizable S corporation built-
 in gain property, over
 ``
            (ii) the aggregate adjusted basis of all 
 such property held by the S corporation as of 
 such date.
 ``

    (2) Amortizable s corporation built-in gain property.--
 The term `amortizable S corporation built-in gain property' 
 means, as of the applicable valuation date, the S corporation 
 property that is of a character subject to depreciation or 
 amortization.
 ``

    (3) Amortizable s corporation built-in gain amount.--The 
 term `amortizable S corporation built-in gain amount' means the 
 pro rata share of the portion of the S corporation built-in 
 gain amount that is attributable to amortizable S corporation 
 built-in gain property.
 ``

    (4) Non-amortizable s corporation built-in gain 
 property.--The term `non-amortizable S corporation built-in 
 gain property' means, as of the applicable valuation date, the 
 S corporation property that is not of a character subject to 
 depreciation or amortization (other than an equity interest in 
 an electing S corporation partnership).
 ``

    (5) Non-amortizable s corporation built-in gain amount.--
 The term `non-amortizable S corporation built-in gain amount' 
 means the pro rata share of the portion of the S corporation 
 built-in gain amount that is attributable to non-amortizable S 
 corporation built-in gain property.
 ``

    (6) Special rule for partnership interests.--If an 
 electing S corporation owns, directly or indirectly, an equity 
 interest in an electing S corporation partnership, including a 
 lower-tier electing S corporation partnership, the amortizable 
 S corporation built-in gain property and the non-amortizable S 
 corporation built-in gain property shall include the electing S 
 corporation's distributive share of such property held by the 
 partnership. Rules similar to the rules under paragraphs

    (1) ,

    (2) ,

    (3) ,

    (4) , and

    (5) of this subsection shall apply to 
 determine the electing S corporation's distributive share of 
 the amortizable S corporation built-in gain property and the 
 non-amortizable S corporation built-in gain property held by 
 such partnership for purposes of this section. For purposes of 
 subsection

    (b) , a disposition of an interest in an electing S 
 corporation partnership shall be treated as a disposition of 
 the electing S corporation's distributive share of the property 
 held by such partnership.
 ``

    (7) Electing s corporation.--The term `electing S 
 corporation' means, with respect to any shareholder, 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 prescribe.
 ``

    (8) Electing s corporation partnership.--The term 
 `electing S corporation partnership' means, with respect to any 
 shareholder, any equity interest in a partnership owned 
 directly or indirectly by the electing S corporation, including 
 a lower-tier partnership, for which the S corporation elects 
 the application of this section with respect to such 
 shareholder at such time and in such form and manner as the 
 Secretary may prescribe.
 ``

    (9) Applicable valuation date.--The term `applicable 
 valuation date' means--
 ``
        (A) in the case of a decedent with respect to 
 which the executor of the decedent's estate elects the 
 application of 

section 2032, the date months after the 
 decedent's death, and
 ``
        (B) in the case of any other decedent, the date 
 of the decedent's death.
 ``
            (d) Recharacterization of Gains as Ordinary Income to Extent of 
Deduction.--If--
 ``

    (1) stock of an S corporation with respect to which a 
 deduction was allowed under this section,
 ``

    (2) amortizable S corporation built-in gain property with 
 respect to which a deduction was allowed under subsection

    (b)

    (1) , or
 ``

    (3) nonamortizable S corporation built-in gain property 
 with respect to which a deduction was allowed under subsection

    (b)

    (2) ,
is disposed of at a gain (determined 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 subtitle), 
the amount of such gain (or the shareholder's pro rata share of such 
gain in the case of property described in paragraph

    (2) or

    (3) ) shall 
be treated as gain which is ordinary income (and shall be recognized 
notwithstanding any other provision of this subtitle) 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 years.
 ``

    (e) Termination of Deduction.--No deduction shall be allowed 
under subsection

    (a) with respect to any stock in an electing S 
corporation with respect to any period beginning after the earlier of--
 ``

    (1) the date on which the corporation's election under 
 

section 1362 terminates, or
 ``

    (2) the date on which the shareholder transfers such 
 stock to any other person.
 ``

    (f) Treatment of Certain Transfers.--
 ``

    (1) Distributions from estates or trusts.--
 Notwithstanding any other provision of this section, in the 
 case of a distribution of stock from an estate or trust to a 
 beneficiary, the beneficiary (and not the estate or trust) 
 shall be treated as the shareholder to which this section 
 applies with respect to periods after such distribution.
 ``

    (2) Certain transfers involving spouses.--Notwithstanding 
 any other provision of this section, in the case of a transfer 
 described in section, the transferee (and not the transferor) 
 shall be treated as the shareholder to which this section 
 applies with respect to periods after such transfer.
 ``

    (3) Gifts.--Notwithstanding any other provision of this 
 section, in the case of a gift, the donee (and not the donor) 
 shall be treated as the shareholder to which this section 
 applies with respect to periods after such gift.
 ``

    (4) Transfers to trusts.--Notwithstanding any other 
 provision of this section, in the case of a transfer to a 
 trust, the trust (and not the transferor) shall be treated as 
 the shareholder to which this section applies with respect to 
 periods after such transfer.
 ``

    (g) Treatment of Income in Respect of the Decedent.--
 ``

    (1) Adjustment to built-in gain of property held by s 
 corporation.--For purposes of subsection
            (c) (1)
        (B) , the fair 
 market value of any property taken into account under 
 subparagraph
        (B)
            (i) thereof shall be decreased by any amount of 
 income in respect of the decedent with respect to such property 
 to which 

section 691 applies. For purposes of subsections

    (b)

    (1)
        (A) and

    (b)

    (2)
        (A) , the gain recognized on the disposition 
 of such property shall be reduced by such amount.
 ``

    (2) Adjustment to basis of s corporation stock.--For 
 adjustment to basis of S corporation stock, see 

section 1367

    (b)

    (4)
        (B) .
 ``

    (h) Reporting.--Except as otherwise provided by the Secretary, 
for purposes of 

section 6037, the amounts determined under subsections

    (b)

    (1) ,

    (b)

    (2) ,
            (c) (1)
        (B) ,
            (c) (3) ,
            (c) (5) ,
            (c) (6) ,
            (d) (2) , and
            (d) (3) 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 6037

    (b) .''.

    (b) Adjustment to Basis of Stock.--

    (1) In general.--

Section 1367

    (a)

    (2) is amended by striking 
 ``and'' at the end of subparagraph
            (D) , by striking the period 
 at the end of subparagraph
        (E) and inserting ``, and'', and by 
 inserting after subparagraph
        (E) the following new 
 subparagraph:
 ``
        (F) the amount of the shareholder's deduction 
 under 

section 1369.''.

    (2) Adjustment not taken into account in determining 
 treatment of distributions.--

Section 1368 is amended--
        (A) in subsection
            (d) (1) , by inserting ``(other 
 than subsection

    (a)

    (2)
        (F) thereof)'' after ``

section 1367'', and
        (B) in subsection

    (e)

    (1)
        (A) --
            (i) by striking ``this title and the 
 phrase'' and inserting ``this title, the 
 phrase'', and
            (ii) by inserting ``, and no adjustment 
 shall be made under 

section 1367

    (a)

    (2)
        (F) '' 
 after ``

section 1367

    (a)

    (2) ''.
            (c) Clerical Amendment.--The table of sections for part II of 
subchapter S of chapter 1 is amended by adding at the end the following 
new item:

``

Sec. 1369. Treatment of S corporation built-in gain amount upon death 
 of shareholder.''.
            (d) Effective Date.--The amendments made by this section shall 
apply with respect to decedents dying after the date of the enactment 
of this Act, in taxable years ending after such date.

SEC. 3. MODIFICATIONS TO S CORPORATION PASSIVE INVESTMENT INCOME RULES.

    (a) Increased Percentage Limit.--

Section 1375

    (a)

    (2) is amended by 
striking ``25 percent'' and inserting ``60 percent''.

    (b) Repeal of Excessive Passive Income as a Termination Event.--

Section 1362
            (d) is amended by striking paragraph

    (3) .
            (c) Conforming Amendments.--

    (1) Section 1375

    (b) is amended by striking paragraphs

    (3) and

    (4) and inserting the following new paragraph:
 ``

    (3) Passive investment income defined.--
 ``
        (A) In general.--Except as otherwise provided in 
 this paragraph, the term `passive investment income' 
 means gross receipts derived from royalties, rents, 
 dividends, interest, and annuities.
 ``
        (B) 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 1221

    (a)

    (1) .
 ``
            (C) Treatment of certain lending or finance 
 companies.--If the S corporation meets the requirements 
 of 

section 542
            (c) (6) for the taxable year, 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 (as defined in 

section 542
            (d) (1) ).
 ``
            (D) Treatment of certain dividends.--If an S 
 corporation holds stock in a C corporation meeting the 
 requirements of 

section 1504

    (a)

    (2) , 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 business.
 ``
        (E) Exception for banks, etc.--In the case of a 
 bank (as defined in 

section 581) or a depository 
 institution holding company (as defined in 

section 3

    (w)

    (1) of the Federal Deposit Insurance Act (12 U.S.C. 
 1813

    (w)

    (1) )), the term `passive investment income' 
 shall not include--
 ``
            (i) interest income earned by such bank 
 or company, or
 ``
            (ii) dividends on assets required to be 
 held by such bank or company, including stock 
 in the Federal Reserve Bank, the Federal Home 
 Loan Bank, or the Federal Agricultural Mortgage 
 Bank or participation certificates issued by a 
 Federal Intermediate Credit Bank.
 ``
        (F) Gross receipts from the sales of certain 
 assets.--For purposes of this paragraph--
 ``
            (i) Capital assets other than stock and 
 securities.--In the case of dispositions of 
 capital assets (other than stock and 
 securities), gross receipts from such 
 dispositions shall be taken into account only 
 to the extent of capital gain net income 
 therefrom.
 ``
            (ii) Stock and securities.--In the case 
 of sales or exchanges of stock or securities, 
 gross receipts shall be taken into account only 
 to the extent of the gain therefrom.
 ``
        (G) Coordination with 

section 1374.--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 period. Terms used in the preceding 
 sentence shall have the same respective meanings as 
 when used in 

section 1374.''.

    (2)
        (A) Section 26

    (b)

    (2)
        (J) is amended by striking ``25 
 percent'' and inserting ``60 percent''.
        (B) Section 1375

    (b)

    (1)
        (A)
            (i) is amended by striking ``25 
 percent'' and inserting ``60 percent''.
            (C) The heading for 

section 1375 is amended by striking 
 ``25 percent'' and inserting ``60 percent''.
            (D) The item relating to 

section 1375 in the table of 
 sections for part III of subchapter S of chapter 1 is amended 
 by striking ``25 percent'' and inserting ``60 percent''.

    (3) Section 1042
            (c) (4)
        (A)
            (i) is amended by striking 
 ``

section 1362
            (d) (3)
            (C) '' and inserting ``

section 1375

    (b)

    (3) ''.

    (4) Section 1362

    (f)

    (1)
        (B) is amended by striking 
 ``paragraph

    (2) or

    (3) of subsection
            (d) '' and inserting 
 ``subsection
            (d) (2) ''.
            (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2024.

SEC. 4. NONRESIDENT ALIEN INDIVIDUALS PERMITTED AS S CORPORATION 
 SHAREHOLDERS.

    (a) In General.--

Section 1361

    (b)

    (1) is amended by adding ``and'' at 
the end of subparagraph
        (B) , by striking subparagraph
            (C) , and by 
redesignating subparagraph
            (D) as subparagraph
            (C) .

    (b) Gain or Loss of Nonresident Aliens From Sale or Exchange of S 
Corporation Stock.--

Section 864
            (c) is amended by adding at the end the 
following new paragraph:
 ``

    (9) Gain or loss of nonresident aliens from sale or 
 exchange of s corporation stock.--
 ``
        (A) In general.--Notwithstanding any other 
 provision of this subtitle, if a nonresident alien 
 individual owns, directly or indirectly, stock of an S 
 corporation which is engaged in any trade or business 
 within the United States, gain or loss on the sale or 
 exchange of all (or any portion of) such stock shall be 
 treated as effectively connected with the conduct of 
 such trade or business to the extent such gain or loss 
 does not exceed the amount determined under 
 subparagraph
        (B) .
 ``
        (B) Amount treated as effectively connected.--The 
 amount determined under this subparagraph with respect 
 to any S corporation stock sold or exchanged--
 ``
            (i) in the case of any gain on the sale 
 or exchange of the S corporation stock, is--
 ``
            (I) the portion of the 
 shareholder's pro rata share of the 
 amount of gain which would have been 
 effectively connected with the conduct 
 of a trade or business within the 
 United States if the S corporation had 
 sold all of its assets at their fair 
 market value as of the date of the sale 
 or exchange of such stock, or
 ``
            (II) zero if no gain on such 
 deemed sale would have been so 
 effectively connected, and
 ``
            (ii) in the case of any loss on the sale 
 or exchange of the S corporation stock, is--
 ``
            (I) the portion of the 
 shareholder's pro rata share of the 
 amount of loss on the deemed sale 
 described in clause
            (i) 
            (I) which would 
 have been so effectively connected, or
 ``
            (II) zero if no loss on such 
 deemed sale would have been so 
 effectively connected.
 ``
            (C) Application of certain other rules.--Except 
 as otherwise provided by the Secretary, rules similar 
 to the rules of subparagraphs
            (C) ,
            (D) , and
        (E) of 
 paragraph

    (8) shall apply for purposes of this 
 paragraph.''.
            (c) Withholding Tax.--Subchapter A of chapter 3 is amended by 
adding at the end the following new section:

``

SEC. 1447. WITHHOLDING TAX ON NONRESIDENT ALIEN S CORPORATION 
 SHAREHOLDER'S PRO RATA SHARE OF EFFECTIVELY CONNECTED 
 INCOME.

 ``

    (a) In General.--If--
 ``

    (1) an S corporation has effectively connected taxable 
 income for any taxable year, and
 ``

    (2) any shareholder of such S corporation is a 
 nonresident alien,
such S corporation shall pay a withholding tax under this section at 
such time and in such manner as the Secretary may provide.
 ``

    (b) Amount of Withholding Tax.--The amount of the withholding tax 
payable by any S corporation under subsection

    (a) shall be equal to the 
product of--
 ``

    (1) the highest rate of tax specified in 

section 1, 
 multiplied by
 ``

    (2) the aggregate pro rata shares of the effectively 
 connected taxable income of such S corporation with respect to 
 shareholders who are nonresident aliens.
 ``
            (c) Effectively Connected Taxable Income.--For purposes of this 
section, the term `effectively connected taxable income' means the 
taxable income of the S corporation which is effectively connected (or 
treated as effectively connected) with the conduct to a trade or 
business in the United States. For purposes of the preceding sentence, 
the S corporation shall be allowed a deduction for depletion with 
respect to oil and gas wells but the amount of such deduction shall be 
determined without regard to sections 613 and 613A.
 ``
            (d) Treatment of Nonresident Alien Shareholders.--
 ``

    (1) Allowance of credit.--Each nonresident alien who is a 
 shareholder of an S corporation shall be allowed a credit under 
 

section 33 for such shareholder's share of the withholding tax 
 paid by the S corporation under this section. Such credit shall 
 be allowed for the shareholder's taxable year in which (or with 
 which) the S corporation taxable year (for which such tax was 
 paid) ends.
 ``

    (2) Credit treated as distributed to shareholder.--Except 
 as provided in regulations, a nonresident alien shareholder's 
 share of any withholding tax paid by the S corporation under 
 this section shall be treated as distributed to such 
 shareholder by such S corporation on the earlier of--
 ``
        (A) the day on which such tax was paid by the S 
 corporation, or
 ``
        (B) the last day of the S corporation's taxable 
 year for which such tax was paid.
 ``

    (e) Special Rules for Withholding on Dispositions of S 
Corporation Stock.--
 ``

    (1) In general.--Except as provided in this subsection, 
 if any portion of the gain (if any) on any disposition of stock 
 in an S corporation would be treated under 

section 864
            (c) (9) as 
 effectively connected with the conduct of a trade or business 
 within the United States, the transferee shall be required to 
 deduct and withhold a tax equal to 10 percent of the amount 
 realized on the disposition.
 ``

    (2) Exception if nonforeign affidavit furnished; other 
 special rules.--Except as otherwise provided by the Secretary, 
 rules similar to the rules of paragraphs

    (2) through

    (6) of 
 

section 1446

    (f) shall apply for purposes of this subsection.
 ``

    (f) Regulations.--The Secretary shall prescribed such regulations 
or other guidance as may be necessary or appropriate to carry out the 
purposes of this section, including regulations or other guidance 
providing--
 ``

    (1) that for purposes of 

section 6655, the withholding 
 tax imposed under this section shall be treated as a tax 
 imposed by 

section 11 and any S corporation required to pay 
 such tax shall be treated as a corporation to which such 
 section applies, and
 ``

    (2) appropriate adjustments in applying 

section 6655 with 
 respect to such withholding tax.''.
            (d) Conforming Amendments.--

    (1) Section 1361
            (c) (2)
        (B)
            (v) is amended by striking the 
 last sentence.

    (2) Section 6401

    (b)

    (2) is amended by inserting ``or 1447'' 
 after ``

section 1446''.

    (3) The table of sections for subchapter A of chapter 3 is 
 amended by adding at the end the following new item:

``

Sec. 1447. Withholding tax on nonresident alien S corporation 
 shareholder's pro rata share of effectively 
 connected income.''.

    (e) Effective Dates.--

    (1) In general.--Except as otherwise provided in this 
 subsection, the amendments made by this section shall apply to 
 taxable years beginning after December 31, 2024.

    (2) Gain or loss; withholding.--The amendments made by 
 subsections

    (b) ,
            (c) ,
            (d) (2) , and
            (d) (3) shall apply to sales, 
 exchanges, and dispositions after December 31, 2024.

SEC. 5. EMPLOYEES OF A FIRM COUNTED AS A SINGLE SHAREHOLDER TOWARD 
 SHAREHOLDER LIMIT OF S CORPORATION.

    (a) In General.--Subsection
            (c) of 

section 1361 is amended by 
adding at the end the following:
 ``

    (7) Employees treated as one shareholder.--
 ``
        (A) In general.--For purposes of subsection

    (b)

    (1)
        (A) , there shall be treated as one shareholder 
 all employees (and their estates) of a corporation and 
 any wholly owned business entities (as determined by 
 the Secretary) of such corporation.
 ``
        (B) Employee defined.--For purposes of this 
 paragraph, the term `employee' means any individual 
 that would be an employee described under paragraph

    (1) or

    (2) of 

section 3121
            (d) .''.

    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2024.

SEC. 6. EXPANSION OF S CORPORATION ELIGIBLE SHAREHOLDERS TO INCLUDE 
 IRAS.

    (a) In General.--

Section 1361
            (c) (2)
        (A)
            (vi) is amended to read as 
follows:
 ``
            (vi) A trust which constitutes an 
 individual retirement account under 

section 408

    (a) , including one designated as a Roth IRA 
 under 

section 408A.''.

    (b) Sale of Stock in IRA Relating to S Corporation Election Exempt 
From Prohibited Transaction Rules.--

Section 4975
            (d) (16) is amended--

    (1) by striking subparagraphs
        (A) and
        (B) and by 
 redesignating subparagraphs
            (C) ,
            (D) ,
        (E) , and
        (F) as 
 subparagraphs
        (A) ,
        (B) ,
            (C) , and
            (D) , respectively, and

    (2) by striking ``such bank or company'' in subparagraph
        (A) (as so redesignated) and inserting ``the issuer of such 
 stock''.
            (c) Effective Date.--The amendments made by this section shall take 
effect on January 1, 2026.

SEC. 7. TRANSFER OF SUSPENDED LOSSES INCIDENT TO DEATH.

    (a) In General.--

Section 1366
            (d) (2)
        (B) is amended by inserting ``, 
or any transfer incident to the death of the transferor,'' after ``any 
transfer described in 

section 1041

    (a) ''.

    (b) Effective Date.--The amendment made by this section shall apply 
to transfers incident to deaths occurring after the date of the 
enactment of this Act.

SEC. 8. REPEAL OF INCLUSION IN GROSS INCOME OF DEFERRED COMPENSATION 
 UNDER NONQUALIFIED DEFERRED COMPENSATION PLANS.

    (a) In General.--Subpart A of part I of subchapter D of chapter 1 
is amended by striking 

section 409A (and by striking the item relating 
to such section from the table of sections for such subpart).

    (b) Conforming Amendments.--

    (1) Section 26

    (b)

    (2) is amended by striking subparagraph
            (V) and by redesignating subparagraphs
        (W) through
        (Z) as 
 subparagraphs
            (V) through
        (Y) , respectively.

    (2) Section 430
            (c) (7)
            (D) 
            (iv) 
            (I) is amended by inserting 
 ``as in effect before its repeal'' after ``

section 409A''.

    (3)
        (A) Section 457A is amended by redesignating subsections
            (d) and

    (e) as subsections

    (e) and

    (f) and by inserting after 
 subsection
            (c) the following new subsection:
 ``
            (d) Nonqualified Deferred Compensation Plan.--For purposes of 
this section--
 ``

    (1) In general.--The term `nonqualified deferred 
 compensation' plan means--
 ``
        (A) any plan that provides for the deferral of 
 compensation, other than--
 ``
            (i) a qualified employer plan, and
 ``
            (ii) any bona fide vacation leave, sick 
 leave, compensatory time, disability pay, or 
 death benefit plan, and
 ``
        (B) any plan that provides a right to 
 compensation based on the appreciation in value of a 
 specified number of equity units of the service 
 recipient.
 ``

    (2) Qualified employer plan.--The term `qualified 
 employer plan' means--
 ``
        (A) any plan, contract, pension, account, or 
 trust described in subparagraph
        (A) or
        (B) of 

section 219

    (g)

    (5) (without regard to subparagraph
        (A)
            (iii) ),
 ``
        (B) any eligible deferred compensation plan 
 (within the meaning of 

section 457

    (b) ), and
 ``
            (C) any plan described in 

section 415
            (m) .
 ``

    (3) Plan includes arrangements, etc.--The term `plan' 
 includes any agreement or arrangement, including an agreement 
 or arrangement that includes one person.
 ``

    (4) Treatment of earnings.--References to deferred 
 compensation shall be treated as including references to income 
 (whether actual or notional) attributable to such compensation 
 or such income.
 ``

    (5) Aggregation rules.--Except as provided by the 
 Secretary, rules similar to the rules of subsections

    (b) and
            (c) of 

section 414 shall apply.
 ``

    (6) Treatment of qualified stock.--An arrangement under 
 which an employee may receive qualified stock (as defined in 
 

section 83
            (i) (2) ) shall not be treated as a nonqualified 
 deferred compensation plan with respect to such employee solely 
 because of such employee's election, or ability to make an 
 election, to defer recognition of income under 

section 83
            (i) .''.
        (B) Section 457A

    (e)

    (3) , as redesignated by subparagraph
        (A) , is amended to read as follows:
 ``

    (3) 12-month exception.--Compensation shall not be 
 treated as deferred for purposes of this section if the service 
 provider receives payment of such compensation not later than 
 12 months after the end of the taxable year of the service 
 recipient during which the right to the payment of such 
 compensation is no longer subject to a substantial risk of 
 forfeiture.''.
            (C) Section 457A

    (e) , as redesignated by subparagraph
        (A) , 
 is amended by striking paragraph

    (5) .

    (4) Section 877A

    (g)

    (6) is amended by striking 
 ``409A

    (a)

    (1)
        (B) ,''.

    (5) Section 3401

    (a) is amended by striking the last 
 sentence.

    (6) Section 6041 is amended by striking subsection

    (g) .

    (7) Section 6051

    (a) is amended--
        (A) by striking paragraph

    (13) and redesginating 
 paragraphs

    (14) through

    (17) as paragraphs

    (13) through

    (16) , respectively, and
        (B) by striking the last sentence.
            (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2025.
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