[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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