Law Offices of Michael D. Daniels
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SECTION 1374. TAX IMPOSED ON CERTAIN BUILT-IN GAINS
(a) GENERAL RULE
If for any taxable year beginning in the recognition period an S
corporation has a net recognized built-in gain, there is hereby imposed a
tax (computed under subsection (b)) on the income of such corporation for
such taxable year.
(b) AMOUNT OF TAX
(1) IN GENERAL
The amount of the tax imposed by subsection (a) shall be computed by
applying the highest rate of tax specified in section 11(b) to the net
recognized built-in gain of the S corporation for the taxable year.
(2) NET OPERATING LOSS CARRYFORWARDS FROM C YEARS ALLOWED
Notwithstanding section 1371(b)(1), any net operating loss
carryforward arising in a taxable year for which the corporation was a
C corporation shall be allowed for purposes of this section as a
deduction against the net recognized built-in gain of the S
corporation for the taxable year. For purposes of determining the
amount of any such loss which may be carried to subsequent taxable
years, the amount of the net recognized built-in gain shall be treated
as taxable income. Rules similar to the rules of the preceding
sentences of this paragraph shall apply in the case of a capital loss
carryforward arising in a taxable year for which the corporation was a
C corporation.
(3) CREDITS
(A) IN GENERAL
Except as provided in subparagraph (B), no credit shall be
allowable under part IV of subchapter A of this chapter (other
than under section 34) against the tax imposed by subsection (a).
(B) BUSINESS CREDIT CARRYFORWARDS FROM C YEARS ALLOWED
Notwithstanding section 1371(b)(1), any business credit
carryforward under section 39 arising in a taxable year for which
the corporation was a C corporation shall be allowed as a credit
against the tax imposed by subsection (a) in the same manner as
if it were imposed by section 11. A similar rule shall apply in
the case of the minimum tax credit under section 53 to the extent
attributable to taxable years for which the corporation was a C
corporation.
(4) COORDINATION WITH SECTION 1201(a)
For purposes of section 1201(a)--
(A) the tax imposed by subsection (a) shall be treated as if it
were imposed by section 11, and
(B) the amount of the net recognized built-in gain shall be
treated as the taxable income.
(c) LIMITATIONS
(1) CORPORATIONS WHICH WERE ALWAYS S CORPORATIONS
Subsection (a) shall not apply to any corporation if an election under
section 1362(a) has been in effect with respect to such corporation
for each of its taxable years. Except as provided in regulations, an S
corporation and any predecessor corporation shall be treated as 1
corporation for purposes of the preceding sentence.
(2) LIMITATION ON AMOUNT OF RECOGNIZED BUILT-IN GAINS
The amount of the net recognized built-in gain taken into account
under this section for any taxable year shall not exceed the excess
(if any) of--
(A) the net unrealized built-in gain, over
(B) the net recognized built-in gain for prior taxable years
beginning in the recognition period.
(d) DEFINITIONS AND SPECIAL RULES
For purposes of this section--
(1) NET UNREALIZED BUILT-IN GAIN
The term "net unrealized built-in gain" means the amount (if any) by
which--
(A) the fair market value of the assets of the S corporation as
of the beginning of its 1st taxable year for which an election
under section 1362(a) is in effect, exceeds
(B) the aggregate adjusted bases of such assets at such time.
(2) NET RECOGNIZED BUILT-IN GAIN
(A) IN GENERAL
The term "net recognized built-in gain" means, with respect to
any taxable year in the recognition period, the lesser of--
(i) the amount which would be the taxable income of the S
corporation for such taxable year if only recognized
built-in gains and recognized built-in losses were taken
into account, or
(ii) such corporation's taxable income for such taxable year
(determined as provided in section 1375(b)(1)(B)).
(B) CARRYOVER
If, for any taxable year, the amount referred to in clause (i) of
subparagraph (A) exceeds the amount referred to in clause (ii) of
subparagraph (A), such excess shall be treated as a recognized
built-in gain in the succeeding taxable year. The preceding
sentence shall apply only in the case of a corporation treated as
an S corporation by reason of an election made on or after March
31, 1988.
(3) RECOGNIZED BUILT-IN GAIN
The term "recognized built-in gain" means any gain recognized during
the recognition period on the disposition of any asset except to the
extent that the S corporation establishes that--
(A) such asset was not held by the S corporation as of the
beginning of the 1st taxable year for which it was an S
corporation, or
(B) such gain exceeds the excess (if any) of--
(i) the fair market value of such asset as of the beginning
of such 1st taxable year, over
(ii) the adjusted basis of the asset as of such time.
(4) RECOGNIZED BUILT-IN LOSSES
The term "recognized built-in loss" means any loss recognized during
the recognition period on the disposition of any asset to the extent
that the S corporation establishes that--
(A) such asset was held by the S corporation as of the beginning
of the 1st taxable year referred to in paragraph (3), and
(B) such loss does not exceed the excess of--
(i) the adjusted basis of such asset as of the beginning of
such 1st taxable year, over
(ii) the fair market value of such asset as of such time.
(5) TREATMENT OF CERTAIN BUILT-IN ITEMS
(A) INCOME ITEMS
Any item of income which is properly taken into account during
the recognition period but which is attributable to periods
before the 1st taxable year for which the corporation was an S
corporation shall be treated as a recognized built-in gain for
the taxable year in which it is properly taken into account.
(B) DEDUCTION ITEMS
Any amount which is allowable as a deduction during the
recognition period (determined without regard to any carryover)
but which is attributable to periods before the 1st taxable year
referred to in subparagraph (A) shall be treated as a recognized
built-in loss for the taxable year for which it is allowable as a
deduction.
(C) ADJUSTMENT TO NET UNREALIZED BUILT-IN GAIN
The amount of the net unrealized built-in gain shall be properly
adjusted for amounts which would be treated as recognized
built-in gains or losses under this paragraph if such amounts
were properly taken into account (or allowable as a deduction)
during the recognition period.
(6) TREATMENT OF CERTAIN PROPERTY
If the adjusted basis of any asset is determined (in whole or in part)
by reference to the adjusted basis of any other asset held by the S
corporation as of the beginning of the 1st taxable year referred to in
paragraph (3)--
(A) such asset shall be treated as held by the S corporation as
of the beginning of such 1st taxable year, and
(B) any determination under paragraph (3)(B) or (4)(B) with
respect to such asset shall be made by reference to the fair
market value and adjusted basis of such other asset as of the
beginning of such 1st taxable year.
(7) RECOGNITION PERIOD
The term "recognition period" means the 10-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 section 593(e), the preceding
sentence shall be applied without regard to the phrase "10-year".
(8) TREATMENT OF TRANSFER OF ASSETS FROM C CORPORATION TO S
CORPORATION
(A) IN GENERAL
Except to the extent provided in regulations, if--
(i) an S corporation acquires any asset, and
(ii) the S corporation's basis in such asset is determined
(in whole or in part) by reference to the basis of such
asset (or any other property) in the hands of a C
corporation,
then a tax is hereby imposed on any net recognized built-in gain
attributable to any such assets for any taxable year beginning in
the recognition period. The amount of such tax shall be
determined under the rules of this section as modified by
subparagraph (B).
(B) MODIFICATIONS
For purposes of this paragraph, the modifications of this
subparagraph are as follows:
(i) IN GENERAL
The preceding paragraphs of this subsection shall be applied
by taking into account the day on which the assets were
acquired by the S corporation in lieu of the beginning of
the 1st taxable year for which the corporation was an S
corporation.
(ii) SUBSECTION (c)(1) NOT TO APPLY
Subsection (c)(1) shall not apply.
(9) REFERENCE TO 1ST TAXABLE YEAR
Any reference in this section to the 1st taxable year for which the
corporation was an S corporation shall be treated as a reference to
the 1st taxable year for which the corporation was an S corporation
pursuant to its most recent election under section 1362.
(e) REGULATIONS
The Secretary shall prescribe such regulations as may be necessary to carry
out the purposes of this section including regulations providing for the
appropriate treatment of successor corporations.
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