§1374 — Tax imposed on certain built-in gains
85 cases·14 followed·10 distinguished·1 criticized·4 overruled·56 cited—16% support
Statute Text — 26 U.S.C. §1374
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.
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.
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.
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).
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.
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.
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—
the net unrealized built-in gain, over
the net recognized built-in gain for prior taxable years beginning in the recognition period.
For purposes of this section—
The term “net unrealized built-in gain” means the amount (if any) by which—
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
the aggregate adjusted bases of such assets at such time.
The term “net recognized built-in gain” means, with respect to any taxable year in the recognition period, the lesser of—
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
such corporation’s taxable income for such taxable year (determined as provided in section 1375(b)(1)(B)).
If, for any taxable year described in subparagraph (A), 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 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—
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
such gain exceeds the excess (if any) of—
the fair market value of such asset as of the beginning of such 1st taxable year, over
the adjusted basis of the asset as of such time.
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—
such asset was held by the S corporation as of the beginning of the 1st taxable year referred to in paragraph (3), and
such loss does not exceed the excess of—
the adjusted basis of such asset as of the beginning of such 1st taxable year, over
the fair market value of such asset as of such time.
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.
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.
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.
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)—
such asset shall be treated as held by the S corporation as of the beginning of such 1st taxable year, and
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.
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”.
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.
Except to the extent provided in regulations, if—
an S corporation acquires any asset, and
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).
For purposes of this paragraph, the modifications of this subparagraph are as follows:
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.
Subsection (c)(1) shall not apply.
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.
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.
Treasury Regulations
- Treas. Reg. §Treas. Reg. §1.1374-0 Table of contents
- Treas. Reg. §Treas. Reg. §1.1374-0(a) In general.
- Treas. Reg. §Treas. Reg. §1.1374-0(b) Additional rules.
- Treas. Reg. §Treas. Reg. §1.1374-0(c) Revocation and re-election of S corporation status.
- Treas. Reg. §Treas. Reg. §1.1374-0(d) Taxable income limitation.
- Treas. Reg. §Treas. Reg. §1.1374-0(e) Examples.
- Treas. Reg. §Treas. Reg. §1.1374-0(f) Discharge of indebtedness and bad debts.
- Treas. Reg. §Treas. Reg. §1.1374-0(g) Completion of contract.
- Treas. Reg. §Treas. Reg. §1.1374-0(h) Installment method.
- Treas. Reg. §Treas. Reg. §1.1374-0(i) In general.
- Treas. Reg. §Treas. Reg. §1.1374-1 General rules and definitions
- Treas. Reg. §Treas. Reg. §1.1374-1(a) Computation of tax.
- Treas. Reg. §Treas. Reg. §1.1374-1(b) Anti-trafficking rules.
- Treas. Reg. §Treas. Reg. §1.1374-1(c) Section 1374 attributes.
- Treas. Reg. §Treas. Reg. §1.1374-1(d) Recognition period.
- Treas. Reg. §Treas. Reg. §1.1374-1(e) Predecessor corporation.
- Treas. Reg. §Treas. Reg. §1.1374-10 Effective date and additional rules
- Treas. Reg. §Treas. Reg. §1.1374-10(a) In general.
- Treas. Reg. §Treas. Reg. §1.1374-10(b) Additional rules.
- Treas. Reg. §Treas. Reg. §1.1374-10(c) Termination and re-election of S corporation status—(1) In general.
- Treas. Reg. §Treas. Reg. §1.1374-1A Tax imposed on certain capital gains
- Treas. Reg. §Treas. Reg. §1.1374-1A(a) General rule.
- Treas. Reg. §Treas. Reg. §1.1374-1A(b) Amount of tax.
- Treas. Reg. §Treas. Reg. §1.1374-1A(c) Exceptions to taxation—(1) New corporations and corporations with election in effect for 3 immediately preceding years—(i) In general.
- Treas. Reg. §Treas. Reg. §1.1374-1A(d) Determination of taxable income—(1) General rule.
85 Citing Cases
1374, as amended by the Tax Reform Act of 1986 (TRA of 1986), Pub. L. 99-514, 100 Stat. 2085, does not apply to tax the alleged sec.
1374, as amended by the Tax Reform Act of 1986 (TRA of 1986), Pub. L. 99-514, 100 Stat. 2085, does not apply to tax the alleged sec.
1374, as amended by the Tax Reform Act of 1986 (TRA of 1986), Pub. L. 99-514, 100 Stat. 2085, does not apply to tax the alleged sec.
The determination against Recovery Group, an S corporation, was made pursuant to section 1374 (see infra note 5) and was as follows : 2Except as otherwise noted, all section references are to the Internal Revenue Code (26 U.S .C .), and all Rule references are to the Tax Court Rules of Practice and Procedure .
Respondent, however, contends that, pursuant to section 1374(d)(9), as amended, petitioner’s “most recent election” (i.e., 1994 S election) is the election to which section 1374, as amended, refers.
1374 requires an S corporation to pay a corporate-level tax on any net recognized built-in gains recognized within 10 years following the effective date of the S election.
Tax Returns for 2000 and 2001 MMC reported the section 481 adjustment as income on the S corporation tax returns for the years at issue but did not report the section 481 adjustment as recognized built-in gain pursuant to section 1374 for either year at issue .
ot apply to tax the alleged sec. 311(b) gain to Ridge. See TRA of 1986 sec. 633(b), 100 Stat. 2277; Rev. Rui. 86-141, 1986-2 C.B. 151, 152. Sec. 1374 requires that “built-in gain” be taxed directly to an S corporation. The pre-TRA of 1986 version of sec. 1374 applied only during the first 3 years (not the first 10 years as under the amended provision) for which an S corporation election was in effect. See former sec. 1374(c)(1). For Ridge, the applicable years were its 1988-90 taxable years. The
The language of section 1371(b) ("No carryforward, and no carryback") is broad, unlike that of other sections which specify certain types of carryforwards and carrybacks. See supra note 4. The legislative history of section 1371(b) supports a broad 4 See, e.g., sec. 170(d)(1) and (2) (charitable contributions); sec. 38(a) (business credit carryforwards and carrybacks); sec. 172 (net operating loss carryovers and carrybacks); sec. 904(c) (foreign tax credit); sec. 1212 (capital loss carrybacks an
.3 2 Although Sainte Claire elected to be an S corporation for its 1987 and 1988 taxable years, respondent determined that it was liable for tax on its excess net passive income pursuant to sec. 1375 for 1987 and on its net capital gain pursuant to sec. 1374 for 1988. 3 Petitioners object on grounds of relevance to entries in an exhibit prepared by respondent's agent that relate to payments of interest by James F. Boccardo to Sainte Claire during 1985 and 1986. While we sustain petitioners' obje
.3 2 Although Sainte Claire elected to be an S corporation for its 1987 and 1988 taxable years, respondent determined that it was liable for tax on its excess net passive income pursuant to sec. 1375 for 1987 and on its net capital gain pursuant to sec. 1374 for 1988. 3 Petitioners object on grounds of relevance to entries in an exhibit prepared by respondent's agent that relate to payments of interest by James F. Boccardo to Sainte Claire during 1985 and 1986. While we sustain petitioners' obje
Congress further cemented the repeal ofthe General Utilities doctrine by enacting section 1374 in the Tax Reform Act of 1986, Pub L.
was liable for deficiencies in built-in gains tax under section 1374 of $49,724,005.
- 2 - The issues raised in the motion concern KRP, Inc.’s (KRP) liability for the built-in gains tax imposed pursuant to section 1374 for 1995.2 Background KRP is a corporation organized and existing under the laws of the State of Alaska.
Discussion Prior to the enactment of the TRA, section 1374 imposed a tax on capital gain recognized by an S corporation within 3 years after making a section 1362(a) election.
In enacting section 1363(d), Congress was concerned that a corporation maintaining its inventory under LIFO might circumvent the built-in gain rules of section 1374 to the extent the corporation did not liquidate its LIFO layers during the 10 years following its conversion from a C corporation to an S corporation.
sec. 351, I.R.C., the immediate distribution of SIC stock in redemption of A's stock in MIC was a distribution of appreciated property under secs. 311(b) and 317(b), I.R.C., on which recognized gain in the amount of $141,000 is taxable to MIC under sec. 1374, I.R.C. 5. Held, further, MIC is not liable for a negligence addition to tax under sec. 6653(a), I.R.C., but is liable for a substantial understatement addition under sec. 6661, I.R.C. - 3 - Frank Agostino, Alan G. Merkin, Mary Ann Perrone,
In the notice, the Commissioner determined an increased tax liability of $181,661,831 attributable to built-in gains under section 1374 and denied Tribune’s $2.5 million deduction of Mr.
(An S corporation converted in 2002--the year of RLC’s incorporation--would have had to wait seven years to sell its assets to avoid paying this tax. See American Recovery and Reinvestment Act of 2009, Pub. L. No. 111- 5, sec. 1251(a), 123 Stat. at 342.) A C corporation also cannot avoid double taxation on its built-up profits by convert
(An S corporation converted in 2002--the year of RLC’s incorporation--would have had to wait seven years to sell its assets to avoid paying this tax. See American Recovery and Reinvestment Act of 2009, Pub. L. No. 111- 5, sec. 1251(a), 123 Stat. at 342.) A C corporation also cannot avoid double taxation on its built-up profits by convert
(An S corporation converted in 2002--the year of RLC’s incorporation--would have had to wait seven years to sell its assets to avoid paying this tax. See American Recovery and Reinvestment Act of 2009, Pub. L. No. 111- 5, sec. 1251(a), 123 Stat. at 342.) A C corporation also cannot avoid double taxation on its built-up profits by convert
(An S corporation converted in 2002--the year of RLC’s incorporation--would have had to wait seven years to sell its assets to avoid paying this tax. See American Recovery and Reinvestment Act of 2009, Pub. L. No. 111- 5, sec. 1251(a), 123 Stat. at 342.) A C corporation also cannot avoid double taxation on its built-up profits by convert
(An S corporation converted in 2002--the year of RLC’s incorporation--would have had to wait seven years to sell its assets to avoid paying this tax. See American Recovery and Reinvestment Act of 2009, Pub. L. No. 111- 5, sec. 1251(a), 123 Stat. at 342.) A C corporation also cannot avoid double taxation on its built-up profits by convert
The board wanted DPI to avoid the section 1374 built-in gams tax on corporate assets.
Congress further cemented the repeal ofthe General Utilities doctrine by enacting section 1374 in the Tax Reform Act of 1986, Pub L.
Congress further cemented the repeal ofthe General Utilities doctrine by enacting section 1374 in the Tax Reform Act of 1986, Pub L.
Congress further cemented the repeal ofthe General Utilities doctrine by enacting section 1374 in the Tax Reform Act of 1986, Pub L.
Congress further cemented the repeal ofthe General Utilities doctrine by enacting section 1374 in the Tax Reform Act of 1986, Pub L.
) ED MAY 10 2010 - 2 - decided are : (1) For purposes of determining built-in gain under section 1374, whether the fair market value of a partnership interest petitioner owned as of January 1, 2000, was $2,980,000, as petitioner contends, or $5,220,423, as respondent contends, and (2) whether petitioner is liable for the accuracy-related penalty respondent determined pursuant to section 6662 .
was liable for deficiencies in built-in gains tax under section 1374 of $49,724,005 and $63,856,385 for 2000 and 2001, respectively.
Regs., provides that after the year of the S corporation election, the S corporation is not to be treated as a C corporation in applying.
t limited to the 0.5-percent addition to the Federal short-term rate. We have also considered that petitioner was at one time a C corporation and is only now subject to a corporate-level tax liability because of its prior status and the operation of section 1374. However, this does not change our conclusion because in interpreting the application of section 6621(c)(3) to underpayments, section 301.6621-3(b)(3), Proced. & Admin. Regs., provides that after the year of the S corporation election, t
Built-in gain is measured by the appreciation in value. of ~any asset over its adjusted basis -as- of.the time the 3 Petitioner has replied to the notice (the reply), and respondent has responded to the reply (the response) . - 8 - 2. Business Record In order to constitute a business record admissible under Fed. R. Evid. 803(6)
e.) In - 71 - addition, personal interest does not include interest of an S corporation which is attributable to an underpayment of income tax from a year in which the corporation was a C corporation or from the underpayment of the taxes imposed by sec. 1374 or 1375. Nor does personal interest include interest on an underpayment of income tax of a corporation payable by a shareholder by reason of transferee liability (under sec. 6901). (7) TAMRA 1988 On June 10, 1987, the Technical Corrections A
ss income.) In addition, personal interest does not include interest of an S corporation which is attributable to an underpayment of income tax from a year in which the corporation was a C corporation or from the underpayment of the taxes imposed by sec. 1374 or 1375. Nor does personal interest include interest on an underpayment of income tax of a corporation payable by a shareholder by reason of transferee liability (under sec. 6901). The Ways and Means Committee’s amendment added tits. Ill (S
itioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 8563-00. Filed October 30, 2001. Respondent (R) sent petitioner (P), an S corporation, a notice of deficiency in which R determined that P was subject to the built-in gains tax under sec. 1374, I.R.C., for payments P received in fiscal years 1996, 1997, and 1998. R issued no notice of final S corporation administrative adjustment to P for fiscal years 1996 or 1997. R contends that the notice of deficiency is invalid as to fiscal
Respondent contends that the notice of deficiency is invalid as to fiscal years 1996 and 1997 and prohibited by sections 6225 and 6244 for those years because the proposed built-in gains tax for which respondent determined petitioner is liable under section 1374 for fiscal years 1996 and 1997 is a subchapter S item that must be determined in a unified audit and litigation procedure for an S corporation.
must generally be individuals, whereas experts of both parties conclude that the likely buyer of decedent's Johnco stock would be a large timber products company or a pension fund. Finally, respondent and his expert fail to consider the impact that sec. 1374 might have on any decision to convert Johnco from C to S corporation status. - 41 - done so in a manner sufficient to prevent petitioner from being able to carry its burden of final persuasion, as respondent asserts. We may allow the applic
1374 was superseded upon the addition of sec. 1366 to the Code. Subchapter S Revision Act of 1982, Pub. L. 97-354, sec. 2, 96 Stat. 1669, 1677. - 27 - S. Rept. 1983, 85th Cong., 2d Sess. (1958), 1958-3 C.B. 922, 1141. We have construed the term "investment", as used in section 1366(d)(1)(B), to mean actual economic outlay of the shareholder i
1374 was superseded upon the addition of sec. 1366 to the Code. Subchapter S Revision Act of 1982, Pub. L. 97-354, sec. 2, 96 Stat. 1669, 1677. - 27 - S. Rept. 1983, 85th Cong., 2d Sess. (1958), 1958-3 C.B. 922, 1141. We have construed the term "investment", as used in section 1366(d)(1)(B), to mean actual economic outlay of the shareholder i
between Maverick Transportation, Inc. (MTI), and respondent in a related case, Maverick Transp., Inc. v. Commissioner, docket No. 18322-95. In the notice of deficiency to MTI, respondent determined that MTI was subject to a built-in gains tax under sec. 1374 in the amount of $104,362 for 1991. In the notice of deficiency issued to petitioners, respondent allowed petitioners a $104,362 passthrough deduction in 1991 for MTI's built-in gains tax liability. In the settlement in Maverick Transp., In
between Maverick Transportation, Inc. (MTI), and respondent in a related case, Maverick Transp., Inc. v. Commissioner, docket No. 18322-95. In the notice of deficiency to MTI, respondent determined that MTI was subject to a built-in gains tax under sec. 1374 in the amount of $104,362 for 1991. In the notice of deficiency issued to petitioners, respondent allowed petitioners a $104,362 passthrough deduction in 1991 for MTI’s built-in gains tax liability. In the settlement in Maverick Transp., In
It does not follow, as petitioner suggests, from the fact that the statute specifies certain items to be excluded from the application of section 1371(b) for one purpose, namely built-in gains under section 1374, that other items are excluded from the application of section 1371(b) for other purposes.
1374 was superseded upon the addition of sec. 1366 to the Code. Subchapter S Revision Act of 1982. Pub. L. 97-354. sec. 2. 96 Stat. 1669. 1677. SPC-SC and SPC-FL each recorded the transaction as a debit to assets and a credit to notes payable — seller. Furthermore, with respect to the SPC-FL transaction, the record contains additional evidence
Petitioner’s Tax Liability Under Section 1374 Section 1363(a) provides that, generally, S corporations are not subject to income tax.