§1374 — Tax imposed on certain built-in gains

Statute Text — 26 U.S.C. §1374

Treasury Regulations

• Treas. Reg. §1.1374-0Table of contents Show full text ▾ Collapse ▴

  This section lists the major paragraph headings for §§ 1.1374-1 through 1.1374-10.

  (a) Computation of tax.

  (b) Anti-trafficking rules.

  (c) Section 1374 attributes.

  (d) Recognition period.

  (e) Predecessor corporation.

  (a) In general.

  (b) Allocation rule.

  (c) Recognized built-in gain carryover.

  (d) Accounting methods.

  (e) Example.

  (a) In general.

  (b) Example.

  (a) Sales and exchanges.

  (1) In general.

  (2) Oil and gas property.

  (3) Examples.

  (b) Accrual method rule.

  (1) Income items.

  (2) Deduction items.

  (3) Examples.

  (c) Section 267(a)(2) and 404(a)(5) deductions.

  (1) Section 267(a)(2).

  (2) Section 404(a)(5).

  (3) Examples.

  (d) Section 481(a) adjustments.

  (1) In general.

  (2) Examples.

  (e) Section 995(b)(2) deemed distributions.

  (f) Discharge of indebtedness and bad debts.

  (g) Completion of contract.

  (h) Installment method.

  (1) In general.

  (2) Limitation on amount subject to tax.

  (3) Rollover rule.

  (4) Use of losses and section 1374 attributes.

  (5) Examples.

  (i) Partnership interests.

  (1) In general.

  (2) Limitations.

  (i) Partnership RBIG.

  (ii) Partnership RBIL.

  (3) Disposition of partnership interest.

  (4) RBIG and RBIL limitations.

  (i)-Sale of partnership interest.

  (ii) Amounts of limitations.

  (5) Small interest exception.

  (i) In general.

  (ii) Contributed assets.

  (iii) Anti-abuse rule.

  (6) Section 704(c) gain or loss.

  (7) Disposition of distributed partnership asset.

  (8) Examples.

  (a) In general.

  (b) Example.

  (a) In general.

  (b) Limitations.

  (c) Examples.

  (a) Valuation.

  (b) Identity of dispositions.

  (a) In general.

  (b) Effective date of section 1374(d)(8).

  (c) Separate determination of tax.

  (d) Taxable income limitation.

  (e) Examples.

  (a) In general.

  (b) Additional rules.

  (1) Certain transfers to partnerships.

  (2) Certain inventory dispositions.

  (3) Certain contributions of built-in loss assets.

  (4) Certain installment sales.

  (i) In general.

  (ii) Examples.

  (c) Revocation and re-election of S corporation status.

  (1) In general.

  (2) Example.

• Treas. Reg. §1.1374-0(a)In general. Show full text ▾ Collapse ▴

  In general.

• Treas. Reg. §1.1374-0(b)Additional rules. Show full text ▾ Collapse ▴

  Additional rules.

  (1) Certain transfers to partnerships.

  (2) Certain inventory dispositions.

  (3) Certain contributions of built-in loss assets.

  (4) Certain installment sales.

• Treas. Reg. §1.1374-0(c)Revocation and re-election of S corporation status. Show full text ▾ Collapse ▴

  Revocation and re-election of S corporation status.

  (1) In general.

  (2) Example.

• Treas. Reg. §1.1374-0(d)Taxable income limitation. Show full text ▾ Collapse ▴

  Taxable income limitation.

• Treas. Reg. §1.1374-0(e)Examples. Show full text ▾ Collapse ▴

  Examples.

• Treas. Reg. §1.1374-0(f)Discharge of indebtedness and bad debts. Show full text ▾ Collapse ▴

  Discharge of indebtedness and bad debts.

• Treas. Reg. §1.1374-0(g)Completion of contract. Show full text ▾ Collapse ▴

  Completion of contract.

• Treas. Reg. §1.1374-0(h)Installment method. Show full text ▾ Collapse ▴

  Installment method.

  (1) In general.

  (2) Limitation on amount subject to tax.

  (3) Rollover rule.

  (4) Use of losses and section 1374 attributes.

  (5) Examples.

• Treas. Reg. §1.1374-0(i)In general. Show full text ▾ Collapse ▴

  In general.

  (ii) Examples.

• Treas. Reg. §1.1374-1General rules and definitions Show full text ▾ Collapse ▴

  (a) Computation of tax. The tax imposed on the income of an S corporation by section 1374(a) for any taxable year during the recognition period is computed as follows—

  (1) Step One: Determine the net recognized built-in gain of the corporation for the taxable year under section 1374(d)(2) and § 1.1374-2;

  (2) Step Two: Reduce the net recognized built-in gain (but not below zero) by any net operating loss and capital loss carryforward allowed under section 1374(b)(2) and § 1.1374-5;

  (3) Step Three: Compute a tentative tax by applying the rate of tax determined under section 1374(b)(1) for the taxable year to the amount determined under paragraph (a)(2) of this section;

  (4) Step Four: Compute the final tax by reducing the tentative tax (but not below zero) by any credit allowed under section 1374(b)(3) and § 1.1374-6.

  (b) Anti-trafficking rules. If section 382, 383, or 384 would have applied to limit the use of a corporation's recognized built-in loss or section 1374 attributes at the beginning of the first day of the recognition period if the corporation had remained a C corporation, these sections apply to limit their use in determining the S corporation's pre-limitation amount, taxable income limitation, net unrealized built-in gain limitation, deductions against net recognized built-in gain, and credits against the section 1374 tax.

  (c) Section 1374 attributes. Section 1374 attributes are the loss carryforwards allowed under section 1374(b)(2) as a deduction against net recognized built-in gain and the credit and credit carryforwards allowed under section 1374(b)(3) as a credit against the section 1374 tax.

  (d) Recognition period. The recognition period is the 10-year (120-month) period beginning on the first day the corporation is an S corporation or the day an S corporation acquires assets in a section 1374(d)(8) transaction. For example, if the first day of the recognition period is July 14, 1996, the last day of the recognition period is July 13, 2006. If the recognition period for certain assets ends during an S corporation's taxable year (for example, because the corporation was on a fiscal year as a C corporation and changed to a calendar year as an S corporation or because an S corporation acquired assets in a section 1374(d)(8) transaction during a taxable year), the S corporation must determine its pre-limitation amount (as defined in § 1.1374-2(a)(1)) for the year as if the corporation's books were closed at the end of the recognition period.

  (e) Predecessor corporation. For purposes of section 1374(c)(1), if the basis of an asset of the S corporation is determined (in whole or in part) by reference to the basis of the asset (or any other property) in the hands of another corporation, the other corporation is a predecessor corporation of the S corporation.

• Treas. Reg. §1.1374-1(a)Computation of tax. Show full text ▾ Collapse ▴

  Computation of tax. The tax imposed on the income of an S corporation by section 1374(a) for any taxable year during the recognition period is computed as follows—

  (1) Step One: Determine the net recognized built-in gain of the corporation for the taxable year under section 1374(d)(2) and § 1.1374-2;

  (2) Step Two: Reduce the net recognized built-in gain (but not below zero) by any net operating loss and capital loss carryforward allowed under section 1374(b)(2) and § 1.1374-5;

  (3) Step Three: Compute a tentative tax by applying the rate of tax determined under section 1374(b)(1) for the taxable year to the amount determined under paragraph (a)(2) of this section;

  (4) Step Four: Compute the final tax by reducing the tentative tax (but not below zero) by any credit allowed under section 1374(b)(3) and § 1.1374-6.

• Treas. Reg. §1.1374-1(b)Anti-trafficking rules. Show full text ▾ Collapse ▴

  Anti-trafficking rules. If section 382, 383, or 384 would have applied to limit the use of a corporation's recognized built-in loss or section 1374 attributes at the beginning of the first day of the recognition period if the corporation had remained a C corporation, these sections apply to limit their use in determining the S corporation's pre-limitation amount, taxable income limitation, net unrealized built-in gain limitation, deductions against net recognized built-in gain, and credits against the section 1374 tax.

• Treas. Reg. §1.1374-1(c)Section 1374 attributes. Show full text ▾ Collapse ▴

  Section 1374 attributes. Section 1374 attributes are the loss carryforwards allowed under section 1374(b)(2) as a deduction against net recognized built-in gain and the credit and credit carryforwards allowed under section 1374(b)(3) as a credit against the section 1374 tax.

• Treas. Reg. §1.1374-1(d)Recognition period. Show full text ▾ Collapse ▴

  Recognition period. The recognition period is the 10-year (120-month) period beginning on the first day the corporation is an S corporation or the day an S corporation acquires assets in a section 1374(d)(8) transaction. For example, if the first day of the recognition period is July 14, 1996, the last day of the recognition period is July 13, 2006. If the recognition period for certain assets ends during an S corporation's taxable year (for example, because the corporation was on a fiscal year as a C corporation and changed to a calendar year as an S corporation or because an S corporation acquired assets in a section 1374(d)(8) transaction during a taxable year), the S corporation must determine its pre-limitation amount (as defined in § 1.1374-2(a)(1)) for the year as if the corporation's books were closed at the end of the recognition period.

• Treas. Reg. §1.1374-1(e)Predecessor corporation. Show full text ▾ Collapse ▴

  Predecessor corporation. For purposes of section 1374(c)(1), if the basis of an asset of the S corporation is determined (in whole or in part) by reference to the basis of the asset (or any other property) in the hands of another corporation, the other corporation is a predecessor corporation of the S corporation.

• Treas. Reg. §1.1374-10Effective date and additional rules Show full text ▾ Collapse ▴

  (a) In general. Sections 1.1374-1 through 1.1374-9, other than § 1.1374-3(b) and (c) Examples 2 through 4, apply for taxable years ending on or after December 27, 1994, but only in cases where the S corporation's return for the taxable year is filed pursuant to an S election or a section 1374(d)(8) transaction occurring on or after December 27, 1994. Section 1.1374-3(b) and (c) Examples 2 through 4 apply to section 1374(d)(8) transactions that occur in taxable years beginning after February 23, 2005. In addition, an S corporation may apply § 1.1374-3(b) and (c) Examples 2 through 4 to section 1374(d)(8) transactions that occur in taxable years beginning on or before February 23, 2005, if the S corporation (and any predecessors or successors) and all affected shareholders file original or amended returns that are consistent with these provisions for taxable years of the S corporation during the recognition period of the pool of assets the net unrealized built-in gain of which would be adjusted pursuant to those provisions that are not closed as of the first date after February 23, 2005, that the S corporation files an original or amended return. For purposes of this section, affected shareholders means all shareholders who received distributive shares of S corporation items in such taxable years. However, the Commissioner may, in appropriate circumstances, permit taxpayers to apply these provisions even if all affected shareholders cannot file consistent returns. In addition, for this purpose, a predecessor of an S corporation is a corporation that transfers its assets to the S corporation in a transaction to which section 381 applies. A successor of an S corporation is a corporation to which the S corporation transfers its assets in a transaction to which section 381 applies.

  (b) Additional rules. This paragraph (b) provides rules applicable to certain S corporations, assets, or transactions to which §§ 1.1374-1 through 1.1374-9 do not apply.

  (1) Certain transfers to partnerships. If a corporation transfers an asset to a partnership in a transaction to which section 721(a) applies and the transfer is made in contemplation of an S election or during the recognition period, section 1374 applies on a disposition of the asset by the partnership as if the S corporation had disposed of the asset itself. This paragraph (b)(1) applies as of the effective date of section 1374, unless the recognition period with respect to the contributed asset is pursuant to an S election or a section 1374(d)(8) transaction occurring on or after December 27, 1994.

  (2) Certain inventory dispositions. For purposes of section 1374(d)(2)(A), the inventory method used by the taxpayer for tax purposes (FIFO, LIFO, etc.) must be used to identify whether goods disposed of following conversion to S corporation status were held by the corporation at the time of conversion. Thus, for example, a corporation using the LIFO inventory method will not be subject to the built-in gain tax with respect to sales of inventory except to the extent that a LIFO layer existing prior to the beginning of the first taxable year as an S corporation is invaded after the beginning of that year. This paragraph (b)(2) applies as of the effective date of section 1374, unless the recognition period with respect to the inventory is pursuant to an S election or a section 1374(d)(8) transaction occurring on or after December 27, 1994.

  (3) Certain contributions of built-in loss assets. If a built-in loss asset (that is, an asset with an adjusted tax basis in excess of its fair market value) is contributed to a corporation within 2 years before the earlier of the beginning of its first taxable year as an S corporation, or the filing of its S election, the loss inherent in the asset will not reduce net unrealized built-in gain, as defined in section 1374(d)(1), unless the taxpayer demonstrates a clear and substantial relationship between the contributed property and the conduct of the corporation's current or future business enterprises. This paragraph (b)(3) applies as of the effective date of section 1374, unless the recognition period with respect to the contributed asset is pursuant to an S election or a section 1374(d)(8) transaction occurring on or after December 27, 1994.

  (4) Certain installment sales—(i) In general. If a taxpayer sells an asset either prior to or during the recognition period and recognizes income either during or after the recognition period from the sale under the installment method, the income will, when recognized, be taxed under section 1374 to the extent it would have been so taxed in prior taxable years if the selling corporation had made the election under section 453(d) not to report the income under the installment method. For purposes of determining the extent to which the income would have been subject to tax if the section 453(d) election had not been made, the taxable income limitation of section 1374(d)(2)(A)(ii) and the built-in gain carryover rule of section 1374(d)(2)(B) will be taken into account. This paragraph (b)(4) applies for installment sales occurring on or after March 26, 1990, and before December 27, 1994.

  (ii) Examples. The rules of this paragraph (b)(4) are illustrated by the following examples.

  (c) Termination and re-election of S corporation status—(1) In general. For purposes of section 633(d)(8) of the Tax Reform Act of 1986, as amended, any reference to an election to be an S corporation under section 1362 shall be treated as a reference to the corporation's most recent election to be an S corporation under section 1362. This paragraph (c) applies for taxable years beginning after December 22, 2004, without regard to the date of the corporation's most recent election to be an S corporation under section 1362.

  (2) Example. The following example illustrates the rules of this paragraph (c):

• Treas. Reg. §1.1374-10(a)In general. Show full text ▾ Collapse ▴

  In general. Sections 1.1374-1 through 1.1374-9, other than § 1.1374-3(b) and (c) Examples 2 through 4, apply for taxable years ending on or after December 27, 1994, but only in cases where the S corporation's return for the taxable year is filed pursuant to an S election or a section 1374(d)(8) transaction occurring on or after December 27, 1994. Section 1.1374-3(b) and (c) Examples 2 through 4 apply to section 1374(d)(8) transactions that occur in taxable years beginning after February 23, 2005. In addition, an S corporation may apply § 1.1374-3(b) and (c) Examples 2 through 4 to section 1374(d)(8) transactions that occur in taxable years beginning on or before February 23, 2005, if the S corporation (and any predecessors or successors) and all affected shareholders file original or amended returns that are consistent with these provisions for taxable years of the S corporation during the recognition period of the pool of assets the net unrealized built-in gain of which would be adjusted pursuant to those provisions that are not closed as of the first date after February 23, 2005, that the S corporation files an original or amended return. For purposes of this section, affected shareholders means all shareholders who received distributive shares of S corporation items in such taxable years. However, the Commissioner may, in appropriate circumstances, permit taxpayers to apply these provisions even if all affected shareholders cannot file consistent returns. In addition, for this purpose, a predecessor of an S corporation is a corporation that transfers its assets to the S corporation in a transaction to which section 381 applies. A successor of an S corporation is a corporation to which the S corporation transfers its assets in a transaction to which section 381 applies.

• Treas. Reg. §1.1374-10(b)Additional rules. Show full text ▾ Collapse ▴

  Additional rules. This paragraph (b) provides rules applicable to certain S corporations, assets, or transactions to which §§ 1.1374-1 through 1.1374-9 do not apply.

  (1) Certain transfers to partnerships. If a corporation transfers an asset to a partnership in a transaction to which section 721(a) applies and the transfer is made in contemplation of an S election or during the recognition period, section 1374 applies on a disposition of the asset by the partnership as if the S corporation had disposed of the asset itself. This paragraph (b)(1) applies as of the effective date of section 1374, unless the recognition period with respect to the contributed asset is pursuant to an S election or a section 1374(d)(8) transaction occurring on or after December 27, 1994.

  (2) Certain inventory dispositions. For purposes of section 1374(d)(2)(A), the inventory method used by the taxpayer for tax purposes (FIFO, LIFO, etc.) must be used to identify whether goods disposed of following conversion to S corporation status were held by the corporation at the time of conversion. Thus, for example, a corporation using the LIFO inventory method will not be subject to the built-in gain tax with respect to sales of inventory except to the extent that a LIFO layer existing prior to the beginning of the first taxable year as an S corporation is invaded after the beginning of that year. This paragraph (b)(2) applies as of the effective date of section 1374, unless the recognition period with respect to the inventory is pursuant to an S election or a section 1374(d)(8) transaction occurring on or after December 27, 1994.

  (3) Certain contributions of built-in loss assets. If a built-in loss asset (that is, an asset with an adjusted tax basis in excess of its fair market value) is contributed to a corporation within 2 years before the earlier of the beginning of its first taxable year as an S corporation, or the filing of its S election, the loss inherent in the asset will not reduce net unrealized built-in gain, as defined in section 1374(d)(1), unless the taxpayer demonstrates a clear and substantial relationship between the contributed property and the conduct of the corporation's current or future business enterprises. This paragraph (b)(3) applies as of the effective date of section 1374, unless the recognition period with respect to the contributed asset is pursuant to an S election or a section 1374(d)(8) transaction occurring on or after December 27, 1994.

  (4) Certain installment sales—(i) In general. If a taxpayer sells an asset either prior to or during the recognition period and recognizes income either during or after the recognition period from the sale under the installment method, the income will, when recognized, be taxed under section 1374 to the extent it would have been so taxed in prior taxable years if the selling corporation had made the election under section 453(d) not to report the income under the installment method. For purposes of determining the extent to which the income would have been subject to tax if the section 453(d) election had not been made, the taxable income limitation of section 1374(d)(2)(A)(ii) and the built-in gain carryover rule of section 1374(d)(2)(B) will be taken into account. This paragraph (b)(4) applies for installment sales occurring on or after March 26, 1990, and before December 27, 1994.

  (ii) Examples. The rules of this paragraph (b)(4) are illustrated by the following examples.

• Treas. Reg. §1.1374-10(c)Termination and re-election of S corporation status—(1) In general. Show full text ▾ Collapse ▴

  Termination and re-election of S corporation status—(1) In general. For purposes of section 633(d)(8) of the Tax Reform Act of 1986, as amended, any reference to an election to be an S corporation under section 1362 shall be treated as a reference to the corporation's most recent election to be an S corporation under section 1362. This paragraph (c) applies for taxable years beginning after December 22, 2004, without regard to the date of the corporation's most recent election to be an S corporation under section 1362.

  (2) Example. The following example illustrates the rules of this paragraph (c):

• Treas. Reg. §1.1374-1ATax imposed on certain capital gains Show full text ▾ Collapse ▴

  (a) General rule. Except as otherwise provided in paragraph (c) of this section, if for a taxable year beginning after 1982 of an S corporation—

  (1) The net capital gain of such corporation exceeds $25,000, and

  (2) The net capital gain of such corporation exceeds 50 percent of its taxable income (as defined in paragraph (d) of this section) for such year, and

  (3) The taxable income of such corporation (as defined in paragraph (d) of this section) for such year exceeds $25,000,

  section 1374 imposes a tax (computed under paragraph (b) of this section) on the income of such corporation. The tax is imposed on the S corporation and not on the shareholders.

  (b) Amount of tax. The amount of tax shall be the lower of—

  (1) An amount equal to the tax, determined as provided in section 1201(a)(2), on the amount by which the net capital gain of the corporation for the taxable year exceeds $25,000, or

  (2) An amount equal to the tax which would be imposed by section 11 on the taxable income of the corporation (as defined in paragraph (d) of this section) for the taxable year were it not an S corporation.

  No credit shall be allowable under part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1954 (other than under section 34) against the tax imposed by section 1374(a) and this section. See section 1375(c)(2) and § 1.1375-1(c)(2) for a special rule that reduces the amount of the net capital gain of the corporation for purposes of this paragraph (b) in cases where a net capital gain is taxed as excess net passive income under section 1375. See section 1374(c)(3) and paragraph (c)(1)(ii) of this section for a special rule that limits the amount of tax on property with a substituted basis in certain cases.

  (c) Exceptions to taxation—(1) New corporations and corporations with election in effect for 3 immediately preceding years—(i) In general. If an S corporation would be subject to the tax imposed by section 1374 for a taxable year pursuant to paragraph (a) of this section, the corporation shall, nevertheless, not be subject to such tax for such year, if:

  (A) The election under section 1362(a) which is in effect with respect to such corporation for such year has been in effect for the corporation's three immediately preceding taxable years, or

  (B) An election under section 1362(a) has been in effect with respect to such corporation for each of its taxable years for which it has been in existence, unless there is a net capital gain for the taxable year which is attributable to property with a substituted basis within the meaning of paragraph (c)(1)(iii) of this section.

  (ii) Amount of tax on net capital gain attributable to property with a substituted basis. If for a taxable year of an S corporation either paragraph (c)(1)(i) (A) or (B) of this section is satisfied, but the S corporation has a net capital gain for such taxable year which is attributable to property with a substituted basis (within the meaning of paragraph (c)(1)(iii) of this section), then paragraph (a) of this section shall apply for the taxable year, but the amount of tax determined under paragraph (b) of this section shall not exceed a tax, determined as provided in section 1201 (a), on the net capital gain attributable to property with a substituted basis.

  (iii) Property with substituted basis. For purposes of this section, the term property with a substituted basis means:

  (A) Property acquired by a corporation (the acquiring corporation) during the period beginning 36 months before the first day of the acquiring corporation's taxable year and ending on the last day of such year;

  (B) The basis of such property in the hands of the acquiring corporation is determined in whole or in part by reference to the basis of any property in the hands of another corporation; and

  (C) Such other corporation was not an S corporation throughout the period beginning the later of:

  (1) 36 months before the first day of the acquiring corporation's taxable year, or

  (2) The time such other corporation came into existence,

  and ending on the date such other corporation transferred the property, the basis of which is used to determine, in whole or in part, the basis of the property in the hands of the acquiring corporation. An S corporation and any predecessor corporation shall not be treated as one corporation for purposes of this paragraph (c) (1).

  (iv) Existence of a corporation. For purposes of this section, a corporation shall not be considered to be in existence for any month which precedes the first month in which such corporation has shareholders or acquires assets or begins business, whichever is first to occur.

  (v) References to prior law included. For purposes of this paragraph (c), the term S corporation shall include an electing small business corporation under prior subchapter S law, and the term election under section 1362 (a) shall include an election under section 1372 of prior subchapter S law.

  (iv) Examples. The provisions of this paragraph may be illustrated by the following examples:

  (2) Treatment of certain gains of options and commodities dealers—(i) Exclusion of certain capital gains. For purposes of this section, the net capital gain of any options dealer or commodities dealer shall be determined by not taking into account any gain or loss (in the normal course of the taxpayer's activity of dealing in or trading section 1256 contracts) from any section 1256 contract or property related to such a contract.

  (ii) Definitions. For purposes of this paragraph (c)(2)—

  (A) Options dealer. The term options dealer has the meaning given to such term by section 1256(g)(8).

  (B) Commodities dealer. The term commodities dealer means a person who is actively engaged in trading section 1256 contracts and is registered with a domestic board of trade which is designated as a contract market by the Commodities Futures Trading Commission.

  (C) Section 1256 contracts. The term section 1256 contracts has the meaning given to such term by section 1256(b).

  (iii) Effective dates—(A) In general. Except as otherwise provided in this paragraph (c)(2)(iii), this paragraph (c)(2) shall apply to positions established after July 18, 1984, in taxable years ending after such date.

  (B) Special rule for options on regulated futures contracts. In the case of any option with respect to a regulated futures contract (within the meaning of section 1256), this paragraph (c)(2) shall apply to positions established after October 31, 1983, in taxable years ending after such date.

  (C) Elections with respect to property held on or before July 18, 1984. See §§ 1.1256 (h)-1T and 1.1256(h)-2T for rules concerning an election to have this paragraph (c)(2) apply to certain property held on or before July 18, 1984.

  (d) Determination of taxable income—(1) General rule. For purposes of this section, taxable income of the corporation shall be determined under section 63(a) as if the corporation were a C corporation rather than an S corporation, except that the following deductions shall not apply in the computation—

  (i) The deduction allowed by section 172 (relating to net operating loss deduction), and

  (ii) The deductions allowed by part VIII of subchapter B (other than the deduction allowed by section 248, relating to organization expenditures).

  For any taxable year in which a tax under this section is imposed on an S corporation, the S corporation shall attach a Form 1120 completed in accordance with this paragraph (d) and the instructions to Form 1120S to its tax return filed for such taxable year.

  (2) Special rule for net capital gains taxed as excess net passive income under section 1375. See section 1375 (c) (2) and § 1.1375-1(c)(2) for a special rule that reduces the taxable income of the corporation for purposes of section 1374(b)(2) and § 1.1374-1(b)(2) in cases where a net capital gain is taxed as excess net passive income under section 1375.

  (e) Reduction in pass-thru for tax imposed on capital gain. See section 1366(f)(2) for a special rule reducing the S corporation's long-term capital gains and the corporation's gain from sales or exchanges of property described in section 1231 for purposes of section 1366(a) by an amount of tax imposed under section 1374 and this section.

  (f) Examples. The following examples illustrate the principles of this section and assume that a tax will not be imposed under section 1375:

• Treas. Reg. §1.1374-1A(a)General rule. Show full text ▾ Collapse ▴

  General rule. Except as otherwise provided in paragraph (c) of this section, if for a taxable year beginning after 1982 of an S corporation—

  (1) The net capital gain of such corporation exceeds $25,000, and

  (2) The net capital gain of such corporation exceeds 50 percent of its taxable income (as defined in paragraph (d) of this section) for such year, and

  (3) The taxable income of such corporation (as defined in paragraph (d) of this section) for such year exceeds $25,000,

  section 1374 imposes a tax (computed under paragraph (b) of this section) on the income of such corporation. The tax is imposed on the S corporation and not on the shareholders.

• Treas. Reg. §1.1374-1A(b)Amount of tax. Show full text ▾ Collapse ▴

  Amount of tax. The amount of tax shall be the lower of—

  (1) An amount equal to the tax, determined as provided in section 1201(a)(2), on the amount by which the net capital gain of the corporation for the taxable year exceeds $25,000, or

  (2) An amount equal to the tax which would be imposed by section 11 on the taxable income of the corporation (as defined in paragraph (d) of this section) for the taxable year were it not an S corporation.

  No credit shall be allowable under part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1954 (other than under section 34) against the tax imposed by section 1374(a) and this section. See section 1375(c)(2) and § 1.1375-1(c)(2) for a special rule that reduces the amount of the net capital gain of the corporation for purposes of this paragraph (b) in cases where a net capital gain is taxed as excess net passive income under section 1375. See section 1374(c)(3) and paragraph (c)(1)(ii) of this section for a special rule that limits the amount of tax on property with a substituted basis in certain cases.

• 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. Show full text ▾ Collapse ▴

  Exceptions to taxation—(1) New corporations and corporations with election in effect for 3 immediately preceding years—(i) In general. If an S corporation would be subject to the tax imposed by section 1374 for a taxable year pursuant to paragraph (a) of this section, the corporation shall, nevertheless, not be subject to such tax for such year, if:

  (A) The election under section 1362(a) which is in effect with respect to such corporation for such year has been in effect for the corporation's three immediately preceding taxable years, or

  (B) An election under section 1362(a) has been in effect with respect to such corporation for each of its taxable years for which it has been in existence, unless there is a net capital gain for the taxable year which is attributable to property with a substituted basis within the meaning of paragraph (c)(1)(iii) of this section.

  (ii) Amount of tax on net capital gain attributable to property with a substituted basis. If for a taxable year of an S corporation either paragraph (c)(1)(i) (A) or (B) of this section is satisfied, but the S corporation has a net capital gain for such taxable year which is attributable to property with a substituted basis (within the meaning of paragraph (c)(1)(iii) of this section), then paragraph (a) of this section shall apply for the taxable year, but the amount of tax determined under paragraph (b) of this section shall not exceed a tax, determined as provided in section 1201 (a), on the net capital gain attributable to property with a substituted basis.

  (iii) Property with substituted basis. For purposes of this section, the term property with a substituted basis means:

  (A) Property acquired by a corporation (the acquiring corporation) during the period beginning 36 months before the first day of the acquiring corporation's taxable year and ending on the last day of such year;

  (B) The basis of such property in the hands of the acquiring corporation is determined in whole or in part by reference to the basis of any property in the hands of another corporation; and

  (C) Such other corporation was not an S corporation throughout the period beginning the later of:

  (1) 36 months before the first day of the acquiring corporation's taxable year, or

  (2) The time such other corporation came into existence,

  and ending on the date such other corporation transferred the property, the basis of which is used to determine, in whole or in part, the basis of the property in the hands of the acquiring corporation. An S corporation and any predecessor corporation shall not be treated as one corporation for purposes of this paragraph (c) (1).

  (iv) Existence of a corporation. For purposes of this section, a corporation shall not be considered to be in existence for any month which precedes the first month in which such corporation has shareholders or acquires assets or begins business, whichever is first to occur.

• Treas. Reg. §1.1374-1A(d)Determination of taxable income—(1) General rule. Show full text ▾ Collapse ▴

  Determination of taxable income—(1) General rule. For purposes of this section, taxable income of the corporation shall be determined under section 63(a) as if the corporation were a C corporation rather than an S corporation, except that the following deductions shall not apply in the computation—