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d. Petitioner’s Tax Liability Under Section 1374
Section 1363(a) provides that, generally, S corporations are not
subject to income tax. However, when a former C corporation such as
MIC elects S corporation status and then distributes or sells
appreciated property, it may be liable for tax under section 1374 if
the S corporation election was made prior to January 1, 1987. TRA
sec. 633(b), 100 Stat. 2277; H. Conf. Rept. 99-841 (Vol. II), at II-
203 (1986), 1986-3 C.B. (Vol. 4) 1, 203. Petitioner is a former C
corporation that elected S status prior to January 1, 1987.
Section 1374, as applicable to petitioner for the year in issue,
reads in pertinent part:
SEC. 1374(a). General Rule.--If for a taxable year of
an S corporation--
(1) the net capital gain of such corporation
exceeds $25,000, and exceeds 50 percent of its taxable
income for such year, and
(2) the taxable income of such corporation for
such year exceeds $25,000,
There is hereby imposed a tax (computed under subsection (b)) on
the income of such corporation.
32(...continued)
best it is an ambiguous indication. Furthermore, because
petitioner was not a party to the transaction with H�agen-Dazs,
the Danielson rule does not apply.
MIC cannot be held to an allocation that it did not bargain
for with a party with opposing interests in an arm’s-length
negotiation. Neither MIC, SIC, nor Arnold actively negotiated
the allocation with H�agen-Dazs. It remained unchanged from the
June 2 draft agreement through the closing of the sale on July
22. See Particelli v. Commissioner, 212 F.2d 498, 501 (9th Cir.
1954), affg. a Memorandum Opinion of this Court dated Feb. 20,
1952; Berry Petroleum Co. & Subs. v. Commissioner, 104 T.C. 584,
615 (1995).
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