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1997, and 1998 arise from respondent’s determination that
petitioner is liable for the section 1374 built-in gains tax for
franchise payments it received in those years.
Petitioner contends that the built-in gains tax is not a
subchapter S item and that section 301.6245-1T, Temporary Proced.
& Admin. Regs., 52 Fed. Reg. 3003 (Jan. 30, 1987), which defines
a subchapter S item to include the section 1374 built-in gains
tax, is invalid. As discussed next, we agree with respondent.
B. Subchapter S Unified Audit and Litigation Procedures
The S corporation audit and litigation procedures, sections
6241–6245, were enacted to provide a method for unified treatment
of subchapter S items among the shareholders. Subchapter S
Revision Act of 1982, Pub. L. 97-354, sec. 4(a), 96 Stat. 1691;
see S. Rept. 97-640, at 25 (1982), 1982-2 C.B. 718, 729; see also
Katz v. Commissioner, 116 T.C. 5, 12 n.7 (2001); Hang v.
Commissioner, 95 T.C. 74, 77-78 (1990).
A subchapter S item is any item of an S corporation to the
extent regulations provide that the item is more appropriately
determined at the corporate level than at the shareholder level.
Sec. 6245; Dial U.S.A., Inc. v. Commissioner, 95 T.C. 1, 4
(1990). The correct tax treatment of subchapter S items is
determined in a unified proceeding at the corporate level rather
than in separate actions against each shareholder. Secs. 6241
and 6242; Univ. Heights at Hamilton Corp. v. Commissioner, 97
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