- 6 -
T.C. 278, 280-281 (1991); Maxwell v. Commissioner, 87 T.C. 783
(1986); Allen Family Food, Inc. v. Commissioner, T.C. Memo. 2000-
327; see S. Rept. 97-640, at 25 (1982), 1982-2 C.B. 718, 729.
No FSAA was issued to petitioner or to its shareholders.
Thus, if the built-in gains tax is a subchapter S item, as
respondent contends, the notice of deficiency is invalid to the
extent it relates to that item for petitioner’s fiscal years 1996
and 1997.
C. The Built-In Gains Tax
Section 1374 imposes a corporate level tax on an S
corporation’s built-in gain recognized during the 10-year period
beginning with the first taxable year for which the corporation
was an S corporation. Sec. 1374(a), (d)(3), (7). Built-in gain
is measured by the appreciation in value of any asset over its
adjusted basis as of the time a corporation converts from C to S
status. H. Conf. Rept. 99-841 (Vol. II), at II-203 (1986), 1986-
3 C.B. (Vol. 4) 1, 203; see also sec. 1374(d)(3)(B); Colo. Gas
Compression, Inc. v. Commissioner, 116 T.C. 1, 2-3 (2001); Coggin
Auto. Corp. v. Commissioner, 115 T.C. 349, 363 (2000). An S
corporation is liable for the built-in gains tax on the
disposition of any asset except to the extent that it establishes
that it did not own the asset on the day it converted from C to S
status, or the fair market value of the asset was less than its
adjusted basis on the first day of the first taxable year for
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