Garwood Irrigation Company - Page 18

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          to which C corporations are subject.  Such an eligible                      
          corporation may elect, under the provisions of section 1362, to             
          be an S corporation with the consent of all its shareholders.               
          Section 1374 was enacted in 1986 to prevent corporations from               
          electing to be S corporations for the purpose of avoiding tax on            
          built-in gains.  Tax Reform Act of 1986, Pub. L. 99-514, sec.               
          633(d)(8), 100 Stat. 2280.  Section 1374 requires that if a                 
          corporation holds appreciated capital assets before it makes an             
          election under section 1362, and any of the appreciated capital             
          assets are sold within 10 years of the election, it will be                 
          subject to corporate-level tax on the amount the corporation                
          realizes over its basis in the sold assets (built-in gain).  The            
          corporation is taxed only on the built-in gain present on the               
          effective date of the election; any gain after the effective date           
          is passed through to the corporation’s shareholders.  Therefore,            
          if an asset with built-in gain has uncertain value, the proper              
          valuation date for the asset is the effective date of the                   
          corporation’s election.                                                     
               Petitioner agrees that because it elected to be an S                   
          corporation as of January 1, 1997, it will be taxed on the built-           
          in gain on its assets as of that date.  The parties dispute the             
          value of petitioner’s primary asset, the water right, on that               

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Last modified: May 25, 2011