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originally changed their accounting method. The RRA provided
that petitioners had to include the 1997 deduction in income by
making section 481 adjustments ratably over the next 4 taxable
years. RRA sec. 7003(c)(2)(C), 112 Stat. 833.
Petitioners properly reported the ratable portions of the
section 481 adjustment as income on the returns for 1998 and
1999. Before petitioners could fully include the remaining
section 481 adjustments in income over the next 2 years, MMC
elected to be treated as an S corporation commencing with the
2000 taxable year. The subsidiaries that had previously been
consolidated with MMC also elected to be treated as S
corporations commencing with the 2000 taxable year.
Tax Returns for 2000 and 2001
MMC reported the section 481 adjustment as income on the S
corporation tax returns for the years at issue but did not report
the section 481 adjustment as recognized built-in gain pursuant
to section 1374 for either year at issue.
Respondent examined the returns for the years at issue and
issued a deficiency notice determining that petitioners should
have included the section 481 adjustment income as recognized
built-in gain under section 1374 and were therefore liable for
additional built-in gain tax for the years at issue.
Petitioners timely filed a petition.
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Last modified: March 27, 2008