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e.g., Argo Sales Co. v. Commissioner, 105 T.C. 86, 87 (1995)
(section 481 adjustment taken into account over 6 years under
Rev. Proc. 85-36, sec. 4.03, 1985-2 C.B. 434, 435).
The RRA added a new paragraph (4) to section 475(c),
requiring petitioners to change their accounting method. The
effective date provisions accompanying the enactment of that
amendment specifically provided that taxpayers were to take the
resulting section 481 adjustments into account ratably over the
years beginning with their first taxable year ending after the
date of the enactment. RRA sec. 7003(c)(2).
Built-In Gain Rules
We now outline the built-in gain rules for corporations
electing S status. S corporations are not generally taxed on
their net income, unlike C corporations. Instead, the income is
passed through to the owners and taxed only to the owners. Sec.
1366(a). There is an exception to this general rule, however,
for net recognized built-in gain, which is taxed to the S
corporation itself. Sec. 1374(a). The built-in gain rules are
an attempt to prevent corporations from electing to be S
corporations to avoid corporate-level tax on any built-in gain on
their assets. Garwood Irrigation Co. v. Commissioner, T.C. Memo.
2004-195 (citing Tax Reform Act of 1986, Pub. L. 99-514, sec.
633(d)(8), 100 Stat. 2280).
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Last modified: March 27, 2008