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The built-in gain rules tax S corporations at the corporate
level on any built-in gain on disposal of an asset. Sec.
1374(d)(3); Garwood Irrigation Co. v. Commissioner, supra. Only
the appreciation present at the time the corporation becomes an S
corporation is taxed at the corporate level. Garwood Irrigation
Co. v. Commissioner, supra. Any gain attributable to post-S
status conversion is passed through and taxed to the shareholders
only. Id.
Certain income items are treated as built-in gain. For
example, income that the S corporation properly takes into
account during the recognition period but which is attributable
to the periods before the corporation became an S corporation is
treated as built-in gain. Sec. 1374(d)(5)(A). The recognition
period is the 10-year period beginning with the first day of the
first taxable year in which the corporation is an S corporation.
Sec. 1374(d)(7).
There are also specific rules addressing when section 481
adjustments are treated as built-in gain. A section 481
adjustment taken into account in the recognition period is
recognized built-in gain or loss to the extent the adjustment
relates to items attributable to periods before the beginning of
the recognition period under the principles for determining
built-in gain or loss for S corporations. Sec. 1.1374-4(d)(1),
Income Tax Regs. The principles for determining recognized
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Last modified: March 27, 2008