Internal Revenue Code:Sec. 1374. Tax imposed on certain built-in gains
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Location in Internal Revenue Code
TITLE 26 - INTERNAL REVENUE CODE
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter S - Tax Treatment of S Corporations and Their
Shareholders
PART III - SPECIAL RULES
Statute
Sec. 1374. Tax imposed on certain built-in gains
(a) General rule
If for any taxable year beginning in the recognition period an S
corporation has a net recognized built-in gain, there is hereby
imposed a tax (computed under subsection (b)) on the income of such
corporation for such taxable year.
(b) Amount of tax
(1) In general
The amount of the tax imposed by subsection (a) shall be
computed by applying the highest rate of tax specified in section
11(b) to the net recognized built-in gain of the S corporation
for the taxable year.
(2) Net operating loss carryforwards from C years allowed
Notwithstanding section 1371(b)(1), any net operating loss
carryforward arising in a taxable year for which the corporation
was a C corporation shall be allowed for purposes of this section
as a deduction against the net recognized built-in gain of the S
corporation for the taxable year. For purposes of determining
the amount of any such loss which may be carried to subsequent
taxable years, the amount of the net recognized built-in gain
shall be treated as taxable income. Rules similar to the rules
of the preceding sentences of this paragraph shall apply in the
case of a capital loss carryforward arising in a taxable year for
which the corporation was a C corporation.
(3) Credits
(A) In general
Except as provided in subparagraph (B), no credit shall be
allowable under part IV of subchapter A of this chapter (other
than under section 34) against the tax imposed by subsection
(a).
(B) Business credit carryforwards from C years allowed
Notwithstanding section 1371(b)(1), any business credit
carryforward under section 39 arising in a taxable year for
which the corporation was a C corporation shall be allowed as a
credit against the tax imposed by subsection (a) in the same
manner as if it were imposed by section 11. A similar rule
shall apply in the case of the minimum tax credit under section
53 to the extent attributable to taxable years for which the
corporation was a C corporation.
(4) Coordination with section 1201(a)
For purposes of section 1201(a) -
(A) the tax imposed by subsection (a) shall be treated as if
it were imposed by section 11, and
(B) the amount of the net recognized built-in gain shall be
treated as the taxable income.
(c) Limitations
(1) Corporations which were always S corporations
Subsection (a) shall not apply to any corporation if an
election under section 1362(a) has been in effect with respect to
such corporation for each of its taxable years. Except as
provided in regulations, an S corporation and any predecessor
corporation shall be treated as 1 corporation for purposes of the
preceding sentence.
(2) Limitation on amount of recognized built-in gains
The amount of the net recognized built-in gain taken into
account under this section for any taxable year shall not exceed
the excess (if any) of -
(A) the net unrealized built-in gain, over
(B) the net recognized built-in gain for prior taxable years
beginning in the recognition period.
(d) Definitions and special rules
For purposes of this section -
(1) Net unrealized built-in gain
The term ''net unrealized built-in gain'' means the amount (if
any) by which -
(A) the fair market value of the assets of the S corporation
as of the beginning of its 1st taxable year for which an
election under section 1362(a) is in effect, exceeds
(B) the aggregate adjusted bases of such assets at such time.
(2) Net recognized built-in gain
(A) In general
The term ''net recognized built-in gain'' means, with respect
to any taxable year in the recognition period, the lesser of -
(i) the amount which would be the taxable income of the S
corporation for such taxable year if only recognized built-in
gains and recognized built-in losses were taken into account,
or
(ii) such corporation's taxable income for such taxable
year (determined as provided in section 1375(b)(1)(B)).
(B) Carryover
If, for any taxable year, the amount referred to in clause
(i) of subparagraph (A) exceeds the amount referred to in
clause (ii) of subparagraph (A), such excess shall be treated
as a recognized built-in gain in the succeeding taxable year.
The preceding sentence shall apply only in the case of a
corporation treated as an S corporation by reason of an
election made on or after March 31, 1988.
(3) Recognized built-in gain
The term ''recognized built-in gain'' means any gain recognized
during the recognition period on the disposition of any asset
except to the extent that the S corporation establishes that -
(A) such asset was not held by the S corporation as of the
beginning of the 1st taxable year for which it was an S
corporation, or
(B) such gain exceeds the excess (if any) of -
(i) the fair market value of such asset as of the beginning
of such 1st taxable year, over
(ii) the adjusted basis of the asset as of such time.
(4) Recognized built-in losses
The term ''recognized built-in loss'' means any loss recognized
during the recognition period on the disposition of any asset to
the extent that the S corporation establishes that -
(A) such asset was held by the S corporation as of the
beginning of the 1st taxable year referred to in paragraph (3),
and
(B) such loss does not exceed the excess of -
(i) the adjusted basis of such asset as of the beginning of
such 1st taxable year, over
(ii) the fair market value of such asset as of such time.
(5) Treatment of certain built-in items
(A) Income items
Any item of income which is properly taken into account
during the recognition period but which is attributable to
periods before the 1st taxable year for which the corporation
was an S corporation shall be treated as a recognized built-in
gain for the taxable year in which it is properly taken into
account.
(B) Deduction items
Any amount which is allowable as a deduction during the
recognition period (determined without regard to any carryover)
but which is attributable to periods before the 1st taxable
year referred to in subparagraph (A) shall be treated as a
recognized built-in loss for the taxable year for which it is
allowable as a deduction.
(C) Adjustment to net unrealized built-in gain
The amount of the net unrealized built-in gain shall be
properly adjusted for amounts which would be treated as
recognized built-in gains or losses under this paragraph if
such amounts were properly taken into account (or allowable as
a deduction) during the recognition period.
(6) Treatment of certain property
If the adjusted basis of any asset is determined (in whole or
in part) by reference to the adjusted basis of any other asset
held by the S corporation as of the beginning of the 1st taxable
year referred to in paragraph (3) -
(A) such asset shall be treated as held by the S corporation
as of the beginning of such 1st taxable year, and
(B) any determination under paragraph (3)(B) or (4)(B) with
respect to such asset shall be made by reference to the fair
market value and adjusted basis of such other asset as of the
beginning of such 1st taxable year.
(7) Recognition period
The term ''recognition period'' means the 10-year period
beginning with the 1st day of the 1st taxable year for which the
corporation was an S corporation. For purposes of applying this
section to any amount includible in income by reason of section
593(e), the preceding sentence shall be applied without regard to
the phrase ''10-year''.
(8) Treatment of transfer of assets from C corporation to S
corporation
(A) In general
Except to the extent provided in regulations, if -
(i) an S corporation acquires any asset, and
(ii) the S corporation's basis in such asset is determined
(in whole or in part) by reference to the basis of such asset
(or any other property) in the hands of a C corporation,
then a tax is hereby imposed on any net recognized built-in
gain attributable to any such assets for any taxable year
beginning in the recognition period. The amount of such tax
shall be determined under the rules of this section as modified
by subparagraph (B).
(B) Modifications
For purposes of this paragraph, the modifications of this
subparagraph are as follows:
(i) In general
The preceding paragraphs of this subsection shall be
applied by taking into account the day on which the assets
were acquired by the S corporation in lieu of the beginning
of the 1st taxable year for which the corporation was an S
corporation.
(ii) Subsection (c)(1) not to apply
Subsection (c)(1) shall not apply.
(9) Reference to 1st taxable year
Any reference in this section to the 1st taxable year for which
the corporation was an S corporation shall be treated as a
reference to the 1st taxable year for which the corporation was
an S corporation pursuant to its most recent election under
section 1362.
(e) Regulations
The Secretary shall prescribe such regulations as may be
necessary to carry out the purposes of this section including
regulations providing for the appropriate treatment of successor
corporations.
Sources
(Added Pub. L. 97-354, Sec. 2, Oct. 19, 1982, 96 Stat. 1683;
amended Pub. L. 97-448, title III, Sec. 305(d)(3), Jan. 12, 1983,
96 Stat. 2400; Pub. L. 98-369, div. A, title I, Sec. 102(d)(1),
title IV, Sec. 474(r)(27), title VII, Sec. 721(u), July 18, 1984,
98 Stat. 623, 844, 971; Pub. L. 99-514, title VI, Sec. 632(a), Oct.
22, 1986, 100 Stat. 2275; Pub. L. 100-647, title I, Sec.
1006(f)(1)-(5)(A), Nov. 10, 1988, 102 Stat. 3403, 3404; Pub. L.
101-239, title VII, Sec. 7811(c)(4), (5)(B), (8), Dec. 19, 1989,
103 Stat. 2407, 2408; Pub. L. 105-34, title XVI, Sec.
1601(f)(5)(B), Aug. 5, 1997, 111 Stat. 1091.)
Miscellaneous
PRIOR PROVISIONS
A prior section 1374, added Pub. L. 85-866, title I, Sec. 64(a),
Sept. 2, 1958, 72 Stat. 1653; amended Pub. L. 86-376, Sec. 2(b),
Sept. 23, 1959, 73 Stat. 699; Pub. L. 94-455, title XIX, Sec.
1901(a)(150), Oct. 4, 1976, 90 Stat. 1788, related to allowance to
shareholders of corporation net operating loss, prior to the
general revision of this subchapter by section 2 of Pub. L. 97-354.
AMENDMENTS
1997 - Subsec. (d)(7). Pub. L. 105-34 inserted at end ''For
purposes of applying this section to any amount includible in
income by reason of section 593(e), the preceding sentence shall be
applied without regard to the phrase '10-year'.''
1989 - Subsec. (b)(3)(B). Pub. L. 101-239, Sec. 7811(c)(8),
inserted at end ''A similar rule shall apply in the case of the
minimum tax credit under section 53 to the extent attributable to
taxable years for which the corporation was a C corporation.''
Subsec. (d)(2)(A)(i). Pub. L. 101-239, Sec. 7811(c)(4), struck
out ''(except as provided in subsection (b)(2))'' after ''taxable
year if''.
Subsec. (d)(5)(B). Pub. L. 101-239, Sec. 7811(c)(5)(B)(i),
inserted ''(determined without regard to any carryover)'' after
''during the recognition period''.
Subsec. (d)(5)(C). Pub. L. 101-239, Sec. 7811(c)(5)(B)(ii),
substituted ''which would be treated as recognized built-in gains
or losses under this paragraph if such amounts were properly taken
into account (or allowable as a deduction) during the recognition
period'' for ''treated as recognized built-in gains or losses under
this paragraph''.
1988 - Subsec. (a). Pub. L. 100-647, Sec. 1006(f)(1), inserted
''net'' before ''recognized''.
Subsec. (b)(1). Pub. L. 100-647, Sec. 1006(f)(2), added par. (1)
and struck out former par. (1) which read as follows: ''The tax
imposed by subsection (a) shall be a tax computed by applying the
highest rate of tax specified in section 11(b) to the lesser of -
''(A) the recognized built-in gains of the S corporation for
the taxable year, or
''(B) the amount which would be the taxable income of the
corporation for such taxable year if such corporation were not an
S corporation.''
Subsec. (b)(2). Pub. L. 100-647, Sec. 1006(f)(2), added par. (2)
and struck out former par. (2) which read as follows:
''Notwithstanding section 1371(b)(1), any net operating loss
carryforward arising in a taxable year for which the corporation
was a C corporation shall be allowed as a deduction against the
lesser of the amounts referred to in subparagraph (A) or (B) of
paragraph (1). For purposes of determining the amount of any such
loss which may be carried to subsequent taxable years, the lesser
of the amounts referred to in subparagraph (A) or (B) of paragraph
(1) shall be treated as taxable income.''
Subsec. (b)(4)(B). Pub. L. 100-647, Sec. 1006(f)(3), amended
subpar. (B) generally. Prior to amendment, subpar. (B) read as
follows: ''the lower of the amounts specified in subparagraphs (A)
and (B) of paragraph (1) shall be treated as the taxable income.''
Subsec. (c)(2). Pub. L. 100-647, Sec. 1006(f)(4), substituted
''net recognized built-in gain'' for ''recognized built-in gains''
in introductory provisions and in subpar. (B).
Subsec. (d)(2) to (9). Pub. L. 100-647, Sec. 1006(f)(5)(A), added
pars. (2) to (9) and struck out former pars. (2), (3), and (4),
which related to recognized built-in gain, recognition period, and
taxable income, respectively.
Subsec. (e). Pub. L. 100-647, Sec. 1006(f)(5)(A), added subsec.
(e).
1986 - Pub. L. 99-514 amended section generally, substituting
provisions imposing tax on certain built-in gains for provisions
imposing tax on certain capital gains which had declared in:
subsec. (a), general rule for capital gains tax on S corporations;
subsec. (b), amount of tax; subsec. (c), general rule as to
exceptions from subsec. (a) in par. (1), exception as to new
corporations in par. (2), provisions relating to property with
substituted basis in par. (3), and treatment of certain gains of
options and commodities dealers in par. (4); and subsec. (d),
determination of taxable income of corporation.
1984 - Subsec. (b). Pub. L. 98-369, Sec. 474(r)(27), substituted
''section 34'' for ''section 39'' in provisions following par. (2).
Subsec. (c)(2). Pub. L. 98-369, Sec. 721(u), struck out ''(and
any predecessor corporation)'' before ''has been in existence'' in
subpar. (A), and inserted provision that to the extent provided in
regulations, an S corporation and any predecessor corporation shall
be treated as 1 corporation for purposes of this paragraph and
paragraph (1).
Subsec. (c)(4). Pub. L. 98-369, Sec. 102(d)(1), added par. (4).
1983 - Subsec. (d). Pub. L. 97-448 substituted ''this section''
for ''subsections (a)(2) and (b)(2)''.
EFFECTIVE DATE OF 1997 AMENDMENT
Amendment by Pub. L. 105-34 effective as if included in the
provisions of the Small Business Job Protection Act of 1996, Pub.
L. 104-188, to which it relates, see section 1601(j) of Pub. L.
105-34, set out as a note under section 23 of this title.
EFFECTIVE DATE OF 1989 AMENDMENT
Amendment by Pub. L. 101-239 effective, except as otherwise
provided, as if included in the provision of the Technical and
Miscellaneous Revenue Act of 1988, Pub. L. 100-647, to which such
amendment relates, see section 7817 of Pub. L. 101-239, set out as
a note under section 1 of this title.
EFFECTIVE DATE OF 1988 AMENDMENT
Amendment by Pub. L. 100-647 effective, except as otherwise
provided, as if included in the provision of the Tax Reform Act of
1986, Pub. L. 99-514, to which such amendment relates, see section
1019(a) of Pub. L. 100-647, set out as a note under section 1 of
this title.
EFFECTIVE DATE OF 1986 AMENDMENT
Amendment by Pub. L. 99-514 applicable to taxable years beginning
after Dec. 31, 1986, but only in cases where the return for the
taxable year is filed pursuant to an S election made after Dec. 31,
1986, and with provision that, in the case of any taxable year of
an S corporation which begins after Dec. 31, 1986, and to which the
amendments by section 632 (other than subsec. (b) thereof) of Pub.
L. 99-514 do not apply, subsec. (b)(1) of this section (as in
effect on the date before Oct. 22, 1986) shall apply as if it read
as follows: ''an amount equal to 34 percent of the amount by which
the net capital gain of the corporation for the taxable year
exceeds $25,000, or'', and with other exceptions and special and
transitional rules, see section 633 of Pub. L. 99-514, as amended,
set out as an Effective Date note under section 336 of this title.
EFFECTIVE DATE OF 1984 AMENDMENT
Amendment by section 102(d)(1) of Pub. L. 98-369 applicable to
positions established after July 18, 1984, in taxable years ending
after that date, except as otherwise provided, see section 102(f),
(g) of Pub. L. 98-369 set out as a note under section 1256 of this
title.
Amendment by section 474(r)(27) of Pub. L. 98-369 applicable to
taxable years beginning after Dec. 31, 1983, and to carrybacks from
such years, see section 475(a) of Pub. L. 98-369, set out as a note
under section 21 of this title.
Amendment by section 721(u) of Pub. L. 98-369 effective as if
included in the Subchapter S Revision Act of 1982, Pub. L. 97-354,
see section 721(y)(1) of Pub. L. 98-369, set out as a note under
section 1361 of this title.
EFFECTIVE DATE OF 1983 AMENDMENT
Amendment by Pub. L. 97-448 effective on date of enactment of
Subchapter S Revision Act of 1982 (Oct. 19, 1982), see section
311(c)(4) of Pub. L. 97-448, set out as a note under section 1368
of this title.
EFFECTIVE DATE
Section applicable to taxable years beginning after Dec. 31,
1982, see section 6(a) of Pub. L. 97-354, set out as a note under
section 1361 of this title.
References
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 26, 1366, 1375, 6655 of
this title.
