Amended 1986
- 1986 Pub. L. 99-514 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.
Forms: Form 1120; Form 1120S
Final rules 6
(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.
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(f)(1), inserted “net” before “recognized”.
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(b) Amount of tax
Amended 1984, 1988, 2017
- 2017 Pub. L. 115-97 Pub. L. 115–97, § 13001(b)(2)(N), struck out par. (4). Text read as follows: “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.”
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 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.”
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 474(r)(27), substituted “section 34” for “section 39” in provisions following par. (2).
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(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.
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 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.”
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(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.
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 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.”
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(3) Credits
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(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.
Amended 1989, 2017
- 2017 Pub. L. 115-97 Pub. L. 115–97, § 12002(c), struck out 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.”
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 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.”
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(c) Limitations
Amended 1984
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 102(d)(1), added par. (4).
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(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.
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(2) Limitation on amount of net recognized built-in gain 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—
Amended 1984, 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(f)(4), which directed amendment of par. (2) by substituting “net recognized built-in gain” for “recognized built-in gains” wherever appearing, was executed by making the substitution in heading as well as in introductory provisions and in subpar. (B), to reflect the probable intent of Congress.
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 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).
(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—
Amended 1983
- 1983 Pub. L. 97-448 Pub. L. 97–448 substituted “this section” for “subsections (a)(2) and (b)(2)”.
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(1) Net unrealized built-in gain The term “net unrealized built-in gain” means the amount (if any) by which—
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(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
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 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.
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(A) In general The term “net recognized built-in gain” means, with respect to any taxable year in the recognition period, the lesser of—
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(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
Amended 1989
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7811(c)(4), struck out “(except as provided in subsection (b)(2))” after “taxable year if”.
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(ii) such corporation’s taxable income for such taxable year (determined as provided in section 1375(b)(1)(B)).
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(B) Carryover If, for any taxable year described in subparagraph (A), 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.
Amended 2013, 2018
- 2018 Pub. L. 115-141 Pub. L. 115–141 struck out at end “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.”
- 2013 Pub. L. 112-240 Pub. L. 112–240, § 326(b), inserted “described in subparagraph (A)” after “for any taxable year”.
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(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—
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 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.
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(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
(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
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 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.
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(5) Treatment of certain built-in items
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 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.
(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.
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(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.
Amended 1989
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7811(c)(5)(B)(i), inserted “(determined without regard to any carryover)” after “during the recognition period”.
(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.
Amended 1989
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 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”.
(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)—
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 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.
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(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
Amended 1988, 1997, 2009, 2013, 2014, 2015
- 2015 Pub. L. 114-113 Pub. L. 114–113 amended par. (7) generally. Prior to amendment, par. (7) defined recognition period, with special rules for certain years and for distributions to shareholders.
- 2014 Pub. L. 113-295 Pub. L. 113–295 substituted “2012, 2013, and 2014” for “2012 and 2013” in heading and “2012, 2013, or 2014” for “2012 or 2013” in text.
- 2013 Pub. L. 112-240 Pub. L. 112–240, § 326(a)(1), (2), added subpar. (C) and redesignated former subpar. (C) as (D).
- 2013 Pub. L. 112-240 Pub. L. 112–240, § 326(a)(3), added subpar. (E).
- 2009 Pub. L. 111-5 Pub. L. 111–5 amended par. (7) generally. Prior to amendment, text read as follows: “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’.”
- 1997 Pub. L. 105-34 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’.”
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 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.
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(A) In general The term “recognition period” means the 5-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 distributions to shareholders pursuant to section 593(e), the preceding sentence shall be applied without regard to the phrase “5-year”.
(B) Installment sales If an S corporation sells an asset and reports the income from the sale using the installment method under section 453, the treatment of all payments received shall be governed by the provisions of this paragraph applicable to the taxable year in which such sale was made.
Amended 2010
- 2010 Pub. L. 111-240 Pub. L. 111–240 amended subpar. (B) generally. Prior to amendment, text read as follows: “In the case of any taxable year beginning in 2009 or 2010, no tax shall be imposed on the net recognized built-in gain of an S corporation if the 7th taxable year in the recognition period preceded such taxable year. The preceding sentence shall be applied separately with respect to any asset to which paragraph (8) applies.”
(8) Treatment of transfer of assets from C corporation to S corporation
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 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.
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(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:
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(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.
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 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.
(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.
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(f)(5)(A), added subsec. (e).