Treasury Regulations (26 C.F.R.)
26 CFR § 1.1374-2
Net recognized built-in gain.
# (a) In general.
An S corporation's net recognized built-in gain for any taxable year is the least of—
(1) Its taxable income determined by using all rules applying to C corporations and considering only its recognized built-in gain, recognized built-in loss, and recognized built-in gain carryover (pre-limitation amount);
(2) Its taxable income determined by using all rules applying to C corporations as modified by section 1375(b)(1)(B) (taxable income limitation); and
(3) The amount by which its net unrealized built-in gain exceeds its net recognized built-in gain for all prior taxable years (net unrealized built-in gain limitation).
# (b) Allocation rule.
If an S corporation's pre-limitation amount for any taxable year exceeds its net recognized built-in gain for that year, the S corporation's net recognized built-in gain consists of a ratable portion of each item of income, gain, loss, and deduction included in the pre-limitation amount.
# (c) Recognized built-in gain carryover.
If an S corporation's net recognized built-in gain for any taxable year is equal to its taxable income limitation, the amount by which its pre-limitation amount exceeds its taxable income limitation is a recognized built-in gain carryover included in its pre-limitation amount for the succeeding taxable year. The recognized built-in gain carryover consists of that portion of each item of income, gain, loss, and deduction not included in the S corporation's net recognized built-in gain for the year the carryover arose, as determined under paragraph (b) of this section.
# (d) Accounting methods.
In determining its taxable income for pre-limitation amount and taxable income limitation purposes, a corporation must use the accounting method(s) it uses for tax purposes as an S corporation.
# (e) Example.
The rules of this section are illustrated by the following example.
Example: Net recognized built-in gain.
X is a calendar year C corporation that elects to become an S corporation on January 1, 1996. X has a net unrealized built-in gain of $50,000 and no net operating loss or capital loss carryforwards. In 1996, X has a pre-limitation amount of $20,000, consisting of ordinary income of $15,000 and capital gain of $5,000, a taxable income limitation of $9,600, and a net unrealized built-in gain limitation of $50,000. Therefore, X's net recognized built-in gain for 1996 is $9,600, because that is the least of the three amounts described in paragraph (a) of this section. Under paragraph (b) of this section, X's net recognized built-in gain consists of recognized built-in ordinary income of $7,200 [$15,000 × ($9,600/$20,000) = $7,200] and recognized built-in capital gain of $2,400 [$5,000 × ($9,600/$20,000) = $2,400]. Under paragraph (c) of this section, X has a recognized built-in gain carryover to 1997 of $10,400 ($20,000−$9,600 = $10,400), consisting of $7,800 ($15,000−$7,200 = $7,800) of recognized built-in ordinary income and $2,600 ($5,000−$2,400 = $2,600) of recognized built-in capital gain.
[T.D. 8579, 59 FR 66463, Dec. 27, 1994]
Source: view the official text
In this part (40 sections)
- 1.1363-2 · Recapture of LIFO benefits.
- 1.1366-0 · Table of contents.
- 1.1366-1 · Shareholder's share of items of an S corporation.
- 1.1366-2 · Limitations on deduction of passthrough items of an S…
- 1.1366-3 · Treatment of family groups.
- 1.1366-4 · Special rules limiting the passthrough of certain items of…
- 1.1366-5 · Effective/applicability date.
- 1.1367-0 · Table of contents.
- 1.1367-1 · Adjustments to basis of shareholder's stock in an S…
- 1.1367-2 · Adjustments to basis of indebtedness to shareholder.
- 1.1367-3 · Effective/Applicability date.
- 1.1368-0 · Table of contents.
- 1.1368-1 · Distributions by S corporations.
- 1.1368-2 · Accumulated adjustments account (AAA).
- 1.1368-3 · Examples.
- 1.1368-4 · Effective date and transition rule.
- 1.1371-1 · Distributions of money by an eligible terminated S…
- 1.1371-2 · Impact of Audit PTTP on ETSC Period.
- 1.1374-0 · Table of contents.
- 1.1374-1 · General rules and definitions.
- 1.1374-2 · Net recognized built-in gain.
- 1.1374-3 · Net unrealized built-in gain.
- 1.1374-4 · Recognized built-in gain or loss.
- 1.1374-5 · Loss carryforwards.
- 1.1374-6 · Credits and credit carryforwards.
- 1.1374-7 · Inventory.
- 1.1374-8 · Section 1374(d)(8) transactions.
- 1.1374-9 · Anti-stuffing rule.
- 1.1374-10 · Effective date and additional rules.
- 1.1375-1 · Tax imposed when passive investment income of corporation…
- 1.1377-0 · Table of contents.
- 1.1377-1 · Pro rata share.
- 1.1377-2 · Post-termination transition period.
- 1.1377-3 · Applicability dates.
- 1.1378-1 · Taxable year of S corporation.
- 1.1374-1A · Tax imposed on certain capital gains.
- 1.1381-1 · Organizations to which part applies.
- 1.1381-2 · Tax on certain farmers' cooperatives.
- 1.1382-1 · Taxable income of cooperatives; gross income.
- 1.1382-2 · Taxable income of cooperatives; treatment of patronage…