Are the sec. 1374 final regulations a BIG improvement?The Tax Reform Act of 1986 overhauled Sec. 1374 by imposing a tax on built-in gains on conversion from C to S corporation status. Proposed regulations issued in 1992 generated critical comments from the public, particularly in nine key areas. This article analyzes the final Sec. 1374 regulations by comparing and contrasting them with the proposed rules and explaining the IRS's response to submitted AICPA AICPA See American Institute of Certified Public Accountants (AICPA). comments. At the end of 1994, the Treasury issued final regulations under Sec. 1374 relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc the built-in gains (BIG) tax imposed on certain S corporations.(1) The regulations are effective for tax years ending on or after Dec. 27, 1994, but only in cases in which the return for the tax year is filed pursuant to an S election or a Sec. 1374(d) (8) transaction occurring on or after that date.(2) The final regulations adopt with revisions the 1992 proposed regulations.(3) The preamble A clause at the beginning of a constitution or statute explaining the reasons for its enactment and the objectives it seeks to attain. Generally a preamble is a declaration by the legislature of the reasons for the passage of the statute, and it aids in the interpretation of to the final regulations (PFR) identifies nine major issues contained in comments submitted on the proposed regulations. This article examines these issues and their resolution in the final regulations, and highlights comments submitted by the AICPA and the IRS's response. Sec. 1374 was amended a·mend v. a·mend·ed, a·mend·ing, a·mends v.tr. 1. To change for the better; improve: amended the earlier proposal so as to make it more comprehensive. 2. by Section 632(a) of the Tax Reform Act of 1986 (TRA TRA Training TRA Transfer TRA Transition TRA Tennessee Regulatory Authority TRA Telecommunications Regulatory Authority (Oman) TRA Tax Reform Act (1976, 1984, or 1986) TRA Teachers Retirement Association '86) to prevent a liquidating C corporation from electing S status to circumvent cir·cum·vent tr.v. cir·cum·vent·ed, cir·cum·vent·ing, cir·cum·vents 1. To surround (an enemy, for example); enclose or entrap. 2. To go around; bypass: circumvented the city. the repeal The Annulment or abrogation of a previously existing statute by the enactment of a later law that revokes the former law. The revocation of the law can either be done through an express repeal of the General Utilities doctrine General Utilities Doctrine An Internal Revenue Service provision that permits a firm to liquidate its assets at more than book value and to pass the proceeds of the liquidation through to stockholders without making the firm pay income taxes on the gains. . Gain realized by the liquidating corporation on a sale or distribution generally is recognized by the S corporation and reported to shareholders, who include their pro rata [Latin, Proportionately.] A phrase that describes a division made according to a certain rate, percentage, or share. In a Bankruptcy case, when the debtor is insolvent, creditors generally agree to accept a pro rata share of what is owed to them. shares of such gain on their returns. Without Sec. 1374, there would be no corporate-level tax on such gain.4 Shareholders would increase their bases in their S corporation stock by the gain, thereby reducing their capital gain potential on the liquidating distribution; thus, double taxation would be avoided. Sec. 1374 prevents the circumvention CIRCUMVENTION, torts, Scotch law. Any act of fraud whereby a person is reduced to a deed by decree. Tech. Dict. It has the same sense in the civil law. Dig. 50, 17, 49 et 155; Id. 12, 6, 6, 2; Id. 41, 2, 34. Vide Parphrasis. of double taxation of C income by imposing a corporate-level tax on income or gain recognized by an S corporation to the extent reflective Refers to light hitting an opaque surface such as a printed page or mirror and bouncing back. See reflective media and reflective LCD. of unrealized appreciation attributable to C tax years. The tax is calculated by applying the highest corporate rate (currently, 35%) to the net recognized built-in gain (NRBIG) of the S corporation for any tax year beginning in a 10-year recognition period. The BIG tax is treated as a loss that flows through to shareholders.(5) Although conceptually straightforward, the operation of Sec. 1374 is complex, sometimes incongruous in·con·gru·ous adj. 1. Lacking in harmony; incompatible: a joke that was incongruous with polite conversation. 2. , and may be more onerous on·er·ous adj. 1. Troublesome or oppressive; burdensome. See Synonyms at burdensome. 2. Law Entailing obligations that exceed advantages. than the double taxation imposed by the C corporation rules. Overview Sec. 1374 generally applies to tax years beginning after 1986 of S corporations that were formerly C corporations, provided the S election is filed after 1986. However, a corporation that has always been an S corporation can be subject to BIG tax if it acquires assets in a transaction in which its basis in such assets is determined by reference to their basis in. the hands of a C corporation (a Sec. 1374(d)(8) transaction). Sec. 1374(d)(8) provides that assets so acquired are also subject to BIG tax, essentially distinct from any BIG tax computation Computation is a general term for any type of information processing that can be represented mathematically. This includes phenomena ranging from simple calculations to human thinking. to which other assets other assets Assets of relatively small value. For financial reporting purposes, firms frequently combine small assets into a single category rather than listing each item separately. of the S corporation may be subject. Example, 1: P, a C corporation, elected S status effective Jan. 1, 1994; thus, it has a 10-year recognition period with respect to all assets owned on that date. If Plater acquires another group of assets in a Sec. 1374(d) (8) transaction, a new 10-year recognition period begins with respect to those assets. As previously mentioned, the BIG tax is largely a function of NRBIG. The principal components of NRBIG are RBIGs and recognized built-in losses (RBILS). Sec. 1374(d) (3) defines RBIG as any gain recognized by an S corporation on the disposition of an asset during the recognition period, except to the extent the S corpor-ation can show that (1) it did not hold the asset on the first day of the recognition period or (2) the gain exceeds the asset's unrealized appreciation on such day. In contrast, under Sec. 1374(d) (4), the taxpayer must prove that a loss is an RBIL. Regs. Sec. 1.1374-4(a) (1) provides that the rules of Sec. 1374(d) (3) and (4) apply only to recognized gain Recognized Gain The amount of gain reported for income tax purposes. Notes: You can defer recognizing some gains until the following year(s). See also: Capital Gain, Capital Loss, Deferred Income Tax, Drought Sale, Exempt Income, Exemption, Gain, Recognized Loss and loss arising from sales or exchanges. Under Sec. 1374 (d) (5), any item of income or deduction deduction, in logic, form of inference such that the conclusion must be true if the premises are true. For example, if we know that all men have two legs and that John is a man, it is then logical to deduce that John has two legs. (other than gain or loss arising from a sale or exchange)(6) properly taken into account by an S corporation during the recognition period is RBIG or RBIL, if it is attributable to periods before the recognition period (i.e., the C corporation period). Regs. Sec. 1.1374-4(b) provides that an S corporation's income or deduction items generally are treated as RBIGs or RBILs if they would have been taken into account before the recognition period by a taxpayer using the accrual accrual, n continually recurring short-term liabilities. Examples are accrued wages, taxes, and interest. method (accrual method rule).(7) As will be discussed, certain aspects of this ufle stimulated a strong objection A formal attestation or declaration of disapproval concerning a specific point of law or procedure during the course of a trial; a statement indicating disagreement with a judge's ruling. from the AICPA. The application of the RBIG or RBIL rules can lead to incongruous results. BIG potential that exists due to an asset's anticipated (but not yet accrued ac·crue v. ac·crued, ac·cru·ing, ac·crues v.intr. 1. To come to one as a gain, addition, or increment: interest accruing in my savings account. 2. ) large revenue stream will not be subject to BIG tax as long as the asset is not sold; thus, a corporation can reap the economic benefit of the asset through realization of the income stream and avoid BIG tax. On the other hand, if the economic benefit were realized by a sale or exchange of the asset, BIG tax would apply. For instance, in Prop. Regs. Sec. 1.1374-4(b) (3), Example 2, the sale of oil extracted from a well in which a corporation holds, as of the first day of the recognition period, a substantially appreciated working interest does not trigger RBIG during the recognition period, provided the oil had not yet been extracted from the ground at the beginning of the recognition period.(8) Because the interest is not sold, the income is not RBIG under Sec. 1374(d) (3); because the oil had not been extracted at the beginning of the recognition period, the sale does not trigger RBIG under Sec. 1374 (d) (5). Final Regs. Sec. 1.1374-4(a) (3), Examples 1 and 2, retain and augment aug·ment v. aug·ment·ed, aug·ment·ing, aug·ments v.tr. 1. To make (something already developed or well under way) greater, as in size, extent, or quantity: the proposed regulation's example by addressing the calculation of RBIG on the sale of an oil and gas property. An item can yield a different RBIG amount, depending on whether Sec. 1374(d) (3) or (d) (5), applies. This inconsistency in·con·sis·ten·cy n. pl. in·con·sis·ten·cies 1. The state or quality of being inconsistent. 2. Something inconsistent: many inconsistencies in your proposal. (9) is illustrated by Regs. Sec. 1.1374-4 (b) (3), Example 1, in which a cash-basis C corporation has accounts receivable accounts receivable n. the amounts of money due or owed to a business or professional by customers or clients. Generally, accounts receivable refers to the total amount due and is considered in calculating the value of a business or the business' problems in paying of $50,000, with a fair market value (FMV FMV - full-motion video ) of $40,000 on the date of conversion to S status. The receivables arose from services rendered prior to the conversion date. The taxpayer collects all the receivables after the conversion, resulting in RBIG of $50,000.10 However, had the corporation sold the receivables for $45,000 after the S election, rather than collecting them, RBIG would be limited to $40,000. Thus, the excess of an asset's FMV over its basis at the beginning of the recognition period is the maximum amount of RBIG under Sec. 1374(d) (3) if the asset is sold; this excess does not limit the amount of RBIG if the asset is converted to cash other than through a sale or exchange. Calculating NRBIG After the RBIGSsand RBILs are determined, the next step in calculating BIG tax is to compute To perform mathematical operations or general computer processing. For an explanation of "The 3 C's," or how the computer processes data, see computer. NRBIG. Regs. Sec. 1.1374-2 (a) defines NRBIG as the least of (1) the pre-limitation amount; (2) the taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. limitation; or (3) the NUBIG limitation. The pre-limitation amount, according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. Regs. Sec. 1.1374-2 (a) (1), is the amount of an S corporation's taxable income determined by using aH rules applying to C corporations and by considering only its RBIGs, RBILs, and RBIG carryover carryover n. in taxation accounting, using a tax year's deductions, business losses or credits to apply to the following year's tax return to reduce the tax liability. (See: carryback) . The RBIG carryover, defined in Regs. Sec. 1. 1374-2 (c), is the amount by which an S corporation's pre-limitation amount exceeded its taxable income limitation for the preceding tax year. The RBIG carryover is designed so that BIG tax generally cannot be avoided by manipulating swings. in taxable income so that operating losses operating loss The excess of operating expenses over revenue. As with operating income, operating losses exclude revenues and expenses from operations that are not considered a regular part of the business. Also called deficit. Compare operating income. are incurred in periods of large RBIGs. If a taxpayer is able to report net losses for all tax years in the 10-year recognition period, however, no BIG tax will be paid. Regs. Sec. 1.1374-2 (a) (2) defines the taxable income limitation as the S corporation's taxable income determined by using all rules applying to C corporations, but without regard to the net operating loss (NOL NOL - Never Offline ) and dividends-received deductions Dividends-received deduction A corporate tax deduction on income allowed by company A that is in ownership of shares of company B and receives dividends on the shares of company B. . In determining its taxable income for prelimitation amount and taxable income limitation purposes, Regs. Sec. 1.1374-2 (d) requires a corporation to use the accounting methods it uses for tax purposes as an S corporation. The accounting methods issue is discussed below. The NUBIG limitation is the amount by which NUBIG exceeds NRBIG for all prior tax years. NUBIG is defined by Sec. 1374 (d) (1) as the amount by which the FMV of the S corporation's assets as of the date of conversion from C status (or of the Sec. 1374(d) (8) acquisition) exceeds their aggregate adjusted bases on that date. Regs. Sec. 1.1374-3 takes a hypothetical Hypothetical is an adjective, meaning of or pertaining to a hypothesis. See:
Reducing NRBIG The next step in computing computing - computer the BIG tax is to reduce NRBIG by certain C carryforwards. Sec. 1374(b) (2) provides that NOL and capital loss carryforwards Loss Carryforward An accounting technique with which a company applies net operating losses of the current year to future year's profits in order to reduce tax liability. Notes: from C years arc allowed as deductions against NRBIG. Regs. Sec. 1.1374-5(a) provides that the loss carryforwards are allowed as deductions only to the extent their use is allowed under C corporation rules. No other loss carryforwards (e.g., charitable contribution charitable contribution n. in taxation, a contribution to an organization which is officially created for charitable, religious, educational, scientific, artistic, literary, or other good works. carryforwards) can be deducted de·duct v. de·duct·ed, de·duct·ing, de·ducts v.tr. 1. To take away (a quantity) from another; subtract. 2. To derive by deduction; deduce. v.intr. against NRBIG.(12) A tentative tentative, adj not final or definite, such as an experimental or clinical finding that has not been validated. BIG tax is then computed by applying the highest corporate rate to NRBIG as reduced by loss carryforwards. Similar to the loss carryforward rules, Sec. 1374(b) (3) (B) allows Sec. 39 business credit carryforwards and Sec. 53 minimum tax credits attributable to C years to reduce BIG tax. In addition, under Sec. 1374(b) (3) (A), the Sec. 34 special fuels tax is creditable cred·it·a·ble adj. 1. Deserving of often limited praise or commendation: The student made a creditable effort on the essay. 2. Worthy of belief: a creditable story. against the tentative BIG tax.(13) Regs. Sec. 1.1 374-1 (b) provides anti-trafficking rules. Specifically, if Sec. 382, 383 or 384 would have applied to limit the use of a corporation's RBIL or Sec. 1374 attributes(14) at the beginning of the recognition period had the corporation remained a C corporation, these sections apply to limit their use in determining the S corporation's pre-limitation amount, taxable income limitation, NUBIG limitation, deductions against NRBIG and credits against BIG tax. The Nine Issues In response to the proposed regulations, commentators (including the AICPA) raised nine major issues (denominated 3.A-I A-I General Audiences (Catholic movie rating) in the PFR). The analysis below highlights the AICPA's comments and the resolution of its concerns as reflected in the final regulations. A. Accounting Methods As previously mentioned, an S corporation's NRBIG is the least of the prelimitation amount, the taxable income limitation, and the net unrealized BIG limitation. Both the pre-limitation amount and the taxable income limitation are determined, in general, by using the rules applicable to C corporations. The AICPA was concerned about the extent to which the subchapter C rules should apply in this regard.15 It requested guidance about the accounting methods an S corporation can use in making the prelimitation amount and taxable income determinations: "For example, what effect, if any, should be given to section 448, which limits the use of the cash method of accounting by C corporations? What limitations on deductions should be imposed under sections 465 or 469 in determining the [corporation's] taxable income as if it were a C corporation?"(16) The AICPA recommended that the final regulations permit an S corporation to use any accounting method or election that would have been available to it had the S election not been made. " The apparent and appropriate purpose of [the pre-limitation amount and the taxable income limitation] is to place the taxpayer in no worse a position as an S corporation than it would have been in had it not made the S corporation election." The IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. disagreed. Regs. Sec. 1.1374-2(d) provides that in determining its pre-limitation amount and taxable income limitation, a corporation must use the accounting method or methods it uses for tax purposes as an S corporation. Thus, the Sec. 448 limitation on the use of the each method of accounting for C corporations, the Sec. 465 at-risk rules at-risk rule A law that limits tax write-offs to the amount of money directly invested (and thus, at risk) in an asset. The purpose of an at-risk rule is to prohibit investors from deriving tax benefits that exceed the amount of money actually invested. and the Sec. 469 passive activity rules are inapplicable in·ap·pli·ca·ble adj. Not applicable: rules inapplicable to day students. in·ap . The Service reasoned that Sec. 1374 "applies only to items an S corporation actually takes into account during the recognition period. It does not apply to items the corporation would have taken into account under a hypothetical method of accounting."(17) B. Recognition Period The AICPA requested(18) that final regulations confirm that the recognition period of Sec. 1374(d) (7) is the 120-month period, rather than the 10-tax-year period, beginning on the first day of S status.(19) Guidance was also requested on determining the NRBIG when the recognition period ends during a tax year. The Service confirmed the 120-month period interpretation. In addition, if the recognition period ends during a tax year, the pre-limitation amount for that year is determined as if the corporation's books were closed at the end of the recognition period.(20) Example 2: X is a C corporation with an April 30 year-end. X elected S status beginning May 1, 1995, and changed to a calendar year. The recognition period began May 1, 1995 and ends Apr. 30, 2005. Under Sec. 1374(a), BIG tax applies in tax year (calendar year) 2005, because that year begins within the recognition period. However, only BIGs and BILs recognized between Jan. 1, 2005 and Apr. 30, 2005 (and any RBIG carryover from 2004) are taken into account in computing X's pre-limitation amount for tax year 2005. However, under Sec. 1374(d) (2) (A) (ii), the taxable income limitation apparently is based on the corporation's taxable income for the entire 2005 tax year.(21) C. Accrual Method Rule Sec. 1374(d) (5) (B) provides that any amount allowable as a deduction during the recognition period (other than an NOL or capital loss carryover) and "attributable to" periods before the effective date of the S election is treated as an RBIL. Prop. Regs. Sec. 1. 13 74-4 (b) (2) provided that a deduction item is "attributable to" pre-S periods if the item would have been deductible That which may be taken away or subtracted. In taxation, an item that may be subtracted from gross income or adjusted gross income in determining taxable income (e.g., interest expenses, charitable contributions, certain taxes). in a pre-S period by an accrual-basis taxpayer,(22) without regard to Secs. 461 (h) (2) (C) (relating to certain payment liabilities) and 469. The AICPA found this proposed rule overly restrictive; it recommended(23) that an expense be "attributable to" a pre-S period if, during such period, all the events had occurred to establish the fact of the liability, the amount of the liability could be determined with reasonable accuracy, and economic performance (without regard to Sec. 461 (h) (2) (C)) had occurred with respect to the liability.(24) Thus, for example, any timing restrictions under Secs. 461 (h) (2) (C), 404(a) (5) (relating to payments of certain deferred compensation), 267 (a) (2) (relating to accrued amounts payable to related persons), 1630) (relating to disqualified dis·qual·i·fy tr.v. dis·qual·i·fied, dis·qual·i·fy·ing, dis·qual·i·fies 1. a. To render unqualified or unfit. b. To declare unqualified or ineligible. 2. interest payable by corporations), 465 and 469 would be ignored. The final regulations represent a compromise between the proposed regulations and the AICPA recommendation. The accrual method rule was retained, with several modifications. First, any amount properly deductible under Sec. 267 (a) (2) is RBIL to the extent: [] All events have occurred that establish the fact of the liability as of the first day of the recognition period; [] The exact amount of the liability can be determined as of the first day of the recognition period; and [] The amount is paid either --during the first 21/2 months of the recognition period, or --to a related party owning (actually and by attribution at·tri·bu·tion n. 1. The act of attributing, especially the act of establishing a particular person as the creator of a work of art. 2. ) less than 5% of the corporation's stock (by vote and value), both at the beginning of the recognition period and at the time of payment.(25) Second, any amount deducted under Sec. 404(a) (5) during the recognition period is RBIL if: [] All events have occurred that establish the fact of the liability, and the exact amount can be determined, at the beginning of the recognition period; and [] The amount is not deductible under Sec. 267 (a) (2).(26) Third, Regs. Sec. 1.1374-4(b)(2) expands the Sec. 461 (h) (2) (C) exception to the accrual method rule to include all items listed in Regs. Sec. 1.461-4(g) (relating to items for which payment constitutes economic performance). Finally, the Sec. 469 exception was eliminated.(27) It is hard to understand why the Sec. 267 (a) (2) and 404(a) (5) modifications to the accrual method rule are so restrictive. The PFR, Item 3.C, merely states that the additional limitations for amounts deductible under Sec. 267(a) (2) are needed "because of the particular difficulty in determining whether amounts, paid to related parties are attributable to services performed before or after the beginning of the recognition period." This rationale is unconvincing un·con·vinc·ing adj. Not convincing: gave an unconvincing excuse. un . The applicability of Sec. 267(a) (2) to an accrual-method taxpayer for a particular tax year with respect to services performed by a related party always depends, among other things, on whether the services are performed before or after the close of such year. The economic performance rule of Sec. 461 (h) (2) (A) (i) demands no less. Subchapter S Subchapter S IRS regulation that gives a corporation with 35 or fewer shareholders the option of being taxed as a partnership to escape corporate income taxes. and the conversion of a C corporation to S status add nothing to this basic requirement. In addition, by making the second prong of the all-events test more restrictive(28) for this purpose, certain compensation expenses arising in a C year may not be BILS when paid during the recognition period. For example, a salary to an employee-owner that is a function of receivables (built-in income items) collected would not be a BIL BIL Brother-In-Law BIL Billion BIL Bilateral BIL Band Interleaved by Line BIL Basic Impulse Level (electrical power switches) BIL Basic Insulation Level (IEC) , because the exact amount of the salary cannot be determined at the beginning of the recognition period. This potential mismatching Mismatching is the term given to the alleged negative effect that affirmative action has when it places a student into a college that is allegedly too diffucult for her. For example, according to the theory, in the absence of affirmative action, a student will be admitted to a college of built-in income items (receivables) with the compensation attributable to such pre-conversion services is improper
D. Sec. 481 Adjustments Prop. Regs. Sec. 1.1374-4(c) provided that an item of income or deduction taken into account under Sec. 481 during the recognition period is an RBIG or RBIL if the item is taken into account because of a change in accounting method effective before the second year of the recognition period. PFR, Item 3.D, indicates that, subsequently, the Service became concerned that in some cases this ride would have the effect of omitting certain items attributable to C periods and of including other items twice. Regs. Sec. 1.1374-4 (d) provides that a Sec. 481 (a) adjustment taken into account at any time during the recognition period is an RBIG or RBIL if the adjustment relates to items attributable to"(30) pre-S periods.(31) Example 3.(32) X is an accrual-method C corporation that elected S status effective Jan. 1, 1996. In 1995, X received $5,000 for services to be rendered in 1996 and properly included the $5,000 in 1995 gross income. (X used the accrual method of accounting in 1995 without regard to the one-year deferral deferral - Waiting for quiet on the Ethernet. rule permitted by Rev. Proc. 71-21.33) In 1996, X elects to include the $5,000 in gross income in 1996 pursuant to Rev. Prod. 71-21; this election is a change in accounting method to which Secs. 446 and 481 apply.34 Thus, X has a $5,000 negative Sec. 481 (a) adjustment. The issues are whether the $5,000 included in gross income in 1996 is an RBIG and whether the $5,000 negative Sec. 481 adjustment is an RBIL First, the $5,000 of gross income is an RBIG, because it would have been included in a C year (1995) by an accrual-method taxpayer(35) without regard to Rev. Proc. 71-21 (because X had not adopted the one-year deferral ride when it was a C corporation(36)). Second, the $5,000 negative Sec. 481 adjustment is an RBIL because it relates to services attributed to 1995 (a C year). E. Installment Method installment method The accounting method of treating revenue from the sale of an asset on installments such that profits are recognized in proportion to the percentage of the sale price collected in a given accounting period. As was discussed, BIG tax applies only to tax years beginning in the recognition period, and RBIGs and RBILs must be recognized during such period. These rules notwithstanding, the Service warned taxpayers in Notice 90-27(37) that it would use its regulatory authority Noun 1. regulatory authority - a governmental agency that regulates businesses in the public interest regulatory agency administrative body, administrative unit - a unit with administrative responsibilities under Secs. 337 (d) and 1374(e) to impose the BIG tax on BIG recognized under the installment method, when the sale occurs before or during the recognition period and the income is recognized during or after such period. Under Prop. Regs. Sec. 1.1374-4(g), BIG was imposed on installment income when reported to the extent the income would have been included in NRBIG during the recognition period had the Sec. 453 (d) election out been made and all provisions of Sec. 1374 and the regulations thereunder applied.(38) Because the Service believes that the installment rule is needed to prevent taxpayer abuse of Sec. 1374, Regs. Sec. 1.1374-4(h) retains the rule, but clarifies its operation. First, Regs. Sec. 1.1374-4(h) (2) adopts a special taxable income limitation for RBIGs associated with an installment sale Installment sale The sale of an asset in exchange for a specified series of payments (the installments). installment sale A sale in which the buyer is scheduled to make a series of payments over a period of time. ; it equals the amount by which corporate NRBIG would have been increased from the year of the installment sale to the year the income is reported (or, if earlier, the last year of the recognition period) had a Sec. 453 (d) election out been made. All Sec. 1374 rules apply in making this calculation. Second, Regs. Sec. 1.1 374-4 (h) (3) contains a "rollover A graphic element in an application or on a Web page that changes its color or shape when the pointer is moved (rolled) over it. See JavaScript rollover. See also n-key rollover. " rule for installment gains analogous analogous /anal·o·gous/ (ah-nal´ah-gus) resembling or similar in some respects, as in function or appearance, but not in origin or development. a·nal·o·gous adj. to the carryover ride of Sec. 1374(d) (2) (B) and Regs. Sec. 1.1374-2(c). Any excess of installment RBIG over the taxable income limitation just described is rolled over (i.e., carried over) to the next year, but only if the succeeding year is in the recognition period. However, this carryover is reduced to the extent it is caused by an excess of RBIL over RBIG in the tax year of sale and succeeding tax years in the recognition period.(39) Third, under Regs, Sec. 1.1374-4(h)(4), if Sec. 1374 applies to an installment RBIG after the recognition period under the above rules, any remaining Sec. 1374 attributes (as defined in Regs. Sec. 1.1374-1 (c)) may be used to the extent allowable under all provisions of the Code in determining BIG tax. Finally, any loss recognized after the recognition period that would have been an RBIL if recognized during the recognition period may not be used in determining BIG tax. Example 4: X is a C corporation that elected S status effective Jan. 1, 1995. On that date, Xsold real property with a basis of $0 and an FMV of $100 (i.e., $100 BIG potential) for a $100 note (bearing a market rate of interest) payable in 1996. X's taxable income in 1995 was $40, including a $30 RBIL. In 1996, in addition to collecting $100 on the note, X has a $100 operating loss and no other RBIGs or RBILs. X's NUBIG is $500. Had a Sec. 453 (d) election out been made in 1995, NRBIG would have been $70 (least of $1) pre-limitation amount ($100 income on sale if Sec. 453(d) had been elected - $30 RBIL), (2) taxable income limitation ($40 actual taxable income + $100 additional taxable income had Sec. 453(d) been elected) or (3) NUBIG limitation ($500)) in 1995 and $0 in 1996. Thus, the special installment sale taxable income limitation for 1996 is $70.(40) Therefore, X has NRBIG of only $70 in 1996. There is no rollover of the $30 excess ($100 installment BIG + $70 special taxable income limitation), because it was caused by an excess of RBIL over RBIG in 1995. Example 5.(41) Z elected S status effective Jan. 1, 1996. On that date, Z sold real property with a basis of $0 and an FMV of $500 (i.e., $500 BIG potential) for a $500 note (bearing a market rate of interest) payable on Jan. 1, 2011. Z uses the installment method. In 2011, Z has income of $500 on collecting the note, loss of $100 that would have been an RBIL had it been recognized in the recognition period, taxable income of $400, and a $60 minimum tax credit arising in 1995. None of Z's minimum tax credit is limited under Sec. 53 (c) or 383. Had Zreported the $500 gain in 1996, Z's NRBIG during the recognition period would have been $350 greater than otherwise. Thus, Z has a $350 NRBIG subject to BIG tax in 2011, a tentative BIG tax of $122.50 ($350 X 0.35), and a BIG tax of $62.50 ($122.50 -- $60). The $100 loss recognized after the recognition period has no effect on the BIG tax. R Partnership Interests Without preventative regulations, an S corporation arguably ar·gu·a·ble adj. 1. Open to argument: an arguable question, still unresolved. 2. That can be argued plausibly; defensible in argument: three arguable points of law. would be able to avoid BIG tax by contributing (either before or after the S effective date) assets with BIG potential to a partnership in exchange for a partnership interest. Because the S corporation owns the partnership interest and not the contributed assets, it could be argued that the corporation need only hold the partnership interest for 10 years to avoid BIG tax. In the meantime Adv. 1. in the meantime - during the intervening time; "meanwhile I will not think about the problem"; "meantime he was attentive to his other interests"; "in the meantime the police were notified" meantime, meanwhile , the corporation could cause the partnership to dispose of To determine the fate of; to exercise the power of control over; to fix the condition, application, employment, etc. of; to direct or assign for a use. See also: Dispose the contributed assets and avoid BIG tax. Under authority provided in Secs. 337(d) and 1374(e), Prop. Regs. Sec. 1. 1374-4 (h) generally required the S corporation to look through its partnership interest for BIG tax purposes. In general, the proposed regulations treated an S corporation's distributive dis·trib·u·tive adj. 1. a. Of, relating to, or involving distribution. b. Serving to distribute. 2. share of the partnership's items as RBIGs or RBILs to the extent the distributive share would have been so treated had the items originated in and been taken into account directly by the S corporation. The application of this look through rule, however, was limited to the BIG or BIL potential of the partnership interest to the S corporation.(42) In turn, the BIG (or BIL) potential of the partnership interest was adjusted for lookthrough RBIG (or RBIL). Certain special and anti-avoidance rules also applied. Under Prop. Regs. Sec. 1.1374-4(h) (5) (i), and subject to an anti-abuse rule, the lookthrough rule did not apply to small partnership interests (i.e., any year in the recognition period in which the value of the S corporation's partnership interest was less than $100,000 and represented less than a 10% interest in partnership capital and profits at all times during that year). The AICPA's recommendations to modify the lookthrough rule were twofold.(43) First, to simplify the administration of the small partnership interest exception, it recommended that the FMV of an S corporation's interest in a partnership be tested only on the first day of the recognition. period for partnership interests owned at that date, or on the date of a property contribution by the corporation to a partnership if made during the recognition period. Any subsequent increase or decrease in value would be disregarded dis·re·gard tr.v. dis·re·gard·ed, dis·re·gard·ing, dis·re·gards 1. To pay no attention or heed to; ignore. 2. To treat without proper respect or attentiveness. n. , avoiding a yearly redetermination Noun 1. redetermination - determining again determination, finding - the act of determining the properties of something, usually by research or calculation; "the determination of molecular structures" of value. The second recommendation was that the lookthrough rule not apply to any interest in a publicly traded partnership Publicly Traded Partnership A limited partnership that also has interests traded in the equity securities market. Notes: This is also known as a master limited partnership. See also: Master Limited Partnership, Partnership, Public Company (PTP (1) See peer-to-peer. (2) (Picture Transfer Protocol) An ISO standard for transferring photos from a digital camera to a computer or photo printer. ) held by an S corporation. There was concern that an S corporation might not be able to obtain sufficiently detailed information from the PTP to determine the value of the PTP's assets. Regs. Sec. 1.1374-4(i) retains the lookthrough rule and dismisses the insufficient information argument. However, the Service did modify the small partnership interest exception so that a valuation of the partnership interest need only be done at the beginning of the recognition period. Under Regs. Sec. 1.1374-4(i) (5) (i), the small interest exception applies (and the lookthrough rule does not) to a recognition period tax year if the corporation owns a less-than-10% capital and profits interest in the partnership at all times during the year and all prior years in the recognition period, and the value of the interest as of the first day of the recognition period is less than 100,000.(44) Regs. Sec. 1.1374-4(i) (6), retaining a proposed rule of questionable validity, provides that an S corporation's Sec. 704(c) gain or loss amount with respect to a contributed asset is not reduced for BIG tax purposes, except through the lookthrough BIG (BIL) mechanism. Even if depreciation reduces an asset's Sec. 704(c) potential under the traditional method of Regs. Sec. 1.704-3(b), the full Sec. 704(c) potential remains for Sec. 1374 purposes. Example 6.(45) Y is a C corporation that elected S status effective jan. 1, 1996. On that date, Y contributed Asset (basis $0, FMV $40) for a 50% interest in partnership P. Asset has $40 BIG potential and $40 of Sec. 704(c) gain potential. P adopts the Regs. Sec. 1.704-3(b) traditional method; book depreciation is $8 per year. After three years, the Years, The the seven decades of Eleanor Pargiter’s life. [Br. Lit.: Benét, 1109] See : Time Sec. 704 (c) potential has been reduced to $16 ($40 - $24 - $0) for subchapter K purposes. If P sells Asset for $36 at that time, it recognizes $36 gain. The first $16 of such gain is allocated to Y under Sec. 704 (c); Y is also allocated half of the remaining $20 of gain. Thus, Y is allocated $26 of partnership gain. Y's Sec. 1363 (b) taxable income increases by $26, and $26 passes through to Y's shareholders under Sec. 1366. However, solely for Sec. 1374 purposes, Asset's Sec. 704(c) gain potential remains at $40 and, therefore, solely for Sec. 1374 purposes, P's $36 gain is allocated entirely to Y. Sec. 1374 generally does not create income or loss; it merely taxes that income or loss recognized by the S corporation under other Code provisions. While Regs. Sec. 1.1374-4(h) may subject to BIG tax certain installment gain recognized after the recognition period, that gain is recognized pursuant to Secs. 453 and 1001, not Sec. 1374. However, in Example 6, Y is allocated (recognizes) $26 but is subject to Sec. 1374 tax on $36. Although the Treasury may feel shortchanged if Y recognizes only $26 for Sec. 1374 purposes, the fault seems to lie with Sec. 704(c) and the traditional method of allocation The apportionment or designation of an item for a specific purpose or to a particular place. In the law of trusts, the allocation of cash dividends earned by a stock that makes up the principal of a trust for a beneficiary usually means that the dividends will be treated as , not Sec. 1374. If Treasury feels aggrieved ag·grieved adj. 1. Feeling distress or affliction. 2. Treated wrongly; offended. 3. Law Treated unjustly, as by denial of or infringement upon one's legal rights. , it should seek a legislative(46) change rather than impose a regulatory fix of questionable validity. G. Valuing Inventory The BIG potential of inventory is of great concern to many C corporations contemplating an S election. If the corporation uses the LIFO (Last In-First Out) A queueing method in which the next item to be retrieved is the item most recently placed in the queue. Contrast with FIFO. LIFO - stack method, it must recognize the LIFO recapture recapture n. in income tax, the requirement that the taxpayer pay the amount of tax savings from past years due to accelerated depreciation or deferred capital gains upon sale of property. (See: income tax) RECAPTURE, war. amount in its last C year,(47) and its inventory basis is increased by a corresponding amount. Under Regs. Sec. 1. 137477 (b), if the FW of the inventory exceeds its revised tax basis, BIG tax will still apply, but only to the extent that the collapsed LJFO layers(48) as of the first day of the recognition period are subsequently invaded. Thus, inventory valuation for BIG tax purposes is important, whether FIFO (First In First Out) A storage method that retrieves the item stored for the longest time. Contrast with LIFO. See traffic engineering methods. FIFO - first-in first-out or LIFO has been adopted. Prop. Regs. Sec. 1.1374-7(a) provided that the value of an S corporation's inventory on the first day of the recognition period equals the amount a willing buyer would pay a willing seller for the inventory in a purchase of all the S corporation's assets on that day. The Service also considered publishing a revenue procedure containing a safe harbor Safe Harbor 1. A legal provision to reduce or eliminate liability as long as good faith is demonstrated. 2. A form of shark repellent implemented by a target company acquiring a business that is so poorly regulated that the target itself is less attractive. , under which RBIG from inventory for Sec. 1374 purposes could be determined using a formula.(49) The AICPA made several comments with respect to the inventory issue. First, it reiterated its Pre-release Comment(50) that inventory valuation should be based on (but not necessarily equal to) replacement cost. Second, even if the Service rejected this approach and retained the "willing buyer-willing seller" methodology, the AICPA recommended that the regulations make clear that value generally will be substantially less than retail value. Although it should be obvious that a willing buyer will not pay retail for inventory, the AICPA was concerned that some IRS field agents "have been greatly confused on this issue.(51) Concern about field agents' actions also influenced the AICPA's remarks about a possible safe harbor rule safe harbor rule Antitrust law A federal guideline as to what constitutes antitrust activity, established by the FTC and Justice Dept, after specific legislation–which might be open to misinterpretation–is enacted. Cf Self-referral. for determining RBIG for inventory. The; AICPA agreed with the Service that a safe harbor rule may be appropriate, but admonished the IRS that revenue agents must be carefully instructed on the meaning and correct use of safe harbors, and that no inference (logic) inference - The logical process by which new facts are derived from known facts by the application of inference rules. See also symbolic inference, type inference. should be drawn from a failure to meet the safe harbor.(52) In the end, the AICPA decided not to recommend "a simple safe harbor in addition to our replacement-cost recommendation." The experience we have gained from servicing those of our clients with inventories convinces us that taxpayers' inventories are far too diverse to be susceptible to a simple safe harbor valuation scheme. A safe harbor cannot apply equally to raw materials, work in process, finished goods and to all industries. One size simply does not fit all.(53) Regs. Sec. 1. 1 374-7 (a) retains the willing buyer-willing seller rule, but adds that the hypothetical buyer must expect to continue to operate the corporation's business. In addition, the buyer and seller are presumed not to be under any compulsion COMPULSION. The forcible inducement to au act. 2. Compulsion may be lawful or unlawful. 1. When a man is compelled by lawful authority to do that which be ought to do, that compulsion does not affect the validity of the act; as for example, when a court of to buy or sell and to have reasonable knowledge of all "relevant facts," which, under PFR, Item 3.G, includes the following: [] The inventory's replacement cost. [] The inventory's expected retail selling price. [] The seller's incentive to demand a price for the inventory that would compensate for and provide a fair return for expenditures the seller incurred to obtain, prepare, carry and dispose of dis·pose v. dis·posed, dis·pos·ing, dis·pos·es v.tr. 1. To place or set in a particular order; arrange. 2. the inventory before the sale of the business; and [] The buyer's incentive to pay a price for the inventory that would compensate for and provide a fair return for similar expenditures the buyer expects to incur To become subject to and liable for; to have liabilities imposed by act or operation of law. Expenses are incurred, for example, when the legal obligation to pay them arises. An individual incurs a liability when a money judgment is rendered against him or her by a court. after the sale of the business. The Service expects that the value of an S corporation's inventory will generally be less than its anticipated retail price, but greater than its replacement cost. The Service did not provide a safe harbor rule for valuing inventory. Given that inventory valuation is predicated on a hypothetical sale of the entire business, the regulations' inventory rule finds support in the case law.(54) In particular, FMV generally is lower than retail price but higher than replacement cost, based on allocation of profit between the two parties.(55) However, value can be below replacement cost (e.g., subnormal subnormal /sub·nor·mal/ (-nor´m'l) below normal. subnormal below or less than normal. goods).(56) These issues were careful considered by the AICPA in both its Comments and Pre-release Comments.(57) H. Sec. 1374(d)(8) Transactions Because BIG tax generally applies only to gains recognized on assets owned on the date of conversion to S status,(58) a special rule is needed to prevent tax avoidance The process whereby an individual plans his or her finances so as to apply all exemptions and deductions provided by tax laws to reduce taxable income. Through tax avoidance, an individual takes advantage of all legal opportunities to minimize his or her state or federal through a reorganization. Under Sec. 1374(d) (8), if an S corporation acquires assets in a transaction in which its basis in the assets is determined by reference to their basis in the hands of a a corporation (a Sec. 1374(d) (8) transaction), BIG tax is imposed on any NRBIG attributable to such assets. For purposes of the tax, the 10-year recognition period begins on the date of the Sec. 1374(d) (8) transaction. Prop. Regs. Sec. 1.1374-8 specified that a separate determination of tax is to be made with respect to assets acquired in each Sec. 1374(d) (8) transaction. Thus, the loss carryforwards acquired in one Sec. 1374(d) (8) transaction could offset only the NRBIG attributable to assets acquired in the same transaction. Similarly, an S corporation's Sec. 1374 attributes on the day it became an S corporation could only be used to reduce a BIG tax imposed on dispositions of assets the S corporation held (or treated as held) on that day.59 The AICPA took issue with part of the separate determination rule,(60) recommending that Sec. 1374 attributes acquired in one Sec. 1374(d) (8) transaction be allowed to offset any NRBIG, subject to applicable statutory limitations (e.g., Secs. 381-384). The separate determination rule also should be modified to the extent it precludes the offsetting of RBIGs attributable to assets acquired in a Sec. 1374(d) (8) transaction with RBILs attributable to other assets (or vice versa VICE VERSA. On the contrary; on opposite sides. ). The AICPA gave two reasons for its recommendations: First, it felt that the statute literally supported its position; second, it opined that it was inappropriate to apply more severe restrictions on attributes in the subchapter S context than in the subchapter C context.(61) The Service retained the Sec. 1374(d) (8) miles as proposed.(62) I. Effective Date Regs. Sec. 1.1374-10(a) provides that the final regulations apply to tax years ending on or after Dec. 27, 1994, but only in cases in which the S return is filed pursuant to an S election or Sec. 1374(d) (8) transaction occurring on or after that date. Transition rules are found in Regs. Sec. 1.1374-10(b). The regulations may be consistent with pre-Dec. 27, 1994 law--i.e., a court may analyze a pre-effective date fact pattern in light of the statute and its legislative history, case law, etc. (but without regard to the regulations) and reach the same result as if the regulations had been in effect. The Tax Court did just that in two recent cases.(63) Conclusion The Sec. 1374 final regulations are an improvement over the proposed regulations and, in general, represent a reasonable interpretation of the statute. Although not all of its recommendations were adopted, the AICPA has been a significant player in the process leading to the promulgation PROMULGATION. The order given to cause a law to be executed, and to make it public it differs from publication. (q.v.) 1 Bl. Com. 45; Stat. 6 H. VI., c. 4. 2. of the final regulations. Authors' note: The authors would like to thank Theodore B. Stone, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , Ernst & Young LLP LLP - Lower Layer Protocol , Vienna, Va., in his capacity as chair of the AICPA Tax Division S Corporation Taxation Committee, for his many helpful comments and suggestions. (Dr. Orbach was a member of the Committee when this article was written; he is now an active alumnus ALUMNUS, civil law. A child which one has nursed; a foster child. Dig. 40, 2, 14. . (1) ITD ITD Idaho Transportation Department ITD Information Technology Division (at NRL) ITD Information Technology Division (MMDS) itd I Tak Dalej (Polish: And So On) 8579 (12/23/94). (2) Regs. Sec. 1.1374-10(a). In a Sec. 1374(d) (8) transaction, an S corporation acquires assets in a transaction in which the corporation's basis in the assets is determined by reference to their basis in the hands of a C corporation; see Regs. Sec. 1.1374-8(a). (3) CO-80-87 (12/4/92). For an analysis, see O'Neil and Dennis-Escoffier, "S Corporation Built-in Gains Tax," 24 The Tax Adviser 593 (Sept. 1993). (4) The pre-TRA '86 capital gains tax (applicable to corporations electing S status prior to 1987) and the transition rule (applicable to corporations electing S status after 1986 but prior to 1989) are ignored in this article. See TRA '86 Section 633(d) (8), as amended by the Technical and Miscellancous Revenue Act of 1988, Section 1006(g) (7). (5) Sec. 1366(f) (2). The character of the loss is determined by the character of the recognized built-in gains (RBIGs) giving rise to the BIG tax. (6) Regs. Sec. 1.1374-4(b); Preamble to the Proposed Regulations (hereinafter here·in·af·ter adv. In a following part of this document, statement, or book. hereinafter Adverb Formal or law from this point on in this document, matter, or case Adv. 1. , PPR PPR peste des petitis ruminants. "), Item 1. (7) See PPR, id., Item 1. (8) See IRS Letter Rulings 9520044 (2/21/95), 9519024 (2/9/95), and 9430026 (5/2/94) (S corporation income derived from the cutting of timber and sale of logs during the recognition period is not RBIG under Sec. 1374(d) (3) or (d) (5), provided the timber is cut during said period). (9) But see Preamble to the Final Regulations (hereinafter, "PFR"), Item 3.C, in which the Service justifies the approach specified because "separately valuing each item of income and deduction for [NRBIG] purposes would be unduly burdensome both for taxpayers and for the IRS." (10) RBIG is $50,000 even though net unrealized built-in gain (NUBIG) (see note 11 and accompanying text, infra [Latin, Below, under, beneath, underneath.] A term employed in legal writing to indicate that the matter designated will appear beneath or in the pages following the reference. infra prep. ) presumably pre·sum·a·ble adj. That can be presumed or taken for granted; reasonable as a supposition: presumable causes of the disaster. is only $40,000 greater than it would have been had the receivables not been an asset on the first day of the recognition period. (11) Regs. Sec. 1.1374-3 generally provides that NUBIG is (1) the amount that would be realized if the corporation remained a C corporation and sold all of its assets on the first day of the recognition period at FMV to an unrelated party that assumed all its liabilities (the hypothetical sale); (2) minus any corporate liability that would be included in the amount realized “Amount Realized” is one of two variables in the formula used to compute gains and losses when determining gross income for tax purposes. The Amount Realized – Adjusted Basis tells the amount of Realized Gain (if positive) or Realized Loss (if negative). on the hypothetical sale, but only if the corporation would be allowed a deduction on payment of the liability; (3) minus the aggregate adjusted bases of the corporation's assets on the first day of the recognition period; (4) plus or minus the corporation's Sec. 481 adjustments taken into account on the hypothetical sale; (5) plus any RBIL disallowed as a deduction under Sec. 382, 383 or 384 on the hypothetical sale, (12) This disallowance dis·al·low tr.v. dis·al·lowed, dis·al·low·ing, dis·al·lows 1. To refuse to allow: "[The government] rule, which does not apply to C corporations, broadens the BIG tax income base relative to the C corporation tax base. (13) Regs. Sec. 1.1374-6(a) provides that the credit and credit carryforwards are allowed only to the extent allowed under C corporation rules; for BIG tax purposes, no other credits or credit carryforwards are permitted. (14) Regs. Sec. 1.1374-1(c) defines "Sec. 1374 attributes" as the Sec. 1374(b)(2) loss carryforwards and the Sec. 1374(b)(3) credit and credit carryforwards, (15) See AICPA, "Comments on Proposed Regulations: Section 1374 Tax Imposed on Certain Built-in Gains," submitted to the IRS on Apr. 13, 1993 (hereinafter, "AICPA Comments"), Specific Comment 2. (16) The latter question assumes the corporation is closely held A phrase used to describe the ownership, management, and operation of a corporation by a small group of people. In a closely held corporation, the same people often act as shareholders, directors, and officers, and no outside investors exist. under Secs. 465 (a) (1) (B) and 469 (j) (1) but for the S election. (17) PFR, note 9, Item 3.A. (18) AICPA Comments, note 15, Specific Comment 1. (19) A 120-month recognition period also begins on the day an S corporation acquires any asset in a Sec. 1374(d) (8) transaction. See note 2. (20) Regs. Sec. 1.1374-1 (d); the regulations do not provide for such a closing in computing the taxable income limitation. (21) The AICPA recommended that the taxable income limitation for 2005 be based on the corporation's taxable income for the period Jan. 1 to Apr. 30, 2005, computed using either a closing of the books method or a per-day allocation of the entire year's taxable income; see AICPA Comments, note 15, Specific Comment 1. (22) A similar rule applies for income items. Prop. Regs. Sec. 1.1374-4 (b) (1); Regs. Sec. 1. 1 374-4 (b)(1). (23) AICPA Comments, note 15, Specific Comment 3. (24) See Regs. Sec. 1.461-1 (a)(2)(i). (25) Regs. Sec. 1.13744 (c) (1). This modification to the accrual method rule is intended to apply to cash-method corporations, despite some ill-chosen language in the provision; it literally also applies to accrual-method corporations. (26) Regs. Sec. 1.1374-4 (c) (2); see note 25. (27) See note 12 and accompanying text. The Service's view is that losses suspended sus·pend v. sus·pend·ed, sus·pend·ing, sus·pends v.tr. 1. To bar for a period from a privilege, office, or position, usually as a punishment: suspend a student from school. under Sec. 469 are carryovers that cannot be used during S years. See Sec. 1371 (b) (1); Regs. Sec. 1.1374-5(a); and PFR, note 9, Item 3.C (last sentence). For a contrary view, see Orbach and Gaulreau, "The Predicament Predicament Dancy, Captain Ronald must persecute friend to save own skin. [Br. Lit.: Loyalties, Magill I, 533–534] Gordian knot inextricable difficulty; Alexander cut the original. [Gk. Hist. of Suspended Passive Activity Losses Upon a Conversion from C to S Status," 49 Tax Notes 321 (10/15/90) (Sec. 469 is a prescribed pre·scribe v. pre·scribed, pre·scrib·ing, pre·scribes v.tr. 1. To set down as a rule or guide; enjoin. See Synonyms at dictate. 2. To order the use of (a medicine or other treatment). (special) method of accounting). (28) The second prong of Regs. Sec. 1.461-1 (a) (2) (i) requires only that the amount of the liability be determined with reasonable accuracy. In contrast, Regs. Sec. 1.1374-4(c) (1) (i) requires that the exact amount be determinable Liable to come to an end upon the happening of a certain contingency. Susceptible of being determined, found out, definitely decided upon, or settled. determinable adj. at the beginning of the recognition period. (29) See H. Rep (programming) REP - A directive used in IBM object code card decks (and later PTF Tapes) to REPlace fragments of already assembled or compiled object code prior to link edit. . No. 100-795, 100th Cong., 2d Sess. 63-64 (1988). (30) Attribution is made under the principles for determining RBIG or RBIL under Regs. Sec. 1.1374-4 (especially the accrual method rule). (31) The Tax Court has made clear that Regs. Sec. 1.1374-4(d) is a reasonable and acceptable interpretation of Sec. 1374. See Argo Sales Co., Inc., 105 TC 86,94, n.7 (1995); Rondy, Inc., TC Memo 1995-372. (32) Adapted from Regs. Sec. 1. 1374-4 (b) (3), Example 5. (33) Rev. Proc. 71-21, 1971-2 CB 549. (34) See id., Section 5.01. (35) In fact, X so included it in 1995. (36) See the parenthetical phrase in Re s. Sec. 1.1374-4(b)(1). In contrast, if X had properly elected to defer de·fer 1 v. de·ferred, de·fer·ring, de·fers v.tr. 1. To put off; postpone. 2. To postpone the induction of (one eligible for the military draft). v.intr. the $5,000 under Rev. Proc. 71-21, the income recognized in 1996 would not be RBIG, as it was not properly accruable in 1995; see Regs. (Sec. 1.1374-4(b)(3), Example 4. (37) Notice 90-27, 1990-1 CB 336. (38) For this purpose, if the installment sale took place before the recognition period, the deemed Sec. 453(d) "election out" was assumed to occur during the first recognition period tax year in an amount equal to the installment gain not recognized as of the beginning of the recognition period. Regs. Sec. 1.1374-4(h) (2) adopts this proposed rule. (39) This rule is necessary because the special installment sale taxable income limitation is defined as the excess NRBIG from the date of sale, not the excess Sec. 1374(d) (2) (A) (ii) taxable income from the date of sale. (40) This is the excess of what NRBIG would have been in 1995 and 1996 had the Sec. 453(d) election out been made over the actual NRBIG for those two years. Although not important given the facts of the example (in particular, the $100 operating loss in 1996), it appears that the $100 installment gain recognized in 1996 (the tax year in question) should not be taken into account in computing the special installment sale taxable income limitation (i.e., the treatment of the installment gain in 1996 is determined after a tentative 1996 NRBIG is computed without regard to the installment gain). (41) Adapted from Regs. Sec. 1.1374-4(h) (5), Example 3. (42) Regs. Sec. 1.1374-4(i) (4) (i) properly adjusts this limitation for assets contributed to the partnership by the S corporation during the recognition period. The limitation is also increased or decreased by the corporation's allocable al·lo·ca·ble adj. Capable of being allocated. Adj. 1. allocable - capable of being distributed allocatable, apportionable distributive - serving to distribute or allot or disperse share of partnership Sec. 481 (a) adjustments as of the first day of the recognition period. (43) AICPA Comments, note 15, Specific Comments 4 and 5. (44) The FMV of the partnership interest as of the first day of the recognition period is adjusted for assets contributed to the partnership by the corporation during the recognition period, if such assets were held by the corporation at the beginning of the recognition period. This rule does not affect qualification for the small interest exception for years prior to the asset contribution; see Regs. Sec. 1.1374-4(i) (5) (ii). (45) Adapted from Regs. Sec. 1.1374-4(i) (8), Example 8. (46) See, e.g., Sec. 453B(h), under which no gain or loss is recognized by a liquidating S corporation on the distribution of certain installment obligations, except for purposes of any subchapter S tax (e.g., BIG tax). (47) Sec. 1363 (d). Under Regs. Sec. 1. 1 363-2 (a), if a C corporation transfers assets to an S corporation in a reorganization or division, LIFO recapture occurs in the tax year in which the LIFO inventory assets are transferred. (48) See Rev. Proc. 94-61, 1994-2 CB 775. (49) PPR, note 6, Item 3. The Service suggested one possible safe harbor. (50) AICPA, "Pre-Release Comments on the Built-In Gains Tax Regulations," submitted to the IRS on July 25, 1990 (hereinafter, "Pre-Release Comments"), Comment 1; see also AICPA Comments, note 15, Specific Comment 14. (51) AICPA Comments, note 15, Specific Comment 14. (52) AICPA Comments, note 15, General Comment 2. (53) Letter from Harvey L. Coustan, Chairman, AICPA Tax Executive Committee, to Mark S. Jennings, IRS (6/6/94). (54) See Reliable Steel Fabricators, Inc., TC Memo 1995-293; Knapp King-Size Corp., 527 F2d 1392 (Ct. Cl. 1975) (37 AFTR AFTR American Federal Tax Reports (Prentice-Hall) AFTR Americans For Tax Reform AFTR Air Force Training Ribbon AFTR Air Force Training Record AFTR atrophy, fasciculation, tremor, rigidity AFTR Atomic Frequency Time Reference 2d 76-501, 76-1 USTC USTC University of Science and Technology of China USTC United States Tax Cases (Commerce Clearing House) USTC United States Transportation Command (see USTRANSCOM) [paragraph]9128); Zeropack Co., TC Memo 1983-652, aff'd without pub. op., 4th Cir., 1985. (55) In Knapp King-Size Corp., id. at 1404, 76-1 USTC at 83,101, the Court of Claims allocated the profit element based on the following factors: a fair appraisal of the relative risks, expenses and efforts already incurred by the seller as compared with those yet to be incurred to realize the aggregate retail price, the investment already made compared with that yet to be made to maintain the sales, and the relative time spans under which the seller and buyer had to expose themselves to financial risks; see O'Neil and Dennis-Escoffier, note 3, at 599-601. (56) See Regs. Sec. 1.471-2(c); Rev. Proc. 77-12, 1977-1 CB 569. (57) See note 50. (58) But see Sec. 1374 (d) (6). (59) Prop. Regs. Sec. 1.1374-8(b) specified that the taxable income limitation is allocated to the separate determinations of NRBIG (determined without regard to the taxable income limitation) on a pro rata basis. (60) See AICPA Comments, note 15, Specific Comment 18. (61) See notes 12, 15-17, 27-29 and accompanying texts; see also Thomas, "Built-In Gainstax Under the Final Regulations," 69 Tax Notes 761, 778 (11/6/95), in which the author concludes that "[r]eform of the BIG tax should include a clear enunciation enunciation (inun´sēā´sh  n),n an auxiliary function of teeth, particularly those in the anterior sector of the dental arch; the formation of sounds of the principle that it is intended to reach only so much income as would have been taxed if the S election had not been made, and specific provisions should be adopted in keeping with that principle." However, the theory that BIG tax should not be more onerous than the tax that would have been imposed under subchapter C had the S election not been made is not held by all commentators; some believe an analysis of Sec. 1374 should be based on the notion that a C to S conversion is tantamount tan·ta·mount adj. Equivalent in effect or value: a request tantamount to a demand. [From obsolete tantamount, an equivalent, from Anglo-Norman to a corporate liquidation The collection of assets belonging to a debtor to be applied to the discharge of his or her outstanding debts. A type of proceeding pursuant to federal Bankruptcy . See Nunnallee, Letters to the Editor, "In Praise of Repealing Taxable Income Limitation Under Section 1374," 56 Tax Notes 955 (8/17/92), and citations therein. (62) See Regs. Sec. 1.1374-8. The Service believes its position is supported by the statute and legislative history; see PFR, note 9, Item 3.H. (63) See Argo Sals Co., note 31; Rondy, Inc., note 31. |
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