Planning to escape the S corporation built-in gains tax in 2010.

• Author: Ellentuck, Albert B.

THE AMERICAN RECOVERY AND REINVESTment Act of 2009, P.L. 111-5, suspended imposition of the built-in gains (BIG) tax for tax years beginning in 2009 and 2010 for qualifying S corporations. This means that the BIG tax will not be imposed during 2009 and 2010 for an S corporation if the seventh tax year of the corporation's 10-year recognition period ended before those tax years (Sec. 1374(d)(7)(B)). However, unless the S corporation's 10-year recognition expires in 2009 or 2010, the S corporation will evidently again be subject to the BIG tax for the tax year beginning in 2011 through the end of the 10-year recognition period.

Planning Opportunities

The 2009-2010 BIG tax suspension period provides unprecedented opportunities for eligible S corporations to escape the BIG tax. The planning strategy is to accelerate or delay the disposition of built-in gain assets as necessary so that dispositions take place during the S corporation's suspension period (e.g., 2010 for S corporations whose 10-year recognition period began in 2003).

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An S corporation whose 10-year recognition period began in 2002 will not be subject to the BIG tax for tax years beginning in 2009 or 2010.

Example 1: ABC, a calendar-year C corporation, elects S status on April 1, 2002. The seventh tax year of ABC's 10-year recognition period ends on December 31, 2008. Thus, ABC's net recognized built-in gain during 2009 and 2010 will not be subject to the BIG tax. ABC's 10-year recognition period ends on March 31, 2012, so ABC will evidently again be subject to the BIG tax beginning with calendar year 2011. The application of the BIG suspension rules requires the practitioner to make a clear distinction between the 10-year recognition period rules and the suspension qualification rules. The 10-year (120-month) BIG recognition period begins on the date the corporation's S election becomes effective (Sec. 1374(d)(7)(A); Regs. Sec. 1.1374-1(d)). Similarly, for transferred basis assets, the BIG recognition period begins on the date the S corporation acquires an asset from a C corporation or from an S corporation subject to the BIG tax (Sec. 1374(d)(8)).

However, the BIG tax suspension rules apply to tax years beginning in 2009 or 2010 if the seventh tax year in the recognition period preceded 2009 or 2010 (Sec. 1374(d)(7)(B)). Thus, the BIG tax suspension rules evidently are keyed to the corporation's tax year rather than to any specific 12-month period within the...