IRC 1374 Built-In Gains Tax: C-Corp to S-Corp Conversion Practitioner Guide

IRC 1374 is the primary tax trap that stands between a C-corp and the benefits of S-corp status. When a corporation converts from C to S, the built-in gains tax regime imposes a corporate-level tax on gains from assets that were appreciated at the time of the election, if those assets are sold during the 5-year recognition period. For closely held C-corps carrying real estate, goodwill, equipment, or investment portfolios into an S-corp election, the BIG tax can erode a substantial portion of the tax savings that motivated the conversion. Post-OBBBA, the QBI deduction enhancement has made S-corp status more valuable, which has accelerated conversion interest -- and the stakes of mishandling IRC 1374 have risen accordingly. This guide covers the mechanics of IRC 1374, the recognition period under IRC 1374(d)(7), NUBIG and its role as the ceiling on BIG tax exposure, NOL offset rules and their IRC 382 limits, the installment sale trap, anti-stuffing rules, planning strategies, and the interaction with Form 2553 timing.

A natural companion to the Form 2553 late S-corp election relief guide on this site. The BIG tax analysis belongs in the conversion planning workflow before Form 2553 is filed; this guide provides the IRC 1374 framework for that pre-election review. Because the 5-year recognition period runs from the effective date of the S election, the prior C-corp period and the election that starts BIG tax monitoring are covered in the S-corp election and Form 2553 guide.

This guide is informational and does not constitute tax advice for any specific client situation. All IRC citations, regulatory references, and planning strategies should be verified against current law and IRS.gov guidance before application in practice.

Why IRC 1374 Matters Now: The OBBBA Conversion Wave

The One Big Beautiful Budget Act permanently enhanced the Section 199A QBI deduction rate for pass-through income (verify current rate at IRS.gov; recently enacted OBBBA provision, subject to ongoing regulatory interpretation). For practitioners advising closely held businesses, the OBBBA change has reframed the C-corp versus S-corp comparison. Before the enhancement, the corporate tax rate plus the dividend tax on distributions already created a meaningful incentive for pass-through treatment; after the QBI deduction enhancement, the after-tax advantage of S-corp status has widened further for qualifying businesses. For a detailed analysis of the QBI deduction mechanics and the OBBBA changes, see the Section 199A QBI deduction OBBBA practitioner guide.

The result is that many closely held C-corps are now actively evaluating conversion to S-corp status. Some of these corporations were organized as C-corps for access to QSBS treatment under IRC 1202, for C-corp loss treatment, or for other structural reasons. Others have simply operated as C-corps for years and are reconsidering in light of the revised pass-through tax advantage. In every case, IRC 1374 is the primary statutory obstacle: if the corporation holds appreciated assets at the time of the S-corp election, those built-in gains remain subject to corporate-level tax for 5 years. The BIG tax does not disappear when the S-corp election is filed; it follows the appreciated assets through the recognition period. Practitioners who skip the IRC 1374 analysis before advising a C-to-S conversion are exposing their clients to a tax cost that may partially or fully offset the QBI deduction benefit driving the conversion decision.

How IRC 1374 Works: Scope, Tax, and Economic Result

Scope: which S-corps are subject to IRC 1374

IRC 1374 applies to any S-corp that was a C-corp at any time during the 5-year period preceding the current tax year. The statute reaches back to capture conversions within the recognition window, not just brand-new elections. An S-corp that elected S status more than 5 years ago has no IRC 1374 exposure on current-year dispositions; an S-corp that elected S status within the last 5 years is within the recognition period and must evaluate each asset sale against its built-in gain position at the time of conversion.

The tax: corporate-level BIG tax on recognized built-in gains

If the S-corp recognizes a gain during the recognition period on an asset that had a built-in gain at the time of the S-corp election, the S-corp pays a corporate-level tax on that built-in gain. The built-in gain for any asset is the amount by which the FMV of the asset exceeded its adjusted tax basis on the first day of the first S-corp taxable year. Only the gain that was built-in at conversion is subject to the BIG tax; appreciation that occurred after the S-corp election is treated as ordinary S-corp gain flowing through to shareholders without corporate-level tax.

The BIG tax rate

The BIG tax is imposed at the applicable corporate tax rate per IRC 11. Do not state a specific percentage without confirming the current rate; confirm the current corporate rate at IRS.gov before advising clients on the dollar magnitude of BIG tax exposure in a specific engagement.

Pass-through and credit: how the BIG tax flows to shareholders

After the S-corp pays the corporate-level BIG tax, the built-in gain is still passed through to shareholders as a separately stated item on Schedule K-1. Shareholders include their pro-rata share of the gain in gross income. However, they receive a credit for the corporate-level BIG tax paid by the S-corp, which reduces (but does not eliminate) their individual tax on the pass-through gain. The economic result is that the BIG tax prevents the S-corp from permanently escaping the double tax that a C-corp would have faced on the same gain. The conversion does not eliminate the pre-existing C-corp tax exposure on appreciated assets; it defers the question to the recognition period.

The 5-Year Recognition Period (IRC 1374(d)(7))

IRC 1374(d)(7) defines the recognition period as the 5-year period beginning on the first day of the first taxable year for which the S-corp election is effective. The Tax Cuts and Jobs Act permanently reduced the recognition period from 10 years to 5 years; this 5-year period is the current statutory rule. Gains recognized on built-in-gain assets during this window are subject to the BIG tax.

Practical timing example

If a C-corp elects S status effective January 1, 2026 (Form 2553 timely filed), the recognition period runs from January 1, 2026, through December 31, 2030. Any built-in-gain asset sold between January 1, 2026, and December 31, 2030, is subject to the BIG tax to the extent of its built-in gain at conversion. An asset sold on January 1, 2031 -- the first day after the recognition period -- is no longer subject to the BIG tax on its conversion-date built-in gain, even if that gain is still unrealized and substantial. The 5-year clock controls, not the magnitude of the gain.

After the recognition period: clean exit from IRC 1374

Once the recognition period ends, gains on all assets -- including assets that had large built-in gains at conversion -- are no longer subject to the BIG tax. They flow through to shareholders as ordinary S-corp gains without a corporate-level tax. This is the structural incentive that underlies the primary IRC 1374 planning strategy: delay disposition of significantly appreciated assets until after the 5-year recognition period.

Strategic implication: deferring appreciated asset sales

For a C-corp with appreciated real estate, business goodwill, long-held investments, or other assets with significant built-in gains at conversion, the central IRC 1374 planning question is whether those assets can be held without sale through the recognition period. If the business plan calls for a sale of a major appreciated asset within 5 years of conversion, the BIG tax on that sale may eliminate most or all of the advantage of converting to S status. In that scenario, the practitioner should model the BIG tax cost against the QBI deduction benefit and evaluate whether conversion should be deferred until after the planned asset sale, or whether the asset should be sold while still a C-corp (accepting double tax) before the S-corp election is filed.

NUBIG: The Ceiling on Total BIG Tax Exposure

The Net Unrealized Built-In Gain (NUBIG) is the total built-in gain calculated at the time of the S-corp election. It is the excess of the fair market value of all of the corporation's assets over their aggregate adjusted tax bases on the first day of the first S-corp taxable year. Hedge the specific calculation methodology and asset-by-asset FMV determination to IRS.gov and Rev. Rul. 2003-51 before applying in a client engagement.

NUBIG as the aggregate BIG tax ceiling

The NUBIG functions as the ceiling on the S-corp's total BIG tax exposure across the entire recognition period. The aggregate BIG tax paid cannot exceed the tax on the total NUBIG. This matters most for corporations whose individual assets have significant built-in gains but whose net position is moderated by other assets or by assets with built-in losses. As built-in gains are recognized and the BIG tax is paid during the recognition period, the remaining NUBIG decreases, reducing future BIG tax exposure.

NUBIL: when individual asset gains still count

If the corporation has a net unrealized built-in loss (NUBIL) at the time of conversion -- meaning the aggregate adjusted tax bases exceed the aggregate FMV -- individual assets may still have built-in gains that are subject to the BIG tax. The NUBIL concept limits total BIG tax exposure at the net level, but it does not eliminate the BIG tax on individual asset gains. The interaction between NUBIG, NUBIL, and individual asset gains is a fact-specific calculation; hedge the mechanics to IRS.gov before applying in a specific conversion analysis.

No deemed sale at conversion

A critical and frequently misunderstood rule: there is no deemed sale or deemed disposition of assets when the C-corp converts to S status. The S-corp election does not trigger gain recognition on appreciated assets. The BIG tax is only triggered if and when the S-corp actually disposes of a built-in-gain asset during the recognition period. If no built-in-gain assets are sold during the 5-year recognition period, no BIG tax is ever imposed, regardless of the NUBIG amount. The NUBIG calculation identifies the maximum potential exposure; actual BIG tax liability depends entirely on what is sold and when.

NOL Carryforward Offsets: IRC 1374(b)(2) and IRC 382

Pre-conversion C-corp NOLs do not disappear when the corporation converts to S status. Under IRC 1374(b)(2), the BIG tax is reduced by any deduction allowed for the NOL carryforward from C-corp taxable years. This provision provides a meaningful offset for converting corporations that carried losses into S status, but the offset is subject to an important limitation that practitioners frequently underestimate.

IRC 382 annual limitation

If an ownership change occurred within the meaning of IRC 382 -- which can include the C-to-S conversion itself or prior ownership transactions -- the annual NOL deduction available to offset BIG tax is limited by the IRC 382 annual limitation. The IRC 382 limitation is calculated based on the fair market value of the corporation's stock and the applicable long-term tax-exempt rate. Hedge the IRC 382 limitation calculation mechanics to IRS.gov. Do not state specific NOL offset amounts or IRC 382 percentage computations without verifying current methodology.

Practical impact of a limited NOL

If the converting corporation has a substantial NOL but a binding IRC 382 annual limitation, the face value of the NOL may be far larger than the deduction actually available each year against BIG tax. A corporation with a $10 million NOL and an IRC 382 annual limitation that permits only a modest deduction per year may be able to use only a fraction of the NOL against BIG tax during the 5-year recognition period. Practitioners should model the IRC 382 limitation against the projected BIG tax schedule before representing to clients that the NOL carryforward will substantially reduce BIG tax exposure.

Built-in loss offset within IRC 1374

In addition to NOL carryforwards, built-in losses recognized during the recognition period also offset built-in gains within the IRC 1374 framework. The BIG tax applies to the net built-in gain recognized in each taxable year. If the S-corp disposes of both a built-in-gain asset and a built-in-loss asset in the same year, the net recognized built-in gain (gain minus loss) determines that year's BIG tax exposure, subject to the NUBIG ceiling. Asset-by-asset and year-by-year modeling is required to accurately project BIG tax liability across the recognition period.

The Installment Sale Trap

The installment sale trap is one of the most consequential and underappreciated aspects of IRC 1374 planning. It arises when the S-corp sells a built-in-gain asset during the recognition period under an installment sale structure (IRC 453), with payments stretching beyond the end of the 5-year recognition period.

Why this trap matters for real estate and goodwill transactions

Long-term installment sales are common in real estate transactions and business goodwill sales, precisely the asset classes most likely to carry large built-in gains at the time of a C-to-S conversion. A business owner who converts to S status and then sells the business or a key property in Year 2 of the recognition period, structured as a 10-year installment note, will pay BIG tax on every installment payment received through Year 10. The fact that the recognition period expired in Year 5 does not relieve the BIG tax exposure, because the triggering sale occurred within the period.

Planning responses to the installment sale trap

For a C-corp planning a near-term asset sale that will be structured as an installment sale, the installment sale trap is a factor in the timing of the S-corp election. Options to evaluate include: selling the asset while still a C-corp, before the S-corp election is filed (accepting double tax but avoiding the BIG tax complication); deferring the sale until after the recognition period ends; or if the installment sale is unavoidable during the recognition period, pricing the BIG tax into the deal economics and ensuring the installment note's terms account for the ongoing BIG tax liability. None of these options is universally correct; the analysis depends on the relative tax costs and the business constraints on timing.

Anti-Stuffing Rules Under IRC 1374 and Rev. Rul. 86-110

The regulations under IRC 1374 and Rev. Rul. 86-110 address attempts to manipulate the BIG tax base through transactions designed to artificially inflate or deflate the NUBIG at the time of conversion. Hedge the specific provisions of the anti-stuffing rules to the IRC 1374 regulations and IRS.gov; the regulations are detailed and fact-specific, and their application to particular transactions requires a close reading of the current regulatory text.

Common anti-stuffing scenarios

The anti-stuffing rules target transactions in which assets are contributed to or withdrawn from the corporation shortly before the S-corp election with the primary purpose of affecting the BIG tax calculation. Common scenarios include: contributing assets with unrealized losses to the C-corp just before the S-corp election to inflate the NUBIG denominator and reduce the net built-in gain; or contributing appreciated assets in a way that brings high-basis assets into the corporation to reduce individual asset-level built-in gains without a corresponding economic event.

The anti-stuffing rules also address dispositions of assets shortly before conversion that are designed to push appreciated assets out of the corporation before the BIG tax base is established, when those dispositions lack independent business purpose. The regulations look at substance over form and the primary purpose of transactions in the period surrounding the S-corp election.

Practitioner advisory

Advise clients that transactions with the primary purpose of manipulating the BIG tax base -- whether to reduce NUBIG exposure or to exploit the BIG tax framework for other tax advantages -- are subject to the anti-stuffing rules and may be recharacterized by the IRS. Any restructuring of the corporation's asset base in the period surrounding the S-corp election should be driven by independent business purpose and documented as such. Verify the specific anti-stuffing rule provisions applicable to any planned transaction against the IRC 1374 regulations on IRS.gov before proceeding.

Planning Strategies: Working Within IRC 1374

IRC 1374 does not make C-to-S conversion uneconomical. For corporations with modest built-in gains, with appreciated assets that can be held through the recognition period, or with NOL carryforwards that meaningfully offset BIG tax, the conversion can still produce a significant net benefit. The planning objective is to identify which assets carry BIG tax exposure, model the BIG tax cost against the projected QBI deduction and other S-corp benefits, and structure the conversion timing and post-conversion asset management to minimize the BIG tax hit.

Asset-by-asset NUBIG analysis before conversion

Before filing Form 2553, prepare an asset-by-asset schedule comparing FMV to adjusted tax basis for every corporate asset. Identify which assets carry built-in gains and quantify the total NUBIG. This analysis reveals the maximum BIG tax exposure and identifies which assets are the primary drivers of that exposure. Assets with negligible built-in gains or built-in losses are not BIG tax concerns; assets with large built-in gains relative to their bases are the planning focus.

Delay dispositions of appreciated assets through the recognition period

The primary planning lever is timing: if built-in-gain assets can be held without sale through the 5-year recognition period, no BIG tax is triggered on those assets. Evaluate the business plan to identify any anticipated asset sales within the first 5 years of S status. If a major sale is anticipated, model whether deferring the S-corp election until after the sale (or accelerating the sale before the election) produces a better net outcome than converting and paying BIG tax on the sale proceeds.

Non-BIG assets first: sequencing dispositions during the recognition period

If the S-corp must dispose of assets during the recognition period, prioritize assets with no built-in gain (assets acquired after the S-corp election, or assets whose FMV at conversion was equal to or below their adjusted basis). Disposing of non-BIG assets first preserves the NUBIG for BIG-asset dispositions that cannot be avoided, and keeps overall BIG tax exposure below the NUBIG ceiling for as long as possible.

IRC 338(h)(10) and M&A considerations

If the S-corp is subsequently acquired in a stock purchase and an IRC 338(h)(10) election is made, the stock sale is treated as a deemed asset sale for tax purposes. A deemed asset sale during the recognition period triggers BIG tax on all built-in gains, including those on assets that would not otherwise have been sold. Factor the BIG tax cost of a potential IRC 338(h)(10) election into M&A planning and deal economics when representing an S-corp that converted within the last 5 years.

Asset restructuring before conversion: basis step-up analysis

Some clients may benefit from restructuring the C-corp's asset base before electing S status to step up the tax basis of appreciated assets, reducing or eliminating built-in gains before the S-corp election is filed. This can be accomplished through a taxable asset sale followed by recontribution, through a reorganization, or through other transactions that trigger recognition of the built-in gain while the corporation is still a C-corp. The upfront tax cost of the step-up must be modeled against the BIG tax savings over the recognition period. This strategy makes sense when the C-corp has NOLs, tax credits, or other attributes that can absorb the gain recognition cost at a lower effective rate than the projected BIG tax.

Accumulated earnings and profits (E&P) before conversion

The converting C-corp carries its accumulated earnings and profits (AEP) into S status. Distributions from an S-corp with AEP are treated as dividends (taxed as ordinary income or qualified dividends, depending on the shareholder's holding period) rather than as capital gain or return of basis, until the AEP is fully distributed. The AEP carryover is independent of the BIG tax but adds a parallel tax issue for shareholders who take distributions during the S-corp years. Clearing AEP through a dividend distribution before the S-corp election -- while still a C-corp -- may simplify post-conversion distributions. The cost of that pre-conversion dividend and the best approach to AEP management are fact-specific; evaluate in connection with the overall conversion analysis.

Post-conversion: S-corp operational compliance

Once the conversion is complete and the S-corp is operating, the BIG tax analysis continues throughout the recognition period. Practitioners managing S-corp clients that converted within the last 5 years should flag every significant asset disposition for a BIG tax review before advising the client to proceed. Post-conversion, the S-corp also takes on the full set of S-corp operational compliance requirements, including reasonable compensation documentation for shareholder-employees. For the compensation analysis methodology and documentation framework required for S-corp shareholder-employees, see the S-corp reasonable compensation practitioner guide.

Interaction With Form 2553: Timing the Election Around IRC 1374

The BIG tax recognition period begins on the first day of the first taxable year for which the S-corp election is effective -- the effective date of Form 2553. The election effective date is not the date Form 2553 is filed; it is the date the election takes effect, which for a calendar-year corporation filing timely for 2026 is January 1, 2026. The 5-year clock runs from that date. For a detailed guide to Form 2553 filing rules, the two-months-and-15-days deadline, and late election relief under Rev. Proc. 2013-30, see the Form 2553 late S-corp election relief guide on this site.

Timing the election around a planned asset sale

For a C-corp planning to sell a major appreciated asset -- real estate, a business division, a significant investment position -- the most straightforward IRC 1374 avoidance strategy is to sell the asset before the S-corp election takes effect. A sale completed while the corporation is still a C-corp is subject to double tax (corporate gain recognition plus dividend tax on distribution) but is not subject to the BIG tax because the corporation is not yet an S-corp. If the double tax cost is acceptable or can be mitigated through basis step-up planning or NOL absorption, selling before conversion avoids the BIG tax entirely. The S-corp election is then filed effective after the sale closes.

Conversely: converting after the window for BIG tax concerns

For a corporation that has already held S status for 5 years or more since a prior conversion, the BIG tax recognition period has expired. Gains on assets with built-in gains at the original conversion are no longer subject to the BIG tax. Similarly, a corporation that converted 4 years ago and has disposed of all of its built-in-gain assets during that period may have exhausted its NUBIG and face no further BIG tax exposure on remaining assets. In each case, the practitioner should confirm the end date of the recognition period and verify the NUBIG remaining before advising the client that IRC 1374 no longer presents a concern.

Delaying the election to ride out the BIG tax clock

If a C-corp is not planning any major asset sales within the next 5 years and the NUBIG is manageable, the corporation might elect S status now and simply plan to hold built-in-gain assets through the recognition period. The 5-year clock begins running immediately, and by the time built-in-gain asset sales are anticipated, the recognition period will have expired. This is often the optimal strategy for stable operating businesses with relatively illiquid assets and no near-term exit planning.

Frequently Asked Questions

Related Practitioner Guides

The following guides cover provisions and related tax rules that practitioners should consider alongside the IRC 1374 built-in gains tax analysis.

• S-Corp and Partnership Basis Tracking: Form 7203 Practitioner Guide -- S-corp basis under IRC 1367 and the built-in gains recognition period under IRC 1374 both affect shareholder-level tax consequences; practitioners tracking Form 7203 basis for S-corp shareholders who converted from C corps must also monitor the 5-year BIG recognition period.
• IRC 1245 and 1250 Depreciation Recapture: Form 4797 Guide -- when the IRC 1374 built-in gains tax applies to an asset sale by a former C corp, IRC 1245 and 1250 recapture rules interact with the BIG computation; the built-in gain on a depreciable asset is measured as of the conversion date, and recapture rules apply to the same sale.
• IRC 461(l) Excess Business Loss Limitation Guide -- S-corp owners subject to the built-in gains tax at the entity level may also face the excess business loss limitation at the individual level on their share of S-corp losses; both provisions affect the tax consequences of owning a closely held S-corp that was formerly a C corp.
• Loss Limitation Ordering Rules: IRC 465, 469, 461(l), and 172 Guide -- S-corp shareholders who receive a loss allocation from an S-corp subject to the BIG tax must still apply the five-layer loss limitation stack; understanding the interaction between BIG tax at the entity level and loss limitations at the shareholder level requires both references.
• IRC 1366 and 1367: S-Corp Income Passthrough and Basis Adjustment -- S-corp shareholders in the recognition period for the IRC 1374 built-in gains tax must track two separate computations: the entity-level BIG tax and the shareholder-level basis adjustment under IRC 1367 for the pass-through of the BIG tax paid; the BIG tax reduces the pass-through income under IRC 1366(f)(2), and the Reg. 1.1367-1(f) ordering rules govern which basis items are adjusted in which order.
• IRC 1377: S-Corp Terminating-Year Election and Closing of Books -- the IRC 1374 built-in gains recognition period spans multiple tax years, and a mid-year shareholder termination under IRC 1377 affects how BIG income is allocated between the pre-termination and post-termination short years; when the closing-of-books election is in effect, the BIG computation for each short year uses only the income actually allocated to that period, which can shift the entity-level BIG tax burden between the exiting and remaining shareholders.
• IRC 1378: S-Corp Required Tax Year and Section 444 Election -- in the C-to-S conversion year, the IRC 1374 recognition period begins on the first day of the first tax year for which the S election is effective; if the converting entity also changes its tax year to a permitted year under IRC 1378, the recognition period and the first S-corp tax year must be coordinated so that the transition date is correctly identified for purposes of measuring the built-in gain period.
• IRC 1375: S-Corp Passive Investment Income Tax -- while IRC 1374 imposes the built-in gains tax for 5 years after a C-to-S conversion, IRC 1375 imposes a parallel 21% tax on net passive investment income that persists for as long as the S-corp retains C-corp earnings and profits; conversion clients with rental income, royalties, or investment assets face exposure to both taxes and practitioners must model each independently.
• IRC 1362: S-Corp Election Revocation, Termination, and Inadvertent Termination Relief -- an S-corp that terminates its election under IRC 1362(d) and later seeks readmission must satisfy the 5-year re-election bar under IRC 1362(g); if the entity re-elects S status within the 5-year bar (or if the bar is waived by the IRS), the IRC 1374 built-in gains recognition period from the original C-to-S conversion continues to run; practitioners advising clients who cycle between C and S status must model how the IRC 1362 termination and re-election timeline interacts with the IRC 1374 recognition period.
• IRC 1363: S-Corp Entity-Level Elections and LIFO Recapture -- the built-in gains tax under IRC 1374 and LIFO recapture under IRC 1363(d) are the two major tax traps for C-corporations converting to S status; while IRC 1363(d) triggers the LIFO reserve as ordinary income on the final C-corp return in four installments, IRC 1374 taxes built-in gains recognized during the post-conversion recognition period at the entity level; practitioners advising on C-to-S conversions must evaluate both provisions before recommending the conversion.
• IRC 1368: S-Corp Distribution Ordering, AAA, AEP, and Schedule M-2 -- S-corps that converted from C-corp status carry AEP from C-corp years; when those entities distribute, the IRC 1368(c) ordering rules require distributing from AAA first (tax-free to basis), then from AEP as a qualified dividend taxable at preferential IRC 1(h) rates; practitioners advising on IRC 1374 built-in gains planning must also track the AEP layer under IRC 1368 because AEP distributed during the recognition period is a taxable dividend, not a return of previously taxed S-corp income.
• IRC 1373: S-Corp Foreign Tax Credit Pass-Through and Schedule K-3 -- S-corps with AEP from C-corp years must track the interaction between the IRC 1374 built-in gains tax and the IRC 1373 foreign tax credit regime; when the S-corp pays IRC 1374 entity-level tax on recognized built-in gain, that tax reduces the income passed through to shareholders, which in turn reduces the IRC 904 foreign tax credit limitation computed at the shareholder level using the IRC 1373 pass-through.
• IRC 1371: S-Corp AEP from Prior C-Corp Years and Distribution Ordering -- S-corps that converted from C-corp status carry AEP from C-corp years under IRC 1371; the AEP does not reset on the S election date and persists throughout the IRC 1374 recognition period; practitioners advising on built-in gains tax must separately track AEP under IRC 1371 and the AAA/AEP distribution ordering stack under IRC 1368 in each year of the recognition period.
• IRC 357, 358, and 362: Assumption of Liabilities in Section 351 and Section 368 Transactions -- when a business owner incorporates a leveraged sole proprietorship or partnership under IRC 351, the IRC 357(c) gain recognized (if total liabilities exceed aggregate basis) increases the corporation's inside basis under IRC 362; that stepped-up inside basis reduces the net unrealized built-in gain that must be recognized during the IRC 1374 recognition period; conversely, IRC 357(c) gain recognized at the time of the S election (if the entity was already a C-corp) does not affect the NUBIG computation, making the pre-election basis position the critical planning variable.
• IRC 305: Stock Dividends and Stock Rights Taxability -- an S-corporation that distributes a preferred stock dividend on its single class of outstanding stock may violate the IRC 1361 one-class-of-stock requirement; more importantly, if the S-corp had accumulated earnings and profits from C-corp years and distributes preferred stock that would constitute a taxable stock dividend under IRC 305(b), the IRC 305(b) gain recognized at the shareholder level intersects with the IRC 1374 built-in gains analysis if the preferred stock was accumulated inside the corporation during the C-corp recognition period.
• IRC 401(a)/401(k): Qualified Plan Requirements, CODA Mechanics, and OBBBA Changes