Solutions for Issues Regarding S Corporations and Their Shareholders Include Congressional Action, Revised Guidance From Treasury

Originally published August 31, 2002

Mark J. Silverman heads Steptoe & Johnson LLP's tax practice. Steven B. Teplinsky is a partner and Aaron P. Nocjar is an associate in Steptoe's tax practice. Silverman, Teplinsky, and Nocjar are based in the firm's Washington, D.C. office.

There are a number of important S corporation issues that need to be resolved quickly by the Treasury Department.

The first issue involves the application of Section 1374 to a Section 332 liquidation of a subsidiary owned by an S corporation. Under Section 1374, a C corporation that converts to an S corporation must calculate its net unrealized built-in gain (NUBIG) at the time of conversion. See Section 1374(d)(1); Treasury Regulations §1.1374-3. The S corporation generally must pay a corporate level tax on any built-in gain (BIG) recognized on the sale of these assets during the ten-year period following conversion. See Section 1374(a).