Worthy Corporation elected to be taxed as an S corporation on January 1, of last year, effective last year. It had previously been a C corporation. On the effective date of the S election, Worthy had land with a $70,000 basis and a $210,000 FMV. No net unrealized losses exist on the date of the S corporation election. The land is sold this year for $250,000. The tax result of the sale by Worthy is
A) no gain or loss recognized.
B) a gain of $180,000, none of which is subject to the built-in gains tax.
C) a gain of $180,000, all of which is subject to the built-in gains tax.
D) a gain of $140,000 subject to the built-in gains tax and passes though to shareholders, plus a $40,000 gain subject to the regular S corporation pass-through rules.
D) a gain of $140,000 subject to the built-in gains tax and passes though to shareholders, plus a $40,000 gain subject to the regular S corporation pass-through rules.
Total gain equals the Amount Realized $250,000 - Adjusted Basis $70,000 = $180,000 realized gain.The first $140,000 ($210,000 - $70,000) of post-conversion gain is subject to the built-in gains tax at the corporate level and flows through to the shareholders. The remaining $40,000 is also subject to the pass-through rules but not to the built-in gains tax.
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