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 on the regular S-corporation pass-through rules.

Question

Quizplus · Accepted Answer

The built-in gain is the difference between the FMV and the basis on the date of the S election. The built-in gain is $140,000 ($210,000 - $70,000). The built-in gain is subject to the built-in gains tax. The remaining gain of $40,000 ($250,000 - $210,000) is subject to the regular S-corporation pass-through rules.

Worthy Corporation Elected to Be Taxed as an S Corporation