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

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The built-in gains tax applies to the appreciation in value that occurred while the corporation was a C corporation. The gain from the sale of the land is $180,000 ($250,000 - $70,000). The built-in gain is $140,000 ($210,000 FMV - $70,000 basis at the time of S election), which is subject to the built-in gains tax. The remaining $40,000 gain ($250,000 - $210,000) is subject to regular S corporation pass-through rules.

Worthy Corporation Elected to Be Taxed as an S Corporation