King Corporation, a cash method taxpayer that uses the calendar year as its tax year, was incorporated on June 1, 1984. The corporation made its initial S election on December 1 of last year, effective for the current tax year. Earnings and profits of $60,000 have been retained from C corporation tax years. Which one of the following events results in the recognition of a built-in gain?

Question

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Built-in gain is a tax concept that arises when a corporation that previously operated as a C corporation converts to an S corporation. It refers to gains that have already been earned by the C corporation prior to the conversion but have not yet been recognized for tax purposes. In this case, King Corporation was a C corporation before making the S election, and it has $60,000 in earnings and profits from C corporation tax years. If the corporation sells an asset that was held at the time of the S election and generates a gain, that gain is considered a built-in gain and is subject to a special tax at the corporate level. However, in this scenario, there is no sale of an asset. Option A involves the collection of accounts receivable from services performed by the C corporation prior to the conversion. Since the revenue was earned before the S election, it is considered a built-in gain and would be subject to the special tax if recognized in the current tax year. Options B and C both involve income earned or received after the S election and therefore do not qualify as built-in gains. Option D is incorrect since option A represents a built-in gain.

King Corporation, a Cash Method Taxpayer That Uses the Calendar