Prior to January 1, 2022, Video Corp was a "C" corporation and used the cash method of accounting (except for inventory). Video Corp both sells inventory and provides services. In accounting for inventory, the FIFO method is used. Through 2021, Video Corp has accumulated deficit in E&P of (100,000) and an NOL carryforward of (100,000).

Effective January 1, 2022, Video Corp elected to be an S Corp. Its assets as of the end of 2021 were as follows:

Tax Balance Sheet at 12/31/2021

Assets Fair market value Adjusted Basis

Cash $ 100,000 $ 100,000

Accounts Receivable- sale of inventory $ 400,000 $ 400,000

Accounts Receivable - services $ 300,000 $ 0

Inventory $ 300,000 $ 200,000

Equipment $ 100,000 $ 300,000

Leasehold Improvements $ 200,000 $ 400,000

Land $ 300,000 $ 400,000

Goodwill $ 400,000 none

$2,100,000 $1,800,000

2022 Results

During 2022 the entire inventory of 200,000 owned on December 31, 2021 was sold for 400,000, receivables from services of $300,000 owed on December 31, 2021 were collected, and the corporation sold the equipment of 300,000 owned on December 31, 2021 for 100,000. The corporation's taxable income including the above items was $300,000.

ASSUME THE CORPORATION ELECTED S CORP STATUS IN 2022.

DETERMINE WHETHER THE CORPORATION IS SUBJECT TO THE BUILT-IN GAIN TAX UNDER SECTION 1374 IN 2022. EXPLAIN WHY OR WHY NOT, AND IF SO, HOW MUCH IS SUBJECT TO TAX.

CITE ALL RELATED IRC CODE SECTIONS.

Answer rating: 100% (QA)

To determine whether the corporation is subject to the builtin gain tax under Section 1374 in 2022 we need to consider the rules and requirements for S Corporations Section 1374 of the Internal Revenu... View the full answer