Facts: Spartan Corp. was incorporated as a C-corp. in 1980. However, in 2013, Spartan Corp. changed its status from a C corporation to an S corporation. At that time, Spartan had E&P of $10,000,000 when electing as an S corporation. In 2010, Spartan took immediate deductions of $4,000,000 for some certain tax items. Because of the code changed in 2011, Spartans were required to bring into income the benefit of the prior immediate deductions over a four-year period, which means Spartan would add back income of $1,000,000 per year from 2011 to 2014.
Issue: When it comes to tax return, Spartan did not report or pay built-in gains tax on the $2,000,000 of add back income for 2013 and 2014 when Spartan become a S corporation. The IRS required Spartan …show more content…
v. Commissioner of Internal Revenue relating to the similar situation as Spartan Corp., was brought into U.S. Court of Appeals. Tax Court affirmed the decision that assessing a tax deficiency against MMC for $357,534 for tax year 2000 and a deficiency of $468,068 for tax year 2001. MMC Corp. was a C-Corp since the day formed until making an S-Corp election in 2000. Before 1997, MMC used an accounting method that valued its customer paper accounts at their face value. However, for 1997 tax year, MMC adopted mark-to-market accounting, which valued assets at fair market value when they were sold. On the tax return for 1997, MMC claimed a loss on its customer paper accounts because of chaning in accounting method, which resulted in a tax deduction of $5,349,372. In 1998, Congress amended the tax code to disallow mark-to-market valuation of customer paper accounts. Therefore, MMC had to reverse back to face-value accounting, which means taking $5,349,372 back into incom uender § 481 over a four-year period. MMC properly inclued its income of $1,337,344 for 1998 and $1,337,341 for 1999. As a C corporation, MMC also properly paid corporate income tax on those sums. In 2000, however, MMC changed its status from a C corporation to a S corporation. The IRS contends that the income reflected by the 2000 and 2001 adjustments was taxable on built-in gains under § 1374, so MMC was required to pay the amount of $357,534 for 2000 and $468,068 for 2001 for built-in tax gains. MMC appealed, but the Tax Court held that the adjustments relate to the $5,349,372 in accrued-but-deducted income in 1997, and therefore the djustment amounts reported in 2000 and 2001 constituted built-in gain under