[Code of Federal Regulations]
[Title 26, Volume 11]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1374-1]

[Page 761-762]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1374-1  General rules and definitions.

    (a) Computation of tax. The tax imposed on the income of an S 
corporation by section 1374(a) for any taxable year during the 
recognition period is computed as follows--
    (1) Step One: Determine the net recognized built-in gain of the 
corporation for the taxable year under section 1374(d)(2) and Sec. 
1.1374-2;

[[Page 762]]

    (2) Step Two: Reduce the net recognized built-in gain (but not below 
zero) by any net operating loss and capital loss carryforward allowed 
under section 1374(b)(2) and Sec. 1.1374-5;
    (3) Step Three: Compute a tentative tax by applying the rate of tax 
determined under section 1374(b)(1) for the taxable year to the amount 
determined under paragraph (a)(2) of this section;
    (4) Step Four: Compute the final tax by reducing the tentative tax 
(but not below zero) by any credit allowed under section 1374(b)(3) and 
Sec. 1.1374-6.
    (b) Anti-trafficking rules. If section 382, 383, or 384 would have 
applied to limit the use of a corporation's recognized built-in loss or 
section 1374 attributes at the beginning of the first day of the 
recognition period if the corporation had remained a C corporation, 
these sections apply to limit their use in determining the S 
corporation's pre-limitation amount, taxable income limitation, net 
unrealized built-in gain limitation, deductions against net recognized 
built-in gain, and credits against the section 1374 tax.
    (c) Section 1374 attributes. Section 1374 attributes are the loss 
carryforwards allowed under section 1374(b)(2) as a deduction against 
net recognized built-in gain and the credit and credit carryforwards 
allowed under section 1374(b)(3) as a credit against the section 1374 
tax.
    (d) Recognition period. The recognition period is the 10-year (120-
month) period beginning on the first day the corporation is an S 
corporation or the day an S corporation acquires assets in a section 
1374(d)(8) transaction. For example, if the first day of the recognition 
period is July 14, 1996, the last day of the recognition period is July 
13, 2006. If the recognition period for certain assets ends during an S 
corporation's taxable year (for example, because the corporation was on 
a fiscal year as a C corporation and changed to a calendar year as an S 
corporation or because an S corporation acquired assets in a section 
1374(d)(8) transaction during a taxable year), the S corporation must 
determine its pre-limitation amount (as defined in Sec. 1.1374-2(a)(1)) 
for the year as if the corporation's books were closed at the end of the 
recognition period.
    (e) Predecessor corporation. For purposes of section 1374(c)(1), if 
the basis of an asset of the S corporation is determined (in whole or in 
part) by reference to the basis of the asset (or any other property) in 
the hands of another corporation, the other corporation is a predecessor 
corporation of the S corporation.

[T.D. 8579, 59 FR 66463, Dec. 27, 1994]