[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: 26CFR1.1374-6]
[Page 771-772]
TITLE 26--INTERNAL REVENUE
CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
(CONTINUED)
PART 1_INCOME TAXES--Table of Contents
Sec. 1.1374-6 Credits and credit carryforwards.
(a) In general. The credits and credit carryforwards allowed as
credits against the section 1374 tax under section 1374(b)(3) are
allowed only to the extent their use is allowed under the rules applying
to C corporations. Any other credits or credit carryforwards, such as
foreign tax credits under section 901, are not allowed as credits
against the section 1374 tax.
(b) Limitations. The amount of business credit carryforwards and
minimum tax credit allowed against the
[[Page 772]]
section 1374 tax are subject to the limitations described in section
38(c) and section 53(c), respectively, as modified by this paragraph.
The tentative tax determined under paragraph (a)(3) of Sec. 1.1374-1 is
treated as the regular tax liability described in sections 38(c)(1) and
53(c)(1), and as the net income tax and net regular tax liability
described in section 38(c)(1). The tentative minimum tax described in
section 55(b) is determined using the rate of tax applicable to
corporations and without regard to any alternative minimum tax foreign
tax credit described in that section and by treating the net recognized
built-in gain determined under Sec. 1.1374-2, modified to take into
account the adjustments of sections 56 and 58 applicable to corporations
and the preferences of section 57, as the alternative minimum taxable
income described in section 55(b)(2).
(c) Examples. The rules of this section are illustrated by the
following examples.
Example 1. Business credit carryforward. X is a C corporation that
elects to become an S corporation effective January 1, 1996. On that
date, X has a $500,000 business credit carryforward from a C year and
Asset 1 with a fair market value of $400,000, a basis for
regular tax purposes of $95,000, and a basis for alternative minimum tax
purposes of $150,000. In 1996, X has net recognized built-in gain of
$305,000 from selling Asset 1 for $400,000. Thus, X's tentative
tax under paragraph (a)(3) of Sec. 1.1374-1 and regular tax liability
under paragraph (b) of this section is $106,750 ($400,000-
$95,000=$305,000 x .35= $106,750, assuming a 35 percent tax rate). Also,
X's tentative minimum tax determined under paragraph (b) of this section
is $47,000 [$400,000-$150,000=$250,000-$15,000 ($40,000 corporate
exemption amount -$25,000 phase-out=$15,000)=$235,000 x .20=$47,000,
assuming a 20 percent tax rate]. Thus, the business credit limitation
under section 38(c) is $59,750 [$106,750-$47,000 (the greater of $47,000
or $20,438 (.25 x $81,750 ($106,750-$25,000=$81,750))) = $59,750]. As a
result, X's section 1374 tax is $47,000 ($106,750-$59,750= $47,000) for
1996 and X has $440,250 ($500,000-$59,750 = $440,250) of business credit
carryforwards for succeeding taxable years.
Example 2. Minimum tax credit. Y is a C corporation that elects to
become an S corporation effective January 1, 1996. On that date,
Asset1 has a fair market value of $5,000,000, a basis for
regular tax purposes of $4,000,000, and a basis for alternative minimum
tax purposes of $4,750,000. Y also has a minimum tax credit of $310,000
from 1995. Y has no other assets, no net operating or capital loss
carryforwards, and no business credit carryforwards. In 1996, Y's only
transaction is the sale of Asset 1 for $5,000,000. Therefore, Y
has net recognized built-in gain in 1996 of $1,000,000 ($5,000,000-
$4,000,000=$1,000,000) and a tentative tax under paragraph (a)(3) of
Sec. 1.1374-1 of $350,000 ($1,000,000x.35=$350,000, assuming a 35
percent tax rate). Also, Y's tentative minimum tax determined under
paragraph (b) of this section is $47,000 [$5,000,000-
$4,750,000=$250,000-$15,000 ($40,000 corporate exemption amount -$25,000
phase-out = $15,000) = $235,000x.20 = $47,000, assuming a 20 percent tax
rate]. Thus, Y may use its minimum tax credit in the amount of $303,000
($350,000-$47,000=$303,000) to offset its section 1374 tentative tax. As
a result, Y's section 1374 tax is $47,000 ($350,000-$303,000=$47,000) in
1996 and Y has a minimum tax credit attributable to years for which Y
was a C corporation of $7,000 ($310,000-$303,000=$7,000).
[T.D. 8579, 59 FR 66469, Dec. 27, 1994]