What issues may arise because of the S corporations previous history as a C corporation?
A. Here are three of the most common issues that may arise from the S corporation’s previous history as a C corporation: 1. Tax on built-in-gains (Internal Revenue Code (IRC) Section 1374 and Revenue and Taxation Code (R&TC) Section 23809.) A corporate-level tax is imposed on any gain that is attributed to assets or income from activity accrued while the S corporation was a C corporation. This tax is applicable for a 10-year period from the date of conversion from a C corporation to an S corporation. 2. Tax on excess passive investment income (IRC Section 1375 and R&TC Section 23811.) A corporate-level tax at the rate of 8.84 percent is imposed on an S corporation’s excessive net passive income for any tax year in which it has accumulated earnings and profits at the close of the tax year and passive investment income that exceeds 25 percent of gross receipts. 3. Tax on last-in, first-out (LIFO) recapture (IRC Section 1363(d) and R&TC Sections 23800 and 23802(g).) If a C corporation use
