1995 U.S. Tax Ct. LEXIS 43">*43 Decision will be entered for respondent.
T, a corporation, made an application to change its method of accounting in 1985. The change in accounting method required a
105 T.C. 86">*86 OPINION
RAUM,
105 T.C. 86">*87 Petitioner, an Ohio corporation, had its principal place of business in Wintersville, Ohio, at the time the petition in this case was filed. It began doing business in 1969, and its business activity during all relevant periods was the retail sale of industrial supplies primarily for use in steel mills and coal mines.
In 1985 petitioner made an application to change its accounting method from the cash receipts and disbursements1995 U.S. Tax Ct. LEXIS 43">*45 method to the accrual method. Petitioner recognized that, since it maintained inventories, the cash receipts and disbursements method was an unacceptable method of accounting. Pursuant to
The change in accounting method required a
Accounts receivable | $ 951,656.49 |
Inventory | 548,931.01 |
Accounts payable (inventory items) | (159,731.08) |
Payroll taxes | (3,889.79) |
Total | $ 1,336,966.63 |
The
The
Tax Period | Amount |
Fiscal year ending 3/31/86 | $ 222,827.77 |
Fiscal year ending 3/31/87 | 222,827.77 |
Fiscal year ending 3/31/88 | 222,827.77 |
Short taxable year 4/01/88 | |
through 12/31/88 | 222,827.77 |
Calendar year 1989 | 222,827.77 |
Calendar year 1990 | 222,827.77 |
105 T.C. 86">*88 Effective April 1, 1988, petitioner elected to convert from a subchapter C corporation to a subchapter S corporation. On petitioner's S corporation income tax returns for the short taxable year ending 12/31/88 and the calendar years 1989 and 1990, the
The Commissioner determined that the final three
Section 1374 provides, in part, as follows: (a) General Rule. -- If1995 U.S. Tax Ct. LEXIS 43">*47 for any taxable year beginning in the recognition period an S corporation has a net recognized built-in gain, there is hereby imposed a tax (computed under subsection (b)) on the income of such corporation for such taxable year. * * * (d) Definitions and Special Rules. -- For purposes of this section -- * * * (2) Net recognized built-in gain. -- (A) In general. -- The term "net recognized built-in gain" means, with respect to any taxable year in the recognition period, the lesser of -- (i) the amount which would be taxable income of the S corporation for such taxable year if only recognized built-in gains and recognized built-in losses were taken into account, or (ii) such corporation's taxable income for such taxable year (determined as provided in section 1375(b)(1)(B)). * * * (3) Recognized built-in gain. -- The term "recognized built-in gain" means any gain recognized during the recognition period on the disposition of any asset except to the extent that the S corporation establishes that -- (A) such asset was not held by the S corporation as of the beginning of the 1st taxable year for which it was an S Corporation, or 105 T.C. 86">*89 (B) such gain exceeds the excess (if any) 1995 U.S. Tax Ct. LEXIS 43">*48 of -- (i) the fair market value of such asset as of the beginning of such 1st taxable year, over (ii) the adjusted basis of the asset as of such time. * * * (5) Treatment of certain built-in items. -- (A) Income items. -- Any item of income which is properly taken into account during the recognition period but which is attributable to periods before the 1st taxable year for which the corporation was an S corporation shall be treated as a recognized built-in gain for the taxable year in which it is properly taken into account.
We must decide whether the
Section 1374(d)(5)(A), as quoted above, was added by section 1006(f)(5)(A) of the Technical and Miscellaneous Revenue Act of 1988 (TAMRA), Pub. L. 100-647, 102 Stat. 3342, 3403-3406. The amendments made by TAMRA were effective as if made by the Tax Reform Act of 1986 (TRA 86), Pub. L. 99-514, 100 Stat. 2085; TAMRA section 1019(a), Pub. L. 100-647, 102 Stat. 3593.
Section 1374(d)(3) defines "recognized built-in gain" as "any gain recognized during the recognition period on the disposition of any asset". Certain exceptions follow this definition. The critical matter in dispute in this case is whether the term "recognized built-in gain" is to be limited narrowly to relate to the disposition of a specific identifiable asset or is to be read less restrictively in the light of other provisions of the statute as well as its legislative history.
105 T.C. 86">*90 We begin with section 1374(d)(5) which1995 U.S. Tax Ct. LEXIS 43">*50 provides that "any item of income" properly taken into account during the recognition period is to be treated as recognized built-in gain if it relates to a period prior to the subchapter S election. Section 1374(d)(5), as added by TAMRA, and its legislative history make clear that the term "recognized built-in gain" includes more than the disposition of an identifiable asset. As the House Ways and Means Committee stated: The bill clarifies that, for purposes of this built-in gains tax under section 1374, any item of income which is properly taken into account for any taxable year in the recognition period but which is attributable to periods before the first taxable year for which the corporation was an S corporation is treated as a recognized built-in gain for the taxable year in which it is properly taken into account. Thus, the term "disposition of any asset" includes not only sales or exchanges but other income recognition events that effectively dispose of or relinquish a taxpayer's right to claim or receive income. For example, the term "disposition of any asset" for purposes of this provision also includes the collection of accounts receivable by a cash method taxpayer 1995 U.S. Tax Ct. LEXIS 43">*51 and the completion of a long-term contract performed by a taxpayer using the completed contract method of accounting.
An example following the above quoted material furnishes guidance as to the broad range of items of income that Congress meant to include as recognized built-in gain. "As an example of these built-in gain and loss provisions, in the case of a cash basis personal service corporation that converts to S status and that has receivables at the time of the conversion, the receivables, when received, are built-in gain items."
The issue before us is whether petitioner's
105 T.C. 86">*91 Petitioner was permitted to spread its
1995 U.S. Tax Ct. LEXIS 43">*53 Section 1374(d)(5) provides that
Had petitioner made use of a proper method, instead of an impermissible method, of accounting, the amounts that make up the
105 T.C. 86">*92 Congress used broad language in section 1374(d)(5). Where Congress referred to "any item of income" we think it meant exactly that,
Petitioner refers in its brief to the additions made to section 1374 by TAMRA and to the above quoted House report. It also notes
Even in light of this material, petitioner goes on to argue that, for purposes of the built-in gains tax, a taxpayer must have had an asset on its books at the time of conversion to an S corporation that was effectively disposed of or relinquished thereafter for the built-in gains tax to be imposed. This argument gives no effect to the addition of section 1374(d)(5) by TAMRA, or the explanatory language contained in the House report.
Petitioner's primary argument, however, is made in reference to (1) In general. Any
Petitioner, however, goes well beyond pointing out that It is the Petitioner's position that the prospective application of the regulations made applicable to years subsequent to December 27, 1994, impacts on the issue before the Court in that Respondent is without statutory authority to assert its claim that
Petitioner's position is not that any provision in the statute, statement in the legislative history, or guidance issued by the IRS 6 prior to the publication of the proposed section 1374 regulations in
1995 U.S. Tax Ct. LEXIS 43">*58 The absence of regulations does not relieve us of the duty of interpreting our tax laws. While it has been stated in the context of a regulation applied retroactively by the Commissioner that "if the interpretation of the statute embodied in the regulation is correct, one must conclude that the statute has meant the same thing all along, with or without the regulation",
1995 U.S. Tax Ct. LEXIS 43">*59 Since petitioner's argument here is based on the prospective character of only a regulation, the Government's position is even stronger when considered in the light of cases holding that even an act of Congress itself with a specific prospective date does not automatically foreclose reaching the same result under prior law. See
We hold that petitioner's
1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years at issue.↩
2. The term "recognition period" is defined in sec. 1374(d)(7) as "the 10-year period beginning with the 1st day of the 1st taxable year for which the corporation was an S corporation." There is no dispute that the
3. Sec. 1374(a) provides for a tax computed under subsec. (b). Subsec. (b) provides, in general, that the tax shall be computed by applying the highest rate of tax specified in sec. 11(b) to the net recognized built-in gain.↩
4.
5. In fact, although technically classifiable as a "change", what petitioner did was actually nothing more than to
6. The Service issued
7. Our opinion here should make clear that