2023 Laws of Puerto Rico › TITLE THIRTEEN - Taxation and Finance (§§ 1 — 33423) › Subtitle 17 - Internal Revenue Code of 2011 (§§ 30001 — 33423) › PART II - Income Taxes (§§ 30041 — 30622) › Chapter 1013 - Other Special Taxpayers (§§ 30501 — 30622) › Subchapter E - Corporations of Individuals (§§ 30581 — 30590) › § 30588 - Tax imposed on certain built-in gains

(a) General rule. — If for any taxable year beginning in the recognition period a corporation of individuals 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.
(b) Amount of tax.—
(1) In general.— The amount of the tax imposed by subsection (a) shall be computed by applying the tax rate established in § 30071 of this title plus the highest rate of tax specified in § 30072 of this title to the net recognized built-in gain of the corporation of individuals for the taxable year.
(2) Net operating loss carryforwards from regular years.— Notwithstanding § 30587 (b)(1) of this title, any net operating loss carryforward arising in a taxable year for which the corporation was a regular corporation shall be allowed for purposes of this section as a deduction against the net recognized built-in gain of the corporation of individuals for the taxable year. For purposes of determining the amount of any such loss which may be carried to subsequent taxable years, the amount of the net recognized built-in gain shall be treated as taxable income. Rules similar to the rules of the preceding sentences of this clause shall apply in the case of a capital loss carryforward arising in a taxable year for which the corporation was a regular corporation.
(3) Coordination with § 30083 of this title.— The amount of the net recognized built-in gain shall not qualify for the alternative tax established in § 30083 of this title, regardless of the nature of the asset that generated the same.
(c) Limitations.—
(1) Corporations which were always corporations of individuals.— Subsection (a) shall not apply to any corporation if an election under § 30582(a) of this title has been in effect with respect to such corporation for each of its taxable years. Except as provided in regulations, a corporation of individuals and any predecessor corporation shall be treated as a corporation for purposes of the preceding sentence.
(2) Limitation on amount of recognized built-in gains.— The amount of the net recognized built-in gain for any taxable year shall not exceed the excess (if any) of:
(A) The net unrealized built-in gain, over
(B) the net recognized built-in gain for prior taxable years beginning in the recognition period.
(d) Definitions and special rules.— For purposes of this section:
(1) Net unrealized built-in gain.— The term “net unrealized built-in gain” means the amount (if any) by which:
(A) The fair market value of the assets of the corporation of individuals as of the beginning of its first taxable year for which an election under § 30582 of this title is in effect, exceeds
(B) the aggregate adjusted bases of such assets at such time.
(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 the taxable income of the corporation of individuals 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 § 30105 of this title.
(B) Carryover.— If, for any taxable year, the amount referred to in paragraph (A)(i) exceeds the amount referred to in paragraph (A)(ii), such excess shall be treated as a net recognized built-in gain in the succeeding taxable year.
(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 corporation of individuals establishes that:
(A) Such asset was not held by the corporation of individuals as of the beginning of the first taxable year for which it was a corporation of individuals, or
(B) such gain exceeds the excess (if any) of:
(i) The fair market value of such asset as of the beginning of such first taxable year, over
(ii) the adjusted basis of the asset as of such time.
(4) Recognized built-in losses.— The term “recognized built-in loss” means any loss recognized during the recognition period on the disposition of any asset to the extent that the corporation of individuals establishes that:
(A) Such asset was held by the corporation of individuals as of the beginning of the first taxable year for which it was a corporation of individuals, and
(B) such loss does not exceed the excess of:
(i) The adjusted basis of such asset as of the beginning of such first taxable year, over
(ii) the fair market value of such 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 first taxable year for which the corporation was a corporation of individuals shall be treated as a recognized built-in gain for the taxable year in which it is properly taken into account.
(B) Deduction items.— Any amount which is allowable as a deduction during the recognition period (determined without regard to any carryover) but which is attributable to periods before the first (1st) taxable year referred to in paragraph (A) shall be treated as a recognized built-in loss for the taxable year for which it is allowable as a deduction.
(C) Adjustment to net unrealized built-in gain.— The amount of the net unrealized built-in gain shall be properly adjusted for amounts which would be treated as recognized built-in gains or losses under this clause if such amounts were properly taken into account (or allowable as a deduction) during the recognition period.
(6) Treatment of certain property.— If the adjusted basis of any asset is determined (in whole or in part) by reference to the adjusted basis of any other asset held by the corporation of individuals as of the beginning of the first taxable year referred to in clause (3):
(A) Such asset shall be treated as held by the corporation of individuals as of the beginning of such first taxable year, and
(B) any determination under clause (3)(B) or (4)(B) with respect to such asset shall be made by reference to the fair market value and adjusted basis of such other asset as of the beginning of such taxable year.
(7) Recognition period.— The term “recognition period” means the ten (10)-year period beginning with the first day of the first taxable year for which the corporation was a corporation of individuals.
(8) Treatment of transfer of assets from a regular corporation to a corporation of individuals.—
(A) In general.— Except to the extent provided in regulations, if:
(i) A corporation of individuals acquires any asset, and
(ii) the basis of the corporation of individuals in such asset is determined (in whole or in part) by reference to the basis of such asset (or any other property) in the hands of a regular corporation, then a tax is hereby imposed on any net recognized built-in gain attributable to any such assets for any taxable year beginning in the recognition period. The amount of such tax shall be determined under the rules of this section as modified by paragraph (B).
(B) Modifications.— For purposes of this clause, the following modifications shall be made:
(i) The preceding clauses of this subsection shall be applied by taking into account the day on which the assets were acquired by the corporation of individuals in lieu of the beginning of the first taxable year for which the corporation was a corporation of individuals.
(ii) Subsection (c)(1) shall not apply.
(9) Reference to first taxable year.— Any reference in this section to the first taxable year for which the corporation was a corporation of individuals shall be treated as a reference to the first taxable year for which the corporation was a corporation of individuals pursuant to its most recent election under § 30582 of this title.
(e) Regulations.— The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section. Such regulations shall provide for the appropriate treatment of successor corporations.
History —Jan. 31, 2011, No. 1, § 1115.08, retroactive to Jan. 1, 2011.