Court Opinion

ID: 4333069
Source: CourtListenerOpinion
Date Created: 2018-11-14 01:01:24.77059+00
Date Added: 2024-06-11T14:46:59.860896
License: Public Domain

116 T.C. No. 1

                UNITED STATES TAX COURT

     COLORADO GAS COMPRESSION, INC., Petitioner v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 17251-98.                    Filed January 2, 2001.

     P became an S corp. in 1988, a C corp. in 1989,
and an S corp. in 1994. In 1994, 1995, and 1996,
petitioner sold assets which had accrued gain prior to
the 1994 conversion from C to S corp. status.
     Held: The transition rule of sec. 633(d) of the
Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2278,
relating to a corp. which, pursuant to its most recent
election, became an S corp. before 1989, is not
applicable to P’s 1994, 1995, and 1996 taxable years.

Carl Garold Sims, for petitioner.

Frederick J. Lockhart, Jr., for respondent.
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                                OPINION

     FOLEY, Judge:     By notice dated July 28, 1998, respondent

determined deficiencies of $52,073, $709,939, and $161,037

relating to petitioner’s 1994, 1995, and 1996 Federal income

taxes, respectively.    The parties submitted this case fully

stipulated pursuant to Rule 122.     Unless otherwise indicated, all

section references are to the Internal Revenue Code for the years

in issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure.    After concessions, the issue is whether

section 633(d) of the Tax Reform Act of 1986, Pub. L. 99-514, 100

Stat. 2278 (TRA), is applicable to the years in issue when

petitioner, in 1989, revoked, and, in 1994, regained, its S

corporation status.

                              Background

     Petitioner, a corporation with one shareholder, was

incorporated in 1977 and, from that year through 1988, filed tax

returns as a C corporation.    It had its principal place of

business in Longmont, Colorado, when the petition was filed.       On

February 1, 1988, petitioner made a valid election to be an S

corporation, as defined by section 1361(a)(1).    On that date,

petitioner had assets with unrealized gain, and earnings and

profits, accrued during the period when petitioner was a C

corporation.   These assets included securities and interests in

real estate and oil and gas partnerships.    Since February 1,
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1988, the value of petitioner’s stock has not exceeded $5

million.

     Effective December 1, 1989, petitioner revoked its S

election.   From that date through 1993 (i.e., 1 short taxable

year and 4 calendar years), petitioner filed returns as a C

corporation.

     Effective January 1, 1994, petitioner again made a valid

election to be an S corporation.   During the years in issue,

petitioner sold assets which, except for certain partnership

interests, were acquired prior to 1988.

                            Discussion

     Prior to the enactment of the TRA, section 1374 imposed a

tax on capital gain recognized by an S corporation within 3 years

after making a section 1362(a) election.     See sec. 1374(a),

(c)(1), prior to amendment by TRA (prior sec. 1374).     As amended

by the TRA, section 1374 imposes a tax on an S corporation’s

built-in gain recognized during a 10-year period beginning with

“the 1st taxable year for which the corporation was an S

corporation.”   Sec. 1374(a), (d)(7).    Section 1374(d)(9), as

amended, states:   “Any reference in this section to the 1st

taxable year for which the corporation was an S corporation shall

be treated as a reference to the 1st taxable year for which the

corporation was an S corporation pursuant to its most recent

election under section 1362.”   “Built-in” gain is the increase in
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asset value accrued prior to conversion from C to S corporation

status.   H. Conf. Rept. 99-841 (Vol. II), at II-203 (1986), 1986-

3 C.B. (Vol. 4) 1, 203; see also sec. 1374(d)(3)(B).

I.   Transition Rule

     The TRA provides a transition rule applicable to certain

small corporations with values of up to $10 million (i.e.,

qualified corporations).    See TRA sec. 633(d).   The TRA section

633(d) transition rule states, in paragraph (1), that “the

amendments made by this subtitle shall not apply to the

applicable percentage of each gain or loss which (but for this

paragraph) would be recognized * * * by reason of the amendments

made by this subtitle.”    TRA sec. 633(d)(1), as amended by

Technical and Miscellaneous Revenue Act of 1988 (TAMRA), Pub. L.

100-647, sec. 1006(g)(3), 102 Stat. 3407.    The transition rule

further states that “Paragraph (1) shall not apply to” ordinary

and short-term capital gains.    TRA sec. 633(d)(2), 100 Stat.

2279.   Thus, the transition rule provides that, if a qualified

corporation sells assets, long-term capital gain is subject to

prior section 1374, while ordinary and short-term capital gains

are subject to section 1374, as amended.    See TRA sec. 633(d)(1),

(d)(2).

     The transition rule is applicable “in the case of a

qualified corporation which makes an election to be an S

corporation under section 1362 * * * before January 1, 1989,
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without regard to whether such corporation is completely

liquidated.”     TRA sec. 633(d)(8), 100 Stat. 2280, as amended by

TAMRA sec. 1006(g)(7), 102 Stat. 3409.    The rule is also

applicable to certain complete liquidations of qualified

corporations prior to 1989.    See TRA sec. 633(d)(1).

II.   Analysis

      Petitioner contends that the transition rule, pursuant to

TRA section 633(d)(8), is applicable.    Petitioner further

contends that capital gain accrued during the years in issue is

not subject to prior section 1374, because the relevant S

election occurred in 1988, and the assets were sold more than 3

years after such election.    Respondent contends that section

1374, as amended, is applicable, because petitioner became an S

corporation again in 1994.

      The relevant provisions of section 1374, as amended by TRA

section 632, are clear and unambiguous.    See Huntsberry v.

Commissioner, 83 T.C. 742, 747-748 (1984)(stating that where a

statute is clear on its face, we require unequivocal evidence of

legislative purpose before construing the statute so as to

override the plain meaning of the words used therein).      Section

1374, as amended, is applicable to the 10-year period after an S

corporation’s “most recent election”.    Sec. 1374(d)(9).

      Petitioner contends that there is no provision in the

transition rule, or section 1374, as amended, making section
                                - 6 -

1374(d)(9), as amended, applicable if a qualified corporation

withdraws its S election.   Respondent concedes that petitioner

“made a valid election” to be an S corporation before 1989.

Respondent, however, contends that, pursuant to section

1374(d)(9), as amended, petitioner’s “most recent election”

(i.e., 1994 S election) is the election to which section 1374, as

amended, refers.   Consequently, respondent contends that section

1374, as amended, “by its own literal terms”, is applicable to

petitioner’s 1994, 1995, and 1996 taxable years.   We agree.

     In 1989, when petitioner became a C corporation, the

transition rule became inapplicable.    In 1994, petitioner made an

S election, and thus became subject to section 1374, as amended,

and in effect that year.    TRA section 633(d)(8) is applicable in

the case of an S election before January 1, 1989, while section

1374, as amended, is applicable to entities electing S

corporation status after December 31, 1988.   In determining the

applicability of section 1374, as amended, section 1374(d)(9), as

amended, explicitly directs us to petitioner’s “most recent” S

corporation election (i.e., petitioner’s 1994 election).    Our

holding is a straightforward application of section 1374, as

amended, to petitioner’s 1994, 1995, and 1996 taxable years.      We

also note that our holding is consistent with the legislative

history accompanying TRA section 633.   See H. Conf. Rept. 99-841

(Vol. II), supra at II-198 to II-207, 1986-3 C.B. (Vol. 4) at
                                 - 7 -

198-207.   Accordingly, the TRA section 633(d) transition rule is

not applicable to petitioner’s years in issue.

     Contentions we have not addressed are moot, irrelevant, or

meritless.

     To reflect the foregoing,

                                              Decision will be entered

                                         under Rule 155.