A couple of subscribers have recently asked for sources on how the just-passed American Taxpayer Relief Act of 2012 (ATRA) affects the valuation of S corporations, in particular Sec. 362 and the provisions regarding the recognition period for built-in capital gains.
BV appraisers aren’t alone; financial analysts are also struggling to fully understand ATRA’s impact on S corps. For instance, this Forbes article, “The Secrets of the Fiscal Cliff Deal,” posits that the act may actually usher in a new “golden age” of C corporations by discouraging entities from choosing S corp status now that the “pain” of double taxation is not so acute and the recognition period may only be five years (down from 10). After further thought, however, the author subsequently withdrew the discussion on built-in gains, posting this new article: “A Closer Look at the Fiscal Cliff Deal’s Impact on the Built-in-Gains Recognition Period for S Corporations.” In it, he concludes his initial assessment was “wrong,” and:
Despite … unnecessarily misleading language in the ATRA, it certainly appears that the new law will NOT shorten the 10-year recognition period for corporations electing S status in 2012 or 2013. Rather, if an existing S corporation would otherwise trigger built-in-gains in 2012 or 2013, provided the fifth year of the corporation’s recognition period preceded the year of sale, the corporation may exclude the built-in-gains. Keep in mind, however, that if this is indeed the case, then that same corporation will become subject to the built-in-gains again in 2014, provided the 10-year recognition period hasn’t otherwise expired.
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