§40-18-174. Tax imposed on certain built-in gains.

(a) If for any taxable year beginning in the recognition period an Alabama 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.

(b)(1) The amount of the tax imposed by subsection (a) shall be computed by multiplying five percent by the net recognized built-in gain of the Alabama S corporation for the taxable year.

(2) Notwithstanding Section 40-18-168, any net operating loss carryforward which would be deductible except for Section 40-18-168 and which arose in a taxable year for which the corporation was not an Alabama S corporation, shall be allowed as a deduction against the net recognized built-in gain of the Alabama S corporation for the taxable year. For purposes of determining the amount of any such loss which may be carried to subsequent taxable years, the net recognized built-in gain shall be treated as taxable income.

(c) The following limitations shall apply:

(1) Subsection (a) shall not apply to any corporation that has had in effect an election to be treated as an S corporation under Subchapter S of the U.S. Internal Revenue Code, Title 26, U.S.C., as in effect from time to time or as recodified, for each of its taxable years. Except as provided in regulations, an Alabama S corporation and any predecessor corporation shall be treated as one corporation for purposes of the preceding sentence.

(2) The amount of the net recognized built-in gain taken into account under this section for any taxable year shall not exceed the excess (if any) of the net unrealized built-in gain over the net recognized built-in gain for prior taxable years beginning in the recognition period.

(d) For purposes of this section:

(1) The term "net unrealized built-in gain" means the amount (if any) by which the fair market value of the assets of the corporation exceeds the aggregate adjusted basis of such assets as of the beginning of its first taxable year for which it is treated as an Alabama S corporation.

(2)a. 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 Alabama S corporation for such taxable year if (except as provided in subsection (b)(2)) 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 subsection (b)(1) of Section 40-18-175).

b. If, for any taxable year, the amount referred to in clause (i) of paragraph a. exceeds the amount referred to in clause (ii) of paragraph a., such excess shall be treated as a recognized built-in gain in the succeeding taxable year.

(3) 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 Alabama S corporation established that

a. Such asset was not held by the Alabama S corporation as of the beginning of the first taxable year for which it was an Alabama S corporation, or

b. Such gain exceeds the excess (if any) of the fair market value of such asset as of the beginning of such first taxable year, over the adjusted basis of the asset as of such time.

(4) 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 Alabama S corporation establishes that

a. Such asset was held by the Alabama S corporation as of the beginning of the first taxable year referred to in subdivision (3), and

b. Such loss does not exceed the excess of the adjusted basis of such asset as of the beginning of such first taxable year, over the fair market value of such asset as of such time.

(5)a. 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 an Alabama S corporation shall be treated as a recognized built-in gain for the taxable year in which it is properly taken into account.

b. Any amount which is allowable as a deduction during the recognition period but which is attributable to periods before the first 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. The amount of the net unrealized built-in gain shall be properly adjusted for amounts treated as recognized built-in gains or losses under this subdivision.

(6) 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 Alabama S corporation as of the beginning of the first taxable year referred to in subdivision (3)

a. Such asset shall be treated as held by the Alabama S corporation as of the beginning of such first taxable year, and

b. Any determination under subdivision (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 first taxable year.

(7) The term "recognition period" means the ten-year period beginning with the first day of the first taxable year for which the corporation was an Alabama S corporation.

(8)a. Except to the extent provided in regulations, if an Alabama S corporation acquires any asset, and the Alabama S corporation's basis 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 an Alabama C 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. For purposes of this subdivision, the modifications of this paragraph are as follows: (i) The preceding subdivisions of this subsection shall be applied by taking into account the day on which the assets were acquired by the Alabama S corporation in lieu of the beginning of the first taxable year for which the corporation was an Alabama S corporation, and (ii) subdivision (1) of subsection (c) shall not apply.

(9) Any reference in this section to the first taxable year for which the corporation was an Alabama S corporation shall be treated as a reference to the first taxable year for which the corporation most recently became an Alabama S corporation.

(e) The Department of Revenue shall prescribe such regulations as may be necessary to carry out the purposes of this section including regulations providing for the appropriate treatment of successor corporations.

(Acts 1989, No. 89-837, p. 1671, §9.)