The Application of FAS 109 to S Corp Built-In Gains

In this report, the authors discuss the tax accounting issues that arise when an enterprise changes it tax status to an S corporation. In particular, they discuss the adjustments that are made to a former C corporation's deferred tax assets and liabilities to account for built-in gains and losses. In addition, they illustrate the alternative positions corporations have taken as to when to record these adjustments (that is, when has the change in tax status taken place) and offer our own interpretation of paragraph 28 of FAS 109. Finally the authors suggest the tax accounting disclosures that should accompany an election to convert from a C corporation to an S corporation.