PUBLIC LAW 100-647—NOV. 10,1988 102 STAT. 3405

"(5) TREATMENT OP CERTAIN BUILT-IN ITEMS.—

"(A) INCOME ITEMS.—Any item of income which is prop-
erly taken into account during the recognition period but
which is attributable to periods before the 1st taxable year
for which the corporation was an S corporation 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 but which is
attributable to periods before the 1st taxable year referred
to in subparagraph (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 treated as recognized built-in gains or
losses under this paragraph.

"(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 S corporation
as of the beginning of the 1st taxable year referred to in
paragraph (3)—

"(A) such asset shall be treated as held by the S corpora-
tion as of the beginning of such 1st taxable year, and
"(B) any determination under paragraph (3XB) or (4XB)
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 1st taxable year.
"(7) RECOGNITION PERIOD.—The term 'recognition period'
means the 10-year period beginning with the 1st day of the 1st
taxable year for which the corporation was an S corporation.
"(8) TREATMENT OF TRANSFER OF ASSETS FROM c CORPORATION

TO S CORPORATION.—

"(A) IN GENERAL.—Except to the extent provided in regu-
lations, if—

"(i) an S corporation acquires any asset, and
"(ii) the S corporation's basis in such asset is deter-
mined (in whole or in part) by reference to the basis of
such asset (or any other property) in the hands of a 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 subparagraph (B).

"(B) MODIFICATIONS.—For purposes of this paragraph, the
modifications of this subparagraph are as follows:

"(i) IN GENERAL.—The preceding paragraphs of this
subsection shall be applied by taking into account the
day on which the assets were acquired by the S corpora-
tion in lieu of the beginning of the 1st taxable year for
which the corporation was an S corporation.

"(ii) SUBSECTION (c) (i) NOT TO APPLY.—Subsection
(cXD shall not apply.

"(9) REFERENCE TO IST TAXABLE YEAR.—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