Example: Net recognized built-in gain. X is a calendar year C corporation that elects to become an S corporation on January 1, 1996. X has a net unrealized built-in gain of $50,000 and no net operating loss or capital loss carryforwards. In 1996, X has a pre-limitation amount of $20,000, consisting of ordinary income of $15,000 and capital gain of $5,000, a taxable income limitation of $9,600, and a net unrealized built-in gain limitation of $50,000. Therefore, X's net recognized built-in gain for 1996 is $9,600, because that is the least of the three amounts described in paragraph (a) of this section. Under paragraph (b) of this section, X's net recognized built-in gain consists of recognized built-in ordinary income of $7,200 [$15,000 * ($9,600/$20,000) = $7,200] and recognized built-in capital gain of $2,400 [$5,000 * ($9,600/$20,000) = $2,400]. Under paragraph (c) of this section, X has a recognized built-in gain carryover to 1997 of $10,400 ($20,000-$9,600 = $10,400), consisting of $7,800 ($15,000-$7,200 = $7,800) of recognized built-in ordinary income and $2,600 ($5,000-$2,400 = $2,600) of recognized built-in capital gain.
26 C.F.R. §1.1374-2