Updated July 29, 2026. Quick answer: If your practice elected S status after operating as a C corporation, IRC §1374 imposes a tax on the corporation when built-in gain is recognised in a taxable year beginning within the recognition period. It is not your personal capital-gains rate and it is not avoided by the S election — the election deferred the problem rather than removing it. The corporation pays first, and you receive what is left.
The provision, and where the tax lands
IRC §1374(a): “If for any taxable year beginning in the recognition period an S corporation has a net recognized built-in gain”, a tax is imposed. Two words do the work. “An S corporation has” — the tax is entity-level, computed at the rate §1374 borrows from §11(b), and it is not a pass-through item you net against personal losses. And “beginning in the recognition period” — the exposure is time-limited, which makes the conversion date a load-bearing fact in your deal.
The practical shape: your practice converted from C to S at some point, carrying appreciated assets and, usually, unbilled receivables. Sell inside the recognition period and gain attributable to that pre-conversion appreciation is taxed at the corporate level first. Then what remains flows to you and is taxed again in your hands. The S election did not delete the C-corporation exposure; it started a clock on it.
| Inside the recognition period | After it has run | |
|---|---|---|
| Entity-level tax on built-in gain | Yes, under §1374 | No |
| Rate applied | The §11(b) corporate rate | — |
| Netted against your personal losses? | No — it is the corporation’s tax | — |
| Does the S election help? | It started the clock. It did not remove the exposure | |
Why this changes a negotiation rather than just a return. A buyer performing diligence will find the conversion date, and a seller inside the recognition period is selling a different asset from an otherwise identical practice that converted years earlier. It is one of the few items in a practice sale where waiting has a mechanical, statutory payoff rather than a speculative one — and it is decided by a date already in the past.
Note what this page does not do: it states no dollar figure and no recognition-period length, because the operative numbers belong in §1374(d) and §11(b) rather than in a summary of them. Read those with your own adviser against your own conversion date.
One question this site will not answer, and why. Whether goodwill in a practice sale belongs to you personally or to the entity is the most consequential question in a professional-practice deal. It rests on two Tax Court decisions whose primary text we have never been able to obtain from an official court source, and the one-line summaries in circulation overstate what are narrow, fact-bound holdings. So we do not state a rule on it. Anyone telling you the answer is simple, in either direction, is summarising cases they have probably not read either.
What the corporation is taxed on depends on how the price was split across the assets — the allocation is a waterfall and goodwill is the residual.
Sources
IRC §1374(a) and §1374(d), including the recognition-period definition; IRC §11(b) for the rate §1374 borrows. Fetched July 2026.
This states what the cited authority says. It is not tax or legal advice. A practice sale turns on the entity form, the allocation actually agreed and the buyer’s own tax position — and one of the most-asked questions in this area is deliberately not answered anywhere on this site, for the reason given on each page that touches it.