A finished ACC-681 Topic 3 conversion carryover analysis example, taxing $150,000 of built-in gain at 21 percent inside an S corporation and splitting the distribution between accumulated adjustments and a $41,500 dividend. Searches like "acc 681 topic 3 assignment example", "acc681 topic 3 sample" and "acc-681 topic 3 example" land here.
What a finished ACC-681 Topic 3 conversion carryover analysis looks like
Conversion-date figures open the finished analysis, all illustrative: $180,000 of accumulated earnings and profits from the C years, and investment land worth $400,000 with a $250,000 basis, the corporation's only built-in gain. In its second S year the corporation sells the land for $400,000, inside the five-year recognition period of section 1374. The $150,000 recognized built-in gain is taxed at the corporate level at 21 percent, the highest section 11(b) rate, for $31,500, after the analysis confirms the taxable income limit does not bind. Section 1366(f)(2) treats that tax as a capital loss passing through, so the shareholder nets $118,500. The accumulated adjustments account stands at $158,500 when $200,000 is distributed. Under section 1368(c) that much is tax-free against basis, and the next $41,500 is a dividend drawn from the C-year earnings.
How an ACC-681 Topic 3 example is structured
The analysis runs forward from the conversion date and keeps the corporate and shareholder levels in separate columns. It opens with the conversion snapshot: accumulated earnings and profits, the land's built-in gain and the net unrealized built-in gain that caps any section 1374 tax. Year one follows, with $40,000 of S income left undistributed, raising the accumulated adjustments account and stock basis. The year-two sale is taxed twice, first at 21 percent under section 1374, then as a pass-through gain reduced by that tax. A distribution panel applies the section 1368(c) tiers in order and shows the shareholder's basis falling from $258,500 to $100,000. A comparison panel reruns both years for a corporation that had always been an S corporation, where no corporate tax arises and the whole $200,000 is tax-free. The closing section weighs the election to distribute earnings first, and flags passive investment income for later years.
The recognition period checked first
The land is sold in the second S year, inside section 1374's five-year recognition period, so the gain is examined as built-in gain before anything passes through.
Corporate tax inside an S corporation
The 21 percent rate on the $150,000 gives $31,500, within both the net unrealized built-in gain ceiling and the year's taxable income limit.
The tax passed through as a loss
Section 1366(f)(2) treats the $31,500 as a loss with the gain's character, so the shareholder reports $118,500 net and the accumulated adjustments account moves by the same amount.
Distribution tiers applied in statutory order
The first $158,500 comes out of the accumulated adjustments account against basis, and the next $41,500 is a dividend because C-year earnings still sit beneath it.
The price of the C history
Measured against a corporation that was always an S corporation, the C years cost a $31,500 corporate tax and turn $41,500 of the distribution into dividend income.
Where marks go in ACC-681 Topic 3
Treating the corporation as a pure pass-through the moment it elected S status is the signature error on this analysis, since both the section 1374 tax and the dividend come from years the paper has forgotten. Papers that tax the land gain only on the shareholder's return skip the $31,500 corporate tax. Those that remember the tax but pass the full $150,000 through overlook section 1366(f)(2) and overstate the shareholder's gain. Calling the entire $200,000 tax-free ignores the accumulated earnings beneath the accumulated adjustments account, and calling it all a dividend reverses the order of section 1368(c). A dividend recorded as a reduction of stock basis double counts the $41,500. Credit is also withheld where the paper never asks whether the recognition period had run, because a sale in year six would have changed the corporate answer entirely.
Get an ACC-681 Topic 3 example written to your instructions
Send the ACC-681 Topic 3 instructions, your rubric and the corporation's history and figures from the case. We write a custom example to them, with the conversion snapshot stated, the built-in gains tax computed within its limits, the tax passed through as a loss and each distribution tier applied in order, in 24 to 48 hours. First one free.
ACC-681 Topic 3 questions, answered
Why is the built-in gains tax charged at 21 percent?
Because section 1374 imposes it at the highest rate in section 11(b), which is the flat 21 percent corporate rate. The tax exists so that appreciation built up while the company was a C corporation cannot escape the corporate layer by being realized after the election. It applies only during the recognition period and only to gain that was already present at conversion.
What is the accumulated adjustments account?
A corporate-level account, defined in section 1368(e)(1), that tracks the S corporation's income, losses and distributions since the election, broadly as stock basis does. It matters chiefly for a corporation that still carries earnings and profits from C years, because it marks how much can be distributed before those older earnings are reached and a dividend results.
Could the shareholder avoid the dividend by waiting?
Not by waiting alone. The accumulated earnings stay until they are distributed, and later distributions beyond the accumulated adjustments account would reach them in the same way. The corporation can elect, with shareholder consent, to distribute earnings first and clear them deliberately, which can make sense where passive investment income would otherwise put the election at risk. The example weighs that election and explains its choice.