Re: 2009 Recovery Act: Recognition Period for S Corporation Built-In Gains Tax

Dear Client:

An S corporation, such as yours, is a pass-through entity that is treated very much like a partnership for federal
income tax purposes. As a result, income is generally passed through to your shareholders and taxed at their
individual tax rates.

However, a corporate-level tax is imposed on an S corporation's net recognized built-in gains attributable to assets
held at the time it converted from a C corporation to an S corporation. The built-in gains tax also applies if an S
corporation sells, during the recognition period, assets that were acquired in a carryover basis transaction; for
example, a tax-free reorganization. To avoid the built-in gains tax, the S corporation must not sell the assets during
the ten-year recognition period applicable to the assets.

The 2009 Recovery Act temporarily reduces the recognition period and eliminates the tax for net recognized built-
in gains of S corporations if the seventh tax year in the ten-year recognition period precedes the 2009 or 2010 tax
year. A comparable reduction in the recognition period applies separately with respect to any asset acquired in a
carryover basis transaction. The legislation serves to reduce the ten-year recognition period to seven years,
thereby eliminating the prospective built-in gains tax for qualifying taxpayers.

We can assist you by identifying tax savings opportunities, especially in these hard economic times when
downsizing or disposing of assets can trigger built-in gains. Please call our office at your earliest convenience to
discuss your options.

Sincerely yours,