A c corp owned primariliy by an ESOP wishes to convert to an S corp. The built-in gains tax triggered by the conversion, however, has proven to be a significant obstacle. Any ideas on eliminating or mitigating its impact would be appreciated.

Why is the BIG triggered? (Inventory recapture?) Usually, the BIG is triggered as you sell the assets. This is why it is always a good idea to get a NUBIG valuation.

The company has significant receivables.

I can see your problem. However, I can't think of any great answer. The best I can suggest is to see if you can't accelerate the collection of the receivables to coincide with the tax event(match cash to tax). You could use the end of fiscal year (calender, I am assuming) to plan for the conversion. You may want to offer a discount for early payment to encourage customers. The "cost" of conversion, as I see it, is only the time value of the deferral of tax. If they stay a C, they will be paying tax on the receivables eventualy anyway. If they are a profitable, "tax-paying" entity, the savings from the S conversion should more than offset that "cost."

As your facts indicated that it is not 100% owned, I would be more concerned with (a) buying out existing non-ESOP shareholders (perhaps with 1042); or, if not possible (B) planning for the management of cash distributions to the ESOP as a result of the pro rata distribution rules. (You have probably already addressed these issues).

Thanks for your comments. It is a 92% ESOP ownership and we are intending to redeem most of the remaining non-ESOP interest.

Our other thought was to convert to an accrual basis taxpayer and at least have 4 years to recognize the BIG, using higher ESOP debt service to offset the early years.

Rather than converting your C corporation to an S corporation consider setting up a new S corporation and then merge the two so that the S corporation is the survivor. Code section 1374©(1)implies that if a corporation has always been an S corporation then a built in gain is not recognized.