Which type of entity is potentially subject to a "built-in gains tax"?

The built-in gains tax is specifically applicable to S corporations, which makes this choice the correct answer. An S corporation is a type of pass-through entity that has elected to be taxed under Subchapter S of the Internal Revenue Code. This allows income, deductions, and credits to be passed directly to shareholders, avoiding the double taxation often associated with traditional C corporations.

When an S corporation converts from a C corporation, it may have built-in gains from assets that were appreciated during the time it operated as a C corporation. If the S corporation sells these assets within a certain period after the conversion, it may be subject to a built-in gains tax on the appreciation that occurred while it was a C corporation. This provision is designed to prevent corporations from avoiding taxes on capital gains by simply switching their tax structure.

The other entity types listed, such as C corporations, general partnerships, and limited liability companies, do not face the built-in gains tax in the same way as S corporations do. C corporations are taxed separately on their income, while general partnerships and LLCs typically pass income through to owners without incurring entity-level taxes.