Sixteen year ago, Biff , Buffy, and Buffy Jr. organized Beach Wear, Inc. (BWI) t

Question

Sixteen year ago, Biff , Buffy, and Buffy Jr. organized Beach Wear, Inc. (BWI) to sell beach wear throughout California. The sole class of common stock of BWI is owned by Buffy (60%) and her husband, Biff (20%), and Buffy Jr. (20%). On December 31 of that same tax year, BWI's balance sheet includes the following:

Asset AB FMV

Accounts Receivables $0 $300,000

Payments Due Under 450,000 600,000

Installment Sale 0 225,000

During the next tax year, BWI collected the accounts receivables receiving $300,000. BWI also collected the one of two payments still due on the installment sale of $300,000. BWI's taxable income for the same tax year is $900,000.

New assumption: same fact as above, except that BMW has a net operating loss for the year ended December 31 2015 in the amount of $300,000.

a The NOL reduces the taxable income calculated as if teh S Corporation were a C Corporation under 1374(d)(2)(A).

b The NOL reduces the recognized built-in gain of $375,000 by the $300,000 for purposes of the tax calculation.

c The NOL does not reduce the flow-through of the $300,000. Only the built-in tax reduces the flow-through of the $300,000

d B and C.

Which one is the right answer and why?

Which is the right answer and why?

Explanation / Answer

a)The NOL reduces the taxable income calculated as if teh S corporation were a C corporation under 1374 (d)(2)(A) is the right answer as per this section carry forward losses are settled against taxable income of current year it will reduce the tax liability of of C corpation.

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