Sixteen years ago, Biff, Buffy, and Buffy, Jr. organized Beach Wear Inc. (BWI) t
ID: 2452925 • Letter: S
Question
Sixteen years 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 1 2016, BWI files an S election. As of December 31 of the same tax year, BWI's balance sheet includes the following:
Assets AB FMV
Accounts Receivable $0 $300,000
Payments Due Under:
Installement Sale 450,000 600,000
Machinery 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: BWI holds real estate for investment. Its S election is effective January 1 2016. During the same tax year, it sells land for $915,000 less 10% costs with a basis of $300,000. Installment payments are made of $165,000 in the same tax year, $150,000 in the next tax year, %150,000 in Year 3, $450,000 in Year 4. BWI's income from operations was $300,000 in Year 1, a loss of $150,000 in Year 2, income of $450,000 in Year 3, and income of $600,000 in Year 4.
a In Year 2, BWI will owe no built-in gain tax under 1347 (d)(2)(A)
b In Year 3, BWI will owe built-in gain tax based on $150,000 collected times 57.21% gross profit percentage times 35% or $30,035.
c In Year 3, BWI owe twice as much built-in gain tax as answer B or $60,070.
d A and B
e A and C
Which answer is the correct and why?
Explanation / Answer
Solution:
Collected the accounts receivables receiving $300,000.
Installment sale of $300,000
Taxable income for the same tax year is $900,000.
Land Sale 9,15,000
Instalment 1,65,000
Costs 1,50,000
same tax year, 150,000
next tax year, % 150,000
450,000
1st Year Income $300,000
2nd year Loss $150,000
3rd Year Inocme $450,000
4th Year Income $300,000
Corect Answer is BWI owe twice as much built-in gain tax as answer B or $60,070.
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