Sixteen years ago, Biff, Buffy, and Buffy, Jr. organized BeachWear Inc. (BWI) to sell beach wear throughout California. The soleclass of common stock of BWI is owned by Buffy (60%), and herhusband, Biff (20%), and Buffy, Jr (20%). On December 1 2016, BWIfiles an S election. As of December 31 of the same tax year, BWI'sbalance sheet includes the following:
Assets AB FMV
Accounts Receivable $0 $300,000
Payments Due Under:
Installement Sale 450,000600,000
Machinery 0 225,000
During the next tax year, BWI collected the accounts receivablesreceiving $300,000. BWI also collected the one of two paymentsstill due on the installment sale of $300,000. BWI's taxable incomefor the same tax year is $900,000.
New assumption: BWI invested in common stock ofanother corporation, Apple Computer, which represented a fractionalinterest in the company. BWI elected S status beginning Janurary 1,of the year specified for the exam. BWI purchased the Apple stockfor $300,000 in January, 10 years ago. On December 31, of lastyear, the stock was still worth $300,000. On December 30, samespecified year, the stock was sold for $900,000. BWI had earningson profits as a C corporation of $600,000 on December 31, lastyear. BWI had the following items of income and expenses forDecember 31, this specified year.
OperationalIncome $1,155,000
Tax Exempt Income 45,000
Gain from sale of AppleStock 600,000
TotalIncome $1,800,000
OperationalExpense 600,000
Depreciation 15,000
InvestmentAdvice 18,000
InterestExpense 117,000
TotalExpenses $750,000
Total NetIncome $1,050,000
a Built-in gains tax is due
b Non Passive investment income tax is due
c Passive investment income tax is due since the gains from thestock and tax exempt income totalling $645,000 are more than 25% ofthe $1,800,000 gross receipts.
d None of the above
Which answer is the correct and why?
Sixteen years ago, Biff, Buffy, and Buffy, Jr. organized BeachWear Inc. (BWI) to sell beach wear throughout California. The soleclass of common stock of BWI is owned by Buffy (60%), and herhusband, Biff (20%), and Buffy, Jr (20%). On December 1 2016, BWIfiles an S election. As of December 31 of the same tax year, BWI'sbalance sheet includes the following:
Assets AB FMV
Accounts Receivable $0 $300,000
Payments Due Under:
Installement Sale 450,000600,000
Machinery 0 225,000
During the next tax year, BWI collected the accounts receivablesreceiving $300,000. BWI also collected the one of two paymentsstill due on the installment sale of $300,000. BWI's taxable incomefor the same tax year is $900,000.
New assumption: BWI invested in common stock ofanother corporation, Apple Computer, which represented a fractionalinterest in the company. BWI elected S status beginning Janurary 1,of the year specified for the exam. BWI purchased the Apple stockfor $300,000 in January, 10 years ago. On December 31, of lastyear, the stock was still worth $300,000. On December 30, samespecified year, the stock was sold for $900,000. BWI had earningson profits as a C corporation of $600,000 on December 31, lastyear. BWI had the following items of income and expenses forDecember 31, this specified year.
OperationalIncome $1,155,000
Tax Exempt Income 45,000
Gain from sale of AppleStock 600,000
TotalIncome $1,800,000
OperationalExpense 600,000
Depreciation 15,000
InvestmentAdvice 18,000
InterestExpense 117,000
TotalExpenses $750,000
Total NetIncome $1,050,000
a Built-in gains tax is due
b Non Passive investment income tax is due
c Passive investment income tax is due since the gains from thestock and tax exempt income totalling $645,000 are more than 25% ofthe $1,800,000 gross receipts.
d None of the above
Which answer is the correct and why?
