Biff and Buffy are real estate speculators each of whom over the past 10 years h
ID: 2452842 • Letter: B
Question
Biff and Buffy are real estate speculators each of whom over the past 10 years have brought and sold vas acres of unimproved land in Temecula, Lake Elsinore and Hemet. Their most recent purchase is dry lake bottom in Elsinore. Biff and Buffy together with Regina, a tax lawyer, and Dirk and Edward, cosmetic surgeons, purchased teh Elsinore land. On advice of Regina, they transferred tha land to a newly formed S Corporation. They had held it for two years during the Riverside County land recession and made no effort to sell it. After holding the land for six years, the S Corporation sold 1/3 for a $100,000 gain and then the remaining 2/3 for a $300,000 gain. The sales were on the installment method and as the corporation collected the money it was invested in Elsinore Water Distric bonds.
a The gain on the sale of the land is most likely capital gain at the corporate rate and flows through to the shareholders with the same character.
b The gain on the sale flows through as ordinary income to Biff and Buffy with capital gain to the remaining shareholders.
c Since the corporation was formed to convert ordinary income for some shareholders to capital gain, the gain is ordinary income to all shareholders.
d None of the above.
Which one is the correct answer and why?
Explanation / Answer
c Since the corporation was formed to convert ordinary income for some shareholders to capital gain, the gain is ordinary income to all shareholders.
As the intention of corporate formation is convertion of income to the capital gain, that is the incorporation is for having cpaital gains for biff and buffy, hence this is treated as ordinary income to the shareholders
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