Biff and Buffy are real estate speculators each of whom over the past 10 years have bought and sold vast 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 the Elsinore land. On advice of Regina, they transferred the 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 District bonds.

a. The gain on the sale of the land is most likely capital gain at the corporate level 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.