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?