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 of the tax year specified for the exam, BWI files an S election. As of December 31 of that same tax year, BWI's balance sheet includes the following:

AssetABFMV

Accounts Receivable$ 0$300,000

Payments Due Under

Installment Sale$450,000$600,000

Machinery$ 0$225,000

During the next tax year, BWI collected the accounts receivable 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.

BWI of the statement above invested in common stock of another corporation, Apple Computer, which invesment represented a fractional interest in that company. BWI elected S status beginning January 1, of the year specified for the exam. BWI purchased the Apple stock for $300,000 in January, 10 years ago. On December 31, of last year, the stock was still worth $300,000. On December 30, the same specified year, the stock was sold for $900,000. BWI had earnings on profits as a C Corporation of $600,000 on December 31, last year. BWI had the following items of income and expenses for December 31, this specified year.

OperationalIncome$1,155,000

Tax Exempt Income45,000

Gain from sale of Apple Stock600,000

TotalIncome$1,800,000

OperationalExpense$600,000

Depreciation15,000

Investment Advice18,000

Interest Expense (related to operations)117,000

TotalExpenses750,000

Total NetIncome$1,050,000

a.Built-in gains tax is due.

b.Excess net passive investment income tax is due.

c.Passive investment income tax is due since the gains from the stock and tax exempt income totaling $645,000 are more than 25% of the $1,800,000 gross receipts.

d.None of the above.