February 26, 2014
TAX FILE MEMORANDUM
FROM: Laura Reed and Lisa Andersen
SUBJECT: Kiwi Corporation and Shelly Zumaya (sole shareholder)
Facts:
Shelly Zumaya (2220 East Hennepin Avenue, Minneapolis, MN 55413) is the president and sole shareholder of Kiwi Corporation (stock basis of $400,000). Incorporated in 2003, Kiwi Corporation’s sole business has consisted of the purchase and resale of used farming equipment. In December 2011, Kiwi transferred its entire inventory (basis of $1.2 million) to Shelly in a transaction described by the parties as a sale. According to Shelly and collaborated by the minutes of the board of directors, the inventory was sold to her for the sum of $2 million, the fair market value of the inventory. The terms of the sale provided that Shelly would pay Kiwi Corporation the $2 million at some future date. This debt obligation was not evidenced by a promissory note, and to date, Shelly has made no payments (principal or interest) on the obligation. The inventory transfer was not reported on Kiwi’s 2011 tax return, either as a sale or a distribution. After the transfer of the inventory to Shelly, Kiwi Corporation had no remaining assets and ceased to conduct any business. Kiwi did not formally liquidate under state law. Upon an audit of Kiwi Corporation’s 2011 tax return, the IRS asserted that the transfer of inventory constituted a liquidation of Kiwi and, as such, that the corporation recognized a gain on the liquidating distribution in the amount of $800,000 [$2 million (fair market value) - $1.2 million (inventory basis)]. Further, because Kiwi Corporation is devoid of assets, the IRS assessed a tax due from Shelly for her gain recognized in the purported liquidating distributi...
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...return audit. Kiwi Corporation should have a recognized gain of $800,000 for liquidating the inventory and Shelly is responsible for the tax liability based on transferee liability. Shelly Zumaya should have a recognized gain of $1.6 million ($2 million inventory value - $400,000 stock basis).
Research:
We started our research by reading through the discussions posted within the Topic of Research. From there we read the recommended pages of the text, 20-2, 20-3, and 20-4 regarding the liquidation process. Using the CCH Tax Research Network, we used a selected content search, Federal Tax--Federal Tax Editorial Content--Standard Federal Tax Reporter (2014), to research the following laws: Section 331(a), 336(a), and 6901(a). We also used the Citator in CCH to review the facts and decisions shown in the liquidation cases of Kennemer and Al Zuni of Arizona.
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