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Tax File Memorandum: Shelly Zumaya And Kiwi Corporation

1042 Words5 Pages

February 27, 2017
Tax File Memorandum
FROM: Derrek Mason
SUBJECT: Shelly Zumaya and Kiwi Corporation Tax Liability
FACTS: Shelly Zumaya is the president and sole shareholder of Kiwi Corporation (stock basis of $400,000). Kiwi Corporation, incorporated in 2003, is in the business of purchasing and reselling used farming equipment. In December 2012, Kiwi transferred its entire inventory (basis of $1.2 million) to Shelly Zumaya in a transaction that was recorded as a sale. According to Zumaya, the inventory was sold to her for the sum of $2 million, which was the fair market value of the inventory. The terms of the sale stated that Zumaya would pay Kiwi Corporation the $2 million at a future date. This debt obligation was not evidence by …show more content…

This issue was touched upon in two cases, Al Zuni of Arizona, Inc., 77 TCM 1521 and Kennemer v. Commissioner. The Al Zuni case, along with Regulation Section 1.332-2(c), settled the issue of determining whether a corporation had liquidated or not. The Kennemer case determined that after the transfer of assets in liquidation is completed, the transferee is responsible for the income taxes. To reinforce the authority of these two cases, there is also Section 336 to look at, which explains how the transferring of inventory in liquidation creates realized income, which is evident in the transfer of inventory between Kiwi Corporation and Shelly Zumaya. Section 6901(a) verifies transferee liability.
REASONING: According to the case Al Zuni of Arizona, Inc., 77 TCM 1521, a transfer of inventory to a corporation's sole shareholder constitutes a distribution in complete liquidation. Even if the corporation did not formally adopt a liquidation plan, its intent to liquidate was evidenced by its failure to collect payments that the shareholder agreed to make in exchange for the inventory or to engage in any further business activities after the transfer. Just as in the AL Zuni case, Kiwi Corporation did not collect on any of the payments from Shelly

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