February 26, 2014 TAX FILE MEMORANDUM: 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 ($400,000 share base). Incorporated in 2003, Kiwi Corporation's sole activity was the purchase and resale of used agricultural equipment. In December 2011, Kiwi transferred its entire inventory ($1.2 million basis) to Shelly in a transaction described by the parties as a sale. According to Shelly and in conjunction with board minutes, the inventory was sold to her for $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 a later date. This debt was not evidenced by a promissory note and, to date, Shelly has not made any payments (principal or interest) on this debt. The stock transfer was not reported in Kiwi's 2011 tax return, either as a sale or a distribution. After the stock was transferred to Shelly, Kiwi Corporation no longer had any assets and ceased to carry on any business. Kiwi has not been officially liquidated under state law. In an audit of Kiwi Corporation's 2011 tax return, the IRS asserted that the stock transfer constituted a liquidation of Kiwi and, as such, that the company recognized a gain on the liquidation distribution of an amount of $800,000 [$2 million (fair market value) - $1.2 million (based on inventory)]. Additionally, because Kiwi Corporation is assetless, the IRS assessed a tax owed by Shelly for her recognized gain in the purported liquidation distribution...... middle of paper ...... back check . Kiwi Corporation should have a recognized gain of $800,000 for the inventory liquidation and Shelly is liable for the tax liability based on the transferee's debt. Shelly Zumaya is expected to have a recognized gain of $1.6 million ($2 million inventory value - $400,000 inventory basis). Research: We began our research by reading the discussions posted in the research topic. 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 curated content search, Federal Tax--Federal Tax Editorial Content--Standard Federal Tax Reporter (2014), to search for the following laws: Section 331(a), 336 (a) and 6901(a). We also used CCH's Citator to review the facts and decisions presented in the Kennemer and Al Zuni liquidation cases of Arizona..