Tax Research
Provide a statement or advice letter
addressed to client analyzing the question presented through relevant: 1) Code
section, 2) IRC regulation, 3) a case on point (with similar facts as in your
question, NJ or Federal), and 4) a recent article.
Your response should be well organized
and neatly presented. Make sure your answer includes the following:
1. Clearly
identify your topic and what it is you would like to learn;
2. provide
a copy of the code section(s) applicable to your question;
3. indicate
how you learned which section applies;
4. provide
a copy of an explanatory regulation (which includes an example of your
problem);
5. provide
a copy of a case which deals with your topic (NJ or Federal);
6. provide
a copy of a recent article which deals with your topic (within the last 10
years); and
7. explain
which on-line or other resources you used to locate each of the above (code
section, regulation, case and article), and provide information on how you
navigated through these resources.
Question
Presented:
Shelly
is the president and the sole shareholder of Kane Corporation, stock basis
$400,000). Incorporated in 2005, Kane’s sole business has consisted of purchase
and resale of used medical equipment. In December 2015, Kane transferred its
entire inventory, basis of 1.2M 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 $2 million, its fair
market value. The terms of the sale provided that Shelly would pay Kane $2
million at some future date. The debt obligation was not evidenced by a
promissory note and to date, Shelly has made no payments, principle or
interest, on the obligation.
The
inventory transfer was not reported on Kane’s 2015 tax return, either as a sale
or a distribution. After the transfer of the inventory to Shelly, Kane
Corporation had no remaining assets and ceased to conduct any business. Kane
did not formally liquidate under state law. IRS audited Kane’s 2015 tax return
and assessed the following:
1. Transfer
of inventory constituted taxable liquidation distribution in the amount of
$800,000 (2M – 1.2M)
2. IRS
asserted entire tax liability of $800,000 against Shelly based on transferee
liability
3. IRS
assessed tax due from Shelly for her gain recognized in the purported liquidating distribution
Shelly
contacted you regarding IRS’s determination.
Prepare a memo documenting your research. What are the tax consequences to Kane? To
Shelly?
