helly Zumaya (2220 East Hennepin Avenue, Minneapolis, MN 55413) is the president and sole shareholder of Kiwi Corporation (stock basis of $400,000). Incorporated in 2007, Kiwi Corporation's sole business has consisted of the purchase and resale of used farming equipment. In December 2016, 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 Corpora-tion 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 2016 tax return as either a sale or a distribution. After the transfer of the inventory to Shelly, Kiwi Corpo-ration had no remaining assets and ceased to conduct any business. Kiwi did not for-mally liquidate under state law. Upon an audit of Kiwi Corporation's 2016 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[$2million(fairmarket value)$1.2 million(inventorybasis)]2. Further, because Kiwi Corporation is devoid of assets, the IRS assessed the entire tax liability against Shelly, based on transferee liability. Finally, the IRS assessed a tax due from Shelly for her gain recognized in the purported liquidating distribution. Shelly has contacted you regarding the IRS's determination. Prepare a letter to Shelly Zumaya and a memo for the file, documenting your research.

TAX FILE MEMORANDUM FROM:

Priscilla Hampton

SUBJECT:IRS Audit of Kiwi Corporation's 2016 Return 

Today I talked with Shelly Zumaya regarding the proper tax treatment of Kiwi Corporation's transfer of its inventory to Ms. Zumaya. Ms. Zumaya is the president and sole shareholder of Kiwi Corporation (stock basis ofS400,000).Since2007, Kiwi's sole business has been the purchase and resale of used farming equipment .ln December 2016, Kiwi Corporation transferred to Ms. Zumaya its entire inventory (basis of $1.2 million) in a transaction described as a `sale by both the corporation and Ms. Zumaya.The sales price for the inventory was $2 million, its fair market value.The amount is to be paid by Ms. Zumaya to Kiwi at some future date.The $2 million debt obligation is not evidenced by a promissory note and, to date, Ms. Zumaya has not madeany payments (principal or interest) on the obligation.After the inventory transfer, Kiwi Corporation had no remaining assets and ceased to conduct any business.The corporate didnot formally liquidate under state law.Upon an audit of Kiwi's 2016 tax return, the IRS asserted that the inventory transfer constituted a liquidation of the corporation, resulting in a recognized gain of $800,000 (S2 million (fair market value) - $1.2 million (inventory basis)).Since Kiwi Corporation is devoid of assets, the IRS has assessed the tax against Ms. Zumaya,based on transferee liability.Finally, the IRS also asserted that Ms. Zumaya has a tax deficiency based on the gain she recognized on the purported liquidation. 

At Issue:Does the transfer of the inventory constitute a complete liquidation of KiwiCorporation under 336?If the inventory transfer constitutes a complete liquidation, can the IRS assess the resulting tax against Ms. Zumaya?Conclusion:A corporate liquidation exists for Federal tax purposes when a corporation ceases to be a going concern.Liquidation is completed when the corporation is finally divested of all its property.Liquidation may be completed prior to actual dissolution of the corporation, and legal dissolution under state law is not required for a liquidation to occur. 

Hoffman, Raabe, Maloney, Young and Smith, CPAs

5191 Natorp BoulevardMason,

OH45040 

Ms. Shelly Zumaya