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American Silver’s receipt on September 24, 1992, of the jewelry
inventory from Khalaf.
On audit of Al Zuni, respondent determined that on
September 15, 1992, Al Zuni distributed, rather than sold, all of
its extant jewelry inventory to Khalaf, that the September 15,
1992, transaction between Al Zuni and Khalaf constituted a
distribution to Khalaf in complete liquidation of Al Zuni, that
the jewelry inventory Al Zuni transferred to Khalaf had a cost
basis to Al Zuni of $538,000, a total fair market value upon
distribution of $671,413, and that Al Zuni therefore realized on
the distribution business income of $133,413.
On audit of Khalaf, respondent determined that Khalaf had a
cost basis of zero in his shares of stock in Al Zuni, that the
value of the jewelry inventory Khalaf received from Al Zuni on
September 15, 1992, was $671,413, that a portion of the jewelry
inventory Khalaf received represented a repayment to Khalaf of
the $196,510 purported loan obligation Al Zuni owed to Khalaf,
and that the balance of the jewelry inventory Khalaf received
with a value of $474,903 represented taxable capital gain income
to Khalaf received in exchange for his shares of stock in Al
Zuni.
OPINION
Nature of Transaction
Respondent treats the September 15, 1992, transfer of
jewelry inventory from Al Zuni to Khalaf as a distribution under
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