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property distributed with the cost basis the shareholders had in
their shares of stock.
We have concluded that the jewelry inventory Khalaf received
from Al Zuni in September of 1992 had a value of $671,413.
Respondent reduced this amount by the $196,510 principal amount
of the loan that Al Zuni apparently owed to Khalaf. As
explained, respondent treated Khalaf as having a zero basis in
his stock in Al Zuni, and respondent calculated that Khalaf
realized $474,903 in capital gain income on receipt from Al Zuni
of the jewelry inventory. The only issue remaining with regard
to this income adjustment is the amount of Khalaf’s cost basis in
his shares of stock in Al Zuni.
Respondent contends that Khalaf has not established that he
had any cost basis in his shares of stock in Al Zuni and that the
full $474,903 constitutes taxable capital gain income to Khalaf.
Petitioners contend that Khalaf’s cost basis in his shares of
stock in Al Zuni was at least $486,000.
At trial, Khalaf and Peck testified that Al Zuni was
incorporated in 1976 with a capital contribution of property of
$360,000 and that in 1983 Khalaf made an additional cash
contribution to Al Zuni of $126,000. Khalaf thus contends that
his total cost basis in his stock in Al Zuni was $486,000, an
amount that fully offsets the $474,903 capital gain income that
respondent charges to Khalaf.
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