Al Zuni of Arizona, Inc. - Page 8




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          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            
          section 331 in complete liquidation of Al Zuni, which treatment             
          petitioners do not seriously challenge.  Rather, primarily                  
          petitioners challenge respondent’s determination of the fair                
          market value of the jewelry inventory transferred to Khalaf, of             
          Al Zuni’s cost basis in the jewelry inventory, and of Khalaf’s              
          cost basis in his shares of stock in Al Zuni.                               


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