Gary D. and Lindy H. Combrink - Page 6




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               Subsequently, on October 15, 1996, Mr. Combrink and LINKS              
          agreed to convert the above-referenced promissory notes payable             
          by LINKS to Mr. Combrink into one promissory note in the amount             
          of $77,481.03 and additional paid-in capital of $175,000.00.  No            
          further shares were issued at this time.  Then, on December 1,              
          1996, Mr. Combrink transferred all of his stock in LINKS to COST            
          in exchange for COST’s releasing Mr. Combrink from a liability to           
          COST in the amount of $174,133.20, apparently consisting of the             
          $56,404.47 promissory note, the $17,000.00 promissory note, the             
          $11,000 accounts receivable balance as of May 25, 1995, and the             
          $89,728.73 added to the accounts receivable balance in 1995 and             
          1996 as detailed above.                                                     
               On their timely filed joint 1996 U.S. Individual Income Tax            
          Return, Form 1040, petitioners did not report any income or loss            
          as a result of the release transaction.  Respondent determined              
          that $174,133.20 must be included in income as a dividend                   
          pursuant to sections 301, 302, and 304.                                     
                                     Discussion                                       
               Section 304 mandates that certain transactions involving               
          shares in related corporations be recast for tax purposes as                
          redemptions, the tax treatment of which is then governed by                 
          section 302 and potentially section 301.  The parties here                  
          disagree with respect to whether section 304 is applicable to the           
          December 1, 1996, transaction between Mr. Combrink and COST.                






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