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III. Sale of Petitioner’s Tools to IMC
Petitioner claims that, as a part of his arrangement with
Mr. Kerkinni in 1996, he agreed to sell his old tools to IMC.
Petitioner used his old tools in his work for IMC, and other
employees of IMC also used the tools. In 1996, petitioner
brought the tools to IMC and allowed it to take ownership and
possession of them. At that time, petitioner agreed with Mr.
Kerkinni that he would keep an inventory of the tools that he
transferred to IMC. Petitioner updated the inventory list
annually as more of his tools were used by IMC employees. He
also agreed to assign a reasonable used value to each tool, which
values IMC accepted as sale prices. The record does not show how
petitioner arrived at the values he placed on his tools.
Respondent does not dispute that petitioner sold his tools to IMC
for the amounts petitioner listed in the inventory and that IMC
took possession of the tools. We are convinced that petitioner
did sell his old tools to IMC.
Petitioners argue that the entire amount IMC paid for the
tools should be treated as a return of capital. Respondent
argues that because petitioners did not establish basis in any of
the purchased tools, the amount paid for the tools should be
treated as compensation for services to IMC. Because we have
concluded that petitioner did sell his tools to IMC, we disagree
with respondent’s characterization of the proceeds from the sale
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