- 4 -
as to provide for large--but not out-of-pocket--losses on their
individual tax returns. Enormous losses are attractive to a
select group of taxpayers--those with enormous gains.
Marnin Kligfeld was one such taxpayer. In 1999, he owned
more than 80,000 shares of Inktomi Corporation, a software
developer for Internet service providers. Inktomi’s main
product, a search engine, succeeded in displacing AltaVista.
Eventually, Google displaced Inktomi, and Yahoo! bought what was
left of the business in 2003;4 but in 1999, at the height of the
tech boom, Kligfeld’s Inktomi stock was worth more than $10
million. Kligfeld had a basis in the stock of just over
$300,000, so if he had simply sold it, he would have incurred a
significant capital gain which would have likely resulted in a
very large capital gains tax.
But Kligfeld did not simply sell the stock. Instead, he
began a series of transactions that he asserts eliminated, or at
least reduced, any capital gains built into the Inktomi stock:
• On September 20, 1999, Kligfeld--in conjunction
with his wholly owned “S corporation” Kligfeld
Corporation (Corporation)--formed Kligfeld
Holdings (Holdings 1) as a California partnership.
Kligfeld contributed approximately 83,600 shares
of Inktomi stock.5
4 See Inktomi Corp., Definitive Proxy Statement (Form
DEFM14A) (Feb. 11, 2003).
5 It is unclear from the record at this stage of the
proceedings what Corporation contributed to the partnership or
(continued...)
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