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• On about November 1, 1999, Kligfeld Investments,
LLC (Investments), whose sole member was Marnin
Kligfeld, engaged in a short sale6 of U.S.
Treasury notes. Before closing the short sale,
Investments transferred the resulting proceeds--
along with the attached obligation--to Holdings
1.7 At the end of this transaction, Kligfeld
owned 99 percent of Holdings 1 and Corporation
owned one percent.
• On about November 3, 1999, Holdings 1 closed the
short position by buying U.S. Treasury notes and
using them to replace those borrowed.
• On November 15, 1999, Kligfeld transferred a 98-
percent interest in Holdings 1 to Corporation
through a non-taxable section 3518 exchange.
5(...continued)
when exactly Kligfeld transferred the Inktomi stock to Holdings
1. It is also unclear what the percentage ownership was at the
formation of Holdings 1.
6 A short sale is the sale of borrowed securities, typically
for cash. The short sale is closed when the short seller buys
and returns identical securities to the person from whom he
borrowed them. The amount and characterization of the gain or
loss is determined and reported at the time the short sale is
closed. See sec. 1.1233-1(a), Income Tax Regs.
7 Because Investments is not incorporated and has only one
member, it is disregarded for tax purposes, and Kligfeld is
treated as contributing the short sale proceeds and obligation
himself. See sec. 301.7701-2(c)(2), Proced. & Admin. Regs.
8 Unless otherwise indicated, section references are to the
Internal Revenue Code as in effect for the years at issue.
Section 351 allows a person to transfer property to a corporation
with no recognition of gain or loss, as long as he receives only
that corporation’s stock in exchange for the property and,
immediately after the exchange, is “in control” of the
corporation. Kligfeld received only additional Corporation stock
in the exchange, and since he was the sole shareholder in
Corporation both before and after the transfer, he easily met the
“in control” requirement.
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