Kligfeld Holdings, Kligfeld Corporation, Tax Matters Partner - Page 10

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          Inktomi stock to its partners.14  The distributed cash was                  
          treated as a return of capital (i.e., not taxable) since it                 
          didn’t reduce the outside basis below zero--any cash distributed            
          which exceeded outside basis would be considered a capital gain.            
          Sec. 731(a).  The remaining Inktomi stock that was distributed              
          retained its inside basis in the hands of the partners to the               
          extent of the partners’ remaining outside basis after that basis            
          was reduced by the amount of the cash distribution.  Sec. 732.              
               To reflect the above transactions, each entity filed a tax             
          return:  Holdings 1 filed a partnership return for its brief 1999           
          taxable year (September 20, 1999-November 15, 1999) on July 17,             
          2000.  It listed the short sale of the U.S. Treasury notes and              
          claimed sale proceeds of $9,938,281, a basis of $9,965,625, and a           
          resulting loss of $27,344.15  Holdings 2 also filed a partnership           
          return for its short 1999 taxable year (November 15, 1999-                  
          December 31, 1999) on July 17, 2000, reporting $10,000,004 in               
          proceeds from the sale of Inktomi stock and a gain of $523,337.             
          The Kligfelds filed a joint return for 1999 on August 15, 2000,             

               14 The record doesn’t show precisely how many shares of                
          Inktomi stock were distributed, but Corporation sold 12,000 of              
          the shares it received in November 2000 and distributed all of              
          the cash plus all remaining corporate property to Kligfeld.                 
               15 The basis listed is the price paid for the replacement              
          securities.  In a regular sale, the securities are first paid for           
          and then sold, with the gain or loss equaling the difference                
          between the purchase and sale price.  In a short sale, the timing           
          is backwards--the sale price is determined before the purchase              

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Last modified: November 10, 2007