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Prepare a research memo for the client file that includes the relevant authority explaining how the liquidations and related issues will affect the taxpayers

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Prepare a research memo for the client file that includes the relevant authority explaining how the liquidations and related issues will affect the taxpayers.

A research memo includes facts, issues, conclusions, analysis, summary and sources.

Caroline and Marcus are married taxpayers, both with business interests. Marcus is the president and sole shareholder of Melcorp Corporation (basis of $275,000 in stock). Since 2009, Melcorp has imported fine Mexican pottery and sold it to large nurseries and hardware stores across the United States. On July 1, 2019, Melcorp transferred its entire pottery inventory to Marcus in a transaction described by the parties as a sale. According to Marcus and collaborated by the minutes of the corporation’s board of directors, the inventory was “sold” to him for the sum of $1.2 million, the fair market value of the inventory. Melcorp’s basis in the inventory was $500,000. The terms of the sale provided that Marcus would pay Melcorp the $1.2 million at some future date. This debt obligation was not evidenced by a promissory note, and, to date, Marcus has made no payments (principal or interest) on the obligation. After the transfer of inventory to Marcus, Melcorp had no remaining assets and ceased to conduct any business. After an audit of Melcorp’s 2019 tax return, the IRS asserted that the transfer of inventory constituted a liquidation of Melcorp and, as such, that the corporation recognized a gain on the liquidating distribution in the amount of $700,000 ($1.2 million value – $500,000 basis). Further, the IRS has assessed a tax due from Marcus for his gain recognized in the purported liquidating distribution.

Caroline was a shareholder in Janco Corporation. Janco was liquidated two years ago. In the year of liquidation, Janco reported taxable gain of $8 million, based on the value in its assets of $10 million and a basis of $2 million. After paying its tax liability of $2,720,000, Janco distributed its remaining assets, valued at $7,280,000 ($10 million - $2,720,000 tax paid), to its 10 equal shareholders. Caroline, as one of those 10 shareholders, received $728,000 and reported a long-term capital gain of $628,000 ($728,000 distribution – $100,000 stock basis). In the current year, the IRS audited Janco Corporation’s return and determined that the corporation had an additional gain of $1 million in the year of liquidation. The IRS assessed additional tax of $340,000 plus penalties and interest against Janco Corporation and then against Caroline, based on transferee liability, for the entire amount of the deficiency. Caroline has lost track of the other shareholders and is not sure that she will be able to locate them.

Prepare a research memo for the client file that includes the relevant authority explaining how the liquidations and related issues will affect the taxpayers.

A research memo includes, facts, issues, conclusions, analysis, summary and sources.