identify Issues & Questions regarding widow Black tax position and amount of tax due from facts given below-- Specific issue(s) you are trying to address in tax memorandum.

Your client, Jane Black, is seeking advice on how to report income she received from her deceased husbands former employer. Widow Black would like to pay the least amount of tax possible. However, Widow Black is 90-years old, financially conservative and considers her upstanding reputation to be her most valuable asset. As such, she is not inclined to take an overly aggressive tax position that would cause a protracted IRS audit. Based on the facts provided and your research, draft a Memorandum to Widow Black advising her on the possible reporting positions she could take on her 2014 return regarding the income and the tax consequences of each position.

FACTS

Sirius Black (Sirius) passed away on July 12, 2010. At the time of his death, Sirius was employed as vice president of corporate operations for Marvelous Holdings[1]. Sirius had worked for Marvelous Holdings since 1969. During the five years prior to his death (2007-2010), Sirius received an average salary of $1.1 $1.2 million per year.[2]

After Sirius death, during the years 2010-2013, Dervish and Banges, Co., Inc.[3] ("DAB") paid Sirius widow, Jane Black, $1 million per year. For each of these years, DAB issued a W-2 reporting the payments as wages to Sirius. Jane reported the payments from DAB as compensation on her income tax returns for the 2010-2013 tax years. DAB did not explain why it was making these payments and Jane did not ask.

On or about April, 15, 2014[4], the Marvelous Holdings sold its 100% ownership interest in Ollivanders, Inc. (Ollivanders) to Precision Casting Corp. for $625 million. On or about August 4, 2014, Jane entered into a Settlement Agreement and General Release (the Agreement) dated July ___, 2014, between herself (individually and as trustee of the Black Family Trust) and DAB, Abraxas Malfoy, Morfin Gaunt and the Estate of Marvolo Gaunt (collectively referred to as MG[5]).

The following statements were made in the Agreement:

Sirius had been a valuable long term employee of DAB

During Sirius employment by DAB he was promised certain financial benefits as additional compensation in addition to his regular compensation, to be paid to him if and when Ollivanders, Inc., a corporation (Ollivanders) was sold by DAB.

The parties agreed upon the amount to be paid to BLACK [individually and as trustee of the Black Family Trust] as additional compensation and which shall result in the release, discharge and termination of any and all claims, demands, controversies, causes of action, damages, rights, liabilities and obligations (the "claims") by BLACK against the MG parties.

The parties fully settle and resolve any and all disputes, differences, claims or causes of action, whether or not now known or unknown, which have arisen, or which may exist between BLACK and MG except for MG's obligation to make a $12.5 million payment.

Of the $12.5 million payment, Jane (individually and as trustee) acknowledged the previous payment and receipt of $4 million (i.e., the $1 million payments received in years 2010-2013).

The remaining balance of $8.5 million was to be paid by DAB upon execution and delivery of a signed counterpart of this Agreement by BLACK to MG.

Per his obituary, Sirius was also a partner at DAB.

Jane received the $8.5 million balance in July 2014. Jane had a discussion with her accountant, Griphook, CPA, regarding the payments from Ollivanders. Jane recalls her late husband saying he owned part of Ollivanders. The $12.5 million payment is exactly 2% of the sale proceeds from the sale of Ollivander. Jane does not recall receiving a Schedule K-1 from Ollivanders or any ownership interest of Ollivanders being reported on the Blacks returns. Jane looked through her husbands papers. She did not find any corporate documents showing that Sirius had an ownership interest in Ollivander (i.e., no Articles of Incorporation, stock share certificates, Company Minutes, etc.) However, Jane did find online a Ministry of Magic Committee on Experimental Charms Staff Report entitled Request for an Award from the Ministrys Recovery and Reinvestment Act of 1749, and dated August 14, 2010, wherein Sirius was identified as a principal of Ollivanders. It is unclear whether this designation was intended to identify ownership of Ollivanders or some other form of principal (e.g., principal authors, principal requestors, etc.).

In late August and early September, Griphook had several discussions with Lucian Malfoy regarding whether Sirius had an ownership interest in Ollivanders. Griphook requested copies of any corporate documents reflecting ownership of Ollivanders. No documents have been provided. As Marvelous Holdings (and its companies) are privately-held, there is no public document reflect who has an ownership interest in any of these entities. Further, it is unclear what type of entity Ollivanders was (i.e., S corporation, LLC or C corporation).

It is DAB position that the payments totaling $12.5 million were all for compensation owed to Sirius[6] not a distribution relating to any equity interest owned by Sirius. As such, DAB intends to issue a Form W-2 to Sirius with respect to the $8.5 million payment.

Jane would like to know how the $12.5 million payments (or portions thereof) to Sirius can be treated for tax purposes (e.g., compensation, gift or capital gains).

[1] Marvelous Holdings is a privately-held holding company of a number of witchcraft and wizardry firms: Eeylops Owl Emporium, Ltd, Honeydukes, Inc., Dervish and Banges, Co., Inc., Firebolt Flyer LLC and, until 2014, Ollivanders, Inc. The company traces its origins to Marvolo Gaunt who in the 1600s opened a magic shop in Diagon Alley.

[2] 2007 - $1,103,197

2008 - $1,112,356

2009 - $1,156,431

2010 - $1,189,880 (excludes $1 million paid by DAB in addition to Sirius regular salary)

[3] Established in 1763, Dervish and Banges, Co., Inc. is the flagship company of Marvelous Holdings.

[4] Precision Casting Corp. publically announced the deal with Marvelous Holdings on April 1, 2014. It appears that the sale of Ollivanders to Precision Casting Corp. was the result of negotiations in 2014. Thus, it does not seem as if the sale was foreseen in 2010, 2011, 2012 or 2013.

[5] In the introductory paragraph of the Agreement, its unclear whether collectively referred to as (MG) is intended to cover DAB, the Malfoy/Gaunt individuals and the Estate, or whether collectively referred to as (MG) refers only to Morfin Gaunt and the Estate of Marvolo Gaunt. Throughout the Agreement, there is reference to DAB individually, DAB and MG in the same sentence and the MG parties. On the signature line of the Agreement, DAB and the Malfoy/Gaunt individuals and Estate are listed below the entry MG parties.

[6] Under this position, DAB would be entitled to a deduction for compensation paid to Sirius during the years at issue.