Quail Corporation was created in 2000 through contributions from Kasha ($700,000) and Fardin ($300,000). In a transaction quailfying as a "Type A" merger reorganization. Qauil exchanges all of its assets currently valued at $2.5 million (basis of $1.9 million) for 12,000
shares of Covey Corporation stock plus a $100,000 Covey bond. Quail distirbutes Covey stock to Fardin in exchange for his Quail stock and distributes Covey stock plus the bond to Kasha for her Quail stock. Quail's current and accumulated E&P before the reorgainzation amounts to $200,000.
a. How do Kasha and Fardin treat this transaction for tax purpose?
b. How do Quail and Covey treat this transaction for tax purposes? What is Covey's basis in the assets it receives from Quail?
Make sure that you consider each transaction separately and come up with the tax consequences for each. For part B, here is the answer: Since Quail is distributing the Covey stock and bond that it received in exchange for assets, Quail would not recognize any gain on the reorganization. Covey's basis in the Quail assets would be the carryover basis of $1.9 million.