Five years ago, Spyros Dietrich wanted to sell IMPEXT, Inc., his wholly owned import-export business. He also wanted to avoid recognizing the substantial gain that would result from his selling his IMPEXT shares on the open market. Spyros’ basis in the shares ($100,000) was well below their market value ($600,000).
To avoid gain recognition, Spyros formed the SH Partnership with his brother Hussein. To capitalize the partnership, Spyros transferred all his IMPEXT shares to SH in exchange for 99 SH Partnership units. Hussein transferred $100 cash in exchange for one SH Partnership unit. Subsequently, Spyros formed Fu Yung, Inc., an S corporation, and transferred his 99 SH Partnership units to Fu Yung in exchange for 99 Fu Yung shares.