Quail Corporation was created in 2000 through contributions from Kasha ($900,000) and Frank ($100,000). In a transaction qualifying as a reorganization, Quail exchanges all of its assets currently valued at $1.8 million (basis of $1.2 million) for 12,000 shares of Covey Corporation stock valued at $1.7 million plus $100,000 in Covey bonds. Quail distributes the Covey stock and bonds proportionately to Frank and Kasha in exchange for their stock in Quail. Quail's current and accumulated E & P before the reorganization amounts to $70,000.
a. How do Kasha and Frank treat this transaction for income tax purposes? What is Kasha's and Frank's basis in their Covey stock?
b. How do Quail and Covey treat this transaction for income tax purposes? What is Covey's basis in the assets it receives from Quail?