3. Sondra Vendetti has owned a small apartment building for a number of years. It was acquired for cash in the amount of $1,860,000. This total was allocated on the basis of $460,000 for the land and $1,400,000 for the building. At the present time, the fair market value of the property is estimated to be $2,180,000. This total is allocated $520,000 for the land and $1,660,000 for the building. At January 1 of the current year the balance in its Class 1 is 1,118,690. Using the provisions of Section 85(1), she intends to transfer the property to new corporation in which she will be the only shareholder. She will use an elected value $1,578,690 ($460,000 + $1,118,690). As consideration she will receive 21,800 common shares which have a fair market value of $100 per share. Immediately after the rollover is completed, Sondra sells all of the shares in the new corporation to an arm's length party for cash of $2,180,000.

Required:

A. Describe the tax consequences for Sondra of using Section 85 and selling the common shares.

B. How do these results compare with the tax consequences of simply selling the building directly to an arm's length party for $1,200,000?