Charles Cho (your client) is an accrual basis taxpayer with various lines of businesses. One business is a gas station. The land underneath the gas station was not contaminated when Cho purchased it. However, the land now has potential soil and groundwater problems (environmental liabilities). Cho engages in a Section 351 tax-free exchange, transferring the gas station to a newly-formed corporation, Patten Corporation, in exchange for the stock of Patten and assumption of the environmental liabilities (not considered tax avoidance). Before the exchange, Cho did not take any environmental remediation efforts to clean up the soil and groundwater problems associated with the gas station. One year later, Patten pays $100,000 to an outside party for environmental clean-up costs.

Address the tax consequences of the transfer for both Cho (shareholder) and Patten (corporation). Focus on all aspects of the fact pattern (i.e., the initial transaction and the payment a year later).