Facts: 1. Paul owns a small, successful restaurant. He wants to expand but needs a second location. He thinks his business has an FMV of $5,000,000 (and has a basis of $4,500,000 to Paul). The business is currently an LLC. 2. Lisa is a real estate broker and investor. She normally buys real estate and sells it quickly. She is fully licensed as a real estate broker in Texas. Lisa has a vacant lot that she paid $6,500,000 three years ago. The FMV is currently $5,000,000. 3. No one wants to have a recognized gain from this transaction this year, but if there is a loss to be had- the earliest, the better. 4. Paul approaches Lisa about the following business proposition: the restaurant and the land are contributing to a new corporation. Paul gets 50% of the stock, and Lisa gets 50% of the stock. 5. Lisa is not sure she likes that idea and instead offers the following (this occurs when Lisa is added to the new Corporation): The Corporation will distribute Lisa a part of the parking lot (of the old location). The FMV is $400,000, and the basis to the corp is $750,000. Lisa will contribute the new land for stock. Also- Lisa will contribute services of $250,000 to the Corporation. The client also has this question: what is the amount (%) of stock Lisa should get in the corp? 6. Keep in mind Lisa wants to own part of the restaurant- she thinks it will be successful.

What are the income tax consequences of the first proposal? What are the income tax consequences of the second proposal? Is there a better economic structure that will give the two people the desired result? If so, what is it, and defend the idea?