Joe and Sunny intend to enter into a business venture together and decided that an S corporation would be a desirable entity choice for federal income tax purposes. The corporation is named Michigan Inc. (MII). For newly established MII, Joe intends to contribute Property A with fair market value (FMV) of $800 and basis of $300. Sunny intends to contribute cash of $800. Joe and Sunny are equal owners of MII.

Question: Assume at the end of Year 1, MII had no operating income/loss. MII would like to distribute cash to Joe and Sunny and distribute Property A only to Joe. Will this arrangement work? Why? If yes, provide Joes and Sunnys basis in MII at the end of Year 1.