Quail Corporation was created six years ago 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 $1,800,000 (basis of $1,200,000) for Covey Corporation stock valued at $1,700,000 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.

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