Several years ago, Ms. Fox acquired a small apartment building for total consideration of $950,000. This total was allocated on the basis of $225,000 for the land and $725,000 for the building. At present, the property has a fair market value of $1,200,000, with $300,000 of this total attributable to the land. Ms. Fox would like to transfer the property to a corporation using a Section 85 rollover. At the beginning of the current year, the building had a UCC of $582,000. The value elected for the transfer is $807,000 ($225,000 + $582,000). The consideration given to Ms. Fox for the property is 12,000 common shares. Shortly after the Section 85 rollover is completed, Ms. Fox sells all of the common shares she received as a result of the transfer to Mr. Hound, an arms length party, for proceeds of $1,200,000.

Required:

A. Describe the tax consequences for Ms. Fox 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 Mr. Hound for $1,200,000?