George Georgiou and Judith Georgiou A.K.A. Judy Georgiou, et al. - Page 37

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                               (2) as paid-in surplus or as a contribution                                 
                         to capital,                                                                       
                  then the basis shall be the same as it would be in the                                   
                  hands of the transferor, increased in the amount of                                      
                  gain recognized to the transferor on such transfer.                                      
            The applicability of section 351 to the Kolonaki/GRS exchange is                               
            not in controversy.  Similarly, it is not disputed that Kolonaki                               
            controlled GRS after the exchange as required by section 362.                                  
            The use of fair market value by GRS to determine the basis of the                              
            assets is inappropriate.  The present facts fit squarely within                                
            the language of the Code.  Therefore, we sustain respondent's                                  
            determination that the value of the opening inventory of GRS is                                
            equal to the basis of the inventory in the hands of the                                        
            IV.  Additions to Tax and Penalties                                                            
                  Section 6653(a)(1) imposes an addition to tax in an amount                               
            equal to 5 percent of the underpayment if any part of the                                      
            underpayment is due to negligence or disregard of rules or                                     
            regulations.  Section 6661 imposes an addition to tax in an                                    
            amount equal to 25 percent of the underpayment if the                                          
            underpayment is attributable to a substantial understatement.                                  
            Both sections 6653(a)(1) and 6661 apply to tax returns with a due                              
            date prior to December 31, 1989.  The sections were repealed                                   
            December 31, 1989, with the current sections both recodified in                                
            section 6662, effective for returns with a due date after                                      
            December 31, 1989.  Kolonaki and JAI had a fiscal year ending                                  
            September 30.  The Georgious were calendar year taxpayers.                                     

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