- 37 -
(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
transferor.
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 The sections were repealed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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