Nancy and her daughter, Kathleen, have been working together in a cattery called “The Perfect Cat.” Nancy formed the business several years ago as a sole proprietorship, and it has been very successful. Assets currently have a fair market value of $450,000 and a basis of $180,000. On the advice of their tax accountant, Nancy decides to incorporate “The Perfect Cat.” Because of Kathleen’s participation, Nancy would like her to receive shares in the corporation. What are the relevant tax issues?

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