When a transferor (ie, shareholder) contributes property in exchange for stock in a corporation, the transfer may be taxable or nontaxableFor tax purposes, a transaction resulting in realized income, gain, or loss that is not recognized., depending on the percentage of ownership control. The transfer is nontaxable if 80% or more of the corporate stock is acquired, with cash or property, by the shareholder or shareholder group.

If the transfer is nontaxable, the shareholder's adjusted tax basisThe amount used to value property in tax transactions. It is the property's purchase price (ie, cost) less accumulated depreciation. The cost may be adjusted for subsequent capitalized costs or recoveries. (not FMVThe price of an item or service in an arm's length transaction that is dictated by a market of buyers and sellers.) for the contributed property carries over to the corporation (Choice D). However, if the shareholder receives cash or other property (ie, bootAdditional compensation (eg, cash, property, assumption of debt) given or received in a property exchange to offset any difference in the FMV of the exchanged assets.) in addition to stock from the corporation, gain up to the boot received is recognized by the shareholder. When this occurs, the carryover basisA tax basis of an asset that carries over from the transferor to the transferee in a nontaxable exchange. to the corporation is increased by the shareholder's gain recognized (Choice A).

In this scenario, A and B transfer cash and property for 100% control (ie, ≥ 80%), resulting in a nontaxable exchange. However, because B also received $20,000 cash, B recognizes a $20,000 gain ($70,000 FMV − $40,000 basis = $30,000 gain, limited to $20,000 boot received). Therefore, X Corp has $60,000 basis in the land received, which is B's $40,000 carryover basis plus B's $20,000 recognized gain.

(Choice B) Basis of $50,000 erroneously uses the FMV of the land decreased by the cash received.

Things to remember:
For a nontaxable transfer of cash and property to a corporation in exchange for stock, the shareholder's adjusted tax basis (not FMV) for the contributed property carries over to the corporation. If the shareholder receives cash or other property (ie, boot) in addition to the stock, the corporation's carryover basis in the property received is increased by the gain recognized by the shareholder.