Figures: tax year 2026
A C corporation and its shareholders are separate taxpayers, requiring separate calculations even when one person owns every share. Fair market value (FMV) measures property at its current exchange value; adjusted tax basis measures unrecovered tax investment.
A realized gain arises when consideration exceeds adjusted basis; a negative difference represents a realized loss. Recognition determines how much enters the current tax computation. Nonrecognition generally preserves the deferred amount through basis rather than eliminating it.
The transaction determines each taxpayer's calculation:
A qualifying transfer exchanges property for corporate stock while the property transferors collectively control the C corporation immediately afterward. Cash, land, equipment and transferable intangible property can qualify. Services do not constitute contributed property for this purpose.
The contribution agreement and capitalization records establish qualification:
- Property transferors must hold at least 80% of total voting power and at least 80% of the shares of each nonvoting stock class.
- A service-only recipient does not join the qualifying property-transferor group. Fully vested stock received for services generally creates ordinary compensation equal to FMV minus any amount paid.
Common mistakes
- Recognizing all appreciation. Nora's $90,000 - $50,000 = $40,000 measures realization; the cash-boot case recognizes only $10,000.
- Subtracting debt from property basis. Inez's $90,000 - $20,000 = $70,000 measures her distribution; received-land basis remains $90,000.
- Ignoring distribution-generated E&P. Merrow's $10,000 opening current E&P becomes $41,600 after the $40,000 gain and $8,400 tax.
Bottom line
- Qualifying property contributions require 80% voting control and 80% ownership of each nonvoting class; ordinary boot recognizes gain up to realized gain.
- Corporate contribution basis generally equals transferred basis plus recognized gain, subject to liability and built-in-loss limitations.
- Ordinary assumed liabilities can reduce stock basis without boot treatment; liabilities exceeding aggregate included basis can trigger gain.
- Nonliquidating property distributions recognize corporate appreciation but generally disallow corporate loss; liabilities can establish a gain floor.
Exam shortcut
Read the resolution first. Identify a contribution, an ordinary distribution, a completed liquidation or a loan before selecting any formula. Write FMV, adjusted basis and liabilities separately for each asset. Keep corporate property basis, shareholder stock basis and received-property basis on different lines. For dividends, finish the corporate gain and related E&P adjustments before allocating current E&P across dated distributions. Track stock basis chronologically.
The full lesson (about 8,344 words, 56 min read) adds 14 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- II.A2
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