Rules: There is no gain or loss to the corporation issuing stock in exchange for property for the issuance of stock. The general rule is that the basis of the property received from the transferor/shareholder is the greater of: (1) adjusted net book value of the transferor/shareholder plus any gain recognized by the transferor/shareholder or (2) debt assumed by the corporation. A shareholder recognizes gain when at least 80% of the voting stock is not owned by the shareholders immediately after the transaction and there is no taxable boot (cash is withdrawn or cancellation of debt exists) on the transaction.

Choice "b" is correct. The general rule is that the basis of the property received from the transferor/shareholder is the greater of: (1) adjusted net book value of the transferor/shareholder plus any gain recognized by the transferor/shareholder or (2) debt assumed by the corporation. Applying the information in the fact pattern and the above rules, there is no "shareholder gain" on this transaction. Further, there is no indication of any debt being assumed by the corporation. Thus, Homerun's basis in the contributed bats and balls is $5,500 [$500 for the baseballs plus $5,000 for the bats], which is the adjusted net book value of the transferors.

Choice "c" is incorrect. Homerun's basis in the contributed bats and balls is $5,500 [$500 for the baseballs plus $5,000 for the bats], which is the adjusted net book value of the transferors.

Choice "d" is incorrect. This answer option incorrectly adds the fair market value of the baseballs ($1,000) to the basis of the bats ($5,000). Homerun's basis in the contributed bats and balls is $5,500 [$500 for the baseballs plus $5,000 for the bats], which is the adjusted net book value of the transferors.

Choice "a" is incorrect. This answer option incorrectly adds the fair market value of the baseballs ($1,000) to the fair market value of the bats ($7,000). Homerun's basis in the contributed bats and balls is $5,500 [$500 for the baseballs plus $5,000 for the bats], which is the adjusted net book value of the transferors.