Basis will be 150 (carryover). It carries over because even though she transferred for a loss, Fred sold for a gain. Gain of 25k. Basis will be 120 (FMV). It was transferred with a built in loss and Fred sold for a loss. Using FMV will produce a loss so use it. Loss of 45. Basis will be 150 (carryover). Transferred with a built in loss. Using 120 (FMV) will not result in a loss so we don't use it. You can never use FMV to generate a gain. If we use 150k basis we have a 25k loss. Some of that loss is attributable to loss that was accrued on donor's watch. IRS made a special rule for this. IRS declines to allow TP to recognize the loss. Whenever donee sells property for an amount realized between FMV at date of gift and carryover basis, no loss allowed. Treas Reg 1.1015-1(a)(2).