Seoyun and Nicole form Indigo Corporation with the following transfers: inventory from Seoyun (basis of $360,000 and fair market value of $400,000) and improved real estate from Nicole (basis of $320,000 and fair market value of $375,000). Nicole, an accountant, agrees to contribute her services (worth $25,000) in organizing Indigo. The corporation's stock is distributed equally to Seoyun and Nicole. As a result of these transfers:
A) Indigo can deduct $25,000 as a business expense.
B) Nicole has a recognized gain of $55,000 on the transfer of the real estate.
C) Indigo has a basis of $360,000 in the inventory.
D) Indigo has a basis of $375,000 in the real estate.
E) None of these.

Question

Quizplus · Accepted Answer

EIndigo Corporation's basis in the inventory transferred by Seoyun is equal to Seoyun's basis in the inventory ($360,000), not its fair market value, according to the rules governing contributions of property to a corporation in exchange for stock. The services provided by Nicole in organizing Indigo, valued at $25,000, do not result in a deductible business expense for Indigo because the IRS does not allow corporations to deduct the value of services contributed in exchange for stock. Instead, Nicole would be considered to have received stock for her services, and the value of those services would be income to Nicole. Nicole does not recognize a gain on the transfer of real estate unless she receives something in addition to stock, such as cash or relief from debt, which is not indicated in the scenario. Indigo's basis in the real estate would be Nicole's basis ($320,000), not its fair market value. Therefore, options A, B, and D are incorrect, making C correct because it accurately reflects how basis is transferred in these transactions, and E is also correct because it is a valid statement that none of the other options are correct.

Seoyun and Nicole Form Indigo Corporation with the Following Transfers