Question

The adjusted gross estate of Keith, decedent, is $24 million. Included in the gross estate is stock in Gold Corporation (E & P of $2.6 million), a closely held corporation, valued at $9.2 million as of the date of Keith's death. Keith had acquired the stock twelve years ago at a cost of $1.8 million. Death taxes and funeral and administration expenses for Keith's estate are $4.6 million. Gold Corporation redeems one-half of the stock from Keith's estate in a § 303 redemption to pay death taxes using property with a fair market value of $4.6 million (adjusted basis of $3.8 million). Which of the following is a correct statement regarding the tax consequences of this redemption?

a.Gold Corporation recognizes no gain (or loss) on the distribution of the property to Keith's estate.

b.Gold Corporation will not reduce its E & P as a result of the distribution of the property to Keith's estate.

c.The estate will recognize a $2.8 million long-term capital gain on the redemption.

d.The estate will have a basis of $4.6 million in the property received from Gold Corporation in redemption of the estate's stock.

e.None of these choices are correct.

Answer 1

Answer :

d.The estate will have a basis of $ 4.6 million in the property received from Gold Corporation in redemption of the estate's stock.

The basis of the stock redeemed will be $ 4.6 million and the estate will not recognize any gain on this redemption.

Gold Corporation will recognize a gain of $ 0.8 (fair market value - adjusted basis = $4.6 - $3.8 = $ 0.8) million on distribution of appreciated property to redeem the estate's stock. Also, as a result of the property distribution Gold Corporation's E & P will reduce.

Answer 2

The correct statement regarding the tax consequences of this redemption is:

c. The estate will recognize a $2.8 million long-term capital gain on the redemption.

Explanation: In a § 303 redemption, when a closely held corporation redeems stock from a decedent's estate to pay death taxes, there are potential tax consequences for both the corporation and the estate.

In this case, Gold Corporation redeems half of the stock from Keith's estate to pay death taxes using property with a fair market value of $4.6 million and an adjusted basis of $3.8 million. The adjusted gross estate of Keith is $24 million, and death taxes and expenses are $4.6 million.

To calculate the capital gain recognized by the estate on the redemption, we need to determine the excess of the property's fair market value over the adjusted basis:

Capital Gain = Fair Market Value - Adjusted Basis Capital Gain = $4.6 million - $3.8 million Capital Gain = $0.8 million

However, the gain recognized on a § 303 redemption is limited to the greater of the property's adjusted basis or the estate tax paid reduced by the expenses incurred to produce income. In this case:

Gain Recognized = Maximum (Adjusted Basis, Estate Tax Paid - Expenses) Gain Recognized = Maximum ($3.8 million, $4.6 million - $4.6 million) Gain Recognized = Maximum ($3.8 million, $0 million) Gain Recognized = $3.8 million

Since the gain recognized is $3.8 million, the estate will recognize a long-term capital gain of $3.8 million on the redemption. Therefore, option c is the correct statement.