Question

The gross estate of Raul, decedent, includes stock in Iris Corporation (E & P of $8,000,000) valued at $6,000,000. At the time of his death, Raul owned 60% of the Iris stock outstanding and he had a basis of $840,000 in the stock. The death taxes and funeral and administration expenses related to Raul’s estate amount to $2,000,000, and the adjusted gross estate is $16,000,000. The remainder of the Iris stock is owned by Monica, Raul’s daughter and sole heir of his estate. What are the tax consequences to Raul’s estate if Iris Corporation distributes $6,000,000 to the estate in redemption of all of its stock in the corporation

Answer 1

A redemption to pay death taxes under Section 303 applies to the extent of the sum of the death taxes and funeral and administration expenses or $2,000,000. The estate's basis in the shares redeemed under Section 303 is $2,000,000 (stepped up basis), thus this portion of the redemption results in no gain and no loss to the estate. The remainder of the distribution ($4,000,000) must be tested under the qualifying stock redemption provisions of Section 302 for sale or exchange treatment. For purposes of Section 302, the stock attribution rules of Section 318 apply and the shares owned by Monica, the estate's sole beneficiary are deemed to be owned by estate. As such, the estate owns (directly and indirectly) 100% of the Iris Corporation stock after the redemption and none of the Section 302 are satisfied. $4,000,000 therefore is treated as a dividend distribution to the estate. The estate's basis in the shares not qualifying for sale or exchange treatment ($4,000,000 stepped up basis) attaches to the basis of Monica's shares in Iris Corporation.