Question

1. The gross estate of Juanita, decedent, includes stock in Soap Corporation (E&P of $3,000,000) valued at $2,500,000. At the time of his death, Juanita owned 60% of the Soap stock outstanding, and she had an adjusted basis of $420,000 in the stock. The death taxes and funeral and administrative expenses related to Juanita’s estate amount to $1,000,000 and the adjusted gross estate is $7,000,000. The remainder of the Soap stock is owned by Merry, Juanita’s daughter and sole heir of her estate. What are the tax consequences to Juanita’s estate if Soap Corporation distributes $2,500,000 to the estate in redemption of all of its stock in the corporation?

Answer 1

	Juanita
Owned	60% of Soap corporation stock o/s
Stock of	$3000000
Valued at	$2500000
Adjusted basis	$420000
Expenses	$1000000
Adjusted gross estate	$7000000
Merry owns	40% of soap corporation
tax consequences to Juanita’s estate if Soap Corporation distributes $2,500,000 to the estate in redemption of all of its stock in the corporation
The percentage of stock of soap corporation held in adjusted gross estate of Juanita	$2500000/$7000000
Also merry owns the balance interest in the soap corporation
Since 35% of the gross estate of Juanita consists stock owned of the company so all the stocks to be redeemed and the transaction would be considered as capital instead of an ordinary income and the proceeds from the transaction will be utilised for payment of expenses as per section 303.
Now in this case merry would be the step- up for the estate, there would be no tax on this portion of redemption. The redemption which is in excess of expenses as per section 303 will not be quality for sale or exchange which is ($2.50 M - $ 1M) = $ 1.50 M
Merry will be owning 100% of the ownership in the company
As none of the stock redemption provisions are complied of excess redemption.
Therefore, the estate will have $ 1.50 million of dividend income.
This income would be taxable from the estate of Juinata