Question

Ruth Ames died on January 10,2019. In filling the estate tax return her executor, Melvin Sims, elects the primary valuation date and amount ( fair market value on the death). On March 12. 2019 Melvin invests 30k of cash that Ruth had in her money market account in acquiring 1,000 shares of Orange Inc. ( $30 per share). On January 10,2019 , Orange was selling for $29 per share. The stock is distributed to a beneficiary Annette Rust on June 1 2019, when it is selling for $33.

Melvin wants you to determine the amount at which the orange shares should appear on the estate tax return and the amount of Annettes adjusted basis for the stock. Write a letter on Melvin in which you respond to his inquiry and prepare a memo for the Tax files.

Answer 1

Answer:

a.

CLIENT LETTER

Maloney, Raabe, Young, Nellen, & Hoffman, CPAs
5191 Natorp Boulevard
Mason, OH 45040

January 13, 2020

Mr. Melvin Sims
100 Center Lane
Miami, FL 33124

Dear Mr. Sims:
I am responding to your inquiry about the estate tax treatment and the related income tax basis treatment of $30,000 bequeathed to Annette Rust by Ruth Ames that you, as executor, invested in 1,000 shares of Orange prior to distribution to the beneficiary.

Ruth Ames died on January 10, 2019. Shares of Orange stock were purchased for $30,000 ($30 per share) by you on March 12, 2019, and distributed to Annette Rust on June 1, 2019, when the fair market value was $33 per share ($33,000).

Because you elected the primary valuation date for Ruth’s estate, the assets are valued at the fair market value on January 10, 2019. The cash of $30,000 used to purchase the Orange stock is included in Ruth’s gross estate rather than the Orange shares that were not owned on that date. The basis of the Orange stock to Annette Rust is the purchase price of $30 per share.

If I can be of further assistance, please let me know.

Sincerely,
Betty Cortez, CPA

b.

TAX FILE MEMORANDUM
DATE: January 10, 2020
FROM: Betty Cortez

SUBJECT: Valuation in Ruth Ames Estate of Property Bequeathed to Annette Rust

Ruth Ames died on January 10, 2019. The executor, Melvin Sims, elected the primary valuation date for the estate. Cash of $30,000 was bequeathed to Annette Rust. The executor purchased on March 12, 2019, 1,000 shares of Orange, Inc. stock with the $30,000 from Ruth Ames’s money market account. The shares were distributed to Annette Rust on June 1, 2019, when the fair market value was $33 per share ($33,000).

Under § 2031(a), property is included in the gross estate based on the fair market value at the date of the decedent’s death (primary valuation date and amount). Section 2032(a) provides for the alternate valuation date and amount (i.e., the fair market value six months after the date of the decedent’s death). Because the executor did not elect the alternate valuation date and amount, the primary valuation date (January 10, 2019) and amount are used.

Section 1014(a) provides that a beneficiary will assign a basis to inherited property based on the fair market value at the date of the decedent’s death unless the executor of the estate elects the alternate valuation date and amount. Because the executor did not make the alternate valuation election for Ruth’s estate, the fair market value on January 10, 2019, should be used.

Based on the previous analysis, it appears that the cash of $30,000, rather than the Orange stock, should be included in Ruth’s gross estate. Because the stock was purchased by the executor, rather than being acquired by Ruth, it was not owned by Ruth on January 10, 2019. Regulation § 1.1014–3(c) clarifies this point by specifying that the $30 per share purchase price is the appropriate amount for Annette Rust’s basis.