Question

The gross estate of Raul, decedent, includes stock in Iris Corporation (E & P of $6 million) valued at $5 million. 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 S2 n1 illion, and the adjusted gross estate is $14 million. The remainder of the Iris stock is O\Vned by Monica, Raul's daughter and sole heir of his estate. What are the tax consequences to Raul's estate if Ir is Corporation distributes $5 million to the estate in redemption of all of its stock in the corporation?

Answer 1

Given Information

Stock in Iris Corporation (E&P)	$6 million
Stock in Iris Corporation (Current Value)	$5 million
Raul Ownership in Iris Stock	60%
Basis in the stock	$840,000
Death Taxes and Funeral Expenses	$2.1 million
Adjusted Gross Estate	$14 million

Assumption

In the given question, “The death taxes and funeral and administration expenses related to Raul's estate amount to S2 n1 illion” is read as “The death taxes and funeral and administration expenses related to Raul's estate amount to $2.1 million”

Solution

In the given case, the value of the Iris Corporation stock in Raul's gross estate exceeds 35% of the value of the adjusted gross estate ($5 million ÷ $14 million); thus, the transaction qualifies under IRC §303 for sale or exchange treatment.

Net amount after death taxes and funeral expenses will be $2.9 million (i.e, $5 million - $2.1 million)

A redemption to pay death taxes applies to the extent of the sum of the death taxes and funeral and administrative expenses, or $2.1 million. The estate's basis in the shares redeemed under § 303 is $2.9 million (stepped-up basis), thus this portion of the redemption results in no gain or loss to the estate. The remainder of the distribution ($2.9 million) must be tested under the qualifying stock redemption provisions of § 302 for sale or exchange treatment.

For purposes of § 302, the stock attribution rules of § 318 apply and the shares owned by Monica, the estate's sole beneficiary, are deemed to be owned by the estate. As such, the estate owns (directly and indirectly) 100% of the Iris shares’ outstanding after the redemption and none of the § 302 provisions are satisfied.

The $2.9 million, therefore, is treated as a dividend distribution to the estate.