The gross estate of Katheryn,decedent,includes stock in Yellow Corporation and Violet Corporation valued at $500,000 and $600,000,respectively.Katheryn's adjusted gross estate is $3 million.She owned 22% of the Yellow stock and 27% of the Violet stock.Immediate members of Katheryn's family own the remaining shares of both Yellow and Violet.Those individuals are also the sole beneficiaries of Katheryn's estate.Death taxes and funeral and administration expenses for Katheryn's estate are $500,000.Katheryn had a basis of $230,000 in the Yellow stock and $310,000 in the Violet stock.Yellow Corporation (E & P of $800,000)distributed land worth $500,000 (basis of $420,000)to Katheryn's estate in redemption of all of the Yellow stock.Which of the following is a correct statement regarding the tax consequences of this redemption?

Question

Quizplus · Accepted Answer

Yellow Corporation recognizes gain of $80,000 [$500,000 (fair market value)- $420,000 (land basis)] on the distribution of the land.Since there is included in Katheryn's gross estate a 20% or more interest in two or more stocks,the 35% test is applied by combining the values of the Yellow and Violet stocks.Section 303,therefore,applies to the redemption [($500,000 + $600,000)F1F1F1S1F1F1F10 $3,000,000 = 36.7%],and sale or exchange treatment results.The amount received in redemption of the Yellow stock equals the estate's basis in the stock (date of death value); thus,no gain or loss is recognized by the estate on the redemption.

The Gross Estate of Katheryn,decedent,includes Stock in Yellow Corporation and Violet