The adjusted gross estate of Keith,decedent,is $12 million.Included in the gross estate is stock in Gold Corporation (E & P of $1.3 million),a closely held corporation,valued at $4.6 million as of the date of Keith's death.Keith had acquired the stock twelve years ago at a cost of $900,000.Death taxes and funeral and administration expenses for Keith's estate are $2.3 million.Gold Corporation redeems one-half of the stock from Keith's estate in a § 303 redemption to pay death taxes using property with a fair market value of $2.3 million (adjusted basis of $1.9 million).Which of the following is a correct statement regarding the tax consequences of this redemption?

Question

Quizplus · Accepted Answer

In a § 303 redemption, the stock redeemed is treated as if it were sold to the corporation in exchange for property. The basis of the property received is the fair market value of the property, in this case $2.3 million. Therefore, the estate will have a basis of $2.3 million in the property received from Gold Corporation in redemption of the estate's stock. Option B is incorrect because Gold Corporation's E & P will be reduced by the fair market value of the property distributed to the estate in the redemption. Option C is incorrect because the estate does not recognize any gain or loss on the redemption. Option D is incorrect because Gold Corporation recognizes a reduction in its E & P by the fair market value of the property distributed to the estate in the redemption.

The Adjusted Gross Estate of Keith,decedent,is $12 Million