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Qualified_Stock_redemption_Sec_303_solution - First does...

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TAX 5015 Qualified stock redemption – Sec 303: Distributions to pay death taxes Edward died owning 20% of the total Red Corporation shares outstanding (basis of $600,000), and the Red stock is included in his estate at its date of death value of $1 million. Edward’s adjusted gross estate is $2.5 million, and the death taxes and funeral and administrative expenses total $500,000. Red Corporation (E & P of $6 million) distributes land (fair value of $500,000, basis of $340,000) in redemption of one-half of the estate’s stock in the corporation. The estate sells the land five month later for $520,000. Required : What are the tax consequences to Red Corporation and to the estate as a result of the redemption and sale? Solution : On the date of death the basis in the Red Corporation stock is written up to $1 million (this is what makes Sec. 303 work).
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Unformatted text preview: First, does Sec 303 apply? Is the fair value of the stock > 35% gross estate? Yes, $1M/$2.5M = 40%. and Is the amount of stock redeemed <= qualifying expenditures? Yes, both are $500,000. Tax consequences to Red Corporation : Recognized gain $160,000 [$500,000 – $340,000] (“as if” the land is sold for fair value). Taxable income increases by $160,000. E &P is reduced by the lesser of: (1) the amount distributed $500,000; or (2) 10% of E & P $600,000 (a pro-rata share). E & P is reduced by $500,000. Tax consequences to Edward’s estate : Amount distributed $500,000 Less: basis in Red stock (500,000) [½ fair value on date of death] Recognized gain Five months later Selling price $520,000 Less: basis in land (500,000) [fair value on date of distribution] Recognized LTCG 20,000...
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