LO.8, 9 The gross estate of Raul, decedent, includes stock in Iris Corporation (E & P of $8,000,000) valued at $6,000,000. 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 $2,000,000, and the adjusted gross estate is $16,000,000. The remainder of the Iris stock is owned by Monica, Raul’s daughter and sole heir of his estate. What are the tax consequences to Raul’s estate if Iris Corporation distributes $6,000,000 to the estate in redemption of all of its stock in the corporation?

Explanation:

In the sum of death taxes and funeral and related costs, a refund in compliance with § 303 applies at $6 million. That part of the refund resulted in no profits or damages to the company, which is the basis for shares redempted under § 303 of the Act of $6 million (stufted-up).  

Within the terms of Section 302 for the selling or swap service, the balance of the allocation ($1 million) must be checked. For the purposes of Section 302, there shall be rules of assignment of the stock under Section 318, and shares owned by Denise, the sole beneficiary of the estate, shall be considered to have belonged to that estate.

The estate then has 100% of the shares in Orange which remain after the redemption (directly and indirectly) and no provisions under § 302 are complied with. Consequently, $1 million is known as a dividend payout. The property's basis of the shares not available for sale or exchange (USD 1 million stepped-up) is focused on Denise's shares of Orange Corporation

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