Question 1. The adjusted gross estate of Keith, decedent, is $12 millio

1. 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 one­half 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 correctstatement regarding the tax consequences of this redemption?

a. The estate will have a basis of $2.3 million in the property received from Gold Corporation in redemption of the estate’s stock.

b. Gold Corporation will not reduce its E & P as a result of the distribution of the property to Keith’s estate.

c. The estate will recognize a $1.4 million long-term capital gain on the redemption.

d. Gold Corporation recognizes no gain (or loss) on the distribution of the property to Keith’s estate.

e. None of the above.

2. The adjusted gross estate of Debra, decedent, is $8 million. Debra’s estate will incur death taxes and funeral and administration expenses of $1 million. Debra’s gross estate includes stock in Silver Corporation that she had purchased twelve years ago for $600,000 (date of death fair market value of $3 million). At the time of her death, Debra owned 80% of the stock in Silver Corporation. Silver Corporation (E & P of $4 million) redeems all of the estate’s stock in the corporation for $3 million. Debra’s will names her daughter, Dena, who owns the remaining 20% interest in Silver Corporation, as her sole heir. With respect to this redemption, Debra’s estate has the following income:

a. $0.

b. $2.4 million long-term capital gain.

c. $2 million dividend.

d. $3 million dividend.

e. None of the above.

3. Which of the following is a correctstatement regarding a redemption to pay death taxes under § 303?

a. An estate recognizes gain on the redemption equal to the excess of the distribution proceeds over the decedent’s basis in the stock.

b. The § 318 stock attribution rules do not apply to the redemption.

c. The value of the stock in the decedent’s gross estate must exceed 40% of the value of the adjusted gross estate.

d. A corporation recognizes gains and losses on the distribution of property in the redemption.

e. None of the above.

4. Copper Corporation (E & P of $1.2 million) distributes land (basis of $410,000, fair market value of $650,000) to Lauren, a shareholder, to carry out a qualifying stock redemption. Lauren had a basis of $90,000 in the shares redeemed. Which of the following is an incorrectstatement regarding the redemption?

a. If the land is distributed subject to a $500,000 liability, Copper Corporation will recognize a gain of $240,000.

b. If the land is distributed subject to a $500,000 liability, Lauren will have a basis in the land of $650,000.

c. If the land is distributed subject to a $500,000 liability, Lauren will recognize a gain of $60,000.

d. If the land is distributed subject to a $700,000 liability, Copper Corporation will recognize a gain of $290,000.

e. None of the above.

5. To carry out a qualifying stock redemption, Turaco Corporation (E & P of $800,000) transfers land held for investment purposes to Aida, a shareholder. The land had a basis of $250,000, a fair market value of $400,000, and is subject to a $300,000 liability. Aida has a basis of $70,000 in the shares redeemed. Which of the following is a correctstatement regarding the tax consequences of this redemption?

a. Aida will have $400,000 of dividend income.

b. Aida will have a $100,000 basis in the land.

c. Turaco Corporation will recognize a gain of $50,000.

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