The adjusted gross estate of Howard Stark, decedent, is $12 million. Included in

Question

The adjusted gross estate of Howard Stark, decedent, is $12 million. Included in the gross estate is all of the stock in Stark Munitions, Inc. (E & P of $1.3 million prior to the redemption), valued at $4.6 million as of the date of Howard’s death. Howard had acquired the stock twelve years ago at a cost of $900,000. Estate taxes, funeral and administration expenses for Howard’s estate are $2.3 million. Stark Munitions redeems one-half of the stock from Howard’s estate with property [FMV: $2.3 million, basis: $1.9 million]. Which of the following is a correct statement regarding the tax consequences of this redemption?

a. The estate will have a basis of $1.9 million in the property received.

b. Stark Munitions will reduce its E & P by $850,000.

c. The estate will have a $1.3 million dividend.

d. The estate will have a $1,7 million dividend.

e. None of the above.

Explanation / Answer

answer is a. The estate will have a basis of $1.9 million in the property received.

It is clearly stated in the question that the adjusted basis of the property and will be used for the tax consequences

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