REG Study Group – Q1 2018 - Page 8

@lentilcounter

I think I am following, but want to make sure.

Hall was bequeathed 500 shares of common stock under his father’s will. Hall’s father had paid $2,500 for the stock 10 years ago. Fair market value of the stock on February 1, Year 1, the date of his father’s death, was $4,000 and had increased to $5,500 six months later. The executor of the estate elected the alternate valuation date for estate tax purposes. Hall sold the stock for $4,500 on June 1, Year 1, the date that the executor distributed the stock to him. How much income should Hall include in his individual income tax return for the inheritance of the 500 shares of stock that he received from his father’s estate?

A – 5,500
B – 4,000
C – 2,500
D – 0

I realize Hall would pay no tax on the actual inheritance, but what would his basis be in the stock received?

Would it be the FMV at the date of death of $4,000, because the FMV at the date of distribution was higher($4,500) and thus the alternate valuation would not be allowed? So would there be a capital gain on the sale of the stock?

Or is the value at date of distribution ALWAYS used when the alternate valuation date is chosen, even if it is higher than at the date of death?

@chitown87

If the alternate value is chosen and the property is disposed of before the 6-month period has expired, that property is valued at the fair market value at the date when it is sold (sale price). Since Hall sold the stock before the 6-month period ended, his basis equals his sale price, and no gain or loss exists.

This is one of those exception rules that you have to memorize. Usually, the inherited property is valued at the FMV on the date of the death of decedent. The other option is 6 months after after the date of the death if that election has been taken. The holding period is usually long-term. Hope this helps.

@reckedracing and @lentil counter

I had a longer post that also seems to have disappeared, but here's the short version:

If the AVD is chosen, AND the property is distributed before 6 months, AND the FMV at the date of distribution is higher than the FMV at the date of death, which value is used as the basis?

Thank you both!

I feel like Gleim covered basis in depth.
My books are at the office and I'm “working” from home ie: studying today due to snow in northeast.
I'll check the books and let you know tomorrow.

Both of your answers match my understanding as well. My confusion came from the below question:

Natalie inherited land from her Uncle Josh, who died January 3, Year 4. The basis to Josh was $1,000,000 and the value on January 3, Year 4, was $7,200,000. On July 3, Year 4, the value was $7,600,000. When the land was distributed to Natalie on June 3, Year 4, the value was $7,400,000. This land was Josh's entire estate. Natalie's basis for the estate is:

A – 1,000,000
B – 7,200,000
C – 7,400,000
D – 7,600,000

Surgent's explanation is this: “In order to select the alternate valuation date of July 3, the valuation must be lower, resulting in reduced estate tax liability. Since the market value has risen, the value at time of death ($7,200,000) must be selected.”

Sorry for all the questions. I've probably only managed to confuse myself when I already had a pretty solid understanding haha.

OK, I'm with you so far.

So going back to a question I posted earlier, “Hall was bequeathed 500 shares of common stock under his father’s will. Hall’s father had paid $2,500 for the stock 10 years ago. Fair market value of the stock on February 1, Year 1, the date of his father’s death, was $4,000 and had increased to $5,500 six months later. The executor of the estate elected the alternate valuation date for estate tax purposes. Hall sold the stock for $4,500 on June 1, Year 1, the date that the executor distributed the stock to him. How much income should Hall include in his individual income tax return for the inheritance of the 500 shares of stock that he received from his father’s estate?”

If the question simply asked what Hall's basis in the inherited shares would be, would the answer be $4,000 because the value at the date of distribution (4,500) would be to his advantage as well?

So you're saying Hall's basis would be $4,500? I'm very confused.

I realize it's a very specific question and may not come up at all on the exam tomorrow.

Specific filing dates for returns…safe to ignore them? I could've sworn I read somewhere in Roger's material that they aren't being tested anymore, but now I can't find where it said that…