917 / How does the executor’s election of the alternate valuation method affect the valuation of property for federal estate tax purposes?

Any property distributed, sold, exchanged or otherwise disposed of within six months after decedent’s death is valued as of the date of such distribution, sale, exchange, or other disposition. The phrase “distributed, sold, exchanged, or otherwise disposed of” includes all possible ways by which property ceases to form a part of the gross estate. For example, money on hand at the date of the decedent’s death which is thereafter used in the payment of funeral expenses, or which is thereafter invested, falls within the term “otherwise disposed of.” The term also includes the surrender of a stock certificate for corporate assets in complete or partial liquidation of a corporation pursuant to IRC Section 331. The term does not, however, extend to transactions which are mere changes in form. Thus, it does not include a transfer of assets to a corporation controlled by the transferor in exchange for its stock in a transaction with respect to which no gain or loss would be recognized for income tax purposes under IRC Section 351. Nor does it include an exchange of stock or securities in a corporation for stock or securities in the same corporation or another corporation in a transaction, such as a merger, recapitalization, reorganization, or other transaction described in IRC Section 368(a) or IRC Section 355, with respect to which no gain or loss is recognizable for income tax purposes under IRC Section 354 or IRC Section 355.²

In Estate of Smith v. Commissioner,³ the decedent’s stock in X corporation was exchanged for stock and warrants in Y corporation pursuant to a plan of merger. The court held that the warrants were received in exchange for the estate’s stock in X and were to be valued as of the date of the merger. The Commissioner conceded that the transaction should not be treated as an “exchange” with respect to the receipt of stock in Y, and that even though the value of the Y stock had declined substantially between the decedent’s date of death and the alternate valuation date, the stock should be valued as of the alternate valuation date. The court’s decision, however, was limited to the controverted issue as to the proper valuation date of the warrants. Apparently, the IRS soon changed its mind. In Revenue Ruling 77-221,⁴ on substantially similar facts, the Service concluded that the exchange of X stock for Y stock and warrants constitutes an “exchange” and held that the X stock given in exchange was to be valued as of the date of the exchange.

If the property is listed stock and is sold in an arm’s length transaction, the stock is valued at the actual selling price.⁵ An exercise of stock rights is a “disposition” thereof; their value is equal to the excess, if any, of the fair market value of the stock acquired by such rights at the time the rights are exercised over the subscription price.⁶