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

Any property not distributed, sold, exchanged, or otherwise disposed of within six months after a decedent’s death is valued as of the date six months after death. When shares of stock in the estate are sold at a discount between the date of death and the alternate valuation date, such sales and the number of shares sold cannot be taken into account in determining whether the shares remaining in the estate at the alternate valuation date are eligible for “blockage” valuation (see Q 919).⁷

Any property interest whose value is affected by mere lapse of time is valued as of the date of the decedent’s death. Despite this, an adjustment is made for any change in value during the six-month period (or during the period between death and distribution, sale, or exchange) which is not due to mere lapse of time.⁸ The phrase “affected by mere lapse of time” has no reference to obligations for the payment of money, whether or not interest bearing, the value of which changes with the passage of time.⁹

Proposed regulations would provide that the election to value property includable in the gross estate on the alternate valuation date applies only to the extent that the change in value is a result of market conditions.¹⁰

If the alternate valuation method is elected, it must be applied to all the property included in the gross estate, and cannot be applied to only a portion of the property.¹¹

The election to value property using the alternate valuation method must be made by the executor on the Form 706, and no later than one year after the due date (including extensions) for filing the estate tax return. The election is irrevocable, unless it is revoked no later than the due date (including extensions) for filing the estate tax return. If use of the alternate valuation method would not result in a decrease in both the value of the gross estate and the amount of estate tax and generation-skipping transfer tax on a filed return, a protective election can be made to use the alternate valuation method if it is later determined that such a decrease would occur. A request for an extension of time to make the election or protective election may be made if the estate tax return was filed no later than one year after the due date (including extensions) for filing the estate tax return but an election or protective election was not made on the return.¹²