Rev. Rul. 74-178

Advice has been requested whether, under the circumstances described below, a decedent's estate realizes gain upon the transfer of appreciated property to satisfy a claim against the estate.

At the time of his death on February 1, 1973, the decedent owned 150 shares of common stock in a domestic corporation. These shares were acquired from the decedent by his estate and valued for Federal estate tax purposes at $70 per share, which was the fair market value of a share at the date of his death. On the Federal estate tax return filed on behalf of the decedent's estate, the executor did not elect the alternate valuation date prescribed by section 2032 of the Internal Revenue Code of 1954. An unrelated creditor of the decedent subsequently filed a claim against the estate for $8,000. The claim was based upon an indebtedness of $8,000 that the decedent owed the creditor at the date of his death. In an arm's-length transaction the executor of the estate transferred 100 shares of the stock to the creditor in satisfaction of the claim. The fair market value of a share at the time of the transfer was $80.

Section 1001(a) of the Code provides, in part, that the gain from the disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 1011 for determining gain.

Section 1011(a) of the Code provides, in part, that the adjusted basis for determining the gain from the disposition of property shall be the basis determined under the applicable provisions of the Code.

Section 1014(a) of the Code provides, generally, that the basis of property in the hands of a person acquiring the property from a decedent shall be the fair market value of the property at the date of the decedent's death or, where there is an appropriate election, at the alternate valuation dates as provided in section 2032.

Section 1.1014-2(a)(1) of the Income Tax Regulations provides, in part, that property acquired by the decedent's estate from the decedent is considered to have been acquired from a decedent.

Rev. Rul. 66-207, 1966-2 C.B. 243, holds, in part, that where an executor distributes appreciated property in partial satisfaction of a pecuniary legacy, the estate realizes gain to the extent of the difference between the amount of the bequest satisfied and the estate's basis in the property. That Revenue Ruling states that the effect of the distribution will be the same as if the executor sold the assets of the estate and distributed the proceeds.

In the instant case the fair market value of the shares of stock at the time such stock was transferred to the creditor is equal to the amount of the claim satisfied ($8,000). However, since the executor did not elect the alternate valuation date, the estate's basis in the shares transferred is the fair market value of the shares at the date of the decedent's death ($7,000). Accordingly, it is held that upon such transfer the estate realized a gain of $1,000, which is the excess of the amount of the claim satisfied by the transfer over the estate's basis in the shares. Had the estate's basis in the shares of stock transferred exceeded the amount of the claim satisfied, the estate would have sustained a loss deductible to the extent allowed in sections 1211 and 1212 of the Code.