In this discussion thread, we are discussing the effect of timing on tax consequences associated with a sale of appreciated property. This sale was on June 1st when Andrew entered into a contract to sell his real estate for $2 million. This thread will be discussing the estate and income tax consequences of the two scenarios. First, we need the definition of appreciated property as it is a major component of this thread. Internal Revenue Code (n.d.-a) states, “The term “appreciated property” means any property if the fair market value of such property on the day it was transferred to the decedent by gift exceeds its adjusted basis.”
The first and second scenario is the estate and income tax consequences after Andrew’s death and before Andrew’s death. If we assume that the sale happened after Andrew’s death, then the $2 million in real estate that was sold would be included in Andrew’s gross estate value. We can see this would be the case as in the George W. and Mary Ann Keck v. Commissioner, Mary Ann Keck, Transferee of the Estate of Arthur D. Shaw, Deceased v. Commissioner case in 1968 they looked at the Internal Revenue Code Section 691. The Internal Revenue Code (n.d.-b) states, The amount of all items of gross income in respect of a decedent which are not properly includible in respect of the taxable period in which falls the date of his death or a prior period (including the amount of all items of gross income in respect of a prior decedent, if the right to receive such amount was acquired by reason of the death of the prior decedent or by bequest, devise, or inheritance from the prior decedent) shall be included in the gross income, for the taxable year when received, of: the estate of the decedent, if the right to receive the amount is acquired by the decedent’s estate from the decedent; the person who, by reason of the death of the decedent, acquires the right to receive the amount, if the right to receive the amount is not acquired by the decedent’s estate from the decedent; or the person who acquires from the decedent the right to receive the amount by bequest, devise, or inheritance, if the amount is received after a distribution by the decedent’s estate of such right.”
We can see that, like the Keck case, Andrew would likely fall under a similar ruling from what the tax court found. The tax court found that in the Keck case, “The proceeds received by petitioners in 1960 in exchange for their stock following the sale of the corporate assets are taxable to the recipients as income in respect of a decedent within the meaning of section 691” (George W. and Mary Ann Keck, Petitioners v. Commissioner of Internal Revenue, Respondent, 1968). The court also looked at the Internal Revenue Code Section 1014 (a), in which “Section 1014 (a) provides 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” (George W. and Mary Ann Keck, Petitioners v. Commissioner of Internal Revenue, Respondent, 1968). In doing research and using common knowledge, we can find that if the sale took place before Andrew’s death, then he would have capital gains over the $400,000 adjusted basis price. Another thing to consider and what I believe is that the sale did not legally go through because of a rezoning application. The application was approved on October 10, however, Andrew died on October 1st. I believe that Andrew and his estate should be taxed according to estate tax laws even though the sale was completed after Andrew’s death. We can see that in the Bible that taxes must be paid according to law. Romans 13:6-7 states, “For because of this you also pay taxes, for the authorities are ministers of God, attending to this very thing. Pay to all what is owed to them: taxes to whom taxes are owed, revenue to whom revenue is owed, respect to whom respect is owed, honor to whom honor is owed” (English Standard Version, 2016, Romans 13:6-7).