Background:

Sergio entered into a contract on March 25 to sell real estate for $1 million.  The sale was subject to the condition that the property was rezoned from R-7 to CN-2.  The adjusted basis of the property was $200,000.  The purchaser placed $50,000 in escrow, which was refundable if the zoning was not accomplished by September 30.

Sergio continued working on the rezoning up until the day he died.  He died on September 6.  The rezoning was approved on September 17 and on September 19 the remainder of the purchase price, $950,000 was paid to his estate.

The fiduciary of Sergio’s estate is trying to work out whether the sale goes on the final return for Sergioor is included in the return for the estate and is seeking your advice as to when the sale occurred, why and the income tax and estate tax consequences. Did the sale occur before or after the death of Sergio?

A partial list of aids to help you with your research

§§691 and 1014

George W. Keck, 49 T.C. 313 (1968), rev’d 69-2 USTC ¶9626, 24 AFTR 2d 69-5554, 415 F.2d 531 (CA-6, 1969)

Trust Company of Georgia v. Ross, 68-1 USTC ¶9133, 21 AFTR 2d 311, 392 F.2d 694 (CA-5. 1967)

Your responsibility:

Prepare a tax research memo addressing the question that has been raised.

You will need to support your conclusion using primary sources of tax law.  Your textbook is NOT primary authority Nor are IRS Publications.

On 25th March, there is Tax exemption of $5,250,000. The selling price of the property, in this case, is $1,000,000.00. As per the case, there are no assets that have been stated for the deceased. Therefore, the amount of the estate is below the exemption limit hence nil estate tax. Similarly, the lifetime gift tax is nil as the amount is below $11.58 Million (Geier, 2020). Therefore, the estate tax is payable after Sergio's death and not before, but it's still not payable as it's below the exemption limit of $11.7 Million.

Sergio’s Tax basis in $200,000 on the property

Sergio enters into a contract to sell a property worth $1Million, but he, unfortunately, dies before the selling process is complete. Since the property's basis is stepped up to its fair market value on the date of Sergio's death, the fair market value in the hands of Sergio's successors is 1 million, and it is sold for 1 million, there are no capital gains. If the sale had occurred before Sergio's death, he would have paid a capital gains tax on $800,000.00.

The deal was conditional on the rezoning of the property for commercial use. The approval of the rezoning application was done on 30^th September, meaning the sale was completed on 30th September. Had the zoning not been approved on 30th September, the initial amount of $50,000 put in the escrow account would have been refunded, and the sale would not take place as per the contract. In this regard, the sale occurred on 30th September, after Sergio's death on 6th September.

MEMORANDUM

Subject: Sergio’s Sale Contract Memo

On 25th March, there is Tax exemption of $5,250,000. The selling price of the property, in this case, is $1,000,000.00. As per the case, there are no assets that have been stated for the deceased. Therefore, the amount of the estate is below the exemption limit hence nil estate tax. Similarly, the lifetime gift tax is nil as the amount is below $11.58 Million Burnet v. Guggenheim, supra, 288 U.S. page 286, 53 S.Ct. page 371, 77 L.Ed. 748. Therefore, the estate tax is payable after Sergio's death and not before, but it's still not payable as it's below the exemption limit of $11.7 Million.

Sergio’s Tax basis in $200,000 on the property

Sergio enters into a contract to sell a property worth $1Million, but he, unfortunately, dies before the selling process is complete. Since the property's basis is stepped up to its fair market value on the date of Sergio's death, the fair market value in the hands of Sergio's successors is 1 million, and it is sold for 1 million, there are no capital gains. If the sale had occurred before Sergio's death, he would have paid a capital gains tax on $800,000.00.

The deal was conditional on the rezoning of the property for commercial use. The approval of the rezoning application was done on 30^th September, meaning the sale was completed on 30th September. Had the zoning not been approved on 30th September, the initial amount of $50,000 put in the escrow account would have been refunded, and the sale would not take place as per the contract. In this regard, the sale occurred on 30th September, after Sergio's death on 6th September.

Analysis

308 U.S. 39

60 S. Ct. 51

84 L. Ed. 20

375 U.S. 118

84 S.Ct. 248

Conclusion

Based on the information provided, the sale occurred on 30th September, after Sergio's death on 6^th September.