Example: The decedent creates a trust during his lifetime to pay the income to A for life, remainder to B or his estate. The trust instrument further provides that if the decedent shall survive A, the income shall be paid to the decedent for life. The decedent predeceases A, so that, due to the operation of the estate tax, only the present value of the remainder interest is included in the decedent's gross estate. The trust consists of 100 shares of the stock of X corporation (which is a DISC at the time the shares are transferred to the trust and at the time of the decedent's death) with an adjusted basis immediately prior to the decedent's death of $10,000 (as determined under section 1015). At the time of the decedent's death the value of the stock is $20,000, and the value of the remainder interest in the hands of B is $8,000. Applying the principles of paragraph (b)(3)(i) of § 1.1014-6 , the uniform basis of the entire property following the decedent's death, prior to reduction pursuant to this paragraph, is $14,000. The amount of reduction which would have been determined under paragraph (a) of this section if the entire property consisting of such stock of X corporation were included in the decedent's gross estate is $5,000. The uniform basis of the entire property following the decedent's death, as reduced pursuant to this paragraph, is $12,000, computed as follows:
Uniform basis under section 1014(a), prior to reduction pursuant to this paragraph | $14,000 |
Less decrease in uniform basis (determined by the following formula) | 2,000 |
[Reduction in uniform basis (to be determined)/ $5,000 (amount of reduction if paragraph (a) applied)] = | |
[$8,000 (value of property included in gross estate/$20,000 (value of entire property)] | |
Uniform basis under section 1014(a) reduced pursuant to this paragraph | 12,000 |
(1) Fair market value of DISC stock at alternate valuation date | $140 |
(2) Less: Amount which would have been treated as a dividend under section 995(c) | 50 |
(3) Basis of person who acquires DISC stock | 90 |
If a distribution of $20 attributable to such previously taxed income had been made by the DISC on or before the alternate valuation date (with the DISC stock having a fair market value of $120 after such distribution), the basis of the person who acquires such stock will be $70 determined as follows:
(1) Fair market value of DISC stock at alternate valuation date | $120 |
(2) Less: Amount which would have been treated as a dividend under section 995(c) | 50 |
(3) Basis of person who acquires DISC stock | 70 |
26 C.F.R. §1.1014-9