DANRVAN

I have not had any practical experience, but that is about to change with new client last week.

To clarify, the alternate 6 month valuation is an election per section 2032 made with a timely filed form 706. In order to use the alternate valuation date, the value of the gross estate must have decreased since the date of death. Therefore an appraisal must also be made at DOD to determine if there is a decrease in value. The only practical purpose for the election is to decrease the amount of estate taxed owed. When the election is made, any assets disposed within 6 months of date of death are valued at date of disposition; all other assets are valued at 6 months from date of death. If the section 2032 valuation is used, then the basis for gain or loss is determined at six months from DOD.

But per the uniformity of basis rule 1.104-4 the basis to the estate passes to the heir.

Depending on how far out the sale was from DOD, I might get an opinion from realtor to see if there was a significant change in real estate market since DOD.

The proper way to correct this would be to file a 1040x. I would not count on that.

You can elect to use the alternative valuation at 6 months after date of death per section 2032 if the value of the assets has decreased since date of death; and if an estate tax return is filed. Section 2032(a)(1) allows the use of value on date of disposition if the asset is disposed within 6 month from date of death.

Inventory does not qualify for sect 453 and depreciation on equipment is subject to recapture in the year of sale. If equipment was fully depreciated then 150,000 for equipment and 50,000 for inventory would be recognized in the year of sale.

Looks like preparer has several things to explain......

Why would you need any more documentation if the note clearly states that $100,000 of the $500,000 principal is allocated to the covenant? Then clearly one-fifth of the payments are also allocated to the covenant. That article is not relevant to this situation. The allocation has already been made and there is no reason to question it.

Have him ask for the code section or authoritative source, or ask how section 453(b)(2) applies in his situation. Looks to me like $20,000 (1/5) would be reported in 2022.

That looks clear to me, as you stated in your 2nd post $100,000 was allocated in the contract. Look at sec 453(b)(2) which does not indicate the covenant is excluded from installment sale treatment. It is ordinary, see RR 69-643

That is correct for that situation.

Correct. Only distributions of taxable income. Trust takes income distribution deduction for same amount.

"or as allowed by the governing instrument"

Would also be eligible for accrual accounting election; and an initial short year that might result in better matching of income and expenses.

As long as it was a qualified revocable trust under sec 676.

Will the trust make distributions to a public charity as instructed by the governing instrument? If so, the they might be able to take a Charitable deduction for funds permanently set aside. Possibly a Private Foundation?

Please forgive my double negative error, that should have read "don't think the estate is entitled."

There would be a K-1 if taxable income was distributed.

I don't think so, unless there is some special rule for community property states.

Should be treated like the sell of any other business and recognize goodwill.

Off the top of my head, I am going to say probably not. First of all I don’t think it would be allowed since it was not spelled out in the will. Secondly, I don’t believe the retirement account would be included in the gross estate of the decedent. It should be excluded as a charitable deduction regardless of whether a 706 was filed. Therefore, if it was not part of the estate, I don't think the estate is not entitled to take a deduction on 1041.

Does the K-1 show ordinary income or royalty income.

That does not sound the correct, I believe it should off set passive income, not ordinary income. Is this a new client for you?

Should be line 20-T on the K-1 input sheet.