305 / Does redemption under an insurance-funded stock redemption agreement result in capital gain to a deceased stockholder’s estate?

No. An estate typically realizes no capital gain as a result of a redemption. Where a redemption is a capital transaction ( Q 300 to Q 303), an estate has no tax liability unless the price paid by the corporation exceeds the new tax basis of the stock redeemed.

When a stockholder dies, his or her stock receives a new basis equal to its fair market value at date of death or at an alternate valuation date.¹

As sale price under a proper stock redemption agreement generally is accepted as the fair market value of shares ( Q 322), the sale price should equal the estate’s basis and no gain or loss should be realized by an estate.

For decedents dying in 2010, modified carryover basis rules in IRC Section 1022 may apply, so stock may not receive a full basis step-up.