298 / Will sale of a deceased’s stock under a cross-purchase insurance-funded buy-sell agreement result in income tax liability to the deceased’s estate?

Normally, no taxable gain will result to a deceased’s estate if stock is sold to surviving individual shareholders at its full market value under a standard buy-sell agreement. At the stockholder’s death, the stockholder’s estate receives a new tax basis in the stockholder’s stock equal to its fair market value at the time of death or an alternate valuation date.¹ Because the sale price under a properly designed buy-sell agreement usually is accepted as the fair market value of the stock, the basis and sale price normally will be the same ( Q 322). Consequently, there should be no capital gain. Since individuals, rather than the corporation, purchase the stock, the payment cannot be regarded as a dividend ( Q 300). However, if the parties to the buy-sell agreement are related, additional caution should be taken to determine that the sale price under the buy-sell agreement is reasonable.

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1.     IRC § 1014.

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