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.