306 / If a close corporation redeems stock from a decedent’s estate, is the amount paid for the stock taxable as a constructive dividend to the surviving stockholder or stockholders?
No.
A surviving stockholder will not be treated as having received a constructive dividend merely because the percentage of interest in a corporation is increased by a redemption.1 A redemption may result in a constructive dividend to a survivor if the survivor had an obligation to purchase the stock, for example, under a cross-purchase agreement, and redemption by the corporation satisfies that personal obligation.2
A survivor does not realize taxable income from a redemption unless his or her obligation to purchase stock was primary and unconditional. Thus, there is no constructive dividend if a survivor has assigned his or her obligation to the corporation before conditions for performance of the contract arose, if the buyout contract contained a provision permitting the stockholder to call on the corporation to buy the stock, or if the survivor could have elected not to buy the stock.3
1. Holsey v. Commissioner, 258 F.2d 865 (3d Cir. 1958); Rev. Rul. 58-614, 1958-2 CB 920; Rev. Rul. 59-286, 1959-2 CB 103.