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