Carolina has died and has opted to leave her closely held stock to a charity. The corporation wishes to buy the stock to gain increase power in decisions. The charity has agreed to take the cash. How will the proceeds be treated on the side of the corporation?

Question

Quizplus · Accepted Answer

In general, when a closely held corporations buy back stock form its shareholder, the proceeds must be treated as dividends income unless it falls under Section 303. If an estate qualifies for Section 303, the proceeds received from the redemption are classified as capital gain, usually long-term; if an estate does not qualify for Section 303, the proceeds are treated as ordinary income. Under this rule, stock may be redeemed from an estate equal to the total amount of all estate taxes, inheritances taxes, estate administration costs, and funeral expenses. The owner's death steps up the adjusted basis in the stock, so there is little to no gain reported.

Carolina Has Died and Has Opted to Leave Her Closely