S Corp Files—The Case To Find A Post-Death Inside Basis Step Up

When you learn that a decedent held an interest in an S corporation that owns real estate, it is not uncommon to hear an audible groan in the room, a collective lamenting of the loss of the opportunity for a basis adjustment to the underlying real estate that would be easily available if we just had a partnership which owned the real estate instead of an S corporation.

While the S corporation wrapper serves to block an “inside” basis adjustment for assets owned by the S corporation at an owner's death, not all assets raise the same difficulties as real estate. For example, if the S corporation owned stock of a publicly traded company, there would be no “inside” basis adjustment for the securities on the decedent's death, just as is the case with real estate. However, with the IRC §1014 “outside” basis adjustment to the S corporation stock, the S corporation could liquidate, and offsetting capital gain and loss would be available to the shareholder, with the result