Inherited C-Corporation: Stock Step-Up & Double-Tax Risk

You've inherited C-corp stock that gets a full basis step-up, but the corporation's assets do not. Managing the double-taxation risk and deciding whether to keep or sell is crucial.

Double taxation structure persists. The corporation pays tax on its profits, and you pay tax again on dividends or liquidation proceeds. Your stepped-up stock basis under IRC 1014 helps reduce gain when you eventually sell or liquidate your shares, but it does nothing to reduce the corporate-level tax on business income.

No asset step-up without an election. Unlike your stock basis, the corporation's internal asset basis does not change when you inherit shares. To get an inside-asset step-up, the corporation would need to make a Section 338(h)(10) election in connection with a qualifying stock purchase -- a narrow and rarely available option outside of a sale context.

Accumulated earnings exposure. If the C corp has been retaining profits instead of distributing them, the accumulated earnings tax under IRC 531 may apply. Additionally, large accumulated earnings and profits (E&P) mean that future distributions are taxed as dividends rather than return of capital.

The tradeoff: C corp stock is simple to inherit (no eligibility restrictions, no entity-level elections), but the double taxation structure makes it the most expensive entity type to operate or liquidate after inheritance.