Can you get stepped up basis on Installment debt?

[BulldogTom]

Taxpayers are H&W.  Several years ago, they sold the stock of their company to a related party on an installment agreement.  Very low basis in the stock.  95% GP% on the payments they are still receiving.

Spouse passed away this summer.  Is there any way to step up the basis on the payments being made on the installment agreement.  I think I remember something about a special rule for installment sales, but I can't seem to track it down.

TIA

Tom
Newark, CA

[jklcpa]

From pub 537 -

Transfer due to death.   The transfer of an installment obligation (other than to a buyer) as a result of the death of the seller is not a disposition. Any unreported gain from the installment obligation is not treated as gross income to the decedent. No income is reported on the decedent's return due to the transfer. Whoever receives the installment obligation as a result of the seller's death is taxed on the installment payments the same as the seller would have been had the seller lived to receive the payments.

However, if an installment obligation is canceled, becomes unenforceable, or is transferred to the buyer because of the death of the holder of the obligation, it is a disposition. The estate must figure its gain or loss on the disposition. If the holder and the buyer were related, the FMV of the installment obligation is considered to be no less than its full face value.

[jklcpa]

Tom, there is no step-up, and no recalculation of the GP % or other figures used to report the installment sale.  The recipient "steps into the shoes" of the decedent and continues to report the installment sale in the same manner. 

[BulldogTom]

Thanks Judy.  That is what I thought I might have misremembered.

Tom
Newark, CA