When a shareholder dies, his estate may need cash to pay estate taxes and administrative expenses. If the estate’s assets are largely illiquid stock in a closely‑held corporation, the corporation can redeem some of the stock under § 303, and the redemption will be treated as a sale or exchange (capital gain) rather than a dividend.
Section 303(a) applies if:
- The value of the stock included in the gross estate is more than 35% of the gross estate minus allowable deductions (or more than 35% of the “adjusted gross estate”). § 303(b)(2)(A).
- The distribution is made within the time limits (generally, 90 days after the statute of limitations expires, or if an estate tax extension is granted, within the extension period). § 303(b)(1).
The amount of the redemption cannot exceed the sum of:
- All estate, inheritance, legacy, and succession taxes (including interest), and
- Funeral and administrative expenses deductible under § 2053.
Importantly, the proceeds do not have to be actually used to pay those taxes and expenses. United States v. Lake, 406 F.2d 941 (5th Cir. 1969). And the attribution rules of § 318 do not apply for purposes of the 35% test. Estate of Byrd v. Comm’r, 388 F.2d 223 (5th Cir. 1967).
The estate can count stock in more than one corporation if the decedent owned at least 20% of each. § 303(b)(2)(B). And the stock does not have to be closely held – it can be publicly traded.
Section 303 is a valuable tool for estate planning. If you expect your estate to consist largely of corporate stock, consider structuring your estate plan so that the stock passes to beneficiaries who are willing to have it redeemed, and make sure the will doesn’t shift the tax burden away from those beneficiaries (a requirement of § 303(b)(3)).
This article is for general informational purposes only and is subject to change. Tax laws are complex and vary by situation. You should consult a qualified professional for advice specific to your circumstances. For questions, contact Alan Goldstein.
Was this helpful?
0 / 0