Section 303: Stock Redemptions to Pay Death Taxes

Section 303 was passed by Congress to minimize the risk that a business would have to be sold in order to pay the decedent’s estate tax. Section 303 provides “sale or exchange” treatment to the estate rather than dividend treatment. At the same time, Section 1014 brings the basis up to fair market value, so the estate should end up having to pay littler or no tax when it’s treated as “sale or exchange”. This wouldn’t be the case if Section 303 didn’t exist because the redemption could be treated as a dividend.

Section 303 overrules Section 302.

Requirements of Section 303

  • More than 35% of the estate’s gross value must be held in stock
  • If the decedent owned multiple corporations, they need to own more than 20%
  • In general, redemption must occur within 15 months of the date of death of the decedent

Effects of a Redemption on the Corporation

  • If the corporation distributes appreciated property or built-in gain property, the corporation will be taxed under Section 311(b)- it’s the same as if the corp sold the asset at it’s fair market value and then distributed the cash.
  • If there is a built-in loss under Section 311(b), then that loss is not recognized.
  • E&P is reduced on a pro-rata basis for any redemption
    • If 20% of the corporation’s shares are redeemed, 20% of the E&P is deemed distributed.

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