Section 303 Stock Redemption
Chapter 41
Tools & Techniques of
Estate Planning
What Is Section 303?
• IRC Section 303 allows a corporation to make a
distribution in redemption of a portion of the stock of
a decedent that will not be taxed as a dividend
• A Section 303 partial redemption can provide cash
and/or other property from the corporation without
resulting in dividend treatment
– This permits a decedent shareholder’s executor to pay death
taxes and other expenses
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Section 303 Stock Redemption
Chapter 41
Tools & Techniques of
Estate Planning
When Is Use Of A Section 303 Redemption
Appropriate?
• When the decedent shareholder’s family desires to keep
control of a closely-held or family corporation after his/her
death
• Corporation stock is a major estate asset and there exists a
threat of a forced sale or liquidation of the business in order
to pay death taxes and other costs
• Tax-favored withdrawal of funds from the corporation at the
death of the stockholder would be useful
• Redemption of IRC Section 306 stock is desirable
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Section 303 Stock Redemption
Chapter 41
Tools & Techniques of
Estate Planning
What Are The Requirements?
• The redeemed stock must be included in the
decedent’s gross estate for federal estate tax
purposes
• The value for federal estate tax purposes of all stock
of the corporation that is included in determining the
value of the decedent’s gross estate must be
– More than 35% of the excess of
• The value of the gross estate over
• The sum allowable as a deduction under IRC Sections 2053
(estate expense, indebtedness, and taxes) and 2054 (losses)
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Section 303 Stock Redemption
Chapter 41
Tools & Techniques of
Estate Planning
What Are The Requirements?
• Only an amount equal to the total of
– All estate, inheritance, legacy and succession taxes (including
GST taxes) and interest imposed thereon by reason of
decedent’s death
– Funeral and administration expenses (whether or not claimed
as a deduction on the federal estate tax return)
– Can be redeemed and receive favorable income tax treatment
• Any excess
– Will be taxed under Section 302 rules as a dividend to the
seller (executor or heir from whom stock is being redeemed), or
– May qualify for favorable tax treatment under Section 302 (no
taxable gain due to step-up in basis at decedent’s death)
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Section 303 Stock Redemption
Chapter 41
Tools & Techniques of
Estate Planning
What Are The Requirements?
• A redemption under Section 303 will qualify for
favorable tax treatment only to the extent that
– Interest of a shareholder whose stock is redeemed is reduced
either
– Directly or indirectly through a binding obligation to contribute
toward the payment of the decedent’s administration expenses
and death taxes
Example
– Gross estate $1,250,000; admin. and funeral costs $250,000;
no other deductible expenses
– To qualify for a Section 303 redemption the value of the stock
must exceed $350,000 {35% of ($1,250,000 - $250,000)}
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Section 303 Stock Redemption
Chapter 41
Tools & Techniques of
Estate Planning
How Is It Done?
Example:
–
–
–
–
–
–
Aaron, a widower who dies in 2010, owns 75% of a corporation
His son Joshua owns the remaining 25%
Aaron’s stock is valued at $6,000,000
His gross estate less allowable deductions equals $10,000,000
There is minimal estate liquidity
Assuming Aaron’s estate and inheritance taxes and other
death-related expenses are projected to be about $4,000,000,
the corporation would purchase $4,000,000 of insurance on
Aaron’s life
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Section 303 Stock Redemption
Chapter 41
Tools & Techniques of
Estate Planning
How Is It Done?
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Section 303 Stock Redemption
Chapter 41
Tools & Techniques of
Estate Planning
How Is It Done?
Example Steps:
1)
2)
3)
4)
5)
At Aaron’s death his stock will pass to his estate
The corporation receives the insurance proceeds on
Aaron’s life
The corporation uses the proceeds to pay Aaron’s estate
for the stock qualifying for the Section 303 redemption
The estate transfers stock with a value equal to the money
it receives to the corporation
Aaron’s estate uses the cash to pay federal and state
death taxes, admin. and funeral expenses
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Section 303 Stock Redemption
Chapter 41
Tools & Techniques of
Estate Planning
Tax Implications
• The amount paid by the estate should not be treated
as a dividend distribution
– It will be treated as the “exchange price” for the stock and
will result in no gain being recognized by the estate, if
– The basis of the stock has been stepped-up by reason of
being included in the shareholder’s estate, unless
– The stock was a gift to the decedent within one year of his
death and the property passes from the decedent back to
the donor or the donor’s spouse
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Section 303 Stock Redemption
Chapter 41
Tools & Techniques of
Estate Planning
Tax Implications
• To the extent the price paid to the estate exceeds the
estate’s basis, the estate will pay a tax on any such
gain
• Under the step-up in basis rules, a Section 303
redemption typically results in no adverse income tax
consequences to the shareholder (executor of the
estate) from whom the corporation made the
redemption
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Section 303 Stock Redemption
Chapter 41
Tools & Techniques of
Estate Planning
Tax Implications
• Insurance premiums paid on the life of the insured
stockholder are not income tax deductible by the
corporation
• Proceeds of a key person life insurance paid to the
corporation are federal income tax free, but may be
subject to corporate AMT tax
• Section 303 redemptions are specifically exempt from
attribution (constructive ownership) problems,
– Helping to make redemptions from family corporations
possible without the threat of dividend treatment
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Section 303 Stock Redemption
Chapter 41
Tools & Techniques of
Estate Planning
Issues In Community Property States
• To qualify an aggregate ownership interest in two or
more corporations for purposes of meeting the “more
than 35% of adjusted gross estate” test, there must be
– At least 20% in value of each corporation included in
decedent’s estate
• In determining the 20% stock ownership interest by
the decedent,
– The surviving spouse’s half of the stock constituting
community property may be included by treating it as if it had
been included in determining the value of the gross estate of
the decedent
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