SECTION 303 STOCK REDEMPTION
Section 303 of the Internal Revenue Code permits a
corporation to redeem all or a
portion of a decedent's stock such that will not be taxed as a
dividend. Redemption under
Section 303 can provide cash for estate taxes and other expenses
without the income tax
consequences associated with the declaration of a dividend.
REQUIREMENTS
1) The value of the stock that is redeemed must be
included in the gross estate of
the decedent in calculating the federal estate tax.
2) For federal estate tax purposes, the value of the stock
that was included in the
decedent's estate must be greater than 35 percent of the adjusted
gross estate. For the
purpose of Section 303, adjusted gross estate is defined as the
gross estate minus
deductions for expenses, debts, and estate taxes.
3) There is a limit on the amount of stock that can be
redeemed and still receive
favorable tax treatment. This amount is equal to all estate,
generation skipping and state
inheritance taxes plus the funeral and administration expenses
associated with the
stockholder's death.
4) There is also a restriction on who can sell the stock in a
Section 303 redemption.
The corporation must purchase the stock from the person who is
responsible for paying the
estate taxes and administrative expenses.
In order for a corporation to redeem shares it obviously must
have funds available. A
convenient method to have these funds available could be to keep
the funds on hand in a
corporate account.
However, there is a potential problem with this strategy
called "excess retained
earnings." According to IRS regulations a corporation that
has more than $250,000 may
have "excess retained earnings" and be subject to a
penalty.
SITUATIONS THAT MAY WARRANT USE OF SECTION 303
1) It would be advantageous to keep control of a closely
held corporation.
2) The closely held corporation's stock represents a
substantial portion of the estate
and it is undesirable to liquidate the business for the purpose
of paying estate taxes and
administration expenses.
3) A plan to provide the corporation with the capital to
redeem the stock has been
implemented.
Section 303 rules are complex. While the above provides an
overview, careful review by
a competent tax or legal advisor is necessary to determine
eligibility and application of
Section 303.
