The problem arises when a  business owner wants to pass the business on to his or her children after death, but the estate may be forced to sell the business to raise cash to pay estate taxes. But Section 303 partial redemptions may help.

 

The intent of Section 303 (of the Internal Revenue Code) is to avoid the forced sale of a closely held business at the death of a shareholder by providing a tax efficient method to raise cash. Section 303 provides favorable tax treatment to qualifying partial redemptions of the deceased shareholder's stock.

 

Normally, partial redemptions of a shareholder's interest in a closely held business are treated as dividends subject to ordinary income tax rates. Section 303 permits qualifying partial redemptions to be treated as exchanges subject to capital gains rates. Because the basis of stock included in the deceased shareholder's estate is stepped up to fair market value, there may be little or no tax cost to the redemption.

 

Even if there are other sources of cash, a Section 303 redemption may be advisable because it is a onetime opportunity to bail cash out of a corporation with little or no tax cost.

 

Requirements
The maximum amount of stock that may be redeemed is limited to state and federal estate taxes, plus funeral and administration expenses allowable as deductions for federal estate tax purposes.

There are four tests to qualify for a Section 303 redemption:

Section 303 is of no value if the corporation does not have cash on hand to redeem stock at the death of the shareholder. Life insurance can provide the cash that enables the family to take advantage of Section 303.