303 / What is a Section 303 stock redemption?

Estates of decedents comprised largely of close corporation stock commonly have a liquidity problem. Congress enacted IRC Section 303 expressly to aid these estates in solving this problem and to protect small businesses from forced liquidations or mergers due to the heavy impact of death taxes. Within the limits of IRC Section 303, surplus can be withdrawn from the corporation free of income tax.

In certain instances, stock of a public corporation also may be redeemed under IRC Section 303.

Any payments by a corporation to a shareholder generally are treated as dividends ( Q 300). IRC Section 303 provides that, under stipulated conditions (see Q 304), a corporation can redeem part of a deceased stockholder’s shares without the redemption being treated as a dividend. Instead, the redemption price will be treated as payment in exchange for the stock as a capital transaction ( Q 305). An IRC Section 303 redemption can safely be used in connection with the stock of a family-owned corporation because constructive ownership rules are not applied in an IRC Section 303 redemption ( Q 300).¹