DD—Partial Stock Redemption

A partial stock redemption under Section 303 offers a very attractive way of paying estate settlement costs, particularly for a corporation that will be continued by the surviving family.

Under most circumstances, a stockholder who has the corporation redeem less than his entire stock interest will be fully taxed on the proceeds as ordinary income. However, under the special provisions of Section 303, his surviving family can do after death what the stockholder generally cannot do during his lifetime . . . namely, sell only aportionof his stock interest to the corporation, and have the sale treated as a capital transaction rather than as a dividend.

DURING LIFETIME.If the stock interest will bemore than35 percent of the stockholder’s adjusted gross estate, then his stock will qualify under Section 303 for a partial redemption at his death. Theamountof stock that can be purchased is limited to the sum of all federal and state death taxes, funeral, and administrative expenses. The purchase must also be made from whoever has the obligation to pay these costs, usually the family or estate.