7.5 Use of the I.r.c. § 303 Redemption

• Library: Estate Planning in Virginia (Virginia CLE) (2018 Ed.)

7.5 USE OF THE I.R.C. § 303 REDEMPTION

7.501 In General. A major problem that many owners of closely held businesses confront when planning their estates is the potential lack of liquidity in the estate's assets. Often, the shares in the corporation are the business owner's major asset, and they may be difficult to convert into cash. If the business owner is a sole owner and therefore cannot enter into a buy-sell agreement, or if the owners do not want to enter into a buy-sell agreement, the owner may be forced to look to the corporation's assets in order to pay estate taxes and expenses. A redemption to which I.R.C. § 302 or 303 applies is treated as an exchange, and any gain recognized by the redeemed shareholder qualifies for capital gains treatment. If a redemption does not

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qualify as an exchange under section 302 or 303, the redeemed shareholder is treated as having received a dividend, to the extent of the corporation's earnings and profits. ⁴⁰

7.502 Qualifying Under I.R.C. § 303. To qualify under I.R.C. § 303, the value of the decedent's stock in the closely held corporation must exceed 35 percent of the excess of the value of the gross estate over the sum of the debts, losses, and funeral and administration expenses under section 2053 or 2054. ⁴¹ If an estate is to take advantage of section 303, the planner must remember that the shareholder should refrain from making any gifts of stock that would reduce his or her...