PRIA, Government Policy, Made Personal

Summary

If a corporation buys back stock that was counted in a dead person’s estate, and the money paid back does not exceed the estate or inheritance taxes plus allowed funeral and administration costs, that payment is treated as if it fully bought the stock in exchange. This rule only applies to payments made after death and inside certain time limits (the normal IRS assessment period or close after it, or special times if there is a Tax Court case or an installment-payment election). It only applies when the decedent’s share of the corporation’s stock is more than 35% of the estate after allowed deductions. Stock in two or more companies can be treated as one if at least 20% of each company’s stock is included in the estate. The rule only covers the part of the shareholder’s interest actually reduced by paying those taxes or expenses. If the buyback happens more than 4 years after death, it is limited to the smaller of what was unpaid right before the buyback or what is paid in the year after the buyback. If new stock has its tax basis from old stock that was in the estate, the same rule can apply. If a generation-skipping transfer happens at death, the stock and related taxes are treated like they were part of the decedent’s estate for these rules, with timing and limits measured from that transfer.

Title 26, §303

Internal Revenue Code, Source: USLM XML via OLRC

(a)In general

A distribution of property to a shareholder by a corporation in redemption of part or all of the stock of such corporation which (for Federal estate tax purposes) is included in determining the gross estate of a decedent, to the extent that the amount of such distribution does not exceed the sum of— (1)

(2)the amount of funeral and administration expenses allowable as deductions to the estate under section 2053 (or under section 2106 in the case of the estate of a decedent nonresident, not a citizen of the United States),

shall be treated as a distribution in full payment in exchange for the stock so redeemed.

(b)Limitations on application of subsection (a)

(1)Period for distribution

Subsection (a) shall apply only to amounts distributed after the death of the decedent and— (A)

(B)if a petition for redetermination of a deficiency in such estate tax has been filed with the Tax Court within the time prescribed in section 6213, at any time before the expiration of 60 days after the decision of the Tax Court becomes final, or

(C)if an election has been made under section 6166 and if the time prescribed by this subparagraph expires at a later date than the time prescribed by subparagraph (B) of this paragraph, within the time determined under section 6166 for the payment of the installments.

(2)Relationship of stock to decedent’s estate

(A)In general

Subsection (a) shall apply to a distribution by a corporation only if the value (for Federal estate tax purposes) of all of the stock of such corporation which is included in determining the value of the decedent’s gross estate exceeds 35 percent of the excess of— (i)

(ii)the sum of the amounts allowable as a deduction under section 2053 or 2054.

(B)Special rule for stock of two or more corporations

For purposes of subparagraph (A), stock of 2 or more corporations, with respect to each of which there is included in determining the value of the decedent’s gross estate 20 percent or more in value of the outstanding stock, shall be treated as the stock of a single corporation. For purposes of the 20-percent requirement of the preceding sentence, stock which, at the decedent’s death, represents the surviving spouse’s interest in property held by the decedent and the surviving spouse as community property or as joint tenants, tenants by the entirety, or tenants in common shall be treated as having been included in determining the value of the decedent’s gross estate.

(3)Relationship of shareholder to estate tax

Subsection (a) shall apply to a distribution by a corporation only to the extent that the interest of the shareholder is reduced directly (or through a binding obligation to contribute) by any payment of an amount described in paragraph (1) or (2) of subsection (a).

(4)Additional requirements for distributions made more than 4 years after decedent’s death

In the case of amounts distributed more than 4 years after the date of the decedent’s death, subsection (a) shall apply to a distribution by a corporation only to the extent of the lesser of— (A)

(B)the aggregate of the amounts referred to in paragraph (1) or (2) of subsection (a) which are paid during the 1-year period beginning on the date of such distribution.

(c)Stock with substituted basis

If—

(1)a shareholder owns stock of a corporation (referred to in this subsection as “new stock”) the basis of which is determined by reference to the basis of stock of a corporation (referred to in this subsection as “old stock”),

(2)the old stock was included (for Federal estate tax purposes) in determining the gross estate of a decedent, and

(3)subsection (a) would apply to a distribution of property to such shareholder in redemption of the old stock,

then, subject to the limitation specified in subsection (b), subsection (a) shall apply in respect of a distribution in redemption of the new stock.

(d)Special rules for generation-skipping transfers

Where stock in a corporation is the subject of a generation-skipping transfer (within the meaning of section 2611(a)) occurring at the same time as and as a result of the death of an individual—

(1)the stock shall be deemed to be included in the gross estate of such individual;

(2)taxes of the kind referred to in subsection (a)(1) which are imposed because of the generation-skipping transfer shall be treated as imposed because of such individual’s death (and for this purpose the tax imposed by section 2601 shall be treated as an estate tax);

(3)the period of distribution shall be measured from the date of the generation-skipping transfer; and

(4)the relationship of stock to the decedent’s estate shall be measured with reference solely to the amount of the generation-skipping transfer.

Notes & Related Subsidiaries

Editorial Notes

Amendments

1986—Subsec. (d). Pub. L. 99–514 amended subsec. (d) generally. Prior to amendment, subsec. (d) read as follows: “Under

Regulations

prescribed by the Secretary, where stock in a corporation is subject to tax under section 2601 as a result of a generation-skipping transfer (within the meaning of section 2611(a)), which occurs at or after the death of the deemed transferor (within the meaning of section 2612)— “(1) the stock shall be deemed to be included in the gross estate of the deemed transferor; “(2) taxes of the kind referred to in subsection (a)(1) which are imposed because of the generation-skipping transfer shall be treated as imposed because of the deemed transferor’s death (and for this purpose the tax imposed by section 2601 shall be treated as an estate tax); “(3) the period of distribution shall be measured from the date of the generation-skipping transfer; and “(4) the relationship of stock to the decedent’s estate shall be measured with reference solely to the amount of the generation-skipping transfer.” 1981—Subsec. (b)(1)(C). Pub. L. 97–34, § 422(e)(1), struck out “or 6166A” after “section 6166” in two places. Subsec. (b)(2)(A). Pub. L. 97–34, § 422(b)(1), substituted “35” for “50” before percent. Subsec. (b)(2)(B). Pub. L. 97–34, § 422(b)(2), in heading, substituted “stock in 2” for “stock of two”, in first sentence, struck out “the 50 percent requirement” before “of subparagraph (A)” and substituted “2” for “two” and “20 percent or more in value” for “more than 75 percent in value”, and, in last sentence, substituted “For purposes of the 20-percent requirement” for “For the purpose of the 75 percent requirement” and, in determining value of decedent’s gross estate, treated the estate as including stock which at decedent’s death represented surviving spouse’s interest in property held by the decedent and surviving spouse either as joint tenants, tenants by the entirety, or tenants in common. 1976—Subsec. (b)(1)(C). Pub. L. 94–455, § 2004(e)(1), added subpar. (C). Subsec. (b)(2)(A). Pub. L. 94–455, § 2004(e)(2)(A), substituted provisions limiting the applicability of subsec. (a) to corporate distributions in which the value of the corporate stock included in decedent’s gross estate exceeds 50 percent of the gross estate over deductions allowed under section 2053 and 2054 for provisions limiting the applicability of subsec. (a) to corporate distributions in which the value of the corporate stock included in decedent’s gross estate is either more than 35 percent of the gross estate or 50 percent of the taxable estate. Subsec. (b)(2)(B). Pub. L. 94–455, § 2004(e)(2)(B), substituted “the 50 percent requirement” for “the 35 percent and 50 percent requirements”. Subsec. (b)(3), (4). Pub. L. 94–455, § 2004(e)(3), added pars. (3) and (4). Subsec. (c). Pub. L. 94–455, § 2004(e)(4), substituted “limitation specified in subsection (b)” for “limitation specified in subsection (b)(1)”. Subsec. (d). Pub. L. 94–455, § 2006(b)(4), added subsec. (d).

Statutory Notes and Related Subsidiaries

Effective Date

of 1986 AmendmentAmendment by Pub. L. 99–514 applicable to generation-skipping transfers (within the meaning of section 2611 of this title) made after Oct. 22, 1986, except as otherwise provided, see section 1433 of Pub. L. 99–514, set out as an

Effective Date

note under section 2601 of this title.

Effective Date

of 1981 AmendmentAmendment by Pub. L. 97–34 applicable to estates of decedents dying after Dec. 31, 1981, see section 422(f) of Pub. L. 97–34, set out as a note under section 6166 of this title.

Effective Date

of 1976 AmendmentAmendment by section 2004(e)(1)–(4) of Pub. L. 94–455 applicable to estates of decedents dying after Dec. 31, 1976, see section 2004(g) of Pub. L. 94–455, set out as an

Effective Date

note under section 6166 of this title. For

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of amendment by section 2006(b)(4) of Pub. L. 94–455, see section 2006(c) of Pub. L. 94–455, set out as an

Effective Date

note under section 2601 of this title.

§303 Distributions in Redemption of Stock to Pay Death Taxes

Summary

Title 26, §303

Notes & Related Subsidiaries

Editorial Notes

Amendments

Regulations

Statutory Notes and Related Subsidiaries

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