Among the assets in a decedent’s gross estate is stock in a closely held corpora

Question

Among the assets in a decedent’s gross estate is stock in a closely held corporation that was left to a nephew. The interest passing to the nephew is required to bear the burden of all estate taxes and expenses. The relevant facts about this estate are as follows:

Adjusted Gross estate $3,000,000

Fair market value of stock in the closely held corporation 25,000

Administration and funeral expenses 100,000

State inheritance taxes 0

Federal estate taxes 0

What amount of closely held corporate stock may be redeemed under IRC Sec. 303 so that redemption will be treated as a sale or exchange rather than a dividend distribution?

(A) $0

(B) $70,000

(C) $130,000

(D) $200,000

Provide a detailed explanation for your answer. Only answer if you have a strong estate planning background.

Explanation / Answer

The maximum amount of stock that may be redeemed under 303 is limited to the sum of:

In brief, Section 303 allows a shareholder's estate or heir to sell to the closely held corporation enough stock to pay federal and state death taxes, costs of estate administration, and funeral expenses without treating the transaction as a dividend to the redeeming shareholder.

section 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) the value of the gross estate of such decedent, over

(ii) the sum of the amounts allowable as a deduction

So, amount is 0 is OPTION A

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