What is Section 303 stock redemption?

The gist of IRC Section 303 is that distributions in redemption of a deceased shareholder’s stock are treated not as a dividend but as a capital transaction, up to a certain amount and provided the estate qualifies. For business owner clients needing cash to pay death costs, Section 303 can be a savior.

What is the maximum amount of stock that may be redeemed under section 303?

The redemption generally must occur within four years of the stockholder’s death. The maximum amount of stock that may be redeemed is equal to the sum of state and federal estate taxes, costs of estate administration and funeral expenses.

Are stock redemptions taxable?

In other words, the entire redemption payment counts as taxable income. In contrast, when stock sale treatment applies, you generally recognize a long-term capital gain equal to the excess of the redemption payment over the tax basis of the redeemed shares. So only part of the redemption payment is taxable.

What is a stock redemption plan?

Investopedia defines a stock redemption plan as, “A binding agreement that is implemented by the owners of a business to facilitate the orderly transition of a business interest in the event of the death, disability or retirement of a business owner.”

What is Section 302 tax?

Tax consequence of a sale or exchange under Sec. 302: If a redemption qualifies as a sale or exchange under Sec. 302, the amount of the redemption proceeds in excess of the shareholder’s basis in the redeemed stock will be taxed as a capital gain.

What is the alternate valuation date?

Instead of using the value of assets on the date of death for estate tax purposes, the executor may elect an “alternate valuation” date of six months after the date of death. This election could effectively lower an estate’s federal estate tax bill.

Which of the following are characteristics of a qualified disclaimer?

To be valid, a qualified disclaimer must meet the following requirements:

  • Must be in writing.
  • Must be within nine months of the gift.
  • No acceptance of the gifted interest or any benefits.
  • Interest passes without any direction on the part of the person making the disclaimer.

What is the federal generation skipping tax?

The generation-skipping tax (GST), also referred to as the generation-skipping transfer tax, prevents you from deliberately skipping your children in your estate plan in favor of younger generations to bypass potential estate taxes due upon your children’s deaths.

Is 1099 required for stock redemption?

Form 1099-DIV, Dividends and Distributions, is required to be filed when a company pays a shareholder $600 or more during a calendar year to liquidate all or part of their stock. Form 1099-DIV is required to be furnished to recipients by January 31 of the year after the year in which the transaction occurred.

Can stock redemption treated as nontaxable?

Under the normal S corporation distribution rules, the redemption distribution is treated as a nontaxable return of capital to the extent of the adjusted basis of stock, followed by capital gain from the deemed disposition of stock (Sec. G is approaching retirement and would like the corporation to redeem her stock.

What is the major difference between a stock redemption plan and a cross-purchase plan?

When a corporation purchases the stock of a departing shareholder, it’s called a “redemption.” When the other stockholders purchase the stock, it’s called a cross-purchase. Typically, the redemption versus cross-purchase decision doesn’t impact the ultimate control results.

Who pays for the life insurance coverage on the stockholder in a stock redemption plan?

For 3 or More Business Owners: Stock Redemption Plan The premiums are paid by the company, and if a stockholder dies, the death benefit is used by the surviving stockholders to “buy out” the shares belonging to the deceased’s heir(s) at an agreed upon price.