Estate Stock Redemptions: Proactive Steps to Achieve Sales Treatment

Abstract

Estate planners undertake various strategies to minimize estate taxes and income taxes of the estate and beneficiaries with respect to property received from the estate. A tax planning strategy that can significantly reduce income taxes of the estate and/or its beneficiaries is to structure the redemption of an estate’s corporate stock to qualify for sales treatment as opposed to dividend treatment. More specifically, when a taxpayer’s stock redemption is treated as a dividend, the amount included in income generally equals the entire amount received by the taxpayer. On the other hand, when a taxpayer’s stock redemption is treated as a sale, the amount is treated in part as a tax-free return of the taxpayer’s basis in the stock and in part as a capital gain or loss. Sales treatment is generally even more advantageous for estates and beneficiaries of estates as the basis in the redeemed shares will have been stepped up to their date-of-death value or the value on the alternate valuation date, and as a result of the step-up in basis the estate will generally have minimal or no capital gain as a result of its stock redemption. In order to obtain sale or exchange treatment, the requirements of Secs. 303 and/or 302(b)(1), (2) , (3) or (4) must be met. In addition, the constructive ownership rules of Sec. 318 have to be taken into account in applying the Sec. 302 tests. This article concentrates on the Sec. 302(b) provisions and avoiding the application of the Sec. 318 constructive ownership and attribution rules as a means of assuring sales or exchange treatment. The Estate of Weiskopf case is presented as an example of steps an estate planner can take to avoid the Sec. 318 attribution rules.

Keywords: stock redemptions, sales treatment