How does a Section 303 stock redemption work?
Available to estates that meet the 35% test, up to the allowed amount
Under IRC §303, a corporation's redemption of stock included in a decedent's gross estate is treated as a sale, not a dividend, up to the total of death taxes and deductible funeral and administration expenses. The stock must be worth more than 35% of the gross estate minus §§2053 and 2054 deductions. The redemption must occur within the statutory period. Because the stock's basis generally equals its value at death, the gain is often small.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed · Law and figures current as of September 17, 2026
Key takeaways
- Sale treatment applies only up to the sum of death taxes and deductible funeral and administration expenses.
- The stock must exceed 35% of the gross estate minus §2053 and §2054 deductions.
- The shareholder whose stock is redeemed must bear the taxes and expenses.
- Redemptions generally must occur within the estate tax assessment period plus 90 days, with extensions in some cases.
- Any excess redemption is tested under the ordinary redemption rules of §302.
What it is
When a family company is a large part of an estate, the estate may need cash for estate taxes and expenses while most of its value sits inside the corporation. A distribution from a C corporation with earnings and profits is ordinarily a dividend, taxed in full without any offset for basis.
Section 303 lets the corporation redeem enough stock to cover those costs and treats the redemption as a sale of the stock. Because inherited stock generally has a basis equal to its fair market value at death under §1014, a prompt redemption often produces little or no gain.
What the law says
IRC §303(a) provides that a distribution in redemption of stock included in the decedent's gross estate is treated as a distribution in full payment in exchange for the stock, to the extent it does not exceed the sum of the estate, inheritance, legacy, and succession taxes (including interest) imposed because of the death, and the funeral and administration expenses allowable as deductions under §2053.
Under §303(b)(2)(A), the stock of the corporation included in the gross estate must be worth more than 35% of the gross estate minus the amounts deductible under §2053 or §2054. Stock of two or more corporations can be combined if 20% or more of each corporation's value is included in the gross estate.
Under §303(b)(1), the distribution must generally be made within the estate tax assessment period under §6501(a) or within 90 days after it ends, with longer periods if a Tax Court petition is filed or a §6166 election is in effect. Under §303(b)(3), relief applies only to the extent the redeeming shareholder's interest is reduced by paying the taxes or expenses. Treas. Reg. §1.303-2 provides further rules.
Requirements and tests
The redemption qualifies only if:
- The redeemed stock was included in the decedent's gross estate.
- The 35% test is met, using the gross estate minus §§2053 and 2054 deductions.
- The amount redeemed does not exceed death taxes, including interest, plus deductible funeral and administration expenses.
- The redeeming shareholder, usually the estate, is liable for or bears those taxes and expenses.
- The redemption is made within the time limits of §303(b)(1).
How it works
The estate first computes its death taxes and deductible expenses to set the cap. The corporation then redeems stock up to that amount, often in stages as the liabilities become known.
For the portion that qualifies, the estate reports a sale: the amount received minus the stock's basis, which is generally its value at the date of death (or the alternate valuation date). If the stock is redeemed at that value, the gain is zero.
Any amount above the cap is not covered by §303. It is tested under the general redemption rules of §302, which may still give sale treatment if the redemption meaningfully reduces the estate's ownership after applying the attribution rules; otherwise it is a dividend to the extent of earnings and profits.
Section 303 is often combined with a §6166 installment election, which extends the time allowed for qualifying redemptions.
Planning ahead helps. A buy-sell or redemption agreement signed during the owner's lifetime can commit the corporation to redeem shares at death, and corporate-owned life insurance or retained cash can fund it. The corporation should confirm that state law and its loan agreements permit the redemption, and the estate should keep a record showing how the redemption proceeds were applied to taxes and expenses. When the estate has more than one beneficiary, the executor should also consider how the redemption affects each beneficiary's share, because §303(b)(3) limits relief to the shareholder who actually bears the taxes and expenses.
Assumptions: Decedent died in 2026; gross estate $20,000,000, including C corporation stock worth $8,000,000; §2053 deductions of $500,000; Texas resident (no state estate tax).; Estate tax: ($19,500,000 − $15,000,000 basic exclusion) × 40% = $1,800,000; §303 cap = $1,800,000 + $500,000 = $2,300,000.; The estate redeems stock worth $400,000 at its date-of-death value; the corporation has ample earnings and profits; any dividend would be a qualified dividend.; An estate reaches its top capital gain rate and its NIIT threshold at a low level of income, so the dividend figure below is an upper bound using 20% + 3.8%; the actual amount is slightly lower because a small first slice of an estate's income is taxed at lower rates.
| 35% test threshold (($20,000,000 − $500,000) × 35%) | $6,825,000 |
|---|---|
| Value of the stock (exceeds the threshold) | $8,000,000 |
| Maximum §303 redemption (taxes plus expenses) | $2,300,000 |
| §303 sale: gain ($400,000 − $400,000 basis) | $0 |
| If treated as a dividend: upper-bound tax ($400,000 × 23.8%) | $95,200 |
Because the stock's basis equals its value at death, the qualifying redemption produces no gain, while dividend treatment could cost up to about $95,200.
Illustration only; not a projection of your results.
Risks and IRS scrutiny
The IRS reviews stock valuations, the 35% computation, the cap, and timing. A redemption that exceeds the cap, or that benefits a shareholder who does not bear the taxes and expenses, can produce dividend treatment. State corporate law restrictions on redemptions, and loan covenants, may also limit what the corporation can pay.
Who it is not for
This is not for estates whose closely held stock is 35% or less of the adjusted estate. It is not a general exit strategy, because relief is capped at taxes and expenses. It is not for redemptions made after the statutory window. And it offers little benefit for S corporation stock with enough basis to receive distributions tax-free anyway.
How ebotCPA helps
We test the 35% requirement, compute the cap, coordinate timing with any §6166 election, and document the redemption so it is reported as a sale. We coordinate with your attorney, who drafts the legal documents.
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.
We coordinate with your attorney, who drafts the legal documents.
Frequently asked questions
How much stock can be redeemed under 303?
Up to the sum of the estate, inheritance, legacy, and succession taxes (including interest) and the funeral and administration expenses allowable under §2053.
What is the 35% test?
The decedent's stock in the corporation must be worth more than 35% of the gross estate minus deductions allowable under §§2053 and 2054.
When must the redemption happen?
Generally within the estate tax assessment period plus 90 days, with longer periods when a Tax Court petition is filed or a §6166 election is in effect.
What if the estate redeems more than the cap?
The excess is tested under the general redemption rules of §302 and may be treated as a dividend.
Have facts like these?
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.