Rev. Rul. 84-76
1984-1 C.B. 91, 1984-22 I.R.B. 6.
Internal Revenue Service
Revenue Ruling
REDEMPTION OF STOCK TO PAY DEATH TAX
Published: May 29, 1984
Section 170. - -Charitable, etc., Contributions and Gifts, 26 CFR 1.170A-1: Charitable, etc., contributions and gifts; allowance of deduction.
Section 303. - -Distributions in Redemption of Stock to Pay Death Taxes, 26 CFR 1.303-2: Requirements.
Redemption of stock to pay death tax. A redemption of stock not actually owned by a decedent at death does not qualify under section 303 of the Code even though such stock is included in the decedent's gross estate by reason of section 2035(a) and (d)(3)(A). However, such stock included in a decedent's gross estate is taken into account in determining satisfaction of the percentage requirements of section 303(b).
ISSUE
Whether, in the situations described below, a distribution in redemption of stock of a corporation qualifies as a distribution in full payment in exchange for the stock redeemed under section 303 of the Internal Revenue Code.
FACTS
Situation 1:
Decedent died on January 1, 1982. During 1979, 1980, and 1981, Decedent made various gifts of Corporation X stock to A, the sole beneficiary of Decedent's estate. Decedent was required by section 6019 of the Code to file a gift tax return with respect to each gift of X stock to A. At death, Decedent did not own any X stock. However, if the X stock gifted by Decedent to A since 1979 were included in Decedent's gross estate for federal estate tax purposes, such stock would have constituted 40 percent of Decedent's adjusted gross estate.
The federal estate tax return for Decedent's estate was filed on July 1, 1982. The amount of the federal estate tax, state inheritance taxes, and funeral and administrative expenses incurred by Decedent's estate totalled 450x dollars. On July 15, 1982, X redeemed from A 10x shares of its stock that Decedent had gifted to A for a total redemption price of 450x dollars.
Situation 2:
The facts are the same as in Situation 1 except that the X stock surrendered by A for redemption had actually been owned by Decedent at death. If the X stock gifted by Decedent to A were included in Decedent's gross estate for federal estate tax purposes, such stock, when combined with the X stock actually owned by Decedent at death, would have constituted 40 percent of Decedent's adjusted gross estate. The X stock actually owned by Decedent at death constituted only 15 percent of Decedent's adjusted gross estate.
LAW AND ANALYSIS
Section 303(a) of the Code provides that a distribution of property to a shareholder by a corporation in redemption of its stock, the value of which is included in determining the gross estate of a decedent for federal estate tax purposes, will be treated as a distribution in full payment in exchange for the stock redeemed, to the extent that the amount of the distribution does not exceed the total of (1) all death taxes plus (2) funeral and administration expenses allowable as deductions to the estate under sections 2053 or 2106.
Section 303(b)(1)(A) of the Code provides, in part, that the provisions of section 303(a) apply only to amounts distributed after the death of the decedent and within the period of limitations provided in section 6501(a) for the assessment of the federal estate tax, or within 90 days after the expiration of such period. The general rule provided by section 6501(a) is that the amount of tax imposed shall be assessed within 3 years after the return is filed.
Section 303(b)(2)(A) of the Code provides that in order to qualify for the redemption treatment described in section 303(a), the value (for federal estate tax purposes) of all the stock of the corporation that is included in determining the value of the decedent's gross estate must exceed 35 percent of the excess of (i) the value of the gross estate of the decedent, over (ii) the sum of the amounts allowable as a deduction under section 2053 or 2054.
Section 303(b)(3) of the Code provides that the stock that can qualify for treatment under section 303(a) is limited to stock that is redeemed from a shareholder whose interest is reduced (either directly or through a binding obligation to contribute) by the payment of an amount described in section 303(a)(1) or (2).
Section 2035(a) of the Code provides, generally, that the value of all property transferred by a decedent within 3 years of death is included in the decedent's gross estate.
Section 2035(b)(2) of the Code provides, in part, that section 2035(a) shall not apply to any gift to a donee made during a calendar year if the decedent was not required by section 6019 to file any gift tax return for such year with respect to gifts to such donee.
Section 2035(d)(1) of the Code provides that, except as otherwise provided, section 2035(a) is not applicable to the estates of decedents dying after December 31, 1981. However, section 2035(d)(3)(A) provides that section 2035(d)(1) will not apply for purposes of section 303(b).
The purpose of section 2035(d)(3)(A) of the Code, as reflected in the legislative history, is to preclude deathbed transfers designed to qualify estates for favorable treatment under section 303. H.R.Rep. 97-201, 97th Cong., 1st Sess. 187 (1981), 1981-2 C.B. 352, 390. Thus, section 2035(d)(3)(A) retains the 3-year rule of section 2035(a) solely for purposes of making the section 303(b)(2)(A) percentage determinations. Section 2035(d)(3) does not, however, function to include gifted amounts in the value of a
decedent's gross estate for purposes of determining the amount of the federal estate tax liability and, therefore, has no effect on whether the requirements of section 303(a) are satisfied.
In both Situation 1 and Situation 2, each transfer of X stock by Decedent required the filing of a gift tax return pursuant to section 6019 of the Code. Accordingly, in both situations, the value of all the x stock gifted by Decedent to A was included in Decedent's gross estate pursuant to section 2035(a) and (d)(3)(A) for the purpose of determining whether the estate satisfies the section 303(b)(2)(A) percentage requirements. However, in Situation 1, since the X stock surrendered by A in the redemption was not included in Decedent's gross estate except by operation of section 2035(d)(3)(A), section 303 does not apply to the redemption since the threshold requirements of section 303(a) were not satisfied. There is no indication that Congress intended section 2035(d)(3) to provide favorable income tax treatment under section 303 with respect to the redemption of stock that is not otherwise included in the Decedent's gross estate.
In Situation 2, as a result of the operation of section 2035(a) and (d)(3)(A) of the Code, since the value of the X stock gifted by Decedent to A was combined with the value of the X stock actually owned by Decedent at death, the percentage requirements of section 303(b)(2)(A) were thereby satisfied. In addition, the requirements of section 303(b)(3) are satisfied since, as sole beneficiary, A's interest in the estate was directly reduced by the payment of the death taxes and funeral and administration expenses. Furthermore, the redemption of X stock from A satisfied the time limitations of section 303(b)(1). Accordingly, since the amount distributed to A was in redemption of X stock actually owned by Decedent at death and included in Decedent's gross estate and did not exceed the limitations of section 303(a), the distribution will be treated as a distribution in full payment in exchange for the stock redeemed.
HOLDINGS
Situation 1:
The redemption of 10x shares of X stock from A for 450x dollars does not qualify as a distribution in full payment in exchange for the stock redeemed under section 303 of the Code because A's X stock was not includible in Decedent's gross estate for purposes of section 303(a).
Situation 2:
The redemption from A of 10x shares of the X stock owned by Decedent at death for 450x dollars qualifies as a distribution in full payment in exchange for the stock redeemed under section 303 of the Code.
Rev. Rul. 84-76, 1984-1 C.B. 91, 1984-22 I.R.B. 6.