Corporate Tax | Just Tax

Redemptions to Pay Death Taxes (§ 303)

This checklist guides the analysis of whether a stock redemption qualifies for sale-or-exchange treatment under § 303 as a distribution to pay death taxes. Use it whenever an estate or beneficiary of a decedent seeks to redeem stock from a corporation to fund estate tax, inheritance tax, or administration expense obligations. The checklist covers the gross estate inclusion requirement, the 35 percent and 50 percent stock value tests, the burden-bearing shareholder rule, timing limitations, the death tax ceiling computation, coordination with § 302 and § 318, the § 303(c) substituted basis rule, generation-skipping transfer coordination, § 6166 deferral interaction, corporate-level consequences, and reporting obligations.

Step 1. The § 303(a) Sale-or-Exchange Rule and the Ceiling

"A distribution of property to a shareholder by a corporation in redemption of part or all of the stock of such corporation which (for Federal estate tax purposes) is included in determining the gross estate of a decedent, to the extent that the amount of such distribution does not exceed the sum of (1) the estate, inheritance, legacy, and succession taxes (including any interest collected as a part of such taxes) imposed because of such decedent's death, and (2) the amount of funeral and administration expenses allowable as deductions to the estate under section 2053 (or under section 2106 in the case of the estate of a decedent nonresident, not a citizen of the United States), shall be treated as a distribution in full payment in exchange for the stock so redeemed." (§ 303(a))

• The § 303(a) conversion mechanism. § 303(a) converts what would otherwise be dividend treatment into sale-or-exchange treatment. Without § 303, most estate redemptions fail to qualify under § 302(b) because family attribution under § 318 causes the estate to be treated as owning stock held by related parties. When a redemption fails § 302(b), § 302(d) applies and the distribution is taxed as a dividend under § 301 to the extent of earnings and profits. § 303(a) overrides this result by mandating sale-or-exchange treatment for qualifying distributions up to the statutory ceiling.
• The ceiling on sale-or-exchange treatment. The distribution receives sale-or-exchange treatment only to the extent it does not exceed the sum of two amounts. First, all estate, inheritance, legacy, and succession taxes (including interest collected as part of such taxes) imposed because of the decedent's death. Second, the funeral and administration expenses allowable as deductions to the estate under § 2053 (or § 2106 for nonresident noncitizens). (§ 303(a)) Any distribution amount above this ceiling must be tested independently under § 302(b) or defaults to § 301 dividend treatment under § 302(d). Rev. Rul. 71-261, 1971-1 C.B. 108 (a redemption distribution exceeded the sum of death taxes and administration expenses. The IRS ruled that the amount within the ceiling qualified for § 303 sale treatment and the excess amount was analyzed under § 302(b) for qualification as a substantially disproportionate redemption or other termination of interest).
• Interaction with § 1014 stepped-up basis. Stock included in the gross estate receives a basis equal to its fair market value at the date of the decedent's death (or the alternate valuation date if elected). (§ 1014(a)) This basis step-up applies to stock described in § 1014(b)(9), which covers property acquired from the decedent. When the redemption price equals the estate tax value of the stock, the result is typically zero taxable gain. § 303 provides the character of the transaction (sale versus dividend). § 1014 provides the basis. Either provision alone is insufficient to produce the tax result. The practitioner must verify both.
• § 1223(9) deemed long-term holding period. If the estate or other distributee disposes of the stock within one year of the decedent's death, the estate is deemed to have held the stock for more than one year. (§ 1223(9)) This ensures that any gain recognized on the redemption is taxed at long-term capital gains rates rather than short-term rates. The holding period tacks from the decedent's period of ownership.
• EXAMPLE. A decedent owned stock with a $200,000 adjusted basis that was worth $1,000,000 at death. The estate redeems all shares from the estate for $1,000,000. Under § 1014, the estate's basis in the stock is stepped up to $1,000,000. Under § 303(a), the redemption is treated as a sale in exchange for the stock. Under § 1223(9), any gain is treated as long-term capital gain. Taxable gain is $0 because the redemption proceeds equal the stepped-up basis. Without § 303, the redemption would likely fail § 302(b) and produce dividend treatment under §§ 302(d) and 301, converting the $1,000,000 distribution into ordinary income to the extent of corporate earnings and profits.

Step 2. Stock Inclusion in the Gross Estate

• The foundational inclusion requirement. The redeemed stock must be included in the decedent's gross estate for federal estate tax purposes. (§ 303(a)) Treas. Reg. § 1.303-1 provides that § 303 applies only to distributions in redemption of stock included in determining the gross estate of a decedent for federal estate tax purposes. If the stock is not in the gross estate, § 303 cannot apply. There are no exceptions to this requirement.
• How stock gets included in the gross estate. Stock is included if the decedent owned it at death. (§ 2033) Stock transferred within three years of death may be included under § 2035(b). Jointly held stock is included under § 2040. Stock subject to a general power of appointment is included under § 2041. Community property stock is included under § 2033 and § 2040. Each inclusion mechanism requires independent verification under the estate tax return.
• Stock of multiple corporations. Treas. Reg. § 1.303-2(c)(1) confirms that all classes of stock of the corporation are aggregated for the value computation. A distribution may redeem any class of stock included in the gross estate. The value of all stock of the corporation included in the gross estate determines whether the percentage tests in Step 3 are satisfied.
• Eligible redeeming shareholders. Treas. Reg. § 1.303-2(f) lists the persons who may redeem stock under § 303. The list includes the executor or administrator, heir, legatee, donee (including transfers in contemplation of death under § 2035), surviving joint tenant, surviving spouse, appointee, taker in default of appointment, or trustee of a trust created by the decedent.
• Ineligible shareholders. Treas. Reg. § 1.303-2(f) explicitly excludes two categories of shareholders. First, a stockholder who acquired the stock by gift or purchase from any person to whom such stock passed from the decedent. Second, a stockholder who acquired the stock from the executor in satisfaction of a specific monetary bequest. Rev. Rul. 70-297, 1970-1 C.B. 66 (the IRS ruled that stock used to satisfy a pecuniary bequest cannot be redeemed under § 303 because the beneficiary is treated as having purchased the stock with the proceeds of the bequest).
• Residuary devisee exception to ineligibility. United States v. Lake, 406 F.2d 941 (5th Cir. 1969) (the Fifth Circuit held that Treas. Reg. § 1.303-2(f) did not apply under the specific facts presented when the stock passed to the beneficiary as a residuary devisee rather than in satisfaction of a pecuniary bequest. The court distinguished between a beneficiary who receives stock as part of the residue and a beneficiary who receives stock in satisfaction of a specific monetary amount).
• CAUTION. Verify that the stock being redeemed is actually included in the gross estate. Pre-death transfers that were complete and had no retained strings under §§ 2036 through 2038 remove the stock from the gross estate and destroy § 303 eligibility. Review the estate tax return and supporting worksheets to confirm inclusion.
• TRAP. Once estate stock has been distributed to beneficiaries and the estate closed, § 303 is generally no longer available for that stock. The redemption should occur while the estate holds the stock or from a qualifying distributee under Treas. Reg. § 1.303-2(f). Delay in redemption can permanently forfeit § 303 treatment.

Step 3. The § 303(b)(2) Percentage Tests and Aggregation

"Subsection (a) 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 under section 2053 or 2054." (§ 303(b)(2)(A))

• Test 1. The 35 percent of adjusted gross estate test. The value of the stock of the corporation included in the gross estate must exceed 35 percent of the excess of (i) the value of the gross estate over (ii) the sum of amounts allowable as deductions under § 2053 and § 2054. (§ 303(b)(2)(A)(i) and (ii)) The gross estate is computed under § 2031. The deductions are those allowable under §§ 2053 and 2054. This denominator is often called the adjusted gross estate.
• Test 2. The 50 percent of taxable estate test. Alternatively, the value of the stock included in the gross estate must exceed 50 percent of the taxable estate computed under § 2051. (§ 303(b)(2)(A)) Only one test needs to be satisfied. If either test is met, the percentage requirement is satisfied.
• The aggregation rule for multiple corporations. Under § 303(b)(2)(B), stock of two or more corporations is treated as stock of a single corporation if 20 percent or more in value of the outstanding stock of each corporation is included in the gross estate. The 20 percent threshold was enacted in 1981 as part of the Economic Recovery Tax Act of 1981, Pub. L. 97-34, § 422(b)(2). Treas. Reg. § 1.303-2(a) still references the predecessor 75 percent threshold. The statutory amendment controls and the 20 percent threshold applies.
• Special rule for surviving spouse. Stock that at the decedent's death represents the surviving spouse's interest in community property or joint tenancy is treated as having been included in determining the value of the decedent's gross estate for purposes of the aggregation test. (§ 303(b)(2)(B), second sentence) This rule ensures that the aggregation test can be satisfied where the decedent and surviving spouse jointly owned stock that passes to the surviving spouse.
• Alternate valuation date. If the estate elects alternate valuation under § 2032, the stock value, gross estate, and taxable estate are each determined as of the applicable alternate valuation date. (Treas. Reg. § 1.303-2(b)) The practitioner must use consistent valuation dates across all components of both percentage tests.
• Federal estate tax value controls. Estate of Huntsman v. Commissioner, 66 T.C. 861 (1976) (the Tax Court confirmed that the value of stock for § 303 purposes is the federal estate tax value. The IRS acquiesced in the result, 1977-1 C.B. 5). The practitioner should use the value reported on the federal estate tax return (Form 706) or as finally determined.
• Only directly owned stock counts. Estate of Byrd v. Commissioner, 46 T.C. 25 (1966), aff'd, 388 F.2d 223 (5th Cir. 1967) (Otis Byrd owned stock in four corporations directly and indirectly through an 88.9 percent interest in a holding company. The Tax Court held, and the Fifth Circuit affirmed, that only stock actually owned by the decedent at death counts toward the § 303 percentage requirements. Stock indirectly owned through a corporation in which the decedent held stock cannot be included, even though the value of the underlying stock was reflected in the estate tax valuation of the parent corporation's shares).
• TRAP. The 35 percent test uses the adjusted gross estate (gross estate reduced by §§ 2053 and 2054 deductions), not the taxable estate. The marital deduction under § 2056 does not help satisfy this test because the marital deduction is taken after computing the adjusted gross estate. Estates with large marital deductions may find the 35 percent test difficult to satisfy even though the stock constitutes a large percentage of the taxable estate.
• TRAP. Gifts within three years of death are added back to the gross estate under § 2035(b). If the decedent gifted stock within three years of death, that stock is included in the gross estate denominator but is not available for redemption because the decedent no longer owned it at death. This inclusion without corresponding redemption availability can make the 35 percent test harder to satisfy.

Step 4. Eligible Shareholders and the § 303(b)(3) Burden-Bearing Requirement

"Subsection (a) shall apply to a distribution by a corporation only to the extent that the interest of the shareholder is reduced directly (or through a binding obligation to contribute) by any payment of an amount described in paragraph (1) or (2) of subsection (a)." (§ 303(b)(3))

• The burden-bearing requirement. The redeemed shareholder must be a person whose interest in the estate is reduced directly or through a binding obligation to contribute by the payment of death taxes or funeral and administration expenses. (§ 303(b)(3)) The statute looks to whether the shareholder's economic interest in the estate actually diminishes as a result of the tax and expense payments.
• Shareholders who typically qualify. The following categories of shareholders typically satisfy the burden-bearing requirement. The executor or administrator of the estate, who bears primary responsibility for payment of taxes and expenses. An heir or legatee whose share of the estate is reduced because taxes and expenses are paid before distribution. A surviving joint tenant whose interest is diminished by the payment of estate taxes attributable to the jointly held property. A trustee of a testamentary trust that bears the tax or expense burden under the will. A residuary beneficiary whose share is reduced by payment of estate taxes and expenses. Treas. Reg. § 1.303-2(f) explicitly provides that § 303 may apply to the redemption of stock from a beneficiary of the estate to whom an executor has distributed the stock pursuant to the terms of the will. When the will charges the residue with payment of death taxes and expenses, the residuary beneficiary's interest is reduced by such payments, satisfying § 303(b)(3).
• Shareholders who do not qualify. The following categories typically fail the burden-bearing requirement. A specific beneficiary who receives a designated asset where the will provides that taxes and expenses are paid from the residue (the specific beneficiary's interest is not reduced by tax payments). A beneficiary of property passing outside probate (such as a surviving spouse receiving jointly held property) where the spouse's interest is not reduced by estate tax payments. Treas. Reg. § 1.303-2(f) excludes a person who acquired the stock by gift or purchase from a distributee, and a person who acquired the stock from the executor in satisfaction of a specific monetary bequest.
• Will structure determines qualification. If the will provides that all death taxes and expenses be paid from the residuary estate, the residuary beneficiaries bear the burden and can qualify under § 303(b)(3). If the will provides for tax apportionment against specific beneficiaries, those beneficiaries can qualify. If property passes outside the will through joint tenancy or trust, the § 303(b)(3) analysis depends on state law apportionment statutes and the specific language of the governing instrument.
• CAUTION. Review the will and any trust instruments to determine who bears the burden of death taxes and expenses. If the intended redeeming shareholder does not bear this burden, § 303 cannot apply to that shareholder's redemption. Obtain and read the complete will, all codicils, and all relevant trust agreements.
• TRAP. Coordination failure between estate tax counsel and corporate counsel is a common source of § 303 errors. Estate counsel may structure the estate plan without considering who must bear the burden of taxes for § 303 purposes. Corporate counsel may authorize a redemption from a shareholder who is not burden-bearing. Hold joint planning meetings and develop a written plan addressing all statutory requirements before the redemption is executed.
• Pre-death planning to ensure burden-bearing status. Structure the will so that the intended redeeming party bears the burden of death taxes and expenses. If multiple beneficiaries will redeem, ensure each bears a proportional burden or structure sequential redemptions. The burden-bearing requirement is determined under the governing instrument and applicable state law. Drafting choices made before death control the availability of § 303.

Step 5. Timing Requirements Under § 303(b)(1) and § 303(b)(4)

Step 5A. The Three Timing Windows

"Subsection (a) shall apply only to amounts distributed after the death of the decedent and (A) within the period of limitations provided in section 6501(a) for the assessment of the Federal estate tax (determined without the application of any provision other than section 6501(a)), or within 90 days after the expiration of such period, (B) if a petition for redetermination of a deficiency in such estate tax has been filed with the Tax Court within the time prescribed in section 6213, at any time before the expiration of 60 days after the decision of the Tax Court becomes final, or (C) if an election has been made under section 6166 and if the time prescribed by this subparagraph expires at a later date than the time prescribed by subparagraph (B) of this paragraph, within the time determined under section 6166 for the payment of the installments." (§ 303(b)(1))

• The standard window (§ 303(b)(1)(A)). Distributions must occur within the § 6501(a) assessment period (typically 3 years from filing of the estate tax return) plus 90 days after expiration. Rev. Rul. 69-47, 1969-1 C.B. 94, held that the period is measured from the due date of the estate tax return (including extensions), not from the earlier date of actual filing.
• The Tax Court litigation window (§ 303(b)(1)(B)). If a petition for redetermination of deficiency is filed in Tax Court within the § 6213 period, the distribution window extends to 60 days after the Tax Court decision becomes final. Treas. Reg. § 1.303-2(e) clarifies this extension applies only to bona fide Tax Court contests and NOT to petitions initiated solely to extend the § 303 period.
• The § 6166 installment window (§ 303(b)(1)(C)). If a § 6166 election is made and its installment period extends beyond the other windows, the § 303 redemption period extends to cover the entire § 6166 installment period (up to 15 years from the estate tax return due date). See Step 10 for detailed § 6166 coordination.
• Distributions must occur after death. § 303(b)(1) explicitly requires distribution "after the death of the decedent." A redemption that closes before death cannot qualify.
• Multiple distributions are permitted. Rev. Rul. 67-425, 1967-2 C.B. 134, held that each distribution in redemption of stock within the statutory period may qualify under § 303, provided the aggregate amount does not exceed the ceiling.

Step 5B. The 4-Year Late Distribution Limitation

"In the case of amounts distributed more than 4 years after the date of the decedent's death, subsection (a) shall apply to a distribution by a corporation only to the extent of the lesser of (A) the aggregate of the amounts referred to in paragraph (1) or (2) of subsection (a) which remained unpaid immediately before the distribution, or (B) the aggregate of the amounts referred to in paragraph (1) or (2) of subsection (a) which are paid during the 1-year period beginning on the date of such distribution." (§ 303(b)(4))

• § 303(b)(4) limits late-stage redemptions. For distributions more than 4 years after death, § 303(a) applies only to the lesser of (A) the aggregate unpaid death taxes and expenses immediately before the distribution, or (B) the aggregate death taxes and expenses paid within the 1-year period beginning on the distribution date. (§ 303(b)(4)(A)-(B))
• Purpose of the limitation. This provision prevents abuse of the extended timing windows (particularly the § 6166 15-year window) by requiring that late redemptions be tied to actual payment obligations. If the estate has already paid all death taxes and expenses, a redemption more than 4 years after death cannot qualify for § 303 treatment unless new qualifying payments are made within one year after the distribution.
• PLR 8813047 (January 4, 1988). An estate owning 99.9% of a closely held corporation elected § 6166 and planned serial redemptions over the deferral period. The IRS ruled that serial redemptions are permissible, that § 303(b)(4) limits apply only to redemptions more than 4 years after death, and that the § 6166(g)(1)(B) exclusion applies to redemptions used to pay federal estate taxes.

Step 6. Computing the § 303 Ceiling Amount

• The ceiling formula. The maximum amount that can qualify for § 303 treatment equals the sum of (1) all estate, inheritance, legacy, and succession taxes (including interest) imposed because of the decedent's death, plus (2) funeral and administration expenses allowable as deductions under § 2053. (§ 303(a)) (Treas. Reg. § 1.303-2(g)(1))
• What counts as "death taxes" under § 303(a)(1). Federal estate tax imposed under Chapter 11. State estate taxes. State inheritance taxes. Legacy and succession taxes. GST taxes (treated as death taxes under § 303(d)). Interest collected as part of any such tax. Rev. Rul. 84-76, 1984-1 C.B. 91, held that state estate taxes, inheritance taxes, legacy taxes, and succession taxes imposed because of the decedent's death qualify under § 303(a)(1).
• Interest on deferred estate tax. Estate of Bahr v. Commissioner, 68 T.C. 74 (1977), held that interest paid on deferred estate tax under § 6166 constitutes an administration expense deductible under § 2053 and includible in the § 303 ceiling. Estate of Bailly v. Commissioner, 81 T.C. 246 (1983), limited Bahr by holding that only actual interest payments qualify, not estimated future interest.
• Treas. Reg. § 1.303-2(g)(2). Taxes computed after credits. "For the purpose of section 303, the estate tax or any other estate, inheritance, legacy, or succession tax shall be ascertained after the allowance of any credit, relief, discount, refund, remission or reduction of tax." The ceiling is based on net tax after all credits, including the unified credit under § 2010.
• Funeral and administration expenses. These are expenses allowable as deductions under § 2053. Treas. Reg. § 20.2053-3 provides that administration expenses include executor commissions, attorney fees, accountant fees, appraiser's fees, court costs, and costs of preserving and distributing estate assets. The expenses must be actually and necessarily incurred in the administration of the estate.
• First-come, first-served allocation. Treas. Reg. § 1.303-2(g)(1) provides that "where there is more than one distribution in redemption of stock described in section 303(b)(2) during the period of time prescribed in section 303(b)(1), the distributions shall be applied against the total amount which qualifies for treatment under section 303 in the order in which the distributions are made." This includes all distributions, including those treated as payment in exchange for stock under another Code provision.
• Partial qualification. Rev. Rul. 71-261, 1971-1 C.B. 108, held that where a redemption exceeds the § 303 ceiling, the portion within the ceiling gets § 303 sale treatment. The excess is analyzed under § 302(b). If no § 302(b) test is met, the excess is treated as a dividend under § 301 to the extent of earnings and profits.
• EXAMPLE. Decedent's estate has $500,000 of federal estate tax, $100,000 of state inheritance tax, and $50,000 of funeral and administration expenses. The § 303 ceiling is $650,000. If the corporation redeems stock for $800,000, then $650,000 is treated as a sale under § 303 and the remaining $150,000 is tested under § 302(b) or defaults to dividend treatment under § 301.
• TRAP. The ceiling is computed on an estate-wide basis, not per-shareholder or per-corporation. If multiple shareholders or multiple corporations are involved, coordinate redemptions carefully because the first redemption to close consumes the ceiling.

Step 7. § 318 Attribution, § 302 Coordination, and the Priority Rule

Step 7A. § 318 Attribution Does Not Apply to § 303

• Estate of Byrd v. Commissioner, 46 T.C. 25 (1966), aff'd, 388 F.2d 223 (5th Cir. 1967). The estate argued that § 318 constructive ownership rules should apply to § 303, so that stock owned by a corporation in which the decedent owned 88.9% should be attributed to the decedent for percentage purposes. The Tax Court (affirmed by the Fifth Circuit) rejected this argument. The court held that "in the enactment of section 318, however, Congress had in mind an objective different from that of section 303...While there are cross-references in section 318 to sections 302 and 304, there is none to section 303." The court characterized § 303 as a "self-contained, independent provision" that provides relief in a "specified, narrow situation."
• Practical significance. Because § 318 does not apply to § 303, a redemption can qualify under § 303 even when the same redemption would fail § 302 because of family attribution. This is the primary reason § 303 is valuable in the typical closely held family corporation context.
• Estate of Byrd also held that only stock actually owned by the decedent at death counts toward the § 303(b)(2) percentage requirements. Stock indirectly owned through a corporation cannot be included.

Step 7B. The Treas. Reg. § 1.303-2(g) Priority Rule

• Automatic § 303 classification. Treas. Reg. § 1.303-2(g)(1) provides that when a redemption qualifies under both § 303 and another provision of the Code (such as § 302(a) exchange treatment), the redemption is DEEMED to be a § 303 redemption. This regulation prevents taxpayers from selectively applying the more favorable provision.
• Why this can be disadvantageous. If a redemption would fully qualify under § 302(b)(3) (complete termination with family attribution waiver), the automatic § 303 rule forces § 303 classification, which caps the amount eligible for exchange treatment at the death tax plus expenses ceiling. Under § 302(b)(3), the entire redemption could qualify for exchange treatment without that cap.
• Partial qualification preserves flexibility. Rev. Rul. 71-261, 1971-1 C.B. 108, held that where a redemption partially qualifies under § 303, the portion within the ceiling is treated under § 303. The excess amount is then tested under § 302(b). If the excess qualifies under a § 302(b) test, it gets exchange treatment. If not, it defaults to dividend treatment under § 301.
• Planning around the priority rule. If the practitioner determines that § 302 treatment would be more favorable than § 303 (because the redemption exceeds the § 303 ceiling), consider structuring the redemption to intentionally fail one or more § 303 requirements so that only § 302 applies.
• CAUTION. The § 303 priority rule is not elective. If all § 303 requirements are met, the dual-qualifying redemption is automatically classified under § 303. Plan the transaction structure before executing the redemption.

Step 7C. Why § 303 Is Necessary When § 302(a) Would Otherwise Apply

• The § 302(b) tests that must be met for § 302(a) exchange treatment. A redemption qualifies under § 302(a) only if it meets one of the § 302(b) safe harbors. These are (1) not essentially equivalent to a dividend under § 302(b)(1), (2) substantially disproportionate under § 302(b)(2), (3) complete termination under § 302(b)(3), or (4) partial liquidation under § 302(b)(4).
• United States v. Davis, 397 U.S. 301 (1970). The Supreme Court held that the test for whether a redemption is "not essentially equivalent to a dividend" under § 302(b)(1) is whether the redemption results in a "meaningful reduction of the shareholder's proportionate interest in the corporation." Business purpose is irrelevant. In the typical estate context where the estate owns a controlling interest and redeems only enough stock to pay death taxes, there is no meaningful reduction, so § 302(b)(1) fails.
• Family attribution prevents § 302(b)(2) and § 302(b)(3) in most estate contexts. Under § 318(a)(1), an individual is considered to own stock owned by spouse, children, grandchildren, and parents. When the decedent's estate redeems stock but family members continue to own stock, the estate is treated as constructively owning the family members' stock. This prevents the estate from meeting the § 302(b)(2) substantially disproportionate test (post-redemption ownership must be less than 50% and less than 80% of pre-redemption percentage) and the § 302(b)(3) complete termination test (unless family attribution is waived under § 302(c)(2)).
• Seda v. Commissioner, 82 T.C. 484 (1984). The Tax Court held that a redemption did not qualify as a complete termination under § 302(b)(3) because the redeemed shareholder's father retained an employment relationship with the corporation. Under § 302(c)(2), family attribution cannot be waived if the distributee (or a related party) retains any interest in the corporation other than as a creditor.
• Without § 303, most estate redemptions default to dividend treatment. § 302(d) provides that if none of the § 302(b) tests are met, the distribution is treated as a dividend under § 301 to the extent of earnings and profits. § 303 provides the essential alternative path to exchange treatment.

Step 8. Substituted Basis Stock Under § 303(c)

"If (1) a shareholder owns stock of a corporation (referred to in this subsection as 'new stock') the basis of which is determined by reference to the basis of stock of a corporation (referred to in this subsection as 'old stock'), (2) the old stock was included (for Federal estate tax purposes) in determining the gross estate of a decedent, and (3) subsection (a) would apply to a distribution of property to such shareholder in redemption of the old stock, then, subject to the limitation specified in subsection (b), subsection (a) shall apply in respect of a distribution in redemption of the new stock." (§ 303(c))

• The substituted basis rule. When stock included in a decedent's gross estate is exchanged in a tax-free transaction for "new stock" with basis determined by reference to the old stock, a subsequent redemption of the new stock can qualify for § 303 treatment to the same extent as a redemption of the old stock would have qualified. (§ 303(c)) (Treas. Reg. § 1.303-2(d))
• Covered transactions. Treas. Reg. § 1.303-2(d) specifies four types of transactions. These are (1) a reorganization under § 368, (2) a distribution or exchange under § 355 (or so much of § 356 as relates to § 355), (3) an exchange under § 1036 (stock for stock in the same corporation), and (4) a distribution to which § 305(a) applies (nontaxable stock dividends).
• § 306 stock taint removal. Treas. Reg. § 1.303-2(d) also provides that a distribution in redemption of § 306 stock (which would normally produce ordinary dividend income under § 306(a)) will qualify under § 303 to the extent the conditions of § 303 are met. Because the basis of estate stock is determined under § 1014 rather than by reference to the decedent's basis, the § 306 taint is effectively removed for estate stock. Rev. Rul. 74-266, 1974-1 C.B. 73, addressed a redemption of § 306 preferred stock at a premium and the allocation of the redemption amount to earnings and profits. Rev. Rul. 82-72 modified the approach of Rev. Rul. 74-266. Rev. Rul. 82-72, 1982-1 C.B. 57, modified Rev. Rul. 74-266 and addressed the interaction between § 303 and § 306 redemptions. § 306(b)(4)(A), as enacted in the Tax Reform Act of 1976, now provides an explicit exception that § 306(a) shall not apply to the extent that § 303 applies to a distribution in redemption of § 306 stock.
• Rev. Rul. 87-132, 1987-2 C.B. 82. A corporation with 300 shares of voting common owned equally by an estate and an individual issued a 5-for-1 stock dividend of new nonvoting common to each shareholder, then redeemed a portion of the estate's new nonvoting shares. The IRS ruled that the stock dividend was nontaxable under § 305(a) and the redemption qualified under § 303(a). This ruling allows estates to maintain relative voting control while accomplishing § 303 redemptions.
• GCM 38934 (December 8, 1982). The IRS Office of Chief Counsel considered whether the step-transaction doctrine could apply to deny § 303 treatment where a recapitalization preceded a redemption. The GCM concluded that § 303(c) explicitly provides statutory authority for preserving § 303 eligibility through tax-free exchanges, limiting the application of the step-transaction doctrine in this context.
• CAUTION. The substituted basis rule applies only to tax-free transactions where the basis of the new stock is determined by reference to the old stock. Taxable exchanges or sales do not preserve § 303 eligibility.
• TRAP. If estate stock is distributed to beneficiaries and then exchanged in a tax-free reorganization, the new stock received by the beneficiaries may not qualify for § 303 treatment because § 303(b)(3) requires the redeemed shareholder to bear the burden of death taxes. Coordinate the timing of distributions, reorganizations, and redemptions carefully.

Step 9. Generation-Skipping Transfer Coordination Under § 303(d)

"Where stock in a corporation is the subject of a generation-skipping transfer (within the meaning of section 2611(a)) occurring at the same time as and as a result of the death of an individual (1) the stock shall be deemed to be included in the gross estate of such individual; (2) taxes of the kind referred to in subsection (a)(1) which are imposed because of the generation-skipping transfer shall be treated as imposed because of such individual's death (and for this purpose the tax imposed by section 2601 shall be treated as an estate tax); (3) the period of distribution shall be measured from the date of the generation-skipping transfer; and (4) the relationship of stock to the decedent's estate shall be measured with reference solely to the amount of the generation-skipping transfer." (§ 303(d))

• When § 303(d) applies. § 303(d) provides special rules when stock in a corporation is the subject of a generation-skipping transfer (GST) under § 2611(a) that occurs simultaneously with and as a result of an individual's death. This typically occurs when property passes directly from a grandparent to a grandchild (skipping the parent generation) and GST tax is imposed under § 2601. (§ 303(d))
• Deemed gross estate inclusion. Under § 303(d)(1), stock subject to a GST at death is treated as included in the transferor's gross estate, even if it would not otherwise be included under the standard estate tax provisions. This ensures the stock can satisfy the § 303(a) inclusion requirement even though the property passes outside the probate estate. (§ 303(d)(1))
• GST tax treated as a death tax. Under § 303(d)(2), any GST tax imposed because of the transfer is treated as an estate tax imposed because of the individual's death. This means the GST tax itself counts toward the § 303(a)(1) ceiling amount. The § 2601 GST tax is specifically treated as an estate tax for this purpose. (§ 303(d)(2))
• Period measured from GST date. Under § 303(d)(3), the § 303(b)(1) time periods are measured from the date of the generation-skipping transfer rather than from the date of death. If the GST occurs on the death date, the periods run concurrently with the normal § 303(b)(1) windows. (§ 303(d)(3))
• Percentage test measured by GST amount. Under § 303(d)(4), the § 303(b)(2) percentage tests (35% of adjusted gross estate or 50% of taxable estate) are measured by reference solely to the amount of the generation-skipping transfer, not the full estate. This can make the test easier to satisfy in the GST context because the fraction is the GST transfer amount over the applicable estate base rather than the entire estate over that base. (§ 303(d)(4))
• CAUTION. § 303(d) applies only to generation-skipping transfers that occur "at the same time as and as a result of" the death of an individual. A GST occurring at a later time (such as a taxable termination or taxable distribution years after death) does not trigger § 303(d). In such cases the stock is not deemed included in the gross estate and the GST tax does not count toward the § 303(a)(1) ceiling.
• Practical application. § 303(d) ensures that the § 303 redemption mechanism is available for GST tax payments, not just regular estate tax. Without § 303(d), GST tax on stock passing to skip persons could not be funded through a tax-favored redemption because the GST tax is technically not an estate, inheritance, legacy, or succession tax within the meaning of § 303(a)(1). The practitioner should verify (1) that a GST has actually occurred, (2) that it is simultaneous with death, (3) the amount of the GST for ceiling and percentage-test purposes, and (4) that the stock being redeemed is the stock subject to the GST.

Step 10. § 6166 Estate Tax Deferral and § 303 Redemptions

Step 10A. Extended Redemption Period Under § 303(b)(1)(C)

"In the case of an election under section 6166 the period of distribution shall include the period during which the installments under section 6166 are being paid." (§ 303(b)(1)(C))

• The § 6166 election extends the § 303 redemption window. Under § 303(b)(1)(C), if a § 6166 election is made and the installment period expires later than the standard or Tax Court windows, the § 303 redemption period extends to cover the entire § 6166 installment period. § 6166 allows a 4-year deferral of principal payments (with interest-only payments during this period) followed by up to 10 annual installments. This means the § 303 redemption window can extend up to 15 years from the estate tax return due date (approximately 15.5 years from death). (§ 303(b)(1)(C)) (§ 6166(a))
• Interest-only period plus 10 installments. § 6166(a) permits the executor to elect to pay the estate tax attributable to a closely held business in five or fewer installments, with the first installment payable not more than 5 years after the estate tax return due date. § 6166(a)(2) then permits up to 10 additional annual installments. The practical effect is a maximum deferral of approximately 15 years from the return due date. During the first 4 years of the deferral, only interest payments are due. The § 303 redemption period tracks this entire installment period. (§ 6166(a)) (§ 6166(g)(3))
• CAUTION. The extension under § 303(b)(1)(C) applies only if the estate actually makes a valid § 6166 election. The election is made by attaching a notice of election to Form 706. If the § 6166 election is invalid or is terminated (for example, by acceleration under § 6166(g)(1)(A)), the extended redemption period may be lost and the standard § 303(b)(1) periods apply instead.

Step 10B. Covered Redemptions and the Anti-Acceleration Safe Harbor

"A disposition or a withdrawal with respect to an interest in a closely held business shall not be taken into account under subparagraph (A) to the extent that the proceeds of such disposition or withdrawal are used to pay the estate tax imposed by this chapter or interest on such tax and there is a prepayment of the estate tax in an amount not less than the proceeds of such disposition or withdrawal not later than the date determined under paragraph (3) for the payment of the first installment which becomes due after the disposition or withdrawal (or if earlier not later than 1 year after the disposition or withdrawal)." (§ 6166(g)(1)(B))

• The safe harbor prevents acceleration for qualifying redemptions. Under § 6166(g)(1)(B), a § 303 redemption does NOT trigger acceleration of deferred estate tax payments under § 6166(g)(1)(A) if (1) the proceeds are used to pay federal estate tax (or interest on federal estate tax) and (2) the estate prepays estate tax in an amount not less than the redemption proceeds by the date the first installment becomes due after the redemption (or within one year, if earlier). Under this safe harbor, (i) the redemption and withdrawal are not treated as a disposition for acceleration purposes, and (ii) the value of the closely held business interest is reduced by the value of the redeemed stock. (§ 6166(g)(1)(B))
• Rev. Rul. 72-188, 1972-1 C.B. 383 (cumulative approach adopted). An estate with a closely held business elected § 6166 to defer $125,000 of a $200,000 federal estate tax. The estate made § 303 redemptions of $50,000 each in November 1967 and November 1968. Following each redemption, the estate made an estate tax installment payment equal to the redemption amount within approximately one month. The IRS adopted a cumulative approach, comparing cumulative estate tax payments to cumulative redemption amounts. The ruling held that the redemptions did not trigger acceleration of the remaining deferred tax because cumulative tax payments at least equaled cumulative redemption amounts. The ruling established that the § 6166(g)(1)(B) safe harbor was satisfied when the estate demonstrated that tax payments matched or exceeded redemption proceeds on a cumulative basis.
• Rev. Rul. 86-54, 1986-1 C.B. 356 (modifying Rev. Rul. 72-188). The IRS modified the cumulative-only approach of Rev. Rul. 72-188. Under the current guidance, the determination of whether the safe harbor is satisfied may be made on either (1) a cumulative basis (comparing cumulative tax paid to cumulative redemptions through the date of analysis), or (2) a redemption-by-redemption basis (comparing tax paid following each particular redemption to the amount of that specific redemption). The estate may choose whichever method produces the more favorable result. This flexibility benefits estates that make uneven redemptions or uneven tax payments over the deferral period.
• PLR 8813047 (January 4, 1988) (serial redemptions permitted). An estate owning 99.9% of a closely held corporation elected § 6166 and planned a series of redemptions over the deferral period to fund estate tax payments. The IRS ruled that (1) serial § 303 redemptions during the § 6166 installment period are permissible, (2) the § 6166(g)(1)(B) exclusion applies to redemptions used to pay federal estate taxes due with the initial return and succeeding year installments, and (3) the exclusion applies provided at least half of the combined value of the estate's interest in the closely held business has not otherwise been disposed of or withdrawn under § 6166(g)(1)(A). This ruling confirms that estates may plan multiple redemptions over the full § 6166 deferral period without triggering acceleration.

Step 10C. CAUTION. Non-Covered Redemptions Trigger Acceleration

• Redemptions for state death taxes or expenses do NOT qualify for the safe harbor. § 6166(g)(1)(B) applies only to redemptions used to pay federal estate tax (or interest on federal estate tax). If redemption proceeds are used to pay state death taxes or administration expenses, the redemption does NOT qualify for the safe harbor. Rev. Rul. 85-43, 1985-1 C.B. 356, held that an estate's payment of state death taxes out of redemption proceeds is NOT equivalent to a payment of federal estate tax for § 6166(g) purposes. The rationale is that § 6166(g)(1)(B) specifically refers to "the estate tax imposed by this chapter" (federal estate tax under chapter 11) and does not extend to state-level death taxes. (§ 6166(g)(1)(B)) (Rev. Rul. 85-43, 1985-1 C.B. 356 (state death tax payments from redemption proceeds do not qualify for the § 6166(g)(1)(B) safe harbor))
• Non-covered redemptions count toward the 50% acceleration threshold. Under § 6166(g)(1)(A), if the aggregate of dispositions, distributions, sales, exchanges, and withdrawals equals or exceeds 50% of the value of the closely held business interest, all unpaid deferred estate tax becomes immediately due. Non-covered § 303 redemptions (those used to pay state taxes or expenses) count dollar-for-dollar toward this 50% threshold. (§ 6166(g)(1)(A))
• Monitor the 50% threshold carefully. Track all dispositions, distributions, and withdrawals during the entire § 6166 deferral period. Include non-covered § 303 redemptions, estate distributions of stock to beneficiaries, sales of business interests to third parties, and withdrawals of business assets by the estate. Exempt transactions that do not count toward the 50% include covered § 303 redemptions under § 6166(g)(1)(B), family transfers of business interests by reason of death, and tax-free reorganizations. Maintain a running calculation of cumulative non-exempt dispositions against the original closely held business value. (§ 6166(g)(1)(A)) (§ 6166(g)(1)(B))
• TRAP. Failing to prepay federal estate tax equal to the redemption proceeds by the next installment due date converts a covered redemption into a non-covered redemption. Once converted, the redemption counts toward the 50% acceleration threshold under § 6166(g)(1)(A). Calendar these prepayment deadlines carefully and ensure the prepayment is made in the required amount and within the required timeframe. The prepayment must be at least equal to the redemption proceeds, not merely proportional. (§ 6166(g)(1)(B))
• Planning coordination. Structure the sequence of redemptions to prioritize federal estate tax payments (which qualify for the safe harbor) before state tax payments or expense payments (which do not). If multiple redemptions are planned, ensure that each redemption intended to qualify under § 6166(g)(1)(B) has a corresponding prepayment. Document the use of proceeds for each redemption separately to preserve the safe harbor for qualifying redemptions.

Step 11. Corporate-Level Consequences and Funding the Redemption

• Corporate gain on distribution of appreciated property. If the corporation distributes appreciated property (rather than cash) in a § 303 redemption, the corporation must recognize gain under § 311(b) as if the property were sold to the distributee at its fair market value. The character of the gain depends on the type of property distributed (for example, ordinary income for inventory, capital gain for investment property, recapture for depreciated property). This is a corporate-level tax consequence separate from the shareholder-level § 303 analysis. (§ 311(b)) (§ 311(b)(2))
• Effect on corporate earnings and profits. A § 303 redemption reduces corporate earnings and profits (E&P). Under § 312(a), the corporation reduces its E&P by the ratable share of the E&P attributable to the redeemed stock, subject to the limitations of § 312(n)(7). Because the § 303 redemption is treated as a sale or exchange at the shareholder level, the E&P reduction is computed differently than it would be for dividend treatment. The corporation should compute the E&P impact before structuring a non-cash redemption to ensure adequate surplus remains. (§ 312(a)) (§ 312(n)(7))
• Notes payable satisfy § 303. Rev. Rul. 65-289, 1965-2 C.B. 86, held that a corporation may distribute its own promissory notes in a § 303 redemption. The notes qualify as "property" within the meaning of § 317(a). This is particularly useful when the corporation lacks sufficient cash or liquid assets to complete the redemption. The notes should bear adequate interest, have a fixed maturity date, and reflect arms-length terms. Rev. Rul. 67-425, 1967-2 C.B. 134, confirmed that multiple distributions including notes and cash in a single integrated redemption plan may qualify under § 303. (Rev. Rul. 65-289, 1965-2 C.B. 86 (corporate promissory notes are permissible consideration in a § 303 redemption)) (Rev. Rul. 67-425, 1967-2 C.B. 134 (multiple distributions including notes qualify as a single § 303 redemption))
• CAUTION. Notes issued in redemption must constitute true debt instruments, not disguised equity. Under the § 385 regulations (Treas. Reg. §§ 1.385-1 through 1.385-10), an instrument may be recharacterized as equity if it lacks sufficient debt-like characteristics. Relevant factors include whether there is a fixed maturity date, an unconditional obligation to pay, creditor status upon default, a reasonable rate of interest, and meaningful security. If the note is recharacterized as equity, the redemption may fail to qualify under § 303 or may be treated as a dividend distribution. (Treas. Reg. § 1.385-1) (Treas. Reg. § 1.385-2)
• Permitted accumulation of earnings for § 303 redemption. § 537 expressly permits a corporation to accumulate earnings after a decedent's death for the purpose of redeeming stock under § 303. This provision provides a safe harbor against the accumulated earnings tax (AET) under § 531. A corporation may set aside earnings post-death to fund a § 303 redemption without exposure to the AET, provided the accumulation is reasonable in amount and timed to meet the redemption obligation within the § 303(b)(1) period. (§ 537) (§ 531)
• TRAP. Pre-death accumulations of earnings to fund a future § 303 redemption may trigger the accumulated earnings tax under § 531 and § 532. For minority shareholders, accumulations are generally not subject to the AET if there is a reasonable business purpose independent of the redemption. For majority shareholders, accumulations to fund a redemption of the majority shareholder's stock are more likely to be challenged as lacking a business purpose. In Pelton Steel Casting Co. v. Commissioner, 28 T.C. 153 (1957), the Tax Court held that a corporation's accumulation of earnings to redeem a majority shareholder's stock was subject to the AET because the accumulation was for the benefit of the controlling shareholder rather than for a valid corporate business purpose. (Pelton Steel Casting Co. v. Commissioner, 28 T.C. 153 (1957) (accumulation to redeem majority shareholder stock held subject to AET)) (§ 532) (§ 537)
• Connelly v. United States, 603 U.S. ___ (2024). The Supreme Court held unanimously that life insurance proceeds payable to a closely held corporation to fund a stock redemption agreement are an asset that increases the corporation's fair market value for estate tax purposes. The Court rejected the argument that the corporation's contractual obligation to redeem shares at fair market value constitutes a liability that offsets the insurance proceeds. The deceased shareholder's stock must be valued at the moment of death, before the redemption occurs. This holding produces two significant consequences for practitioners. First, corporate-owned life insurance increases the estate tax value of the corporate stock, potentially pushing more estates above the exemption threshold and increasing the overall estate tax burden. Second, cross-purchase agreements (where surviving shareholders individually buy the decedent's stock) may be preferable to stock redemption agreements (where the corporation redeems the stock) because cross-purchase proceeds do not increase corporate value. (Connelly v. United States, 603 U.S. ___ (2024) (corporate-owned life insurance proceeds are a corporate asset that increases stock value for estate tax purposes. The redemption obligation is not an offsetting liability))
• Post-Connelly planning review. Review all existing buy-sell agreements funded with corporate-owned life insurance in light of Connelly. Consider converting redemption agreements to cross-purchase structures to avoid including insurance proceeds in the corporate value. Ensure agreements are actually followed (the Connelly case was decided in part because the parties failed to follow their own agreement's appraisal requirements and instead used a contractual formula price). Consider establishing irrevocable life insurance trusts (ILITs) to remove insurance proceeds from the taxable estate entirely. If a redemption structure is retained, plan for the increased estate tax value of the stock and confirm that the § 303 ceiling will cover the desired redemption amount.

Step 12. Reporting Obligations and Documentation

• Shareholder-level reporting on Form 8949 and Schedule D. The redeemed shareholder (estate or beneficiary) reports the § 303 redemption as a sale or exchange of a capital asset. Report the transaction on Form 8949, showing (1) the description of the property (number of shares and corporation name), (2) date acquired (date of death or "INHERIT" if stepped-up basis), (3) date sold (redemption date), (4) proceeds (redemption amount), and (5) cost basis (stepped-up basis under § 1014, which is the estate tax value or alternate valuation date value). Carry the totals from Form 8949 to Schedule D (Form 1040 for individual beneficiaries or Form 1041 for estates). Attach an explanatory statement identifying the transaction as qualifying under § 303. (IRS Publication 559, Survivors, Executors, and Administrators) (IRS Publication 544, Sales and Other Dispositions of Assets)
• Form 1099-DIV generally NOT issued for qualifying § 303 redemptions. Because the qualifying portion of the redemption is treated as a sale or exchange under § 303(a), not as a dividend distribution under § 301, the corporation should not issue Form 1099-DIV for the qualifying portion. If the corporation mistakenly issues Form 1099-DIV, the shareholder should still report the qualifying portion on Form 8949 and Schedule D with an explanatory statement referencing § 303. The practitioner should communicate with the corporation's tax preparer before the redemption to ensure proper information return treatment. (§ 303(a)) (§ 6042)
• Reporting redemptions that exceed the § 303 ceiling. For the excess portion that does not qualify under § 303, the corporation must issue Form 1099-DIV if the excess is treated as a dividend under § 301(c)(1). Report the qualifying § 303 portion on Form 8949 and Schedule D as a sale or exchange. Report the dividend portion as ordinary dividend income on Schedule B (Form 1040 or Form 1041). If the redemption exceeds basis but not the ceiling, only the gain portion (proceeds minus stepped-up basis) is reported on Form 8949. (§ 301(c)) (§ 303(a))
• Estate tax return (Form 706) disclosures. The estate must report the corporate stock on Schedule B of Form 706 (stocks and bonds). The estate tax computation on Form 706 Part 2 establishes the aggregate amount of death taxes available for the § 303 ceiling. Report deductible funeral expenses on Schedule J and administration expenses on Schedule K. Retain the filed Form 706 (and all schedules) as the primary documentation of the § 303 ceiling computation. If the estate elects alternate valuation under § 2032, the alternate valuation date value becomes the stock's basis. (§ 2031) (§ 2032) (§ 303(a)(1))
• Basis consistency requirements. Under § 1014(f) and § 6035, the basis reported on the income tax return must generally be consistent with the estate tax value reported on Form 706. The executor must provide Schedule A of Form 8971 to each beneficiary receiving property from the estate, showing the estate tax value of property received. Ensure that the basis used for the redeemed stock on Form 8949 matches the estate tax value reported on Form 706 Schedule B. A discrepancy between the estate tax value and the income tax basis may trigger an IRS inquiry. (§ 1014(f)) (§ 6035) (Treas. Reg. § 1.6035-1)
• Corporate documentation requirements. The corporation should maintain the following documents. (1) A board resolution authorizing the redemption that identifies the shareholder, the number and class of shares, the redemption price, and states the intent to qualify the distribution under § 303. (2) A written redemption agreement between the corporation and the estate or shareholder setting forth the terms. (3) Corporate minutes reflecting consideration and approval by the board of directors. (4) Stock transfer records showing the cancellation of redeemed shares and updating the stock ledger. (5) Evidence of compliance with state corporate law requirements, including solvency and surplus requirements for redemptions under the applicable state corporation statute. (Treas. Reg. § 1.303-2(a))
• Death tax documentation for audit defense. Maintain the following records to substantiate the § 303 ceiling and qualifications. (1) The filed Form 706 (or a certified copy). (2) State estate or inheritance tax returns filed for the decedent's estate. (3) Funeral expense invoices and paid receipts. (4) Estate administration expense records, including attorney fees, executor commissions, accountant fees, and appraisal costs. (5) Paid tax receipts or evidence of payment for all death taxes. (6) The IRS estate tax closing letter (estate tax transcript or closing agreement) if available. (7) Documentation showing the relationship between the redemption proceeds and the death tax payments (canceled checks, wire transfer records, or journal entries). (§ 303(a)(1)) (Treas. Reg. § 1.303-2)
• TRAP. If the IRS challenges a § 303 redemption, the taxpayer bears the burden of proving that all statutory requirements were met. Inadequate documentation can result in reclassification of the entire redemption as a dividend under § 301(c)(1), with ordinary income treatment and no offset for the stepped-up basis. Document the business purpose for the redemption contemporaneously in the corporate minutes. Do not create or backdate documents after an audit has commenced. (Welch v. Helvering, 290 U.S. 111 (1933) (taxpayer bears burden of proving entitlement to claimed deductions and benefits)) (§ 7491)
• CAUTION. In community property states, the estate tax return must properly report both the decedent's and the surviving spouse's community property interests in the corporate stock. Under § 1014(b)(6), both halves of community property receive a stepped-up basis to fair market value at death. Ensure that the Form 706, the state death tax returns, and the income tax basis reported on Form 8949 are all consistent. A mismatch between the community property reporting on Form 706 and the basis claimed on the income tax return can create exposure on both returns. (§ 1014(b)(6)) (§ 2040(b)).