Closely Held Stocks—Deferral and Financing of Estate Tax Costs through Sections 303 and 6166

The enactment of the Economic Recovery Tax Act of 1981 (hereinafter referred to as the 1981 Act ) will reduce both the impact of federal wealth transfer taxes and the number of persons still subject to them. Nevertheless, even after the 1981 Act takes full effect, a category of persons remains for whom wealth transfer taxes will constitute a meaningful burden and whose estates face a liquidity problem in satisfying the estate tax liability. The focus of this article is on two statutory techniques: redemptions of stock pursuant to section 3031 and deferral of estate tax payments under section 6166.2 These two techniques ease the burden of satisfying the estate tax liability when a closely held business constitutes a significant portion of the estate. While there are other important Code sections that permit the redemption of stock without incurring dividend treatment (for example, section 302(b)), only section 303 is examined here because that section is more closely coordinated with section 6166, the principal subject of this article. This article first deals with section 303 and then examines the operation of section 6166 and the interaction of section 6166 and section 303. Finally, it discusses certain pre-mortem planning considerations