26 U.S.C. § 303 — Distributions in redemption of stock to pay death taxes

(a) In general — When a corporation buys back stock from a shareholder, and that stock was counted in a deceased person's estate for federal estate tax purposes, the payment is treated as a full sale of the stock (not as a dividend) — but only up to the amount of: (1) the estate, inheritance, and similar death taxes owed because of the death (plus interest on those taxes); and (2) funeral and estate-administration expenses that can be deducted under section 2053 (or section 2106 for a nonresident who wasn't a U.S. citizen). (b) Limits on subsection (a): (1) Timing — The buyback must happen after the death, and either: (A) within the normal deadline for the IRS to assess estate tax, or within 90 days after that deadline; (B) if the estate challenged an estate tax bill in Tax Court, within 60 days after that court's decision becomes final; or (C) if the estate chose to pay tax in installments under section 6166, within the time allowed for those installments, if that runs later than option (B). (2) How much of the corporation's stock counts — This special treatment only applies if the value of the corporation's stock counted in the estate is worth more than 35% of the estate's value above its allowed section 2053 or 2054 deductions. If two or more corporations are involved, and the estate counted 20% or more of each corporation's stock, those corporations' stock is added together as if it were one corporation's stock for this test. Stock that, at death, represented the surviving spouse's share of jointly or community-owned property is treated as if it had been in the estate. (3) Shareholder's connection to the tax — This treatment only applies to the extent the shareholder's own interest was actually reduced — directly or through a binding promise to pay — by paying the death taxes or expenses described above. (4) Distributions made more than 4 years after death — In that case, the special treatment is limited to the smaller of: (A) the amount of death taxes and expenses still unpaid right before the buyback; or (B) the amount of those taxes and expenses actually paid within one year after the buyback. (c) Stock with a substituted basis — If a shareholder owns "new stock" whose tax basis is figured using an "old stock's" basis, and the old stock was in the estate and would have qualified under subsection (a), then subsection (a) also applies to a buyback of the new stock — still subject to the time limits in subsection (b). (d) Generation-skipping transfers — If stock passes through a generation-skipping transfer that happens at the same time as, and because of, someone's death, then: (1) the stock is treated as if it were in that person's estate; (2) any generation-skipping transfer tax on it (including the tax under section 2601) is treated as a death tax; (3) the time limits are measured from the date of the generation-skipping transfer instead of the death; and (4) whether the stock counts as a big enough share of the estate is measured by the size of the generation-skipping transfer itself.