Connelly v. Internal Revenue Service
Issues
Should a deceased shareholder’s stock valuation for federal estate tax purposes include company-owned life insurance proceeds used to buy back the shareholder’s stock?
This case asks the Supreme Court to decide whether life insurance proceeds acquired by a corporation to redeem a deceased shareholder’s stock are a corporate asset when calculating the shareholder’s interest in the corporation for federal estate tax purposes. Connelly, the petitioner, argues that life insurance proceeds used to fulfill a corporation’s obligation to redeem a shareholder’s stock should not increase the taxable value of the estate because a closely held corporation’s obligation to redeem stock is a liability that offsets the value of life insurance proceeds. Connelly further contends that the estate tax valuation method used by the Internal Revenue Service (“IRS”), which includes insurance proceeds in the company’s share value, is detrimental to closely held corporations because it forces them to overspend on life insurance and redemption arrangements. The IRS counters that life insurance proceeds, which enhance a company’s equity, should not be offset by stock redemption obligations in share valuation. The IRS also contends that taxing life insurance proceeds aligns with legislative goals to tax a deceased shareholder’s property at its fair market value, emphasizing that the Connelly family’s undervaluation of shares bypasses market value impacts. The outcome of this case will affect estate planning strategies and the effectiveness of life insurance-funded redemption agreements that intend to ensure closely held business’s continuity of ownership.
Questions as Framed for the Court by the Parties
Whether the proceeds of a life-insurance policy taken out by a closely held corporation on a shareholder in order to facilitate the redemption of the shareholder’s stock should be considered a corporate asset when calculating the value of the shareholder’s shares for purposes of the federal estate tax.
Michael Connelly and Thomas Connelly (“Connelly”), who were brothers, owned all the shares of Crown C corporation (“Crown”). Connelly v. United States at 414. The brothers and Crown entered into a stock purchase agreement to ensure a seamless transfer of ownership in the event of either brother’s death.
Additional Resources
- Carter Ledyard & Milburn LLP, Certiorari Granted in Connelly (Jan. 16, 2024).
- Aaron LeClair and David Winkowski, Considerations and Best Practices for Estate Planning in Wake of Connelly (Feb. 6, 2024).
- Mercer Capital, Observations from a Buy-Sell Agreement Gone Bad.
- Steven H. Seel and Daniel R. Griffith, Connelly v. IRS: Casting Shadows on Buy-Sell Agreements (Jan. 18, 2022).