Thomas Connelly v. United States, No. 21-3683 (8th Cir. 2023)
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Plaintiffs, two brothers, were the sole shareholders of Crown C Corporation. The corporation obtained life insurance on each brother so that if one died, the corporation could use the proceeds to redeem his shares. When one brother died, the Internal Revenue Service assessed taxes on his estate, which included his stock interest in the corporation. According to the IRS, the corporation’s fair market value includes the life insurance proceeds intended for the stock redemption. The brother's estate argues otherwise and sued for a tax refund. The district court agreed with the IRS.
The Eighth Circuit affirmed. The court explained that here the estate argues that the court should look to the stock-purchase agreement to value of the brother’s shares because it satisfies these criteria. But the estate glosses over an important component missing from the stock purchase agreement: some fixed or determinable price to which we can look when valuing the brother’s shares. Further, the Treasury regulation that clarifies how to value stock subject to a buy-sell agreement refers to the price in such agreements and “the effect, if any, that is given to the . . . price in determining the value of the securities for estate tax purposes.” 26 C.F.R. Section 20.2031-2(h). Here, the stock-purchase agreement fixed no price nor prescribed a formula for arriving at one. Further, the court explained that the proceeds were simply an asset that increased shareholders’ equity. A fair market value of the brother's shares must account for that reality.
Court Description: [Gruender, Author, with Smith, Chief Judge, and Stras, Circuit Judge] Civil case - Federal Tax. Connelly and his brother Michael were the sole shareholders of a corporation and the corporation obtained life insurance on each of them so if one died the corporation could use the insurance proceeds to redeem his shares. When Michael died, the IRS assessed taxes on his estate, which included his stock interest in the corporation. The IRS determined the corporation's fair market value included the life insurance proceeds intended for the stock redemption, and Michael' estate sued for a tax refund. Held, the corporations' value must be determined without regard to the brother's stock-purchase agreement, and the IRS did not err in including the insurance proceeds as part of the corporation's fair market value as the proceeds were a significant asset of the corporation at the time of Michael's death.
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