Episode description

Welcome to Supreme Court Opinions. In this episode, you’ll hear the Court’s opinion in Connelly v United States.

In this case, the court considered this issue: should 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 be considered a corporate asset when calculating the value of the shareholder’s shares for purposes of the federal estate tax?

The case was decided on June 6, 2024.

The Supreme Court held that a corporation’s contractual obligation to redeem shares is not necessarily a liability that reduces a corporation’s value for purposes of the federal estate tax. Justice Clarence Thomas authored the unanimous opinion of the Court.

A share buyback at fair market value does not economically impact any shareholder. Although the remaining shareholders have a larger ownership percentage in a less valuable company following the buyback, the value of their holdings remains the same. Moreover, a hypothetical buyer of the shares pre-buyback would pay full price, knowing they could later redeem the shares from the company at that same fair market value.

Furthermore, the deceased shareholder's shares must be valued just prior to death, before the buyback occurs, not after. At that point, the life insurance proceeds are still a company asset that increases share value. The Court rejected the argument that the buyback obligation is a liability that offsets the life insurance asset, noting that a stock buyback by definition reduces a company's value and concentrates ownership among fewer shares. Consequently, in this case, the company's obligation to buy back the shares using life insurance proceeds does not reduce the taxable value of the deceased shareholder's stock at the time of death, as the insurance remains a company asset at that point.

While acknowledging that this decision could make succession planning more challenging, the Court pointed out that shareholders could have used alternate arrangements, such as a cross-purchase agreement, to avoid this particular tax outcome.

The opinion is presented here in its entirety, but with citations omitted. If you appreciate this episode, please subscribe. Thank you.