Justices to hear estate tax dispute over shareholder’s life-insurance policy

CASE PREVIEW

After a listening to one other high-profile dispute over abortion entry, the justices will return to the bench on Wednesday to think about a routine observe in property planning for carefully held firms. To assist preserve the enterprise within the household upon the demise of a shareholder, companies regularly buy a life insurance coverage coverage on the lifetime of an growing older shareholder. Then, when the shareholder dies, the company makes use of the proceeds of that life insurance coverage coverage to buy the shares from the shareholder’s property. That means, the remaining shareholders (usually members of the family) will personal the corporate with out having to provide you with cash out of pocket to buy the shares.

The query in Connelly v. Internal Revenue Service is the way to deal with the cash that flows into the carefully held company – right here, Crown C Provide Co. Inc. Thomas Connelly, the executor of his brother Michael’s property and the corporate’s solely remaining shareholder, argues that the life insurance coverage cash is principally a wash, as a result of the second it seems on the company’s stability sheet, the company will spend it to redeem the shares.

The IRS’s view is that it will increase the worth of the company as a complete, as a result of a 3rd celebration may purchase all of the shares and thus keep away from redeeming the shares. As a result of the marginal charges of the property tax are fairly excessive for people who must pay it (40% in some circumstances), the query is relatively necessary to the sorts of rich taxpayers that face this downside (however maybe this doesn’t embrace most of us who’re mulling this downside right this moment).

To place some very tough numbers on it, Michael Connelly owned about 75% of a household company that was value a bit lower than $4 million shortly earlier than he died. The company acquired life insurance coverage proceeds on his demise, together with about $3 million that may be spent to redeem his shares. The IRS says that the company is now value virtually $7 million, as a result of a 3rd celebration would pay that a lot to purchase the entire shares, so the shares owned by Michael’s property are value a bit greater than $5 million (three-quarters of $7 million).

Michael’s property takes the view that the shares are value about $3 million (three-quarters of $4 milllion), as a result of the cash must be spent to redeem his shares and since the property can be prohibited by the principles of company regulation from promoting its shares to a 3rd celebration. As a result of the property by no means may promote the shares for the IRS’s prompt valuation, Thomas Connelly argues that it shouldn’t be taxed on that worth.

In a means, either side are asking the justices to disregard financial actuality. Connelly needs the justices to disregard what the entire company can be value to a keen purchaser. And the IRS needs the justices to disregard what inevitably goes to occur to the company in truth – redemption of the shares.

The justices usually lean towards a “defend the fisc” mentality in circumstances like this, which supplies the IRS a leg up in any case that lacks a direct statutory bar to what they suggest. As a result of there’s nothing of the type right here, it might take some wonderful advocacy for Connelly to prevail.