SCOTUS sides with IRS in COLI valuation dispute

BVWireIssue #261-2
June 12, 2024

estate and gift taxation
estate and gift tax, estate & gift, insurance

The U.S. Supreme Court has unanimously sided with the 8th Circuit and ruled that company-owned life insurance (COLI) proceeds used to redeem the deceased shareholder’s stock should be included for purposes of valuing the corporation for estate tax purposes. The proceeds are not to be offset by the redemption liability, the court ruled. The case is Thomas A. Connelly, as Executor of the Estate of Connelly v. United States, No. 23-146, which resolved a split between the 8th Circuit and the 11th Circuit, which, in the Blount case, ruled that the proceeds should not be included.

Flawed logic? In a blog post, veteran valuation expert Jim Alerding provides details of the decision, which he says uses “questionable logic” by assuming that the obligation of the corporation to redeem the shares would be an asset to a hypothetical buyer, i.e., the buyer would also obtain the rights to the “redemption and get to keep the stock.” Earlier this year, Roger Grabowski (Kroll) did a detailed analysis of the Connelly and Blount cases as well as the petition to SCOTUS. He also viewed the 8th Circuit as using flawed reasoning, and he gave an example of the implications of the court’s faulty logic. His analysis is in the January 2024 issue of Business Valuation Update. On the other hand, Jim Hitchner (Financial Valuation Advisors) was on the other side—he told the audience during his annual update webinar that he testified for the IRS in the Blount case (the agency won, but it was overturned by the 11th Circuit).

Be that all as it may, in its opinion, SCOTUS suggests several mitigating strategies, such as cross-purchase agreements. Of course, SCOTUS would not be anyone’s first choice for tax planning advice, so valuation experts should become involved with a business owner’s legal, tax, and accounting professionals in examining existing succession plans and developing alternative strategies in light of this ruling.

The Connelly case full opinion and an analysis will appear in the BVLaw platform.

Extra: Roger Grabowski has written a summary of the SCOTUS decision and gives some initial observations, which will appear in the July issue of Business Valuation Update.

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