The Supreme Court is set to review a contentious issue involving the role of life insurance payouts in federal income tax calculations for estates.
The case, Connelly v. Internal Revenue Service, centers on whether these payouts should be considered corporate assets when assessing the value of a deceased person’s estate for tax purposes.
IRS, Estate clash over valuation of deceased’s shares in corporation
The dispute arose between the IRS and the estate of a deceased co-owner of a closely-held corporation.
After one of the brothers who owned the corporation passed away, disagreements ensued over the valuation of his stock.
The corporation had life insurance policies to fund the redemption of shares after a shareholder’s death, a common practice in closely-held businesses to maintain their structure.
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Appeals court rejects executor’s appeal in IRS stock valuation dispute
The 8th Circuit Court of Appeals previously rejected an appeal by Thomas Connelly, the executor of Michael Connelly’s estate.
The IRS argued that the estate owed nearly $1 million, asserting that the life insurance proceeds should be included in the valuation of the deceased’s stock in the corporation.
Supreme Court Examines Life Insurance in Estate Stock Valuation Case
The Supreme Court will now examine whether the life insurance policy intended to finance the repurchase of the deceased’s shares should impact the stock’s valuation.
The estate contends that the stock should not be taxed as the proceeds were earmarked for share repurchase. Conversely, the IRS maintains that taxation should be based on the fair market value at death.
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Supreme Court tackles fair market value assessment in estate tax law
This case presents a significant question in federal tax law, particularly concerning the fair market value of assets not traded publicly.
The Internal Revenue Code stipulates that federal estate tax is calculated based on the fair market value of an estate’s holdings at death.
However, assessing such value, especially for non-traded assets like company shares, can be complex.
Prelogar advises against Supreme Court review in estate value dispute
U.S. Solicitor General Elizabeth Prelogar, representing the IRS, advised against the Supreme Court’s review.
Citing previous circuit court rulings, she emphasized the established principles of estate valuation at the time of death and the application of the fair market value concept.
The executor of Michael Connelly’s estate reported the value of his shares at $3 million, but an IRS audit later revalued them at over $3.8 million.
8th Circuit backs IRS on life insurance inclusion in estate tax valuation
The IRS’s decision to include life insurance proceeds in the corporation’s valuation raised the company’s worth to $6.8 million at the date of death, leading to an additional tax liability of $890,000 for the estate.
The 8th Circuit sided with the IRS, rejecting the executor’s argument to exclude life insurance proceeds from the federal estate tax valuation of Michael Connelly’s shares.
This decision highlighted the ongoing debate over the valuation of nonoperating assets, including life insurance, in closely held corporations.
Supreme Court case examines estate tax complexity
As the legal community and stakeholders await the Supreme Court’s scheduling of oral arguments, this case underscores the complexities and nuances of federal estate tax law, particularly in scenarios involving non-traditional assets and closely held corporations.
The decision could have far-reaching implications for how life insurance proceeds are considered in estate valuations, potentially impacting many similar cases across the country.
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