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Abstract: 

The Supreme Court addressed the estate tax consequences of corporate-owned life insurance in Connelly v. United States. In doing so, the Court addressed the taxpayer’s argument that the proceeds of an insurance policy on the life of a principal shareholder payable to a corporation should not be treated as an asset of the corporation when the corporation was obligated to redeem that shareholder’s equity interest. Despite displays of sympathy for the plight of owners of closely held corporations in this setting, the Court rejected the taxpayer’s argument—largely as a matter of logic as opposed to statutory or regulatory analysis. Apart from resolving a split among circuit courts of appeals on the matter, perhaps the most remarkable aspect of the case was the manner in which the Court ultimately treated the issue as unremarkable in its unanimous holding.

Keywords: Connelly v. United States; estate tax; stock purchase agreement; valuation; redemption price; buy-sell agreement; fair market value; IRC Sec. 2703(b); Treas. Reg. Sec. 20.2031-2(h); IRC Sec. 2042; Estate of Blount

Affiliations:  1: NYU School of Law.