IRS can tax death benefits used to purchase stocks, high court rules

The U.S. Supreme Court ruled that the IRS can tax death benefits used to purchase stocks, impacting the valuation of shares in closely held corporations for estate taxes. The case involved Crown C Supply Company, which used life insurance proceeds to buy the deceased CEO's shares. The IRS argued, and the Court agreed, that the value of the shares should include the insurance proceeds, leading to higher estate taxes.

The decision stems from Crown C Supply's buy-sell agreement to purchase CEO Michael Connelly's shares using life insurance. After Connelly's death, the IRS assessed the stock's value higher than reported by the estate, including the death benefit proceeds. The Supreme Court's unanimous ruling supported this valuation method, emphasizing that the redemption agreement did not reduce the shares' value for tax purposes.

Justice Clarence Thomas, writing for the majority, stated that the contractual obligation to redeem shares at market value does not offset the insurance proceeds' value. This ruling means closely held corporations may face more challenges in succession planning, as life insurance-funded redemptions increase estate taxes. The Court acknowledged these concerns but upheld the IRS's valuation approach.

For more information see Kelsey Reichmann "IRS can tax death benefits used to purchase stocks, high court rules", Courthouse News, June 6, 2024.

Special thanks to Naomi Cahn (Harold H. Greene Professor of Law, George Washington University School of Law) for bringing this article to my attention.