Connelly v. United States

Connelly v. United States involved a family-owned building supply company, Crown C Supply, Inc., owned equally by brothers Michael and Thomas Connelly. The company held life insurance policies on each brother, and a buy-sell agreement required the company to use the insurance proceeds to redeem the deceased brother's shares. When Michael died, the company received about $3 million in life insurance and used those funds to redeem his stock. Thomas, as executor of Michael's estate, reported the estate tax value of Michael's shares without including the insurance proceeds, arguing the redemption obligation offset them. The IRS disagreed and assessed additional estate tax. The Supreme Court, in a unanimous opinion by Justice Clarence Thomas, held that the life insurance proceeds must be included in the corporation's fair market value for federal estate tax purposes, and the contractual redemption obligation did not reduce that value.

The Supreme Court affirmed the Eighth Circuit, ruling unanimously that the life insurance proceeds must be included in the corporation's fair market value. A contractual redemption obligation does not offset the insurance proceeds in determining the value of the decedent's shares for estate tax purposes.

Whether life-insurance proceeds received by a closely held corporation to fund a mandatory redemption of a deceased shareholder's shares must be included in the corporation's fair market value when valuing the decedent's shares for federal estate tax purposes.

The decision significantly affects succession planning for closely held and family businesses that use life insurance to fund buy-sell agreements. It may increase federal estate tax liabilities for estates of business owners, prompting advisors to revisit valuation methods and consider alternative structures to mitigate tax exposure.