BEST PRACTICES STRUCTURING BUY-SELL AGREEMENTS FOR FARMERS, RANCHERS & OTHER BUSINESS OWNERS POST CONNELLY V. UNITED STATES BY CRAIG W. BENSON & REBEKAH C. BIRCH, KOLEY JESSEN COUNSELOR’S CORNER IN CONNELLY V. UNITED STATES,1 THE Eighth Circuit Court of Appeals (which includes Nebraska) ruled that life insurance proceeds received from company-owned life insurance (COLI) following the death of a shareholder must be considered a corporate asset in valuing the shares of the corporation’s stock held by the estate of the deceased shareholder. The ruling resulted in a circuit split with the Ninth and Eleventh Circuits, which previously ruled that the value of COLI proceeds are offset by the corporation’s contractual redemption obligation. The court also ruled that the company’s buy-sell agreement was not binding to fix the value of the shares for estate tax purposes, finding that the agreement was not fixed and determinable in determining value since the owners merely determined value by mutual agreement, rather than the mechanisms provided for in the buy-sell agreement. The case impacts closely held business owners and illustrates the importance of thoughtful succession planning and key considerations when using COLI to help finance buyouts. The Supreme Court of the United States (SCOTUS) agreed to hear oral arguments on the dispute on March 27, 2024. Background In Connelly, two brothers jointly owned a corporation. To ensure business continuity in the event of one’s death, the corporation secured life insurance policies on each brother, formalizing this arrangement with a buy-sell agreement. The agreement provided for two valuation mechanisms: executing certificates of agreed value at the end of each tax year, or, in the alternative, obtaining two or more appraisals of fair market value. When Michael Connelly passed away, the corporation received a $3.5 million life insurance payout. The corporation redeemed Michael’s shares for $3 million, valuing his interest in the business at the same amount on the federal estate tax return. Notably, the parties failed to use the valuation methods provided in the agreement in valuing the business interest. The IRS argued that the $3.5 million in insurance proceeds should be considered a corporate asset, inflating the total value of the corporation and increasing the estate tax owed. The district court granted the IRS summary judgment, concluding that the buy-sell agreement did not affect the valuation since the parties did not adhere to the terms of the agreement and that a proper valuation must include the life insurance proceeds used for redemption. The Eighth Circuit affirmed. Notably, this result by the Eighth Circuit took the opposite approach for the inclusion of life insurance proceeds than two previous decisions by the Eleventh and Ninth Circuits in Estate of Blount v. Commissioner 26 Nebraska CPA
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