Page 576 - TaxAdviser_2022

ESTATES, TRUSTS & GIFTS

proceeds in the value of Crown C
resulted in the value of the company
The proposed regulations provide guidance being overstated by $3 million. Thomas
as to whether a payment made on paid the additional assessment of $1
a decedent’s personal guaranty million and filed suit on behalf of
the estate, seeking a refund of the $1
is deductible as a claim million. The parties stipulated that,
against the estate. if the estate was due a refund, for the
purpose of determining the amount
of such refund, the FMV of Michael’s
how much the decedent’s shares in the share” by securing two or more appraisals. Crown C shares was $3.1 million as
company were worth for purposes of his The brothers never signed a certificate of of Oct. 1, 2013 (the date of his death).
estate tax. agreed value under the SPA. The stipulation expressly did not take
On Oct. 1, 2013, Michael died, and into account the dispute over how to
Background Crown C received approximately $3.5 account for the life insurance proceeds
Brothers Michael and Thomas Connelly million in life insurance proceeds. Thom- used to redeem Michael’s shares, so the
were the only shareholders in Crown as chose not to buy Michael’s shares, so stipulation only controlled the value of
C Supply Inc., a closely held family Crown C used a portion of the life insur- Crown C exclusive of those life insur-
business. Before his death on Oct. 1, ance proceeds to buy Michael’s shares ance proceeds.
2013, Michael was the president, CEO, from his estate. Crown C and the estate The estate argued that the SPA de-
and majority shareholder. Together, did not have Michael’s shares appraised termined Crown C’s value for estate tax
Crown C had 500 shares outstanding, as required by the SPA and instead en- purposes, so the district court need not
with Michael owning 385.90 shares tered into a sale-and-purchase agreement determine Crown C’s FMV. The estate
(77.18%) and Thomas owning 114.10 for $3 million. By way of the sale agree- argued, alternatively, that Crown C’s
shares (22.82%). ment, (1) the estate received $3 million FMV did not include $3 million of the
In 2001, to maintain family owner- in cash; (2) Michael P. Connelly Jr., Mi- life insurance proceeds because the SPA
ship and control over the company and chael’s son, secured a three-year option created an offsetting $3 million obliga-
to satisfy their estate planning objec- to purchase Crown C from Thomas for tion for Crown C to redeem Michael’s
tives, the brothers and Crown C signed $4,166,666; and (3) in the event Thomas shares. The IRS argued that the SPA
a stock purchase agreement (SPA). sold Crown C within 10 years, Thomas did not meet the requirements under
Under the SPA, on the death of one of and Michael Jr. agreed to split evenly any the Code, the regulations, and the ap-
the brothers, the surviving brother had gains from the future sale. plicable case law to control Crown C’s
the right to buy the decedent’s shares, Thomas, as executor of Michael’s valuation, and that under applicable law
and, if the surviving brother did not estate, filed an estate tax return for the and customary valuation principles, the
purchase those shares, Crown C was estate. He included an amount in the life insurance proceeds used to redeem
required to redeem or buy the shares. estate for Michael’s Crown C shares of Michael’s shares increased Crown C’s
Crown C bought $3.5 million in life $3 million. On audit, the IRS challenged FMV by $3 million.
insurance policies on both brothers the $3 million valuation of Michael’s The district court first addressed
to provide funding for its redemp- Crown C shares. The IRS determined whether the SPA set the value of Mi-
tion obligation. that Crown C’s date-of-death FMV chael’s shares for estate tax purposes,
Article VII of the SPA provided should have included the $3 million in concluding that it did not. The court
two methods for calculating the price life insurance proceeds used to redeem next analyzed whether the life insur-
at which Crown C would redeem the the shares, resulting in a higher value for ance proceeds should be considered
shares. Article VII specified that the Michael’s Crown C shares than reported when calculating Crown C’s value,
brothers “shall, by mutual agreement, on the estate’s return. concluding that they should.
determine the agreed value per share The IRS issued a notice of deficiency,
by executing a new ‘Certificate of assessing over $1 million in additional Whether the SPA set the value:
Agreed Value’ at the end of every tax estate taxes. As part of the IRS audit, the First part of the analysis
year.” If the brothers did not execute a estate obtained a report on Crown C’s On the question of whether the SPA
certificate of agreed value, they would value from an accounting firm conclud- set the value of Michael’s shares for
determine the “appraised value per ing that the inclusion of the insurance estate tax purposes, the first issue

34 November 2022 The Tax Adviser