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addressed by the district court was shares and corresponding lack of a con- the agreement must have been entered
whether Sec. 2703(a) applied. Sec. trol premium for Michael’s shares sub- for a bona fide business reason and
2703(a) states that the FMV of an stantially overvalued Thomas’s shares must not be a substitute for a testamen-
interest in a company is determined and undervalued Michael’s shares. tary disposition for less than full and
without regard to a buy-sell agree- The court found that, while the Con- adequate consideration. The district
ment. However, Sec. 2703(b) provides nelly brothers’ good health when they court found that the SPA did not meet
an exception to Sec. 2703(a) if the executed the SPA weighed in favor of these requirements.
agreement: (1) is a bona fide business the estate’s argument, the parties’ total Regarding whether the purchase
arrangement; (2) is not a device to disregard of the SPA and the lack of a price was fixed and determinable, the
transfer such property to members of control premium or minority discount district court concluded that Crown
the decedent’s family for less than full in it showed that the SPA was a tes- C’s share price was not fixed and deter-
and adequate consideration in money or tamentary device to transfer wealth to minable. It noted that the $3 million
money’s worth; and (3) is comparable Michael’s family members for less than redemption price was not determined
to similar agreements entered into by full and adequate consideration. under a formula in the SPA, and
persons in an arm’s-length transaction. Regarding whether the SPA was Thomas and the estate did not rely, as
Here, the district court determined, comparable to similar arrangements required by the SPA, on a certificate of
based on an analysis of these three negotiated at arm’s length, the district agreed value or two or more appraisals
prongs, that the Sec. 2703(b) exception court determined that, other than the to determine Crown C’s share price. In-
was inapplicable. accountant’s report, the estate failed to stead, Thomas and the estate negotiated
Regarding whether the SPA was provide any evidence of similar arrange- their own value, which, the court noted,
a bona fide business arrangement, ments negotiated at arm’s length. The “not surprisingly was less than the value
the parties stipulated that the Con- court added that the fact that closely of the life insurance proceeds.”
nelly brothers entered the SPA for the held family corporations generally use Regarding whether the SPA was
purpose of ensuring continued family life insurance proceeds to fund redemp- legally binding on the parties during
ownership over Crown C. Based on the tion obligations does not establish that life and after death, the district court
parties’ stipulation, the district court this particular SPA was comparable to focused on whether it was binding after
deemed the SPA a bona fide busi- an arm’s-length bargain, particularly death. The court noted that the conduct
ness arrangement. when the $3 million valuation was so of Thomas and the estate demonstrated
Regarding whether the SPA was far below FMV. The court also observed that the SPA was not binding after
a device to transfer such property to that, here, the SPA’s prohibition of Michael’s death. The court noted that
members of the decedent’s family for control premiums or minority discounts the parties failed to determine Crown
less than full and adequate consider- resulted in an undervalued majority C’s share price through the formula set
ation in money or money’s worth, the interest for Michael’s shares. Thus, the forth in the SPA. Also, the sales price
district court determined that the estate SPA was not found to be comparable of the shares was set without obtaining
failed to show that the SPA was not a to similar arrangements negotiated at any appraisals for Crown C. Finally, the
device to transfer wealth to Michael’s arms’ length. court surmised that the likely explana-
family members for less than full and tion for Thomas’s and the estate’s not
adequate consideration. First, the $3 Whether the SPA set the value: abiding by the SPA was that the for-
million redemption price was not full Second part of the analysis mula in the SPA would have resulted in
and adequate consideration. The par- On the question of whether the SPA a value of Michael’s shares of Crown C
ties’ stipulation explicitly left aside the set the value of Crown C, the second much higher than $3 million.
life insurance issue when it otherwise issue addressed by the district court was Regarding whether the SPA was
agreed to the $3.1 million value of whether the SPA met the requirements entered into for a bona fide business
Michael’s Crown C shares. Second, even of Regs. Sec. 20.2031-2(h). Pursuant reason and not as a substitute for a tes-
though Crown C fulfilled the purpose to Regs. Sec. 20.2031-2(h), a buy-sell tamentary disposition, the district court
of the agreement by redeeming Mi- agreement must meet the following noted that it had already determined the
chael’s shares, Thomas and the estate’s requirements: (1) The offering price SPA was not entered into for those
process in selecting the redemption must be fixed and determinable under reasons in its Sec. 2703 analysis and
price showed that the SPA was a testa- the agreement; (2) the agreement must need not address them again.
mentary device. In addition, the SPA’s be legally binding on the parties both Ultimately, then, the district court
lack of a minority discount for Thomas’s during life and after death; and (3) concluded that the SPA did not

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