Supreme Court Hears Oral Arguments in Complex Business Dispute Over Shareholder’s Life Insurance Policy

The Supreme Court of the United States recently heard oral arguments in a complex tax dispute over a shareholder’s life insurance policy. The case, Connelly v. Internal Revenue Service, centers around whether federal tax liability was properly assessed against a shareholder’s estate after a buyback. The decision of the court could have major implications for business succession planning strategies for closely held corporations in Florida and nationwide. Within this article, our West Palm Beach shareholder litigation attorney provides an overview of the case.

Case Review: Connelly v. Internal Revenue Service

 The Facts 

Two brothers—Michael Connelly and Thomas Connelly—owned a controlling interest in a closely held corporation. That company purchased a life insurance policy on each brother. The purpose of the policy was to provide funding aimed at allowing the other brother (co business owner) to redeem shares upon the policyholder’s death. This is a relatively common business succession planning strategy. It is used by many closely held corporations in Florida. However, when Michael passed away, the IRS assessed an estate tax that included the value his shares gained due to the life insurance policy.

 The Legal Issue 

The central legal issue at stake in this case is whether or not the IRS properly taxed the estate of Michael Connelly. More specifically, the nation’s highest court has been tasked with determining if:

• Life insurance proceeds of closely held corporations that are used to buy back stock from deceased shareholders should be considered as part of the corporation’s assets when calculating the value of the deceased shareholder’s shares.

The Implications 

The implications of the Supreme Court’s decision in Connelly v. IRS are significant. As noted previously, the business succession planning strategy used in this case was not especially novel. Many other closely held corporations are structured in a similar manner. If the Court decides in favor of the IRS, it could lead to higher estate taxes for similar situations where corporations use life insurance to manage share redemptions. Depending on the decision of the court, there could be major ramifications for corporate law, shareholder rights, tax law, and estate planning.

What Comes Next 

Oral arguments in the case of Connelly v. Internal Revenue Service were held on March 27, 2024. Given the typical timeline of the court, a decision is expected to come in the final weeks of the Court’s Spring 2024 term. Most likely, that means a decision from the nation’s top court is expected to come near the end of June or the beginning of July of this year.

Contact Our West Palm Beach, FL Shareholder Dispute Attorney Today

At Pike & Lustig, LLP, our West Palm Beach shareholder dispute lawyer provides the legal advocacy that clients can trust. If you have any specific questions or concerns about a shareholder dispute, we are here to help. Call us now or contact us online to arrange your confidential case review. Our firm handles shareholder disputes all across Southeast Florida.

Source:

law.cornell.edu/supct/cert/23-146#:~:text=This%20case%20asks%20the%20Supreme,for%20federal%20estate%20tax%20purposes