Corporate Life Insurance in Redemptions

Clients may mistake the contractual price set in a buy-sell agreement as the value for filing Small Business/Self-Employed Form 706, U.S. Estate Tax Return, for a deceased owner. If the value is based on a formula price rather than the standard of fair market value, the value may not be acceptable for estate or gift tax purposes. A buy-sell contract may not impose a binding value for federal estate tax purposes. If an agreement fixes the value of a decedent’s interest and the estate is redeemed for that price, the IRS can challenge the amount and assess estate tax on fair market value, which may be higher than the contractual buy-sell amount. A recent cases in which this has happened is the Estate of George C. Blount v. Commissioner, TC Memo 2004-116.

In Estate of Blount v. Commissioner, T.C. Memo. 2004-116, Tax Court Judge Joseph H. Gale had to decide the value of the stock of a closely held Georgia corporation, Blount Construction Co. (BCC), whose controlling shareholder, George C. Blount, died in September 1997 owning 83% of the BCC stock. Under a stock redemption agreement, the estate sold the shares back to the corporation for $4 million. BCC owned a $3 million life insurance policy on Blount that was intended to fund that stock redemption.

The Tax Court ignored a buy/sell agreement under I.R.C. Chapter 14. The Court also included the full proceeds of corporate owned life insurance in the fair market value of the corporation and excluded an ESOP repurchase liability.

The estate appealed Judge Gale's conclusions that, among other things, the stock purchase agreement had to be disregarded and that the life insurance proceeds had to be treated as a corporate asset in valuing BCC. In Estate of Blount v. Commissioner, No. 04-15013 (11th Cir. Oct. 31, 2005), the appeals court agreed with Judge Gale that the estate had to include the shares at their fair market value, not at the price set by the stock purchase agreement, but reversed his holding that that fair market value should include the $3 million insurance proceeds.

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