Syllabus

NOTE: Where it is feasible, a syllabus (headnote) will be released, as is being done in connection with this case, at the time the opinion is issued. The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the convenience of the reader. See United States v. Detroit Timber & Lumber Co., 200 U. S. 321, 337.

SUPREME COURT OF THE UNITED STATES

Syllabus

CONNELLY, AS EXECUTOR OF THE ESTATE OF CONNELLY v. UNITED STATES CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT

No. 23–146. Argued March 27, 2024—Decided June 6, 2024 Michael and Thomas Connelly were the sole shareholders in Crown C Supply, a small building supply corporation. The brothers entered into an agreement to ensure that Crown would stay in the family if either brother died. Under that agreement, the surviving brother would have the option to purchase the deceased brother’s shares. If he declined, Crown itself would be required to redeem (i.e., purchase) the shares. To ensure that Crown would have enough money to redeem the shares if required, it obtained $3.5 million in life insurance on each brother. After Michael died, Thomas elected not to purchase Michael’s shares, thus triggering Crown’s obligation to do so. Michael’s son and Thomas agreed that the value of Michael’s shares was $3 million, and Crown paid the same amount to Michael’s estate. As the executor of Michael’s estate, Thomas then filed a federal tax return for the estate, which reported the value of Michael’s shares as $3 million. The Internal Rev- enue Service (IRS) audited the return. During the audit, Thomas ob- tained a valuation from an outside accounting firm. That firm deter- mined that Crown’s fair market value at Michael’s death was $3.86 million, an amount that excluded the $3 million in insurance proceeds used to redeem Michael’s shares on the theory that their value was offset by the redemption obligation. Because Michael had held a 77.18% ownership interest in Crown, the analyst calculated the value of Michael’s shares as approximately $3 million ($3.86 million x 0.7718). The IRS disagreed. It insisted that Crown’s redemption obli- gation did not offset the life-insurance proceeds, and accordingly, as- sessed Crown’s total value as $6.86 million ($3.86 million + $3 million). The IRS then calculated the value of Michael’s shares as $5.3 million 2 CONNELLY v. UNITED STATES

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($6.86 million x 0.7718). Based on this higher valuation, the IRS de- termined that the estate owed an additional $889,914 in taxes. The estate paid the deficiency and Thomas, acting as executor, sued the United States for a refund. The District Court granted summary judg- ment to the Government. The court held that, to accurately value Mi- chael’s shares, the $3 million in life-insurance proceeds must be counted in Crown’s valuation. The Eighth Circuit affirmed. Held: A corporation’s contractual obligation to redeem shares is not nec- essarily a liability that reduces a corporation’s value for purposes of the federal estate tax. When calculating the federal estate tax, the value of a decedent’s shares in a closely held corporation must reflect the corporation’s fair market value. And, life-insurance proceeds payable to a corporation are an asset that increases the corporation’s fair market value. The question here is whether Crown’s contractual obligation to redeem Mi- chael’s shares at fair market value offsets the value of life-insurance proceeds committed to funding that redemption. The answer is no. Because a fair-market-value redemption has no effect on any shareholder’s economic interest, no hypothetical buyer purchasing Michael’s shares wou