A Tale of Two Cases: Connelly and Anderson

Has the landscape of redemption buy-sell agreements changed?

Note: I have 10 free downloads available for this article, after which I will make it available for purchase. To claim one, visit https://griffinbridgers.gumroad.com/l/xgnfh

Table of Contents

1. Intro

2. Entity-Owned Life Insurance (EOLI)

3. The Blount-Connelly Split?

4. IRC Section 2703 – A Redux

5. Anderson v. Commissioner

6. Conclusion

Intro

It seems to be Charles Dickens month here at State of Estates.  After giving a nod to the three ghosts of GST tax, I find it appropriate to tell you why it is both the best of times and worst of times for buy-sell agreements – especially agreements with a redemption mechanism. 

Ironically, while everyone was fretting about the U.S. Supreme Court’s decision in Estate of Connelly v. U.S. two weeks ago, the Tax Court was busy with its own order last week rejecting a summary judgment motion by the estate in a very similar case – Estate of Anderson v. Commissioner – which was decided based on IRC Section 2703. 

In the meantime, I got schooled by a number of thought leaders for my initial reaction to Connelly.  And, in this vein, I admit – there are people much smarter than me writing and speaking about this new landscape.  The newswire focused on the Supreme Court’s opinion, but the newswire (and I) failed to also cover the context and background from the 8^th Circuit’s opinion.  If you read the 8^th Circuit’s opinion, it goes into greater detail on facts glossed over by the Supreme Court including the nature of the “valuation”[1] and what happened to the excess $500,000 life insurance proceeds not used for the redemption (since the policy on the deceased Connelly brother actually had a death benefit of $3.5 million, with only $3 million of that going to the redemption). 

In this vein, however, I thought a rudimentary review of IRC Section 2703 may be in order because it is bookended by both Connelly and Anderson.  These cases are exacerbated by purchases that indirectly shift value among family members – in fact, this math plays a much larger role in the Connelly decisions that is apparent at first glance.  But, do these two cases affect a redemption buy-sell agreement involving unrelated business partners?  Are these types of agreements now suspect as well?  And, does the “redemption obligation” argument in Blount and Connelly itself violate the principles of IRC Section 2703 - whether involving related or unrelated parties?   

Before looking at Section 2703 in light of the unrelated party distinction, I thought it would help to shine light on somewhat of a red herring – the role life insurance proceeds payable to the entity (whether for satisfaction of a buy-sell arrangement, or otherwise) play in the entity valuation to begin with. 

Entity-Owned Life Insurance (EOLI)