Estate of George Blount v. Comm. of IRS
428 F.3d 1338, 2005 U.S. App. LEXIS 23502, 96 A.F.T.R.2d (RIA) 6795 (2005)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
For estate tax valuation purposes, life insurance proceeds payable to a corporation are not included in the corporation's fair market value if the proceeds are offset by a contractual obligation for the corporation to use them to redeem a decedent's stock.
Facts:
- In 1981, William C. Blount and James M. Jennings, shareholders of Blount Construction Company (BCC), entered into a stock-purchase agreement requiring BCC to buy a deceased shareholder's stock at a price based on book value.
- In the early 1990s, BCC purchased life insurance policies on both Blount and Jennings for the sole purpose of funding this buyback obligation.
- After Jennings died in January 1996, BCC received approximately $3 million in insurance proceeds and used them to purchase his shares in accordance with the 1981 agreement.
- In October 1996, Blount was diagnosed with terminal cancer.
- In November 1996, Blount, who was the 83% majority shareholder and sole director of BCC, executed an amendment to the 1981 agreement.
- The 1996 amendment fixed the purchase price for Blount's shares at $4 million, removing both the formula based on book value and BCC's option to pay in installments.
- Blount died in September 1997, and BCC subsequently paid his estate $4 million for his shares.
Procedural Posture:
- The Estate of Blount ('Taxpayer') filed a federal estate tax return with the Internal Revenue Service, valuing Blount's shares at $4 million per a stock-purchase agreement.
- The IRS issued a notice of deficiency, asserting the shares were worth $7,921,975.
- The Taxpayer petitioned the U.S. Tax Court for a redetermination of the deficiency.
- The Tax Court held that the stock-purchase agreement should be disregarded for valuation purposes.
- The Tax Court calculated the company's fair market value by taking its base value of $6.75 million and adding $3.1 million in life insurance proceeds, arriving at a total value of $9.85 million.
- The Taxpayer, as appellant, appealed the Tax Court's decision to the U.S. Court of Appeals for the Eleventh Circuit, with the Commissioner of the IRS as appellee.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
For estate tax valuation purposes, should life insurance proceeds be included in a corporation's fair market value when those proceeds are intended to fund the corporation's pre-existing, mandatory obligation to redeem the decedent's shares?
Opinions:
Majority - Birch, Circuit Judge
No. Life insurance proceeds should not be included in a corporation's fair market value when they are offset by an enforceable contractual obligation to redeem a decedent's stock. The court first affirmed the Tax Court's determination that the 1996 stock-purchase agreement was not controlling for valuation purposes. It failed the statutory exception under I.R.C. § 2703 because it was not binding during Blount's life—as the 83% owner and sole director, he had the unilateral ability to modify it. The agreement also was not comparable to an arm's-length transaction. However, the court reversed the Tax Court's calculation of BCC's fair market value. The court reasoned that while the agreement was invalid for setting the stock price, it still created an enforceable liability for BCC under state law. The insurance proceeds were acquired for the sole purpose of satisfying this liability. Therefore, the asset (insurance proceeds) was entirely offset by the liability (the contractual obligation to redeem the stock), and adding the proceeds to the company's value without accounting for the corresponding liability 'defies any sensible construct of fair market value.'
Analysis:
This decision provides crucial clarity on the valuation of closely held corporations for estate tax purposes, particularly when buy-sell agreements are funded by life insurance. By holding that insurance proceeds are offset by the redemption liability, the court prevents the IRS from artificially inflating a company's value, which would create an excessive tax burden. This ruling aligns the Eleventh Circuit with the Ninth Circuit's reasoning in Estate of Cartwright, establishing a more economically realistic precedent. It reinforces the importance of structuring buy-sell agreements properly but also protects business succession plans from being penalized by the very financial instruments designed to facilitate them.
