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Connelly v. Internal Revenue Service

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Supreme Court of the United States
Connelly v. Internal Revenue Service
Term: 2023
Important Dates
Argued: March 27, 2024
Decided: June 6, 2024
Outcome
Affirmed
Vote
9-0
Majority
Clarence Thomas • Chief Justice John Roberts • Samuel Alito • Sonia Sotomayor • Elena Kagan • Neil Gorsuch • Brett Kavanaugh • Amy Coney Barrett • Ketanji Brown Jackson

Connelly v. Internal Revenue Service is a case that was decided by the Supreme Court of the United States on June 6, 2024, during the court's October 2023-2024 term. The case was argued before the Court on March 27, 2024.

On June 6, 2024, a unanimous court affirmed the Eighth Circuit ruling, holding that "a corporation’s contractual obligation to redeem shares is not necessarily a liability that reduces a corporation’s value for purposes of the federal estate tax."[1] Justice Clarence Thomas delivered the majority opinion of the court. Click here for more information about the ruling.

HIGHLIGHTS
  • The issue: The case concerned the federal estate tax. Click here to learn more about the case's background.
  • The questions presented: "Whether the proceeds of a life-insurance policy taken out by a closely held corporation on a shareholder in order to facilitate the redemption of the shareholder's stock should be considered a corporate asset when calculating the value of the shareholder's shares for purposes of the federal estate tax."[2]
  • The outcome: The U.S. Supreme Courtaffirmed the United States Court of Appeals for the Eighth Circuit ruling.


    • The case came on a writ of certiorari to the United States Court of Appeals for the Eighth Circuit. To review the lower court's opinion, click here.

    Timeline

    The following timeline details key events in this case:

    • June 6, 2024: The U.S. Supreme Court affirmed the United States Court of Appeals for the Eighth Circuit ruling.
    • March 27, 2024: The U.S. Supreme Court heard oral argument.
    • December 13, 2023: The U.S. Supreme Court agreed to hear the case.
    • August 15, 2023: Thomas Connelly appealed to the U.S. Supreme Court.
    • June 2, 2023: The United States Court of Appeals for the 8th Circuit held that the fair market value of a corporation includes life insurance proceeds designated for stock redemption and affirmed the district court's ruling.[3]

    Background

    Michael and Thomas Connelly were brothers and the sole shareholders in a family business that sold roofing and siding materials in St. Louis, Missouri called in Crown C Supply. In 2001, the brothers and Crown made an agreement that gave the surviving brother the right to buy the deceased brother’s shares. If the surviving brother declined, Crown would be required to regain those shares. To this obligation, Crown bought $3.5 million in life insurance policies for each brother. The Connelly brothers always intended for Crown to regain the shares of the brother who died first. In 2013, Michael Connelly died, and Crown received 3.5 million in life insurance funds. At the time of his death, Michael owned about 77% of Crown’s stock, and Thomas owned about 23%. After negotiating with Thomas and Michael’s son, Crown purchased Michael’s estate for $3 million. Crown then used the remaining $500,000 to fund its general operating expenses.[4]

    Thomas Connelly filed an estate tax return on behalf of Michael’s estate, valuing the estate’s Crown shares at $3 million. After auditing the estate, the IRS issued a notice of deficiency. Although they determined that Michael’s shares were worth $2,982,000, they concluded that the $3 million in life insurance proceeds should have been included as an additional non-operating asset, increasing the value of Crown shares by almost 80%. Therefore, the IRS valued the estate’s shares at about $5.3 million instead of $3 million.[4]

    Thomas Connelly filed a suit against the IRS on behalf of Michael’s estate in the United States District Court for the Eastern District of Missouri, seeking a refund of more than $1 million in estate tax. The district court ruled in the IRS’s favor, and the United States Court of Appeals for the Eighth Circuit affirmed the decision.[5]


    Questions presented

    The petitioner presented the following questions to the court:[2]

    Questions presented:
    “ Whether the proceeds of a life-insurance policy taken out by a closely held corporation on a shareholder in order to facilitate the redemption of the shareholder's stock should be considered a corporate asset when calculating the value of the shareholder's shares for purposes of the federal estate tax.

    [6]

    		”

    Oral argument

    Audio

    Audio of oral argument:[7]




    Transcript

    Transcript of oral argument:[8]

    Outcome

    On June 6, 2024, a unanimous court affirmed the Eighth Circuit ruling, holding that "a corporation’s contractual obligation to redeem shares is not necessarily a liability that reduces a corporation’s value for purposes of the federal estate tax."[1] Justice Clarence Thomas delivered the majority opinion of the court.


    Opinion

    In the court's majority opinion, Justice Clarence Thomas wrote:[1]

    “ Michael and Thomas Connelly owned a building supply corporation. The brothers entered into an agreement to en-sure that the company would stay in the family if either brother died. Under that agreement, the corporation could be required to redeem (i.e., purchase) the deceased brother’s shares. To fund the possible share redemption, the corporation obtained life insurance on each brother. After Michael died, a narrow dispute arose over how to value his shares for calculating the estate tax. The central question is whether the corporation’s obligation to redeem Michael’s shares was a liability that decreased the value of those shares. We conclude that it was not and therefore affirm.[6] ”
    —Justice Clarence Thomas

    Text of the opinion

    Read the full opinion here.


    October term 2023-2024

    See also: Supreme Court cases, October term 2023-2024

    The Supreme Court began hearing cases for the term on October 2, 2023. The court's yearly term begins on the first Monday in October and lasts until the first Monday in October the following year. The court generally releases the majority of its decisions in mid-June.[9]


    See also

    External links

    Footnotes

    1. ↑ 1.0 1.1 1.2 U.S. Supreme Court, Connelly v. Internal Revenue Service, decided June 6, 2024
    2. ↑ 2.0 2.1 U.S. Supreme Court, "No. 23-146," accessed December 13, 2023
    3. ↑ U.S. Court of Appeals for the 8th Circuit, Connelly v. United States, decided June 2, 2023
    4. ↑ 4.0 4.1 U.S. Supreme Court, "Thomas A. Connelly, petitioner v. Internal Revenue Service," March 1, 2024
    5. ↑ Oyez , "Thomas A. Connelly, petitioner v. Internal Revenue Service," March 1, 2024
    6. ↑ 6.0 6.1 Note: This text is quoted verbatim from the original source. Any inconsistencies are attributable to the original source.
    7. ↑ Supreme Court of the United States, "Oral Argument - Audio," argued March 27, 2024
    8. ↑ Supreme Court of the United States, "Oral Argument - Transcript," argued March 27, 2024
    9. ↑ SupremeCourt.gov, "The Supreme Court at Work: The Term and Caseload," accessed January 24, 2022
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