Connelly v. United States

                   PRELIMINARY PRINT

             Volume 602 U. S. Part 1
                             Pages 257–267




       OFFICIAL REPORTS
                                    OF


   THE SUPREME COURT
                                June 6, 2024


Page Proof Pending Publication


                   REBECCA A. WOMELDORF
                           reporter of decisions




    NOTICE: This preliminary print is subject to formal revision before
  the bound volume is published. Users are requested to notify the Reporter
  of Decisions, Supreme Court of the United States, Washington, D.C. 20543,
  pio@supremecourt.gov, of any typographical or other formal errors.
                         OCTOBER TERM, 2023                               257

                                  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 Sup-
 ply, 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 es-
Page Proof Pending Publication
 tate, Thomas then fled a federal tax return for the estate, which re-
 ported the value of Michael's shares as $3 million. The Internal Reve-
 nue Service (IRS) audited the return. During the audit, Thomas
 obtained a valuation from an outside accounting frm. That frm deter-
 mined that Crown's fair market value at Michael's death was $3.86 mil-
 lion, 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% owner-
 ship interest in Crown, the analyst calculated the value of Michael's
 shares as approximately $3 million ($3.86 million × 0.7718). The IRS
 disagreed. It insisted that Crown's redemption obligation did not offset
 the life-insurance proceeds, and accordingly, assessed Crown's total
 value as $6.86 million ($3.86 million + $3 million). The IRS then calcu-
 lated the value of Michael's shares as $5.3 million ($6.86 million × 0.7718).
 Based on this higher valuation, the IRS determined that the estate
 owed an additional $889,914 in taxes. The estate paid the defciency
 and Thomas, acting as executor, sued the United States for a refund.
 The District Court granted summary judgment to the Government.
 The court held that, to accurately value Michael's shares, the $3 million
 in life-insurance proceeds must be counted in Crown's valuation. The
 Eighth Circuit affrmed.
258                CONNELLY v. UNITED STATES

                                 Syllabus

Held: A corporation's contractual obligation to redeem shares is not neces-
 sarily 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 refect 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 would have treated Crown's obligation to
 redeem Michael's shares at fair market value as a factor that reduced
 the value of those shares. At the time of Michael's death, Crown was
 worth $6.86 million—$3 million in life-insurance proceeds earmarked for
 the redemption plus $3.86 million in other assets and income-generating
 potential. Anyone purchasing Michael's shares would acquire a 77.18%
 stake in a company worth $6.86 million, along with Crown's obligation
 to redeem those shares at fair market value. A buyer would therefore
 pay up to $5.3 million for Michael's shares ($6.86 million × 0.7718)—i.e.,
Page Proof Pending Publication
 the value the buyer could expect to receive in exchange for Michael's
 shares when Crown redeemed them at fair market value. Crown's
 promise to redeem Michael's shares at fair market value did not reduce
 the value of those shares.
    Thomas's efforts to resist this straightforward conclusion fail. He
 views the relevant inquiry as what a buyer would pay for shares that
 make up the same percentage of the less-valuable corporation that ex-
 ists after the redemption. For calculating the estate tax, however, the
 whole point is to assess how much Michael's shares were worth at the
 time that he died—before Crown spent $3 million on the redemption
 payment. See 

26 U. S. C. § 2033

 (defning the gross estate to “include
 the value of all property to the extent of the interest therein of the
 decedent at the time of his death”). A hypothetical buyer would treat
 the life-insurance proceeds that would be used to redeem Michael's
 shares as a net asset.
    Thomas's argument that the redemption obligation was a liability
 also cannot be reconciled with the basic mechanics of a stock redemp-
 tion. He argues that Crown was worth only $3.86 million before the
 redemption, and thus that Michael's shares were worth approximately
 $3 million ($3.86 million × 0.7718). But he also argues that Crown
 was worth $3.86 million after Michael's shares were redeemed. See
 Reply Brief 6. Both cannot be right: A corporation that pays out
                      Cite as: 

602 U. S. 257

 (2024)                259

                         Opinion of the Court

  $3 million to redeem shares should be worth less than before the
  redemption.
    Finally, Thomas asserts that affrming the decision below will make
  succession planning more diffcult for closely held corporations. But
  the result here is simply a consequence of how the Connelly brothers
  chose to structure their agreement. Pp. 263–267.

70 F. 4th 412

, affrmed.

  Thomas, J., delivered the opinion for a unanimous Court.

  Kannon K. Shanmugam argued the cause for petitioner.
With him on the briefs were William T. Marks, Yishai
Schwartz, and Robert L. Devereux.
  Yaira Dubin argued the cause for the United States as
amicus curiae supporting neither party. With her on the
brief were Solicitor General Prelogar, Deputy Assistant At-
torney General Hubbert, Deputy Solicitor General Gannon,
Charles L. McCloud, Francesca Ugolini, Jennifer M. Rubin,
and Norah E. Bringer.*
Page
 Justice Proof    Pending
         Thomas delivered           Publication
                          the opinion of the Court.
   Michael and Thomas Connelly owned a building supply cor-
poration. The brothers entered into an agreement to ensure
that the company would stay in the family if either brother
died. Under that agreement, the corporation could be re-
quired to redeem (i.e., purchase) the deceased brother's
shares. To fund the possible share redemption, the corpora-
tion 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 con-
clude that it was not and therefore affrm.

   *Jonathan C. Bond, Saul Mezei, Tyler S. Badgley, Elizabeth Gaudio
Milito, and Patrick J. Moran fled a brief for the Chamber of Commerce
of the United States of America et al. as amici curiae urging reversal.
   Briefs of amici curiae urging affrmance were fled for Brant Hellwig,
pro se; and for Adam Chodorow, pro se.
260                CONNELLY v. UNITED STATES

                          Opinion of the Court

                                    I
                                   A
   Congress has long imposed a tax “on the transfer of the
taxable estate of every decedent who is a citizen or resident
of the United States.” 

26 U. S. C. § 2001

(a).1 A decedent's
“taxable estate” is the value of “all property, real or per-
sonal, tangible or intangible,” owned by the decedent “at the
time of his death,” minus applicable deductions. §§ 2031(a),
2051. Imposing the estate tax thus requires calculating the
value of the property in the decedent's estate. In general,
the lodestar for that assessment is “fair market value,” which
“is the price at which the property would change hands be-
tween a willing buyer and a willing seller, neither being
under any compulsion to buy or to sell and both having rea-
sonable knowledge of relevant facts.” 

26 CFR § 20

.2031–
1(b) (2021).
   A decedent's taxable estate includes his shares in a closely
Page Proof Pending Publication
held corporation. 

26 U. S. C. § 2031

(b). Closely held corpo-
rations ordinarily have only a few shareholders (often within
the same family) and, unlike public corporations, those share-
holders typically participate in the corporation's day-to-day
management. 3 J. Cox & T. Hazen, Law of Corporations
§ 14:1 (3d ed. 2010) (Cox & Hazen). Given this close working
relationship, shareholders sometimes enter into an agree-
ment to restrict the transfer of shares to outside investors.
3 id., § 14:9. One such arrangement involves “giving the
corporation or the other shareholders the right to purchase
the shares of a holder on his death.” Ibid. A related ar-
rangement, called a share redemption agreement, contractu-
ally requires a corporation to repurchase a deceased share-
holder's shares. Although such an agreement may delineate

  1
    Not all estates are subject to the estate tax. Because certain credits
are allowed against the estate tax, any estate valued below a certain
threshold (today, about $13.6 million) is not subject to the tax. See 

26 U. S. C. § 2010

(c).
                   Cite as: 

602 U. S. 257

 (2024)             261

                      Opinion of the Court

how to set a price for the shares, it is ordinarily not disposi-
tive for valuing the decedent's shares for the estate tax.
See 

26 U. S. C. § 2703

. As a general rule, the fair market
value of the corporation determines the value of the
shares, and one must therefore consider “the company's net
worth, prospective earning power and dividend-paying ca-
pacity, and other relevant factors,” “including proceeds of life
insurance policies payable to . . . the company.” 

26 CFR § 20

.2031–2(f)(2).
                               B
   Brothers Michael and Thomas Connelly were the sole
shareholders in Crown C Supply, a small but successful
building supply corporation in St. Louis, Missouri. Michael
owned 77.18% of Crown's outstanding shares (385.9 out of
500 shares), and Thomas owned the remaining 22.82% (114.1
shares). The brothers entered into an agreement with
Crown to ensure a smooth transition of ownership and keep
Page Proof Pending Publication
Crown in the family in the event one of the brothers died.
The agreement provided that if either Michael or Thomas
died, the surviving brother would have the option to pur-
chase the deceased brother's shares. And, if the surviving
brother declined to do so, then Crown itself would be con-
tractually required to redeem the shares. With an excep-
tion not relevant here, the agreement specifed that the re-
demption price for each share would be based upon an
outside appraisal of Crown's fair market value. App. 12–14.
To ensure that Crown would have enough money to redeem
the shares if required, Crown obtained $3.5 million in life
insurance on each brother.
   When Michael died in 2013, Thomas opted not to purchase
Michael's shares. As a result, Crown was obligated under
the agreement to redeem Michael's shares. Rather than se-
cure an outside appraisal of the company's fair market value
(as the agreement contemplated), Michael's son and Thomas
agreed in an “amicable and expeditious manner” that the
value of Michael's shares was $3 million. 

Id.,

 at 25–26.
262             CONNELLY v. UNITED STATES

                      Opinion of the Court

Crown then used $3 million of the life-insurance proceeds to
redeem Michael's shares, leaving Thomas as Crown's sole
shareholder.
   As the executor of Michael's estate, Thomas then fled a
federal tax return for the estate. The return reported the
value of Michael's shares as $3 million, in accordance with
the agreement between Michael's son and Thomas. The In-
ternal Revenue Service (IRS) audited the return. During
the audit, Thomas obtained a valuation from an accounting
frm. The frm's analyst took as given the holding in Estate
of Blount v. Commissioner, 

428 F. 3d 1338

 (CA11 2005), which
concluded that insurance proceeds should be “deduct[ed] . . .
from the value” of a corporation when they are “offset by an
obligation to pay those proceeds to the estate in a stock buy-
out.” 

Id., at 1345

. The analyst thus excluded the $3 million
in insurance proceeds used to redeem Michael's shares, and de-
termined that Crown's fair market value at Michael's death
Page Proof Pending Publication
was $3.86 million. Because Michael held a 77.18% owner-
ship interest, the analyst calculated the value of Michael's
shares as approximately $3 million ($3.86 million × 0.7718).
   The IRS took a different view, insisting that Crown's
redemption obligation did not offset the life-insurance
proceeds. The IRS counted the $3 million in life-insurance
proceeds excluded by the analyst and assessed Crown's total
value as $6.86 million ($3.86 million + $3 million). And, the
IRS thus calculated the value of Michael's shares as $5.3 mil-
lion ($6.86 million × 0.7718). Based on this higher valuation,
the IRS determined that the estate owed an additional
$889,914 in taxes.
   The estate paid the defciency and Thomas, acting as exec-
utor, sued the United States for a refund. As relevant,
Thomas argued that the $3 million in life-insurance proceeds
used to redeem Michael's shares should not be counted when
calculating the value of those shares. The District Court
granted summary judgment to the Government, concluding
that Michael's estate was not entitled to a refund. Connelly
                   Cite as: 

602 U. S. 257

 (2024)           263

                      Opinion of the Court

v. Department of Treasury, IRS, 

2021 WL 4281288

, *17 (ED
Mo., Sept. 21, 2021). The court held that the $3 million in
life-insurance proceeds must be counted to accurately value
Michael's shares. It explained that, under customary valua-
tion principles, Crown's obligation to redeem Michael's
shares was not a liability that reduced the corporation's
fair market value. 

Id., at *14

. The court therefore held
that Crown's redemption obligation did not offset the life-
insurance proceeds. 

Id.,

 at *15–*17. The Court of Appeals
affrmed on the same basis. Connelly v. Department of
Treasury, IRS, 

70 F. 4th 412

 (CA8 2023).
   We granted certiorari, 601 U. S. ––– (2023), to address
whether life-insurance proceeds that will be used to redeem
a decedent's shares must be included when calculating the
value of those shares for purposes of the federal estate tax.
We now affrm.
                             II

Page       Proof
  The dispute          Pending
               in this case              Publication
                            is narrow. All  agree that, when
calculating the federal estate tax, the value of a decedent's
shares in a closely held corporation must refect the cor-
poration's fair market value. And, all agree that life-
insurance proceeds payable to a corporation are an asset
that increases the corporation's fair market value. The
only question is whether Crown's contractual obligation to
redeem Michael's shares at fair market value offsets the
value of life-insurance proceeds committed to funding that
redemption.
  Thomas argues that a contractual obligation to redeem
shares is a liability that offsets the value of life-insurance
proceeds used to fulfll that obligation. Brief for Petitioner
17. He accordingly contends that anyone purchasing “a sub-
set of the corporation's shares would treat the two as cancel-
ing each other out.” 

Ibid.

 By contrast, the Government
argues that Crown's obligation to pay for Michael's shares
did not reduce the value of those shares. It contends that
“no real-world buyer or seller would have viewed the re-
264             CONNELLY v. UNITED STATES

                      Opinion of the Court

demption obligation as an offsetting liability.” Brief for
United States 15. We agree with the Government.
   An obligation to redeem shares at fair market value does
not offset the value of life-insurance proceeds set aside for
the redemption because a share redemption at fair market
value does not affect any shareholder's economic interest.
A simple example proves the point. Consider a corporation
with one asset—$10 million in cash—and two shareholders,
A and B, who own 80 and 20 shares respectively. Each indi-
vidual share is worth $100,000 ($10 million ÷ 100 shares).
So, A's shares are worth $8 million (80 shares × $100,000) and
B's shares are worth $2 million (20 shares × $100,000). To
redeem B's shares at fair market value, the corporation
would thus have to pay B $2 million. After the redemption,
A would be the sole shareholder in a corporation worth $8
million and with 80 outstanding shares. A's shares would
still be worth $100,000 each ($8 million ÷ 80 shares). Eco-
Page Proof Pending Publication
nomically, the redemption would have no impact on either
shareholder. The value of the shareholders' interests after
the redemption—A's 80 shares and B's $2 million in cash—
would be equal to the value of their respective interests in
the corporation before the redemption. Thus, a corporation's
contractual obligation to redeem shares at fair market value
does not reduce the value of those shares in and of itself.
   Because a fair-market-value redemption has no effect on
any shareholder's economic interest, no willing buyer pur-
chasing Michael's shares would have treated Crown's obliga-
tion to redeem Michael's shares at fair market value as a
factor that reduced the value of those shares. At the time
of Michael's death, Crown was worth $6.86 million—$3 mil-
lion in life-insurance proceeds earmarked for the redemption
plus $3.86 million in other assets and income-generating po-
tential. Anyone purchasing Michael's shares would acquire
a 77.18% stake in a company worth $6.86 million, along with
Crown's obligation to redeem those shares at fair market
value. A buyer would therefore pay up to $5.3 million for
                   Cite as: 

602 U. S. 257

 (2024)             265

                      Opinion of the Court

Michael's shares ($6.86 million × 0.7718)—i.e., the value the
buyer could expect to receive in exchange for Michael's shares
when Crown redeemed them at fair market value. We thus
conclude that Crown's promise to redeem Michael's shares at
fair market value did not reduce the value of those shares.
   Thomas resists this straightforward conclusion. He sug-
gests that Crown's redemption obligation “would make it im-
possible” for a hypothetical buyer seeking to purchase
77.18% of Crown “to capture the full value of the insurance
proceeds.” Brief for Petitioner 26. That is so, according
to Thomas, because the insurance proceeds would leave the
company as soon as they arrived to complete the redemption.
He argues that the “buyer would thus not consider proceeds
that would be used for redemption as net assets.” 

Ibid.

 In
other words, Thomas views the relevant inquiry as what a
buyer would pay for shares that make up the same percent-
age of the less-valuable corporation that exists after the re-
Page Proof Pending Publication
demption. See Estate of Blount v. Commissioner, 87 TCM
1303 (2004), ¶2004–116 RIA Memo TC, aff'd in part and rev'd
in part, 

428 F. 3d 1338

 (CA11 2005); see also A. Chodorow,
Valuing Corporations for Estate Tax Purposes, 3 Hastings
Bus. L. J. 1, 25 (2006) (“Any valuation that takes the redemp-
tion obligation into account effectively values the corporation
on a `post-redemption' basis, i. e., after the decedent's shares
have been redeemed”). But, for calculating the estate tax,
the whole point is to assess how much Michael's shares were
worth at the time that he died—before Crown spent $3 mil-
lion on the redemption payment. See 

26 U. S. C. § 2033

 (de-
fning the gross estate to “include the value of all property
to the extent of the interest therein of the decedent at the
time of his death”); 

26 CFR § 20

.2031–1(b) (the “value of
every item of property includible in a decedent's gross estate
. . . is its fair market value at the time of the decedent's
death” (emphasis added)). A hypothetical buyer would thus
treat the life-insurance proceeds that would be used to re-
deem Michael's shares as a net asset.
266            CONNELLY v. UNITED STATES

                     Opinion of the Court

   Moreover, Thomas's argument that the redemption obliga-
tion was a liability cannot be reconciled with the basic me-
chanics of a stock redemption. As the District Court ex-
plained, when a shareholder redeems his shares he “is
essentially `cashing out' his share of ownership in the com-
pany and its assets.” 

2021 WL 4281288

, *16. That transac-
tion necessarily reduces a corporation's total value. And,
because there are fewer outstanding shares after the re-
demption, the remaining shareholders are left with a larger
proportional ownership interest in the less-valuable corpo-
ration. Thomas's understanding, however, would turn this
ordinary process upside down. In Thomas's view, Crown's
redemption of Michael's shares left Thomas with a larger
ownership stake in a company with the same value as before
the redemption. Thomas argues that Crown was worth
only $3.86 million before the redemption, and thus that Mi-
chael's shares were worth approximately $3 million ($3.86
Page Proof Pending Publication
million × 0.7718). But, he also argues that Crown was
worth $3.86 million after Michael's shares were redeemed.
See Reply Brief 6. That cannot be right: A corporation that
pays out $3 million to redeem shares should be worth less
than before the redemption. See Cox & Hazen § 21:2.
Thomas's argument thus cannot be reconciled with an ele-
mentary understanding of a stock redemption.
   Finally, Thomas asserts that affrming the decision below
will make succession planning more diffcult for closely held
corporations. He reasons that if life-insurance proceeds
earmarked for a share redemption are a net asset for estate-
tax purposes, then “Crown would have needed an insurance
policy worth far more than $3 million in order to redeem
Michael's shares at fair market value.” Brief for Petitioner
33. True enough, but that is simply a consequence of how
the Connelly brothers chose to structure their agreement.
There were other options. For example, the brothers could
have used a cross-purchase agreement—an arrangement in
which shareholders agree to purchase each other's shares at
                      Cite as: 

602 U. S. 257

 (2024)                   267

                          Opinion of the Court

death and purchase life-insurance policies on each other to
fund the agreement. See S. Pratt, Valuing a Business 821
(6th ed. 2022). A cross-purchase agreement would have al-
lowed Thomas to purchase Michael's shares and keep Crown
in the family, while avoiding the risk that the insurance pro-
ceeds would increase the value of Michael's shares. The
proceeds would have gone directly to Thomas—not to
Crown. But, every arrangement has its own drawbacks. A
cross-purchase agreement would have required each brother
to pay the premiums for the insurance policy on the other
brother, creating a risk that one of them would be unable to
do so. And, it would have had its own tax consequences.
By opting to have Crown purchase the life-insurance policies
and pay the premiums, the Connelly brothers guaranteed
that the policies would remain in force and that the insurance
proceeds would be available to fund the redemption. As we
have explained, however, this arrangement also meant that
Crown would receive the proceeds and thereby increase the
Page Proof Pending Publication
value of Michael's shares. Thomas's concerns about the im-
plications of how he and Michael structured their agreement
are therefore misplaced.
                              III
  We hold that Crown's contractual obligation to redeem Mi-
chael's shares did not diminish the value of those shares.2
Because redemption obligations are not necessarily liabilities
that reduce a corporation's value for purposes of the federal
estate tax, we affrm the judgment of the Court of Appeals.

                                                      It is so ordered.


  2
    We do not hold that a redemption obligation can never decrease a cor-
poration's value. A redemption obligation could, for instance, require a
corporation to liquidate operating assets to pay for the shares, thereby
decreasing its future earning capacity. We simply reject Thomas's posi-
tion that all redemption obligations reduce a corporation's net value. Be-
cause that is all this case requires, we decide no more.
                           Reporter’s Note

  The attached opinion has been revised to refect the usual publication
and citation style of the United States Reports. The revised pagination
makes available the offcial United States Reports citation in advance of
publication. The syllabus has been prepared by the Reporter of Decisions
Page Proof Pending Publication
for the convenience of the reader and constitutes no part of the opinion of
the Court. A list of counsel who argued or fled briefs in this case, and
who were members of the bar of this Court at the time this case was
argued, has been inserted following the syllabus. Other revisions may
include adjustments to formatting, captions, citation form, and any errant
punctuation. The following additional edits were made:

None