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Supreme Court to decide estate tax impact of life insurance in closely held businesses

Published

7 months ago

April 6, 2024

The U.S. Supreme Court will decide a case this term that presents a crucial question regarding the estate tax treatment of life insurance proceeds received by a closely held business and its shareholder redemption obligations. It focuses on closely held corporations’ practice of entering into an agreement to redeem the stock of a deceased shareholder and funding the redemption with life insurance proceeds received by the company upon the shareholder’s death. The central issue is how these arrangements should be treated for federal estate tax purposes. The Court heard oral arguments in the case, Connelly, No. 23-146 (U.S. 3/27/24), on March 27.

The primary question presented in the case is whether the life insurance proceeds received by Crown C. Supply Inc. (Crown) used to satisfy an estate redemption obligation should increase the valuation of the ownership interest in Crown held by the estate of the deceased shareholder, Michael Connelly, and thus the corresponding estate tax owed.

The case has profound implications for estate planning, taxation, and the operation of closely held corporations, particularly with respect to the use of life insurance in succession planning. A decision in favor of the estate would validate the use of life insurance proceeds to fund shareholder redemption agreements without increasing estate tax liability, thus affirming a practice among small businesses for ensuring continuity.

Conversely, a decision for the government would affect how closely held corporations prepare for the estate tax impact of the transition of ownership following a shareholder’s death. The Court’s ruling is eagerly anticipated for its broader impact on estate planning, taxation, the operation of closely held corporations, and succession planning.

Oral arguments

The Supreme Court justices and the government engaged in a lively debate during the oral argument. The estate argued that the life insurance proceeds used to redeem the estate’s shares did not increase Crown’s net worth because of the contractual obligation to redeem the estate’s shares. Therefore, the estate argued, the estate tax valuation of the estate’s Crown shares was equal to the estate’s interest in Crown prior to the receipt of the life insurance proceeds.

The estate’s position is that a hypothetical buyer would not consider the life insurance proceeds as increasing the value of the Crown shares due to the obligation to redeem the estate’s shares, a preexisting corporate liability. Attorney Kannon K. Shanmugam, arguing on behalf of the estate, said that “the problem with the government’s approach is that [it] requires you to do one of two things: either to disregard the offsetting liability or to assume … that your hypothetical buyer is somehow going to be able to capture the life insurance proceeds.”

The government, represented by Assistant Solicitor General Yaira Dubin, contested the estate’s view by emphasizing that the estate’s method of valuation “contradicts basic math and valuation principles.”

“The estate’s contrary view rests on a fundamental misunderstanding of the nature of a redemption obligation,” Dubin said. “A redemption obligation is not a corporate debt that reduces the corporation’s net worth. … A debt owed to creditors reduces corporate and shareholder value. A redemption obligation divides the corporate pie among existing shareholders without changing the value of their interests.”

The government vigorously argued its position that Crown’s total net worth immediately before the division should reflect the addition of the life insurance proceeds, which would mean the estate’s valuation method significantly undervalued its estate tax obligation.

The justices probed the practical implications and logical underpinnings of both parties’ arguments, focusing on the valuation of Crown and the appropriate treatment of Crown’s redemption obligation.

Justice Clarence Thomas questioned the estate: “If a very interested buyer showed up the day after Michael died, would Thomas sell the business to him for $3.86 million?” The $3.86 million is the value of Crown treating life insurance proceeds as offset dollar for dollar against the redemption obligation. Thomas further questioned the estate: “If a buyer showed up the day after Michael died and offered to buy it at any price, what would he sell it for? … Would he ask $3.86 million or $6.86 million?”

The estate never answered Thomas’s question directly.

Several justices expressed concern about the contrast between the windfall to Michael’s surviving brother, Thomas Connelly, the executor of Michael’s estate, who owned 100% of Crown after the redemption, versus the estate’s valuation, which did not incorporate the amount of the life insurance proceeds.

Justice Elena Kagan responded to the estate and emphasized that “the fundamental problem with your approach is that Thomas’s … asset has quadrupled in value, and it’s quadrupled in value without him putting a single cent more into the company.”

The estate argued that there will be an eventual capital gain tax on the increase in value of Thomas Connelly’s shares. The government did not point out, however, that any potential capital gain tax does not affect the estate tax valuation.

The estate argued that the result the government supports would be for companies to have to “dip into operating assets” to redeem shares or “otherwise engage in some sort of transaction to ensure continuity.” Justice Sonia Sotomayor emphasized that Crown could have obtained additional life insurance.

Justice Brett Kavanaugh focused on two professors’ amicus briefs. He highlighted the fact that both briefs disagree with the position of the estate and summarized their position as “obviously, they’ve spent a lot of time thinking about this issue. They’re against you. Do you want to — maybe you just covered it in your view, but where do they get it wrong?”

— Carol Warley, CPA/PFS, J.D., is a partner at RSM US LLP and incoming chair of the AICPA Trust, Estate, and Gift Tax Technical Resource Panel. Michael Reeves, CPA, MST, is a senior manager at RSM US LLP. To comment on this article or to suggest an idea for another article, contact Paul Bonner at [email protected].

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RightTool Wins 2024 Accountant Bracket Challenge

Published

7 months ago

April 12, 2024

Business Finance News

QuickBooks automation tool RightTool is the champion of the 2024 Accountant Bracket Challenge, presented by Accounting High, as the 3 seed defeated 1 seed CPA Jason Staats, host of the Jason Daily podcast, by a score of 355 votes to 110 votes in the final.

“To everybody in the RightTool Facebook community and all the RightTool users, all of you came together and helped us get the most votes, so I wanted to thank you guys for being the best community in the industry, in my opinion,” said Hector Garcia, CPA, co-founder of RightTool, during the championship final show, which was streamed by Accounting High on YouTube and LinkedIn earlier this afternoon.

RightTool joins accounting and bookkeeping app Uncat as winners of the ABC Tournament. In the inaugural Accountant Bracket Challenge last year, Uncat defeated Staats 339-190 in the championship match.

“I think what we’ve learned is … machines win,” Staats said about his consecutive losses in the tournament final. “We thought that would be down the road, but it’s happening.”

A grand total of 36,831 votes were cast during the three-week tournament.

“This has been so much fun. It only works if other people participate and pay attention and have fun, so thank you to the 1,806 ‘students’ who participated,” said Scott Scarano, an accounting firm owner who founded Accounting High, a community for forward-thinking accountants.

He added that the tournament will return next year, with some tweaks to make it better.

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Tesla to Launch RoboTaxi on August 8

Published

7 months ago

April 12, 2024

Business Finance News

Dana Hull
Bloomberg News
(TNS)

Tesla Inc. plans to unveil its long-promised robotaxi later this year as the electric carmaker struggles with weak sales and competition from cheap Chinese EVs.

Chief Executive Officer Elon Musk posted Friday on X, his social media site, that Tesla’s robotaxi will be unveiled on Aug. 8.

Shares gained as much as 5.1% in postmarket trading in New York. Tesla’s stock has fallen 34% this year through Friday’s close. Shortly before Musk posted the news about the robotaxi, he lost the title of third-richest person in the works to Mark Zuckerberg, CEO of Meta Platforms Inc.

A fully autonomous vehicle, pitched to investors in 2019, has long been key to Tesla’s lofty valuation. In recent weeks, Tesla has rolled out the latest version of the driver-assistance software that it markets as FSD, or Full Self-Driving, to consumers.

The company has said that its next-generation vehicle platform will include both a cheaper car and a dedicated robotaxi. Though the company has teased both, it has yet to unveil prototypes of either. Musk’s Friday tweet indicates that the robotaxi is taking priority over the cheaper car, though both will be designed on the same platform.

Reuters reported earlier Friday that the carmaker had called off plans for the less-expensive vehicle and was shifting more resources toward trying to bring a robotaxi to market. Musk responded by saying “Reuters is lying,” without offering specifics.

Tesla also produced 46,561 more vehicles than it delivered in the first quarter, which has forced it to slash prices. U.S. consumers have been turning away from more expensive EVs in favor of hybrid models, causing many manufacturers to rethink pushes to electrify their fleets.

Splashy product announcements by Musk have always been a key part of Tesla’s ability to gin up enthusiasm among customers and investors without spending on traditional advertising. They don’t always work: the company unveiled the Cybertruck to enormous fanfare in November 2019, but production was delayed for years and the ramp up of that vehicle has been slow.

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(With assistance from Catherine Larkin.)

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Retail Sales and Wages Grew in March

Published

7 months ago

April 12, 2024

Business Finance News

Retail sales grew at a steady pace in March, according to the CNBC/NRF Retail Monitor, powered by Affinity Solutions, released today by the National Retail Federation.

“As inflation for goods levels off, March’s data demonstrates steady spending by value-focused consumers who continue to benefit from a strong labor market and real wage gains,” NRF President and CEO Matthew Shay said. “In this highly competitive market, retailers are having to keep prices as low as possible to meet the demand of consumers looking to stretch their family budgets.”

Total retail sales, excluding automobiles and gasoline, were up 0.36% seasonally adjusted month over month and up 2.72% unadjusted year over year in March, according to the Retail Monitor. That compared with increases of 0.4% month over month and 2.7% year over year in February, based on the first 28 days in February.

The Retail Monitor calculation of core retail sales – excluding restaurants in addition to automobiles and gasoline – was up 0.23% month over month and up 2.92% year over year in March. That compared with increases of 0.27% month over month and 2.99% year over year in February, based on the first 28 days in February.

For the first quarter, total retail sales were up 2.65% year over year and core sales were up 3.12%.

This is the sixth month that the Retail Monitor, which was launched in November, has provided data on monthly retail sales. Unlike survey-based numbers collected by the Census Bureau, the Retail Monitor uses actual, anonymized credit and debit card purchase data compiled by Affinity Solutions and does not need to be revised monthly or annually.

March sales were up in six out of nine retail categories on a yearly basis, led by online sales, sporting goods stores and health and personal care stores, and up in five categories on a monthly basis. Specifics from key sectors include:

Online and other non-store sales were up 2.48% month over month seasonally adjusted and up 15.47% year over year unadjusted.
Sporting goods, hobby, music and book stores were up 0.86% month over month seasonally adjusted and up 8.33% year over year unadjusted.
Health and personal care stores were up 0.03% month over month seasonally adjusted and up 4.5% year over year unadjusted.
Grocery and beverage stores were up 1.17% month over month and up 4.22% year over year unadjusted.
General merchandise stores were up 0.13% month over month seasonally adjusted and up 3.38% year over year unadjusted.
Clothing and accessories stores were down 0.01% month over month and up 2.13% year over year unadjusted.
Building and garden supply stores were down 2.13% month over month and down 3.97% year over year unadjusted.
Furniture and home furnishings stores were down 1.46% month over month seasonally adjusted and down 5.28% year over year unadjusted.
Electronics and appliance stores were down 2.27% month over month seasonally adjusted and down 5.92% year over year unadjusted.

To learn more, visit nrf.com/nrf/cnbc-retail-monitor.

As the leading authority and voice for the retail industry, NRF provides data on retail sales each month and also forecasts annual retail sales and spending for key periods such as the holiday season each year.