The Estate of George C. Blount filed a petition challenging the Internal Revenue Service's assessment of the value of Blount's stock in Blount Construction Company (BCC) for estate tax purposes. Blount, who died in 1997, held an 83% ownership interest in BCC. In 1981, a stock-purchase agreement required BCC to buy back shares of deceased shareholders. The agreement was amended in 1996 to fix the repurchase price of Blount's shares at $4 million.
The IRS rejected the $4 million valuation, asserting that Blount's stock was worth nearly $8 million. The Tax Court disregarded the amended agreement and computed fair market value by including life insurance proceeds BCC received to fund the stock repurchase. The court determined a value of $8.2 million and assessed a tax deficiency.
The Eleventh Circuit reviewed whether the 1996 amendment to the original stock agreement met exceptions to the general fair market valuation rule under the Internal Revenue Code and applicable Treasury regulations. The court found that the 1996 changes were substantial and made the agreement subject to the requirements of Internal Revenue Code ยง 2703.
To fall within the exception, a buy-sell agreement must (1) be binding both during life and at death, (2) serve a bona fide business purpose, and (3) reflect terms comparable to arm's-length deals. The court agreed with the Tax Court that the agreement failed the first and third requirements. Blount had unilateral power to alter the agreement during his lifetime, and the set price did not reflect valuations used in comparable transactions.
The Eleventh Circuit reversed the Tax Court's inclusion of life insurance proceeds in calculating BCC's fair market value. The insurance was obtained specifically to fund BCC's contractual obligation to repurchase Blount's shares. The court held that adding the proceeds to BCC's value overstated its fair market value by ignoring the offsetting liability.
According to Treasury regulations, life insurance proceeds payable to a company may be included in value only to the extent they are not already offset by liabilities. The court noted this principle had been applied in similar cases and that ignoring the obligation to pay the estate from those proceeds defied common business valuation methods.
The Eleventh Circuit affirmed the Tax Court's finding that the stock-purchase agreement could not set estate tax value, but reversed the court's inclusion of life insurance proceeds in the valuation. The case was remanded for further proceedings consistent with that ruling.
If you're preparing a business succession plan or facing disputes over valuation for estate or tax purposes, Whitcomb, Selinsky PC handles matters involving buy-sell agreements, family business transitions, and IRS challenges. Reach out to schedule a consultation and learn how our team can assist with your plan.