Business Owned Buyout Life Insurance Raises Tax Issues

Background

In a recent case owners of a closely held business got bad news. It is common to have a closely held business own life insurance on the owners (e.g., shareholders if it is a corporation). When an owner dies the business uses the life insurance proceeds on the owner’s life to buyout the equity interests the owner held at death. Since the corporation, not the other shareholders are purchasing the deceased shareholder’s stock it is called a “redemption.” If a surviving shareholder purchased the shares it is called a ”cross-purchase.” These present practical ways to keep the stock or other equity interests in a closely held business in the hands of the remaining active shareholders. It can be just good business planning. But good motives don’t assure good tax results (or perhaps more accurately, they don’t assure the tax result the taxpayer might have intended or hoped for). Connelly v. IRS, No. 21-3683 (8th Cir. 2023).