William C. Blount and James M.
Jennings were the only
shareholders in Blount Construction
Company (BCC). Blount and Jennings
agreed, upon the death of either of
them, BCC would purchase the stock
of the decedent. To fulfill this
contractual obligation, BCC purchased
life insurance policies on Blount and
Jennings.
Mr. Jennings predeceased Mr. Blount.
At the time of Jennings' death in
January of 1996, he owned 46% of
BBC's outstanding shares, and, as the
agreement dictated, these shares were
purchased for approximately $3
million by BBC using proceeds from
the life insurance policy.
Shortly after, in October 1996, Mr.
Blount was diagnosed with cancer and
given a life expectancy of only a few
months. Concerned the buy-out
agreement would jeopardize cash
reserves BBC needed to function,
Blount amended the previous
agreement to allow his estate to accept
$4 million for his 83% shares
(undervaluing his shares by 1/3) in
order to reserve funds for BBC.
The taxpayer filed a return claiming
the value of the shares at $4 million.
The IRS claimed the value was closer
to $8 million. After evaluating
valuations offered by experts from
both sides, the Tax Court ultimately
concluded the value to be $6.75
million. (The Tax Court concurred
with the IRS a fair market valuation
was in order for correct tax
assessment). Additionally, the Tax
Court decided to include proceeds
from the life policy on Mr. Blount in
the valuation of the taxable estate.
The 11th Circuit Court of Appeals was
petitioned to review the decisions of
the Tax Court. The Court of Appeals
affirmed the determination of the Tax
Court relating to the need for a fair
market valuation of the shares,
however, they reversed the decision
to include the proceeds from the life
policy. The Appeals Court reasoned
the Tax Court "ignored the
amended agreement's creation of
a contractual liability for BCC,
which the insurance proceeds were
committed to satisfy." Since the
proceeds were earmarked for paying a
liability, the Appeals Court concluded
they should not be included in valuing
the corporation.
Source: Estate of George C. Blount v. Comm’r
of Internal Revenue (11th Circ. App. Ct.,
No. 04-15013, 10-31-05)
