Synopsis: The 2024 decision from the United States Supreme Court in Connelly v. United States[1] upended buy-sell planning for many closely held businesses. With proper planning, there are several ways a buy-sell agreement can be drafted and implemented, to avoid a repeat of Connelly. Time alone will tell, but one can hope that Connelly will one day be merely a curiosity in the history of business valuation and buy-sell agreement planning.

The 2024 decision from the United States Supreme Court in Connelly v. United States[2] upended buy-sell planning for many closely held businesses. Does the case signal a future of a more aggressive stance by the IRS and courts toward life insurance, or will it one day be relegated to a footnote in business valuation history?

For about a year following the release of the decision, the debate among estate planning and insurance professionals was intense as to the fairness of the IRS arguments and the Supreme Court’s logic. Most of the focus in professional circles was on what happened, and whether the Court’s reasoning made sense. Opinions differed considerably, but Connelly is law, and it is time to consider the strategies for preventing a Connelly type of outcome for other business owners.

Three potential solutions are supported by the Internal Revenue Code (IRC), existing guidance and regulations, and the Court’s own language. Two of the three (in combination — (1) and (3), or (2) and (3)) could have prevented the outcome that occurred in the Connelly case.

1. Choice of buy-sell design. The opinion of the Supreme Court made it clear that utilizing a cross purchase agreement would have avoided the life insurance death benefit increasing the value of the company. This is due to the death benefit being payable to the other owner, rather than the company. For this reason, entity purchase agreements may become less favored, and some attorneys are considering options for meeting business owners’ succession goals with various cross purchase designs. See “Cross-purchase, and variations on a cross-purchase theme” below for a description of several innovative strategies for utilizing this design.
2. “Locking in” the value of the business with the buy-sell agreement. The Internal Revenue Code, supported by preexisting guidance and regulations, establishes a process for a buy-sell (or similar) agreement[3] to “lock in” the value of a business for federal estate tax purposes. These requirements are explained below, under “Locking in the value.”
3. Following the terms of the agreement. Compliance with agreement procedures by the client will determine whether the agreement is respected when scrutinized by the IRS or a court or is ignored. In Connelly, the owners did not follow the protocol set forth in their agreement.

Choice of buy-sell design

The Connelly brothers faced a decision many business owners must make when having a buy-sell agreement prepared: whether to utilize an entity purchase approach or a cross purchase approach (or one of several less common designs). Exhibit A shows some of the competing priorities of these two basic designs. Those who cannot decide, or who expect changes in circumstances could dictate their needs might use a “wait and see” agreement, where the decision of who will buy a deceased owner’s shares is not made until the event occurs. A wait and see design provides maximum flexibility, but it may be unclear from the agreement how the life insurance should be owned.[4]

Exhibit A: Traditional cross purchase versus entity purchase designs.

	Cross purchase	Entity purchase
Connelly impact	Cross-owned life insurance proceeds are not included in value of business.	Business-owned life insurance proceeds increase the value of business for federal estate tax purposes under Connelly unless value is “locked in” by the buy-sell agreement.
Ownership of policies	Policies cross owned	Policies owned by business
Intended outcome at death	Surviving owners buy shares of decedent	Business buys shares of decedent
Payment of premiums	Each owner owns and pays premiums on policy on each other owner(s)	Business is owner and premium payer of all policies
Beneficiary designations	Each non-insured owner is beneficiary of policy(ies) he/she owns on each of the other owners	Business is beneficiary of all policies
Tax treatment of death benefit[5]	Each owner receives death benefit on the decedent income tax-free	Business receives death benefit on the decedent income tax-free
Tax impact to family of decedent	No capital gain to decedent’s heirs, due to stepped-up basis	No capital gain to decedent’s heirs, due to stepped-up basis
Cost basis of surviving owners	Increased to extent of purchase price	No increase due to purchase, but may have basis increase due to tax structure and accounting used by business[6]
Pros and Cons	With more than 2 or 3 owners, cross ownership can become unwieldy (e.g., 3 owners would require 6 policies)	Policy ownership by business is simpler; one policy per owner.
	Disparate ages or health of owners results in younger/healthier owners paying higher premiums on older, less healthy owners.	Disparate policy costs can be “smoothed” by all premiums being paid by business.
	Owners may be concerned with whether other owners paying premiums	Business can ensure that all premiums paid
	Separate business owned policy necessary for key person coverage.	One policy per owner can cover both buyout and key person needs.

Cross-purchase, and variations on a cross-purchase theme

For two business owners, a traditional cross purchase design often makes sense. The agreement states that in the event of either owner’s death, the survivor will pay the decedent’s family or heirs for the value of the decedent’s ownership interest. To fund the potential buyout, each owner is the owner and beneficiary of a life insurance policy on the other. Upon the death of either owner, the survivor receives the death benefit (generally income tax-free) and applies it to the purchase of the deceased owner’s interest.[7]

A cross purchase agreement offers the advantage that the surviving owner’s basis in the company is increased when the buyout occurs (whether paid for with life insurance proceeds or with other funds). However, the more business owners there are, the more difficult it becomes to manage a cross purchase. The number of policies needed for a traditional cross purchase set-up is x(x-1), where x equals the number of owners. Thus, for six business owners, thirty policies would be needed.

Several variations on the basic theme of a cross purchase agreement are possible and might make the use of a cross purchase design more feasible for businesses with more than two owners. Exhibit B shows a brief overview comparing these alternatives. They include:

Exhibit B: Variations on a cross purchase.

Buy-sell design	When to consider	Comments
Traditional cross purchase	2 or 3 owners of business	More owners means more policies and complexity
Hybrid cross purchase	2 or 3 major owners plus any number of minor owners	Blends cross purchase and entity purchase approaches
Joint ownership	3-4 owners of business	All policyowners must agree to any changes for a jointly owned policy
Cross endorsed split dollar	Any number of owners, but typically not more than 3 -4	Each owner owns policy on self and endorses part to each other owner
Trusteed cross purchase	Multiple owners desiring third party management of policies.	A trust is a separate legal entity governed by state law
Escrow cross purchase	Multiple owners desiring third party management of policies.	Escrow agent manages policies
Business continuation LLC	Multiple owners, with disparate degrees of ownership in multiple entities	LLC can be taxed as a partnership, and special allocations can allocate the death benefit (and premiums) to the owners other than the insured

• A hybrid agreement, using a cross purchase for the major owners (who may be more likely to face a state or federal estate tax) and an entity purchase for minor owners. Under this arrangement, the larger policies on the more significant owners are held outside the company. The coverage for a buyout of any minor owners is held by the company but is less likely to trigger an estate tax for the owners. Of course, this design might not be appropriate if the business succession plan is for the minor owners to eventually take control of the company.
• Joint ownership, in which two or three individuals are joint owners of a policy on another owner. This design might be helpful for businesses with three or four owners, where only one policy per owner is desired. Some carriers do not permit joint ownership, and joint ownership can become a hinderance if, for example, two owners of a policy cannot agree on a decision involving it.
• Cross endorsements on personally owned policies. With this design, each business owner owns a policy on his or her own life and endorses a portion of the death benefit to each other business owner, pursuant to a split dollar agreement, based on their buyout responsibility. Of course, the policy is likely to be in the owner’s estate, but there is support for the availability of an estate tax deduction to the extent that the death benefit is controlled by and owed to the surviving owners.[8]
• Use of a third party, such as a trustee or escrow agent, to manage the policies. At first glance, this would appear to be a simple and elegant solution. However, shifting ownership to a trustee, escrow agent, or other party who agrees to manage the policies can have its own income tax consequences, including a potential transfer for value. Also, some attorneys might be hesitant to take on the role of trustee or escrow agent.
• Business continuation limited liability company. Some businesses owners establish a separate limited liability company (LLC) that owns life insurance policies for their buy-sell agreement. If the LLC is taxed as a partnership, it should provide the necessary exception to the transfer for value rule. If properly structured, the LLC may be able to allocate the increase in basis (and increase in value) arising from life insurance proceeds following a death only to the surviving owners. This solution can be particularly useful with owners who have multiple entities and disparate interests.

Challenges of transfers

What are the main challenges of these innovative designs? For an existing business needing to change its design, the transfer for value rule presents a challenge to policy transfers. The result of a transfer of a policy (or an interest in a policy) “for valuable consideration” without an exception is that the death benefit becomes subject to income tax, to the extent it exceeds premiums (or other consideration) paid.[9] For any proposed change of policy ownership, the tax consequences must be considered and the potential for a transfer for value mitigated. In addition, the reportable policy sale rules must be considered.[10]

The transfer for value rule was enacted in 1954[11] and generally makes life insurance proceeds subject to income tax, to the extent they exceed premiums or other consideration paid. Exceptions are provided for transfers:

1. to the insured individual,
2. to a partner of the insured,[12]
3. to a partnership in which the insured is a partner;[13]
4. to a corporation in which the insured is a shareholder or officer; and
5. in a transaction in which the transferee receives a carryover basis.[14]

Thus, for example, a transfer of a company-owned policy to an owner other than the insured would likely trigger the transfer for value rule if the transferee were a co-shareholder of the insured, but not if the transferee is a partner of the insured.[15]

When existing company-owned policies must be transferred to fund a cross purchase buy-sell agreement, there are two transfers that must be considered: the first is the transfer from the company to one or more owners other than the insured. The second is the transfer following the first death, when there are transfers of policies (or interests in them) that were held by the deceased individual on the surviving owners.

Example: Al, Becky, and Carla own a company that currently has an entity purchase arrangement. They decide to change to a cross purchase agreement by establishing a business continuation LLC to hold the policies and carry out the agreement. The first policy transfer is from their company to the LLC, which is taxed as a partnership. The status of the LLC as a partnership permits the transfer to meet the exception of a transfer to a partnership in which the insured is a partner.

The second transfer takes place several years later, upon the death of Al, when the ownership of the policies the LLC owned on behalf of Al, on the lives of Becky and Carla, shifts. This shift could again trigger the transfer for value rule – as a transfer “of an interest” in a policy — but if Al, Becky and Carla are partners in a partnership, presumably this would satisfy one several exceptions to the transfer for value rule: a transfer to a partner of the insured, a transfer to a partnership in which the insured is a partner, or the carryover basis exception.

This is a hypothetical example for illustrative purposes only.

Of course, the clients’ goals for their business succession must drive the ultimate decision. There are times when an entity purchase is the only solution that solves the specific needs of the business owners. In those instances, it may be possible to avoid a Connelly outcome by meeting the requirements necessary to “lock in” the value of the business for estate tax purposes with the buy-sell agreement, and do so in a way where the death proceeds paid to the business do not inflate the value of the deceased insured’s business interest.

Locking in the value of the business

For decades, business owners have sought to use buy-sell agreements[16] to establish a price for their business that will be respected for federal estate tax purposes.[17] In 1990, with the passage of the Chapter 14 special valuation rules,[18] Code Section 2703 codified the right of the IRS to ignore the terms of a buy-sell agreement unless certain requirements are met. An agreement that meets those requirements is said to lock in the value for federal estate tax purposes. Code Section 2703 added to, rather than replaced, the pre-existing requirements to have a buy-sell agreement set the estate tax value.[19] The requirements are as follows:

1. The price must be fixed or determined pursuant to a formula set forth in the agreement;[20]
2. Whether during life or at death, the owner or estate must be obligated to sell at a price no higher than the agreement price;[21]
3. The agreement must prohibit the owner from disposing of his/her interest without offering it to the other party(ies) at no more than the agreement price (i.e., a right of first refusal that limits the sale price to the price under the agreement);[22]
4. The agreement must be a bona fide business agreement;[23]
5. The agreement must not be a device to pass the interest to the natural objects of the deceased owner’s bounty without full and adequate consideration in money or money’s worth;[24] and
6. The agreement must have terms that are comparable to similar arrangements entered into by people in an arm’s length transaction.[25]

Each of these requirements has been the subject of legislation, case law, IRS guidance, or regulations thus, it is helpful to look at each requirement in detail.

Price fixed or determinable. The Tax Court has been known to state that it is “axiomatic” that a price under the agreement must be fixed or determinable.[26] The premise that the agreement must set a fixed or determinable price comes from case law dating back decades.[27] If a price is to be locked in, by definition it would be necessary that the price be stated or determined by a formula.

The main shortcoming of a fixed price is that it can become out of date quickly. Most businesses experience fluctuations in value due to economic conditions, demand for their products or services, competition, expansion or reduction of business activities, and other factors. Even professional appraisers can come to different conclusions, as business valuation often seems as much art as science. The most reliable approach to setting a value that will not become outdated may be for the attorney drafting the agreement to collaborate with the clients’ accountant to choose a valuation formula, rather than a fixed price, which is best suited to the circumstances of the business.

Many buy-sell agreements utilize an appraisal, or series of appraisals, to reach a value. In agreements where an appraisal is called for, it may be helpful to include language stating that death proceeds from life insurance on the deceased owner is not to be taken into account, and that the appraisal is to be based on the value as of the end of the month preceding the death of the insured.

In Connelly, the agreement’s pricing provisions called for (a) a certificate of value to be updated annually by the owners, or (b) an appraisal, if the brothers failed to execute a certificate of value. Neither of these took place. This was the first strike against the estate, and resulted in the district court’s determination that the agreement could not be “bona fide” because the parties did not follow it.[28] The Supreme Court focused primarily on whether the increased value of the business was offset by the redemption obligation, and agreed with the Court of Appeals for the Eighth Circuit that it was not.[29]

Obligation during life and at death to sell no higher than agreement price. The concept of locking in a value means setting limitations on the ability of the owners to transfer their shares at a higher price than specified in the agreement.[30] Regulations state that “little weight will be accorded a price contained in an option or contract under which the decedent is free to dispose of the underlying securities at any price he chooses during his lifetime.”[31] A business owner might ask, “what if the business doubles or triples in value over time?” First, a valuation formula contained in the agreement can be designed to accommodate such changes in the financial condition of the business. Second, during their lifetimes, the owners are always free to update their agreement terms, pricing provisions, parties to the contract, and so on.

Right of first refusal terms. “Right of first refusal” is the term used to describe the requirement in many buy-sell agreements that prohibits an owner from disposing of his or her interest without offering it for purchase to the other owners or to the business. In the context of locking in value, the price for the right of first refusal cannot be higher than the agreement price (i.e., the locked-in value). Early IRS guidance states that “where the stockholder is free to dispose of his shares during life and the option is to become effective only upon his death, the fair market value is not limited to the option price.”[32] It is important to pay attention to the price at which a right of first refusal can be exercised. Many agreements call for the use of the greater of the agreement price or the third party offer price. That type of provision could fail the foregoing requirement.

Bona fide business agreement. The requirement that the business agreement be “bona fide” dates to the earliest guidance and is codified in IRC Section 2703(b)(1). Despite the definition in Black’s Law Dictionary of “bona fide,”[33] the fact that an agreement was reached in good faith and with honesty is insufficient to fix a value, as demonstrated by Connelly. Because the owners did not follow the agreement’s terms for valuing the business, the District Court concluded that the agreement was not bona fide. This was unchanged by the fact that an agreement was reached between Thomas Connelly and his brother’s family, and that a realistic price was paid for Michael’s share of the business based on its value prior to his death.

Some case law has interpreted the bona fide agreement as being met only if there is a “bona fide business purpose” for the agreement.[34] Regulations (and some case law) preceding Connelly lump this requirement in with the requirement that the agreement not be a testamentary device to pass the decedent’s shares to the natural objects of his bounty for less than an adequate and full consideration in money or money’s worth.[35]

Not a device to pass the business to the natural objects of the deceased owner’s bounty without full and adequate consideration. This requirement dates back to early IRS guidance[36] and is codified in the Code Section 2703 and regulations thereunder.[37] The IRS has stated that “it is always necessary to consider the relationship of the parties, the relative number of shares held by the decedent, and other material facts, to determine whether the agreement represents a bona fide business arrangement or is a device to pass the decedent’s shares to the natural objects of his bounty for less than an adequate and full consideration in money or money’s worth.”[38]

Terms that are comparable to similar arrangements entered into by people in an arm’s length transaction. This requirement was created with the enactment of IRC Section 2703. It is designed to preclude the price from being locked in if the right or restriction would not be considered “a fair bargain among unrelated parties in the same business dealing with each other at arm’s length.”[39] If more than 50% of the business subject to the agreement is owned (directly or indirectly) by individuals who are not members of the transferor’s family,[40] this requirement and the requirements that the agreement be bona fide and not be a device to pass the business to the natural objects of the deceased owner’s bounty without full and adequate consideration are deemed to be met.[41]

Is it possible in a family-owned business to meet the requirement that the terms be comparable to similar arrangements? And isn’t it the case that many business owners hope to pass their hard-earned business to their children at a bargain price? One respected commentator has observed that “legitimate business purposes are often ‘inextricably mixed’ with testamentary objectives where … the parties to a restrictive stock agreement are all members of the same immediate family.”[42]

Example: Getman Electric Services, LLC is a third generation business that provides electrical contracting services to commercial customers. It is owned by a husband and wife team and was founded by the wife’s grandparents. The current owners have three children, two of whom are involved in the business. With a fair market value of $18 million, the owners plan for the adult children to take over, but they also anticipate supplementing their retirement income with proceeds from the sale of the business to the children. They previously entered into a buy-sell agreement to sell the business to the adult children at book value, which is $5 million.[43] Their attorney suggests updating the agreement’s pricing provisions to use a formula that better reflects the fair market value.

This is a hypothetical example for illustrative purposes only.

The courts and IRS are very much aware of the inclination of family business owners to pass on their business to the “objects of their bounty” for less than the full fair market value of the business. The requirement that the agreement be “comparable to similar arrangements” is designed to assure that the right or restriction is one that could have been obtained in a fair bargain among unrelated parties in the same business dealing with each other at arm’s length.[44] As a general rule, for unlisted stock or securities that are not traded on an exchange, their value is “determined by taking into consideration, in addition to all other factors, the value of stock or securities of corporations engaged in the same or a similar line of business which are listed on an exchange.”[45] However, according to regulations under Section 2703, the determination “will generally entail consideration of the following factors: (1) the expected term of the agreement; (2) the current fair market value of the property; (3) the anticipated changes in value during the term of the arrangement; and (4) the adequacy of any consideration given in exchange for the rights granted.”[46]

Business owners in this position have several options, including lifetime giving, discounting, the use of life insurance to make an arms-length sale manageable, and some combination of gifting and selling the business, to give their adult children the opportunities they want to offer. However, the decision comes down to whether the business owner wants the transfer to family members to be subject to transfer taxes (e.g., a gift, or part gift) or not (e.g., a transfer at fair market value).

Following the terms of the agreement

There is a saying about “the best-laid plans of mice and men ….”[47] A client can have the most elegant, perfectly drafted buy-sell agreement, written by one of the finest business attorneys in the United States, but if the client does not follow the procedures set forth in the agreement, it will fail even the most basic “bona fide agreement” requirement.

The first mistake that set Thomas and Michael Connelly up to become part of U.S. tax history took place in the years prior to the death of Michael in 2013. The first method of pricing the business in their buy-sell agreement required that the owners execute a “Certificate of Agreed Value” annually. Like most business owners,[48] the Connellys neglected to establish or update the value. The backup method for valuing the company, if the annual updates had not been completed, was to have two or more appraisals performed. Following the death of Michael, the company received life insurance proceeds on his life, but Thomas chose not to secure appraisals, reasoning that the family members could come to an agreement among themselves (which they did).[49]

Unfortunately, this failure to follow the terms of the agreement robbed Thomas Connelly and Michael’s estate of the ability to satisfy the first element necessary (under IRC Section 2703(b)) to “lock in” the value of a company: the existence of a “bona fide” agreement for the purchase of the company. Because the brothers did not follow the exact terms of the agreement, they lost the ability to rely on longstanding statutory and case law that might have allowed the agreement to set the value for estate tax purposes. This set the stage for the IRS to determine its own opinion of the value, and to argue that the life insurance death benefit increased the value of the company with no offset for the redemption obligation, a viewpoint with which the Supreme Court agreed.

Can a recurrence of this kind of case be prevented? The use of a “certificate of value” to be completed annually by the business owners could seem almost destined to fail, either through lack of follow-through or lack of expertise on the part of the business owners as to how a business is valued. The annual certificate might be more reliable if the yearly procedure is managed by the accountant or attorney for the business.

Alternatively, clients could be encouraged to collaborate with their accountant and attorney to develop a formula that takes operating income into account and generates a reasonable price. Such a formula might be a more reliable method of pricing the company. If an appraisal is utilized, the owners should be made aware of the costs, and specific instructions can be included for the valuation professional, such as setting a specific date[50]and specifying that life insurance death proceeds are not to be considered.[51]

Conclusion

With proper planning, there are several ways a buy-sell agreement can be drafted and implemented, that might avoid a repeat of Connelly. With the enactment of the One Big Beautiful Bill Act[52] on July 4, 2025, establishing a $15 million per person federal estate tax exemption ($30 million for married couples), business owners may feel comfortable for the near term that they will avoid the estate tax effect of Connelly, even if life insurance death proceeds are partially included in their estate. However, estate and business planning are often a multi-decade process, and a future Congress could change the limits within the lifetime of many clients. Furthermore, some states impose an estate tax, and of those that do, they have a lower threshold.

Time alone will tell, but one can hope that Connelly will one day be merely a curiosity in the history of business valuation and buy-sell agreement planning.

April Caudill, JD, CLU, ChFC, AEP (Distinguished) is a Director of Business and Advanced Solutions at the Principal Financial Group, providing tax and legal support for advanced business and estate planning cases. Previously, she worked in advanced planning for two other major carriers and was the managing editor of Tax Facts at the National Underwriter Company. April is a past national president of the Society of Financial Service Professionals and the 2014 recipient of its Kenneth Black, Jr. Leadership Award. She is also a longtime author and a three-time winner of the Ken Black Jr. Journal Author Award in 2002, 2018 and 2020. April was inducted into the National Association of Estate Planners and Councils Hall of Fame in October 2024.

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[1] 602 U.S. 257 (June 5, 2024).

[2] 602 U.S. 257 (June 5, 2024).

[3] See note 15 regarding various names by which a buy-sell agreement may be known.

[4] One approach in a wait and see agreement is to make the first purchase optional, then the second mandatory, and make certain the second party who must make the purchase receives the life insurance proceeds, to have sufficient funding to carry out the purchase.

[5] Assuming policies are not modified endowment contracts, and no transfer for value or reportable policy sale has occurred.

[6] For partnerships and cash basis S corps, there is potential for increased cost basis to the surviving owners, to the extent the purchase is funded with life insurance. The partnership agreement may accomplish this with special allocations. In a cash basis S corporation, a short tax year election (known as a Sec. 1377 election) may be available.

[7] Generally, the life insurance death benefit is income tax-free under IRC Sec. 101(a) (but see discussion of transfers for value and reportable policy sales at note 9).

[8] See Private Letter Ruling 9026041, in which an estate tax deduction was available under IRC Sec. 2053(a)(4) (mortgaged property) for the endorsed death benefit. Private letter rulings are binding only for the taxpayer to whom they are issued, but they are helpful as an indication of the thinking of the IRS.

[9] IRC Sec. 101(a)(2).

[10] In a reportable policy sale, the transfer for value exception is not available. As such, a transfer for value would lead to taxable death benefit even if a transfer for value exception is met. A reportable policy sale is defined as the acquisition of a life insurance policy where the acquirer has no substantial business, financial or family relationship to the insured at the time of acquisition. See IRC Sec. 101(a)(3); Treas. Reg. §1.101-1(c) (1&2). The rules for reportable policy sales, enacted in TCJA 2017, impose a separate set of requirements to assure income-tax free status of life insurance death proceeds following a transfer. Typically, a buy-sell agreement would assure a substantial business or financial relationship, but the results could change if a business is acquired by another business that has does not have the requisite relationship with the insured. See IRC Sec. 101(a)(3). The reportable policy sale rules were designed to target life settlements or other commercial sales of a life insurance policy; however, in some cases their reach is much wider. See TD 9879, 84 Fed. Reg. 58460 (October 31, 2019); Treas. Regs. §§1.101-1, 1-101-6, 1.6050Y-1 to 1.6050Y-3.

[11] The Internal Revenue Code of 1954 was the first major revision of the federal income tax system after its inception in 1913. The next comprehensive revision of the Internal Revenue Code would not occur until 1986. The transfer for value rule predated the creation of S corporations by four years: S corporations were created by the Small Business Tax Revision Act of 1958, P.L. 85-866 (September 2, 1958). This answers the often-asked question of why there is no transfer for value exception for transfers to a co-shareholder in an S corporation.

[12] In this context, “partner” means a co-owner in a business taxed as a partnership (including an LLC taxed as a partnership). “Partner” does not apply in a colloquial sense, such as to a co-owner of an S corporation. S corporations did not exist when this law was enacted.

[13] Similarly, in this context, “partnership” includes an LLC taxed as a partnership.

[14] One example of a carryover basis is in certain tax-free reorganizations or mergers, where an acquiring business takes on the basis of the company being transferred. IRC Sec. 101(a)(2)(A).

[15] IRC Sec. 101(a)(2)(B); see note 9, above, regarding reportable policy sales.

[16] Buy-sell agreements are also referred to by other names, such as restrictive agreements, stock redemption agreements, and shareholder agreements. Some operating agreements include boilerplate buy-sell provisions, but they typically do not cover all the issues that are included in a dedicated, robust buy-sell agreement.

[17] See, e.g., Wilson v. Bowers, 57 F.2d 682 (2d Cir. 1932); Lomb v. Sugden, 82 F.2d 166 (2d Cir. 1936); Commissioner v. Bensel, 100 F.2d 639 (3d Cir. 1938); Rev. Rul. 157, 1953-2 CB 255.

[18] See Omnibus Budget Reconciliation Act of 1990, P.L. 101-508 (November 5, 1990), Sec. 11602.

[19] This was among the findings in the Connelly decision. All the requirements are facts and circumstances determinations, based on case law, IRS guidance, the Internal Revenue Code, and regulations.

[20] This requirement is based on early case law, such as cases cited in Estate of Pearl I. Amlie v. Comm., TC Memo 2006-76, and Estate of Lauder v. Comm., TC Memo 1992-736.

[21] See Rev. Rul. 59-60, 1959-1 CB 237 (Sec. 8); Treas. Regs. §20.2031-2(h).

[22] Ibid.

[23] Id., and IRC Sec. 2703(b)(1).

[24] Rev. Rul. 59-60, above (Sec. 8); Treas. Regs. §20.2031-2(h); IRC Sec. 2703(b)(2).

[25] Rev. Rul. 59-60, above (Sec. 8); Treas. Regs. §20.2031-2(h); IRC Sec. 2703(b)(3).

[26] See, Estate of Pearl I. Amlie v. Comm., above, Estate of Lauder v. Comm., above. Both opinions cite and rely heavily on earlier case law.

[27] Estate of Pearl I. Amlie v. Comm., above, citing Estate of Lauder v. Comm., above. The Pearl I. Amlie court cited St. Louis County Bank v. United States, 674 F.2d 1207, 1210 (8th Cir. 1982) as support for the ability of an enforceable restrictive agreement to control value for federal estate tax purposes (when certain requirements are met).

[28] Connelly v. U.S., 128 AFTR 2d Sec. 2021-5231 (D.C. MO 2021).

[29] Connelly v. U.S. 602 U.S. 257 (June 5, 2024).

[30] Rev. Rul. 59-60, above (Sec. 8); Treas. Regs. §20.2031-2(h); see also Estate of Weil v. Comm., 22 TC 1267 (1954).

[31] Treas. Reg. §20.2031-2(h).

[32] Rev. Rul. 59-60, above, Sec. 8.

[33] “Bona fide” in Latin means “good faith.” Black’s Law Dictionary defines bona fide as “in or with good faith, honestly, openly, and sincerely; without deceit or fraud.” IRC Sec. 2703(b)(1) states that for an option or restriction to be respected, it must be a bona fide agreement.

[34] Examples of such purposes are maintenance of family ownership and control, excluding outsiders, and assuring managerial continuity.

[35] Treas. Reg. §20.2031-2(h); see Estate of Bischoff v. Comm., 69 TC 32 (1977).

[36] See Rev. Rul. 59-60, above.

[37] IRC Sec. 2703(b)(2); Treas. Reg. §20.2031-2(h).

[38] Rev. Rul. 59-60, above, citing Rev. Rul. 157, 1953-2 CB 255 and Rev. Rul. 189, 1953-2 CB 294.

[39] Treas. Reg. §25.2703-1(b)(4)(i).

[40] Within the meaning of Treas. Reg. §25.2701-6.

[41] Treas. Reg. §25.2703-1(b)(3).

[42] See Estate of Lauder v. Comm., above, quoting 5 Bittker, Federal Taxation of Income, Estates and Gifts, parag. 132.3.10, at 132-54 (1984).

[43] Based on the observations of a team of attorneys, including the author, at a nationally known insurance carrier, who have reviewed over 2,800 buy-sell agreements from 2014 to 2025, about 5% used book value as the means of setting the price of the business. The team maintains a database of nonidentifying characteristics of the agreements. While book value is one of several factors that may be considered in valuing a business, the use of book value alone is inconsistent with IRS guidance. See Rev. Rul. 59-60, above; Rev. Rul. 157, 1953-2 CB 255.

[44] See Treas. Reg. §25.2703-1(b)(4).

[45] IRC Sec. 2031(b).

[46] Treas. Reg. §25.2703-1(b)(4)(i).

[47] The saying “The best-laid plans of mice and men oft’ go awry” is adapted from “To a Mouse,” by Robert Burns, and quoted by John Steinbeck in “Of Mice and Men.”

[48] The database referred to in note 42 indicates that that about 14% of the agreements reviewed call for the business owners to mutually agree on a company value and update it regularly. The author and her colleagues can collectively count on one hand the total number of agreements they have seen in which the annual updates were actually completed each year by the owners.

[49] In fact, the price Thomas paid to Michael’s estate was almost identical to the value for Michael’s shares, determined by an appraisal of the company’s pre-death value after litigation with the IRS had begun.

[50] For example, the end of the month or quarter immediately preceding the death of an owner.

[51] This is a longstanding best practice of buy-sell agreement planning, but it is not yet clear whether this language in a buy-sell agreement will be upheld post-Connelly.

[52] P.L. 119-21, Sec. 70106, amending IRC Sec. 2010 (signed July 4, 2025).