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Emerging Issues and Insights

March 9, 2026

Connelly and Its Favorable Impact on Non-Taxable Estates

On June 12, 2024, we chronicled the Supreme Court’s decision in Connelly v. United States, 602 US 257 (2024), in which it held that a corporate liability to apply the proceeds from corporate-owned life insurance to fund a mandatory redemption of shares on the death of a shareholder did not reduce the value of the corporate assets (which included the life insurance proceeds) when valuing the stock in the estate of the decedent. We also discussed the case and how to avoid its adverse impact at our 2024 Tax Planning Forum.

We wanted to bring to your attention a potential pro-taxpayer result emanating from corporate-owned life insurance that was discussed in Stetson, “Converting an Estate Tax Inclusion Into an Income Tax Capital Loss,” Tax Notes Federal (Mar. 2, 2026). The author astutely points out that where a decedent does not have a taxable estate and there is corporate-owned life insurance that “inflates” the value of the decedent’s stock that is going to be redeemed by the corporation at a price that does not take into account the proceeds of the life insurance, the difference between the higher estate tax value (based on Connelly concepts) and the lower redemption price can produce a capital loss in the decedent’s estate. However, beware of the §302 family attribution rules that could cause the redemption to be recharacterized as a distribution, rather than a sale or exchange (if the family attribution rules are not waived), which would result in there not being a recognized loss.

Free Webinar, Spring Program Registration News
We’re pleased to announce our first complimentary webinar of 2026 will take place on April 29 from 12:00pm to 1:00pm CST. Our focus will be on a number of issues that can arise in connection with the disposition of a partnership interest. Participation is free, but registration is required (1 CPE credit available). If you want a headstart in brushing up on your skills in partnership, LLC and S corporation taxation, attend one of two Spring virtual sessions of our newly enhanced Fundamentals of Flow-Through® program, which contains live Q&A sessions. They’re scheduled for May 19-21 and June 23-25; Early Bird registration now available!

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