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they probably needed to impair the shares so the company has an explicit option to purchase back the shares at an evaluation that didn't include the life insurance payout. it sounds like only the company was forced to do something by the contract so then clearly the shares became worth more and the company underpaid for the shares.
The amount paid for the shares is irrelevant here since the case is about Michael's estate tax obligation, which requires him to pay taxes on the value of his assets at the date of death. The value of the company on that date includes the value of the life insurance proceeds. The defendant was arguing that the buyback requirement created an offsetting liability that diminished the value of the stock Michael held.
the question was about how much the shares were worth to the estate. so if the company had an option to buy the shares back at a different price then the value of the shares to the estate would be impaired. the fair value of a share might be $20 but that doesn't matter if the company has a contract that says they have the option to purchase the shares back at $10. The shares are only worth $10 then. however, i doubt this works around estate law tax. like if you enter into some kind of contract with someone who is about to die to purchase stuff from the estate at reduced value after they die without proper consideration then i'm sure there is something in estate tax law that treats this as a distribution from the estate for tax purposes.
The value of the estate for tax purposes is market value, not realized value. Often they're the same, as in the case when the property is sold in an arm's length transaction, but discounted sales to insiders are always suspect. Consider that most estate assets are what could be termed "maximally impaired" in the sense that they're given away for free. This doesn't make the value zero. You can't offer your nephew the option of purchasing your Picasso for a hundred bucks and claim that that's all it's worth for estate tax purposes. The fact that the company only paid 3 million for the shares is irrelevant, and is why the estate has an independent valuation done as part of the audit. The case was about whether the accountant who did the valuation correctly treated the redemption requirement as a liability, and the court ruled that he didn't.
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