Burgess J.W. Raby & William L. Raby have published Corporate Life Insurance Proceeds as Part of Stock Value When There Is a Redemption Agreement, also available on the Tax Analysts web site as Doc 2005-22743, 2005 TNT 216-39.  Here is the Introduction:

In Estate of Blount v. Commissioner, T.C. Memo. 2004-116, Tax Court Judge Joseph H. Gale had to decide the value of the stock of a closely held Georgia corporation, Blount Construction Co. (BCC), whose controlling shareholder, George C. Blount, died in September 1997 owning 83% of the BCC stock. Under a stock redemption agreement, the estate sold the shares back to the corporation for $4 million. BCC owned a $3 million life insurance policy on Blount that was intended to fund that stock redemption.

The estate appealed Judge Gale’s conclusions that, among other things, the stock purchase agreement had to be disregarded and that the life insurance proceeds had to be treated as a corporate asset in valuing BCC. In Estate of Blount v. Commissioner, No. 04-15013 (11th Cir. Oct. 31, 2005), the appeals court agreed with Judge Gale that the estate had to include the shares at their fair market value, not at the price set by the stock purchase agreement, but reversed his holding that that fair market value should include the $3 million insurance proceeds.