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Notes -
Supreme Court, Again
I'm back, because the nine are back.
Connelly v. United States
9-0, opinion by Thomas.
This deals with a question about estate planning. Two brothers, Michael and Thomas Connelly, owned a company, Crown C Supply, and agreed that Crown would be contractually obligated to purchase out the shares of either of them upon death (funded by a life insurance policy on each brother, owned by the company). Michael died, the money was paid out, and Crown purchased his stock at a value of 3 million. Then came the IRS, with an audit. An accounting firm that Thomas hired valued the company at 3.86 million, then, with the 77% share held by Michael, the valuation of the shares in the estate were about 3 million. The IRS, on the other hand, argued that the value should be 6.86 million (the 3.86 million valued before+3 million that was about to be paid out), and so there was about $900,000 more owed. The next two courts both ruled in favor of the government, and now, the supreme court rules unanimously for the government.
Now, why?
Redemption of stock is argued to have a net-zero effect on any given investor. That is (example borrowed), if you hold an 80% share of 10 million in cash, and the remaining 20% share is redeemed for 2 million, you'd now have a 100% share of 8 million, which is the same valuation as before. Hence the need for a corporation to redeem shares doesn't reduce the value of the shares.
Further, if someone else had bought the shares off of Michael, they'd be expecting to get the life insurance payoff in the valuation of the company, and so they'd be valuing it at the higher value.
Thomas (Connelly) argues that someone attempting to buy the value, separately, can't capture the value of those insurance proceeds, as those are about to be spent, and should be considered a liability for the company. (Clarence) Thomas rebuts this, saying that this is the same in essence as asking what the value of 77% of shares would be after the redemption had taken place, under the smaller valuation. But the relevant question in estate taxation is what the shares were worth at the time of Michael's death. (Clarence) Thomas further points out that this would lead one to think that Thomas (Connelly) would have a larger ownership share in a company with the same valuation, which doesn't make sense.
My own thoughts: my initial, reaction to the posing of the question was thinking that this was unfair for Connelly, as it felt like a liability, but as I read it, I was convinced that the court decided correctly. (Clarence) Thomas's arguments are persuasive.
Truck Insurance Exchange v. Kaiser Gypsum Co.
8-0. (Yes, eight. Alito recused himself.) Opinion by Sotomayor.
Unsurprisingly, there are many lawsuits due to damage from asbestos. This case dealt with whether an insurer would be able to "raise" and "be party to any issue" in bankruptcy. It is ordinary to put up a trust in such situations in order to pay for future claims against a bankrupt company. In this case, there was a plan in a proceeding of an insured company which handled outstanding claims that would be uninsured versus ones that would be insured differently. It provided more care to be sure that the claims would not be fraudulent when it would be uninsured. Truck Insurance Exchange wanted to be able to participate in the proceedings as an interested party in some relevant respects, as the bankruptcy code allows any "party in interest" to do so. The court does not rule on Truck's arguments about the case in particular, but does say that it is a party in interest, and so entitled to be able to object. This is a straightforward interpretation of the relevant portion of the bankruptcy code, as it was put in an open-ended manner. (The court also touches on legislative intent to back this up.)
There's probably a little more detail here that could be worked through, but I didn't entirely. This seems a sensible ruling, although I would be curious exactly how far "party in interest" can be made to stretch. Probably not excessively far.
Becerra v. Apache Tribe
5-4. Opinion written by Roberts, and joined by Gorsuch and the liberals (Kagan, Sotomayor, Jackson). Kavanaugh writes a dissent, joined by Thomas, Alito and Barrett.
This is a case dealing with Indian tribes and allocating money to them for healthcare costs. The majority rules that they should get more money. I still need to read most of the dissent, but presumably they disagree.
I'll write up this last case properly later, but I'll post this comment as is for now.
There might be another wrinkle in the life insurance case. I think that example as a use of life insurance is on FINRA exams. Which is a self-regulatory organization. Which are sort of government sponsored but run by industry. So they can ban you from the industry and make you unhirable but you can’t sue for them for antitrust etc. If my recollection is correct you have this sort of government agency teaching their bankers that this use of insurance was correct and would produce those tax benefits. Now you have another government agency saying nope that’s wrong pay us.
Also it’s a bit weird because before the guy died the company did not have that money. After they did. But what occurred first? The guy died and that’s the value then the company gets 3 million because he died? Or the company gets 3 million because the guy died and now the company is worth more? It’s seems like a simultaneous event.
“A self-regulatory organization (SRO) is an organization that exercises some degree of regulatory authority over an industry or profession. The regulatory authority could exist in place of government regulation, or applied in addition to government regulation. The ability of an SRO to exercise regulatory authority does not necessarily derive from a grant of authority from the government.“
I think it’s clear these type of organizations could not exists without government support based on this definition. So I think it’s clear that things like FINRA are basically government run by industry. A lot like unions that wouldn’t exists without the government protecting them.
The company didn’t have cash before the guy died but it did have an asset in the form of the insurance contract.
But what is the insurance contract worth before he dies? They could be 20 year olds and hence the expected value is 0. They could even be 70 year olds and I guess you would say it has high expected value. They might owe future premiums which means the insurance has no guarantee of having value etc.
That the expected payout was a company asset wasn't at issue in this case. The issue was whether the redemption obligation created a liability that cancelled out that asset.
Yea maybe. Something seems off on how they structured it.
Also, note the estate sold the shares to the company for $3 million. So it seems like the estate got $3 million.
The surviving brother got a big gain but not thru the estate since the shares were sold to the estate for $3 million. It would seem as though the estate would have a short term capital loss if the asset was worth 5+ but sold the asset for $3.
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Agreed. The value is factual based on how much is left to pay and life expectancy. I’m not making a claim on how much the asset was worth but that likely there was some value.
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