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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.
Simple, they should've just got a 0.77 * (3 + 3.86) = 5.28 million dollar insurance policy instead, so his estate could get 77% of the value and the business could stay together. Oh wait, then they would need a 0.77 * (5.28 + 3.86) = 7.04 million dollar policy...
Doing the algebra, they should've taken out a 12.92 million dollar policy (plus some extra for the taxes?) so that the business doesn't have to sell anything off while his estate gets 77% of the business. That makes perfect sense. /s
The basic idea is really strange. Apparently Michael owns 77% of the business and Thomas 23%. What's the difference between Thomas buying his brother's 77% and the business itself buying that 77%? If I own 23% of a business which otherwise owns itself then I am surely the 100% owner. Share buybacks are just share deflation.
I think it's a good ruling based on a tortured tax workaround. The business did own that life insurance policy, after all.
The difference is that the cash spent on the buybacks reduces the value of the company. To use the example from the case, suppose I hold an 80% share in a company whose only asset is 10 million in cash; that 80%share is worth 8 million. Redeeming the other 20% costs the company 2 million, so now I hold a 100% share of a company worth 8 million. The redemption hasn't affected the value of my shares. If, on the other hand, I purchased the 20% interest from the other investors, my shares, the company would still have 10 million in the bank, and my 100% share would be worth 10 million.
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