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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.
The Third Case
Okay, I'm back.
This act has to do with the allocation of funding from the Indian Health Service to tribes.
Tribes may opt to have the Indian Health Service manage their health care, or they may draw up a contract to do it themselves, with funding from the IHS. This case concerns the second option, where they contract to run it themselves, funded by the Indian Health Service.
Money is allocated from the Indian Health Service in two ways: first, the secretarial amount, which is the amount that the Health Service would be spending ordinarily. Secondly, contract support costs, which are used to pay for additional costs that the IHS would not incur. The example given is workers compensation mandated by state law, but which the federal IHS would not have to pay—in order to place the option of self-management of health care on equal footing, the IHS will give money for the extra cost.
Additionally, tribes can collect money from third parties, like Medicare, Medicaid, and private insurers. This money can be spent on anything health-care related, including, but not limited to, what the IHS money can be spent on.
The question of this case is whether the IHS is obligated to provide contract support costs for funding from the other sources.
Roberts, and the court, affirms; Kavanaugh denies. (A rare disagreement between those two justices.)
Thus stated, the answer would seem to be an obvious no, that's something separate. But there is one (okay, more than one) complicating factor: medicare and other funding is often, but not exclusively, used for the same programs supported by the IHS, and, at least in the two tribes here, the contract made with the IHS includes the collection of funds from the third parties. (but as I read the cited section, does not dictate how those third-party funds are to be spent). And, the tribes aver, in their cases, the money was all spent towards the program governed by the contract. The model contract, given in the ISDA, requires that money earned in carrying out the contract must be used to "further the general purposes of the contract. And so, the medicare funding is judged by Roberts to fall under the contract, and so requires that contract support costs be paid for that money.
The dissent disagrees, arguing that they are separate, and so should not be funded.
Kavanaugh makes five main arguments that his interpretation is correct: first, the statutory authorization for contract support funding doesn't mention the third-party income. Second, the activities for which contract support is allocated, per statutory texts, must be to comply with the contract and support the contracted program. Then, connectedly, also in his second point (I don't quite follow the tie here) everyone agrees that this doesn't apply to money from sources like the general treasury, so there is no real reason to think that would apply to money from the third-party sources. Third, the statute specifies that the costs have to be "directly attributable" to the self-determination contracts. Fourth, the statute giving contract support explicitly precludes contract support associated with contracts from other parties than the IHS. Fifth, the statute treats 3rd party revenue as supplemental, and therefore separate.
Additionally, Kavanaugh argues that the tribes might not even want it, as is—one of the bases for the majority's decision is that the money is now restricted and governed by the contract, whereas before they would have been able to use that money for things that they could not have used IHS money for, such as building new facilities. Kavanaugh reads the proper source dictating how funding can be used to be the statute authorizing reception of third-party funding itself (where it must be for general health care purposes), rather than from the model contract in the statute making IHS contracts, which was earlier and more restrictive.
I'm not entirely sure myself. Both make a decent case, I think, that the spending would be governed by their preferred statute.
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