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Update: 2024 Supreme Court Decisions and Business Owners

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Jane G. Ditelberg, Director of Tax Planning
Eric Czepyha, Director of Business Services

This summer’s Supreme Court rulings have significant consequences for business owners across an array of areas, from tax to regulations.

This year saw an unprecedented series of decisions from the Supreme Court impacting business owners, with implications across an array of regulatory areas and taxation. Below, we provide context on these rulings as well as key takeaways for business owners.

Connelly v. United States

In Connelly v. United States, the question before the court was whether, in valuing a closely held company for estate tax purposes, the amount of any obligation to buy back stock from the deceased shareholder is treated as a liability, reducing the value. The court held that it was not. As a result, a company that received $3 million in life insurance proceeds from a key-person policy that was purchased to fund the redemption of an owner’s shares upon death under the terms of a stock restriction agreement was valued for estate tax purposes at the value of its other assets ($3.6 million) plus the $3 million in insurance policies — with no reduction for the obligation to pay the estate of the deceased shareholder $3 million for its shares.

Companies with redemption plans funded by life-insurance should take note of this case. If the decedent’s brother, the other owner of the company, had owned the life insurance policy instead of the company itself, the company would have been valued for estate tax purposes at $3.6 million instead of $6.6 million, and the estate tax on the shares owned by the decedent would have been significantly less. Additionally, there are several other approaches to buying out of a deceased owner that will not have this effect. In light of this case, business owners should consult their legal advisors to review redemption agreements.

Moore v. United States

In Moore v. United States, the court ruled that the Mandatory Repatriation Tax that was enacted as part of the Tax Cuts and Jobs Act of 2017 was constitutional. In this case, owners who controlled foreign corporations were taxed on the company’s accumulated earnings. The majority held that because foreign corporations are treated as pass-through entities, this tax was a constitutional tax on realized income — and taxing the owners instead of the corporation was no different than partnership or S corporation taxation. However, four justices in their separate opinions made clear that they do view realization of the income as critical to the constitutionality of an income tax. This will impact proposals to impose a wealth tax at the federal level.

Cases on Federal Administrative Agencies

Finally, there was a series of cases that put restrictions on administrative agencies of the federal government. Loper Bright Enterprises v. Raimondo has received the most attention, as it overturned the Chevron doctrine, which had — for 40 years — required courts to give deference to federal agencies in reviewing a broad range of regulatory claims. The second case was SEC v. Jarkesy, which limited the ability of administrative law judges to impose fines and certain other legal remedies, holding that these types of penalties could only be assessed in a federal court where the defendant had the right to a jury trial. The third case was Corner Post Inc. v. Board of Governors of the Federal Reserve System, which held that the period for challenging a federal regulation must run from when it applies to a particular individual or business, and not from when the regulation was enacted. (Loper Bright involved fishing, Jarkesy involved securities, and Corner Post involved ATM fees). Taken together, these cases will have significant impacts on businesses subject to federal regulation of all types, including employment, tax and safety, as well as industry-specific regulations. As a result, it will be easier for businesses to pursue challenges to regulations.

In many circumstances, Loper Bright puts challengers on an equal footing with agencies in disputing a regulation; Corner Post can provide the challenger more time to pursue a challenge; and Jarkesy moves some cases from the dockets of specialty administrative law judges to decisions by jury. However, it is important to note that the rulings also create more uncertainty regarding regulatory obligations — because they are subject to greater challenge. For businesses operating in multiple jurisdictions, it is possible that regulations may be valid in one jurisdiction and invalid in another, making it harder to implement consistent compliance processes.

Even if a company is not in a highly regulated industry, these challenges may come in areas of federal regulation that impact all businesses — such as employment and labor laws, employee benefits and taxes. With the period for challenging a regulation extended potentially indefinitely, it is possible that even long-established regulations will be limited or overturned by courts, which will require businesses to adapt.

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© 2024 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability in the U.S

This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.

The information contained herein, including any information regarding specific investment products or strategies, is provided for informational and/or illustrative purposes only, and is not intended to be and should not be construed as an offer, solicitation or recommendation with respect to any investment transaction, product or strategy. Past performance is no guarantee of future results. All material has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed.

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