December 18, 2023
Volume 31, Issue 5
This Report summarizes cases granted review on December 13, 2023 (Part I).
Part I: Cases Granted Review
FDA v. Alliance for Hippocratic Medicine, 22-235; Danco Laboratories, L.L.C. v. Alliance for Hippocratic Medicine, 22-236. The Court will review a Fifth Circuit ruling holding “that respondents—doctors and associations of doctors who oppose abortion—have Article III standing to challenge FDA’s 2016 and 2021 actions with respect to mifepristone’s approved conditions of use and that those actions were likely arbitrary and capricious.” In 2000, FDA approved mifepristone under the brand name Mifeprex (for use in a regimen with another drug, misoprostol) to end an early pregnancy. “FDA concluded based on a review of clinical trials and other scientific evidence that, under those conditions, mifepristone was safe and effective to terminate pregnancy through seven weeks of gestation.” In 2016, relying on safety and efficacy data from numerous studies, FDA “increased the gestational age limit from seven to ten weeks; reduced the number of required in-person clinical visits from three to one;” and allowed nurse practitioners to prescribe and dispense mifepristone. In 2016 and 2021, FDA also altered the approved dosing regimen; modified a requirement that prescribers agree to report certain serious adverse events; and removed the in-person dispensing requirement.
In 2022, respondents—several organizations and doctors opposed to abortion—filed suit in federal district court challenging the initial 2000 approval of mifepristone, the 2016 and 2021 changes to the protocols for using mifepristone, and various other FDA actions with respect to mifepristone. Danco, the maker of Mifeprex, intervened. The district court held that respondents had standing to bring the action; their challenge to the 2000 approval of mifepristone was timely; FDA’s actions were arbitrary and capricious under the Administrative Procedure Act; and the 1873 Comstock Act barred FDA from removing the in-person dispensing requirement. The court granted a preliminary injunction and enjoined FDA’s 2000 approval of mifepristone and all subsequent FDA actions related to it by “staying” the effective dates of those actions. On appeal, the Fifth Circuit concluded that respondents’ challenge to the 2000 FDA approval was likely untimely, but left in place the district court’s stay of FDA’s 2016 and 2021 actions. FDA and Danco submitted emergency stay applications to the Supreme Court. The Court stayed the preliminary injunction in full through the disposition of the cert petitions. The Fifth Circuit merits panel then affirmed the district court’s decision to enjoin FDA’s 2016 and 2021 actions.
The Fifth Circuit first held that the respondent associations have standing. “[T]he court reasoned that ‘a certain percentage’ of women who take mifepristone will experience adverse events or require surgical abortions; that some percentage of that percentage will seek emergency care; and that some of respondents’ members are likely to treat women who experience such adverse events.” (Citations omitted.) The court further ruled that this caused the doctors injury “because doctors who treat such patients may provide care that violates their consciences, may be ‘forced to divert time and resources away from their regular patients,’ and may be ‘expose[d] . . . to greater liability and increased insurance costs.’” On the merits, the Fifth Circuit concluded that respondents are likely to succeed on their claims that FDA’s 2016 and 2021 actions were arbitrary and capricious. “As to the 2016 changes to mifepristone’s conditions of use, the court acknowledged that FDA had relied on studies establishing the safety of the relevant changes. But it nonetheless concluded that FDA acted arbitrarily because ‘none of the studies it relied on examined the effect of implementing all of those changes together.’ The court further held that FDA acted arbitrarily in changing the adverse-event reporting requirement in 2016. The court stated that, although FDA had determined that the risks associated with mifepristone were ‘well known’ by 2016, FDA had ‘failed to account for’ the possibility that the 2016 changes ‘might alter the risk profile.’” (Citations omitted.) The court next concluded that “FDA’s 2021 decision to eliminate the in-person dispensing requirement was arbitrary and capricious because the agency had relied in part on adverse-event data that the court viewed as unreliable due to the 2016 change to the reporting requirement.” (The Fifth Circuit panel did not reach the question whether removal of the in-person dispensing requirement violated the Comstock Act.)
The United States and Danco challenge both the standing and merits holdings, as well as the remedy imposed. On standing, the United States asserts that respondents—who oppose the use of mifepristone—”advanced theories of standing that concededly rest on a series of contingencies[.]” But, says the United States, the Supreme “Court has repeatedly rejected theories of standing that rest on a ‘speculative chain of possibilities,’ Clapper v. Amnesty Int’l USA, 568 U.S. 398, 414 (2013)[.]” Further, “[s]tanding to seek prospective relief cannot be based on such ‘past injury’; instead, a plaintiff must show an ‘imminent future injury.’ Summers v. Earth Island Institute, 555 U.S. 488, 495 (2009).” And, argues the United States, Summers held “that it ‘would make a mockery’ of Article III to find standing whenever, based on an ‘organization’s self-description of the activities of its members, there is a statistical probability that some of those members are threatened with concrete injury.’”
On the merits, the United States contends that FDA’s 2016 changes were “grounded . . . in a voluminous body of medical evidence on the widespread use of mifepristone over decades. And the agency carefully explained why the available data supported its conclusion that the 2016 changes would allow the drug to continue to be used safely and effectively—as in fact it has been since that time.” As to the Fifth Circuit’s criticism that FDA did not consider all of the changes together, the United States maintains that the Supreme Court rejected a similar argument in FCC v. Prometheus Radio Project, 141 S. Ct. 1150 (2021), and that, in any event, “FDA considered numerous studies that examined the effect of multiple proposed modifications.” With respect to the 2016 change in reporting requirements, the United States insists that “FDA had already found that the 2016 changes would not affect mifepristone’s safety profile.” And with respect to the 2021 change to the in-person dispensing requirement, the United States asserts that it was based on reliable information because “FDA’s 2016 changes left undisturbed the detailed reporting requirements governing mifepristone’s sponsors.” Danco’s arguments on standing and the merits are similar to the United States’ arguments.
Thornell v. Jones, 22-982. In this capital case, the question presented is: “Did the Ninth Circuit violate this Court’s precedents by employing a flawed methodology for assessing Strickland prejudice when it disregarded the district court’s factual and credibility findings and excluded evidence in aggravation and the State’s rebuttal when it reversed the district court and granted habeas relief” on respondent’s ineffective-assistance-of-counsel-at-sentencing claim. In March 1992, respondent Danny Lee Jones brutally murdered Robert Weaver and Weaver’s 7-year-old daughter Tisha, attacked Weaver’s mother, stole Weaver’s gun collection, and fled the Weaver home. After police apprehended him, the State of Arizona charged Jones with two counts of premeditated first-degree murder and one count of attempted first-degree murder, and sought the death penalty. The jury convicted Jones on all counts. The penalty phase—the focus of the case now—came next.
At sentencing, the trial court found that the state proved four aggravating factors: Jones committed the murders for pecuniary gain; Jones committed the murders in an especially heinous, cruel, or depraved manner; Jones was convicted of multiple murders; and one of the victims, Tisha, was under age 15. To help his mitigation case, defense counsel called Jones’s stepfather and Dr. Jack Potts, whom the court appointed to perform a mental health examination of Jones. Potts testified about “Jones’s ‘chaotic and abusive childhood’ and its effect on his mental health and development . . .; Jones’s history of significant substance abuse; likelihood that he suffered from an attenuated form of bipolar disorder; history of multiple head injuries; and genetic predisposition for substance abuse and affective disorders.” Dr. Potts also testified that additional neurological testing would help corroborate that Jones suffered from traumatic brain injury and organic neurologic dysfunction since he was 13. The trial court denied Novak’s request for neurological testing. At the conclusion of the hearing, the trial court “did not find any statutory mitigating circumstances, but found proven as non-statutory mitigating factors that Jones suffered from long-term substance abuse; was under the influence of alcohol and drugs at the time of the offense; had a chaotic and abusive childhood; and suffered from [a] substance abuse problem [that] may have resulted from genetic factors and aggravated by head trauma.” He concluded, however, that the mitigating circumstances were not sufficiently substantial to outweigh the aggravating factors and call for leniency, and sentenced Jones to death for each murder. The Arizona Supreme Court affirmed Jones’s convictions and sentence on direct appeal. Following an evidentiary hearing, a state post-conviction court denied relief, and the Arizona Supreme Court denied review.
Jones sought federal habeas relief. The district court (pre-Cullen v. Pinholster, 563 U.S. 170 (2011)) held an evidentiary hearing. At the hearing, Jones presented testimony or submitted reports from five mental health experts; the state presented testimony from three mental health experts. On most disputed issues, the district court credited the state’s experts, not the defense’s experts. The court thus concluded that Jones failed to establish that he suffered from cognitive impairment; failed to establish that he suffered from PTSD at the time of the murders; established that he suffered from AD/HD disorder at the time of the crimes, but that the condition was unrelated to violent behavior and thus was not persuasive mitigation; did not establish that he suffered from a major affective disorder; and established that he suffered from dependence on alcohol, amphetamine, and cannabis. The court concluded that “the results of subsequent examinations performed by the parties’ mental health experts have not established a more-persuasive case in mitigation than that presented through the report and testimony of Dr. Potts at sentencing.” It thus concluded that Jones failed to show Strickland prejudice, i.e., that “this additional information [presented at the evidentiary hearing] would alter the trial court’s sentencing decision after it weighed the totality of the mitigation evidence against the strong aggravating circumstances proven at trial.” A Ninth Circuit panel reversed, the Supreme Court vacated and remanded, the Ninth Circuit remanded to the district court, the district court again denied habeas relief, and the Ninth Circuit panel then reversed in the amended opinion that is the subject of the Supreme Court’s current review. 52 F.4th 1104.
The Ninth Circuit found that AEDPA governed its review of Jones’s ineffective assistance claims but, because it concluded that the post-conviction court did not address Strickland’s prejudice prong, it reviewed the prejudice ruling de novo. Then, after finding deficient performance, the Ninth Circuit held that there was a reasonable probability that, had Novak obtained a defense mental health expert and sought neuropsychological and neurological testing, the results of sentencing would have been different. The court found that “had counsel secured a defense mental health expert, that expert would have uncovered (and presented at sentencing) a wealth of available mitigating mental health evidence. . . . [T]hat expert could have provided substantial evidence—through neuropsychological testing or otherwise—that Jones suffered from mental illness, including evidence supporting any of the diagnoses made by experts in federal district court.” Thus, the court (in contrast to the district court) credited the defense’s experts; and further held that under Ninth Circuit precedent “[i]t was improper for the district court to weigh the testimony of the experts against each other in order to determine who was the most credible.” Finally (in the words of Arizona’s petition), “although the panel listed Jones’s aggravating factors and acknowledged it was required to weigh them against the mitigation evidence, nowhere did the court discuss the aggravation or its weightiness as compared against the proffered mitigation.” (Citation omitted.) Judge Mark Bennett authored a nine-judge dissent from the denial of en banc review.
In its petition, Arizona asserts that the Ninth Circuit’s “egregiously flawed Strickland prejudice analysis takes Jones’s evidence at face value, without crediting the district court’s extensive factual and credibility findings regarding that evidence. The panel’s decision thus directly conflicts with the bedrock rule that ‘courts of appeal may not set aside a district court’s factual findings unless those findings are clearly erroneous.’ Knowles v. Mirzayance, 556 U.S. 111, 126 (2009).” (Citation and quotation marks omitted.) The petition proceeds to offer many examples of this alleged error, including the Ninth Circuit’s disregarding the district court’s credibility determinations with respect to the experts. Next, Arizona contends that “the panel impermissibly ignored entire categories of relevant evidence as required by this Court’s case law. Although the panel gave lip service to the requirement that it must reweigh the evidence in aggravation against the totality of available mitigating evidence, it never actually did that mandatory reweighing. Instead, the panel merely listed the aggravating circumstances found by the sentencing court and never mentioned them again, much less assessed their weight against the mitigating evidence.” (Citation and quotation marks omitted.) Further, says Arizona, the Ninth Circuit panel wrongly failed to consider the state’s rebuttal evidence in evaluating Jones’s mitigation evidence. Arizona concludes by arguing that “[h]ad the panel followed the prescribed framework it would have been compelled to affirm the district court’s denial of habeas relief.”
Fischer v. United States, 23-5572. This case arises from petitioner Joseph Fischer’s actions at the Capitol grounds on January 6, 2021. Petitioner was arrested and then indicted for violating, among other provisions, 18 U.S.C. §1512(c)(2), which prohibits corruptly obstructing, influencing, or impeding an official proceeding. At issue is whether the D.C. Circuit correctly reversed the district court’s dismissal of that count.
Section 1512(c) provides a 20-year maximum sentence on:
(1) alters, destroys, mutilates, or conceals a record, document, or other object, or attempts to do so, with the intent to impair the object’s integrity or availability for use in an official proceeding; or
(2) otherwise obstructs, influences, or impedes any official proceeding, or attempts to do so,
In a case involving a different defendant, the district court found subsection (2) to be implicitly limited by subsection (1). The court noted that the word “otherwise” links the two subsections with the commonality being the conduct proscribed in (c)(1). It thus held that subsection (2) applies only if a defendant took “some action with respect to a document, record, or other object in order to corruptly obstruct, impede or influence an official proceeding.” A broader reading of subsection (2), found the court, would create a superfluity problem, rendering much of §1512 unnecessary. The court also pointed to the statutory history of §1512(c), noting that Congress enacted it as part of the Sarbanes-Oxley Act of 2012, which sought to deter fraud and abuse by corporate executives. The court later applied this interpretation in Fischer’s case. A divided panel of the D.C. Circuit reversed. 64 F.4th 329.
The D.C. Circuit panel majority agreed with the Federal Government “that the words ‘corruptly . . . obstructs, influences, and impedes any official proceeding’ in 18 U.S.C. §1512(c)(2) have a broad meaning that encompasses all forms of obstructive conduct, including appellees’ allegedly violent efforts to stop Congress from certifying the results of the 2020 presidential election.” The court observed that the “commonplace, dictionary meaning” of “‘otherwise’” is “‘in a different manner.’” “And it explained that applying that definition of ‘otherwise’ is consistent with the text and structure of surrounding provisions, which likewise include specific prohibitions and ‘catchall’ clauses designed to ensure that obstructive conduct is broadly prohibited.” The court also observed that a “cramped, document-focused” interpretation of §1512(c)(2) would be “dubious” given the “comprehensive” scope of document-related obstruction already covered by §1512(c)(1), making it “difficult to envision why a catch-all aimed at even more document-related acts would be necessary as a backstop.” The court rejected petitioner’s surplusage argument, noting that “substantial overlap between provisions is not uncommon in criminal statutes,” and that petitioner’s reading also produces overlap. (Citation and quotation marks omitted.)
Petitioner argues that “by reading the term ‘otherwise’ in isolation, and thereby according it an expansive definition, the lead opinion violated this Court’s whole-text canon.” That canon declares that “courts must not divorce words from their statutory context, which provides the ‘primary determinant of meaning.’” Relatedly, petitioner maintains that the “Court has routinely employed the whole-text canon against surplusage.” Yet, he says, the D.C. Circuit majority’s interpretation “collapses wholesale parts of Section 1512 (15 offenses) into subsection (c)(2),” and “absorbs other Chapter 73 offenses outside Section 1512, including Sections 1503 and 1505.” Next, petitioner relies on the ejusdem generis canon. He asserts that “[t]his rule prevents the general words from rendering the specific ones meaningless[,]” yet the “lead opinion’s interpretation of subsection (c)(2) renders (c)(1) meaningless.” He adds that the “Court has construed other sections of the Sarbanes-Oxley Act to prevent similarly unrestrained readings of its proscriptions.” See Yates v. United States, 574 U.S. 528 (2015) . And he concludes by asserting that the Court has interpreted “analogous residual clauses” the way the district court did here. See Begay v. United States, 553 U.S. 137 (2008).
Chiaverini v. City of Napoleon, Ohio, 23-50. To make out a Fourth Amendment malicious prosecution claim under 42 U.S.C. §1983, a plaintiff must show that legal process was instituted without probable cause. This case concerns how that rule operates when multiple charges were brought against the plaintiff. “Under the charge-specific rule, a malicious prosecution claim can proceed as to a baseless criminal charge, even if other charges brought alongside the baseless charge are supported by probable cause. Under the ‘any-crime’ rule, probable cause for even one charge defeats a plaintiff’s malicious prosecution claims as to every other charge, including those lacking probable cause. The question presented is: Whether Fourth Amendment malicious prosecution claims are governed by the charge-specific rule, as the Second, Third, and Eleventh circuits hold, or by the ‘any-crime’ rule, as the Sixth Circuit holds.”
Petitioner Jascha Chiaverini ran Diamond and Gold Outlet, a family business in the town of Napoleon, Ohio. In November 2016, one Brent Burns came to Chiaverini’s store to sell (among other things) a ring and an earring. Officers David Steward and Nicholas Evanoff soon learned that a ring and earring had been stolen, visited Chiaverini’s store, spoke with Chiaverini, and concluded that the ring and earring Burns sold were the stolen ones. Officer Evanoff wrote up a report on November 16 noting that Chiaverini had been cooperative. On December 2, however, Steward altered the November 16 report and inserted the following false sentence: “Jascha [Chiaverini] advised Ptl. Evanoff that the reason he bought the ring and kept records regarding the purchase, was because he suspected that it was in fact stolen.” That same day, Officer Evanoff signed a probable cause affidavit repeating the false allegation: “The defendant bought a ring while suspecting that it was stolen.” Evanoff also filed three criminal complaints against Chiaverini, for retaining stolen property, for violations of precious metals dealers licensing requirements, and for money laundering. Money laundering was the only felony of the three charges, and it required a showing that Chiaverini had knowledge at the time of the Burns transaction that the ring and earring were stolen. Relying on the probable-cause affidavit, a judge authorized arrest and search warrants against Chiaverini. Although the charges were eventually dismissed, Chiaverini spent nearly four days in jail and his business was greatly harmed, particularly due to reputational injuries.
In 2017, Chiaverini filed a §1983 action in state court against respondents (Officers Seward and Evanoff, other officers, and the city). Chiaverini alleged several constitutional violations, including Fourth Amendment claims for malicious prosecution. Respondents removed the action to federal district court, which granted summary judgment to respondents on the malicious prosecution claim, finding that probable cause existed for all three charges. The Sixth Circuit affirmed in an unpublished opinion. It applied the “any crime” rule the circuit had adopted in Howse v. Hodous, 953 F.3d 402 (2020). The court found that probable cause existed for the two non-money-laundering charges, which (under the “any crime” rule) extinguished Chiaverini’s malicious prosecution claim even if there was no probable cause for the felony money-laundering charge. The Sixth Circuit thus refused to assess probable cause for the money-laundering charge.
In his petition, Chiaverini argues that the “any charge” rule is wrong. First, he says, it conflicts with the common law as of 1871 (when Congress enacted §1983). Chiaverini points to an Eleventh Circuit opinion by Chief Judge Pryor, which “canvassed treatises, American cases, and British cases from the time of Section 1983’s passage” and “concluded that ‘[a]t common law, probable cause was specific to each accusation.’” (Emphasis added by cert petition.) Chiaverini then asserted (again quoting Chief Judge Pryor) that “‘[b]edrock Fourth Amendment principles support’ adopting the charge-specific rule.” That is because “the harm of a falsehood in a warrant application does not depend on whether there’s probable cause for some other offense; this Court looks to whether the falsehood undermines probable cause for the listed charge.”
Snyder v. United States, 23-108. Title 18 U.S.C. §666(a)(1)(B) makes it a federal crime for a state or local official to “corruptly solicit[,] demand[,] . . . or accept . . . anything of value from any person, intending to be influenced or rewarded in connection with any” government business “involving any thing of value of $5,000 or more.” At issue is “[w]hether section 666 criminalizes gratuities, i.e., payments in recognition of actions the official has already taken or committed to take, without any quid pro quo agreement to take those actions.”
Petitioner James Snyder is the former mayor of Portage, Indiana. In 2013, while Snyder was mayor, Portage awarded two contracts worth $1.125 million to Great Lakes Peterbilt, a local truck company owned by brothers Robert and Stephen Buha. Around the same time, Mayor Snyder began offering consulting services to supplement his income. Peterbilt hired Snyder and in January 2014 paid Snyder $13,000 upfront for a year’s consulting. In November 2016, the federal government indicted Mayor Snyder for two counts of violating §666(a)(1)(B) and one tax-obstruction count. As relevant here, the indictment alleged that Snyder received a $13,000 payment from Peterbilt after Portage had awarded Peterbilt the two contracts. (Separately, the indictment alleged that Mayor Snyder solicited bribes in connection with a towing contract; a jury later acquitted Snyder of that charge.) The government did not allege a quid pro quo whereby Mayor Snyder agreed to accept $13,000 in exchange for delivering bid awards to Peterbilt. Rather, the government argued that after Peterbilt won the garbage-truck contracts, Mayor Snyder approached the Buhas requesting money, which the government characterized in closing argument as “asking for a reward.” Alternatively, the government argued that Peterbilt paid Mayor Snyder $13,000 because he was “a man of influence.” The jury convicted Mayor Snyder, and the Seventh Circuit affirmed. 71 F.4th 555.
The Seventh Circuit “held that §666(a)(1)(B) ‘forbids taking gratuities as well as taking bribes,’” and defined a gratuity as “a reward for actions the payee has already taken or is already committed to take.” The court reasoned that the term “rewarded” in §666 offered “a strong indication that §666 covers gratuities as well as bribes.” The court added that limiting §666 to quid pro quo bribes would create its own disparity because federal law would then criminalize gratuities paid to federal officials (in 18 U.S.C. §201(c)), but not state or local officials.
In his petition, Snyder argues that the Seventh Circuit’s “holding conflicts with the statutory text, history, and structure, and raises a panoply of constitutional concerns.” He says that “[p]roscribing gratuities under section 666 would [ ] be at odds with the textual requirement that one must act ‘corruptly’ to run afoul of the statute.” (Quotation marks omitted.) Snyder next asserts that §666 “is the stepchild of the federal-official bribery statute, section 201. Section 201 separately criminalizes bribes (in 201(b)) and gratuities (in 201(c)).” (Citations and quotation marks omitted.) And §666 tracks the language of §201(b), not 201(c). Snyder adds that “the government’s capacious prohibition on gratuities would run roughshod over States’ prerogative to regulate the permissible scope of interactions between state officials and their constituents.” (Quotation marks omitted.) And Snyder contends that “[t]he government’s interpretation also risks chilling substantial First Amendment-protected activity.” On the government’s definition of gratuity, “it is hard to see what contribution is not a gratuity. Donors presumably support candidates who take actions they like. And because section 666 applies equally to politicians receiving funds and donors providing them, 18 U.S.C. §666(a)(1)(B), (2), the swath of potentially covered conduct is massive.”
Connelly v. Internal Revenue Service, 23-146. The Court will resolve “[w]hether the proceeds of a life-insurance policy taken out by a closely held corporation on a shareholder in order to facilitate the redemption of the shareholder’s stock should be considered a corporate asset when calculating the value of the shareholder’s shares for purposes of the federal estate tax.” The facts are as follows: “Michael and Thomas Connelly were brothers and the sole shareholders in Crown C Supply, a closely held family business that sold roofing and siding materials in St. Louis, Missouri. In 2001, the brothers and Crown entered into an agreement to ensure continued family control in the event of the death of one of the brothers. The agreement granted the surviving brother the right to buy the decedent’s shares and, if he declined, required Crown to redeem those same shares. To fund the redemption obligation, Crown purchased $3.5 million in life-insurance policies on each brother. Michael died in 2013. At the time, Michael owned approximately 77% of Crown’s stock and Thomas owned approximately 23%. Upon Michael’s death, Crown received approximately $3.5 million in life-insurance proceeds. Pursuant to the agreement, Crown then purchased all of the Crown shares in Michael’s estate for $3 million, an agreed-upon figure arrived at through negotiations between Thomas and Michael’s son. Crown used the remaining $500,000 from the insurance proceeds to fund its general operating expenses.” That left the issue of estate taxes.
Petitioner Thomas Connolly filed an estate-tax return on behalf of Michael’s estate valuing the estate’s Crown shares at $3 million. The IRS, however, “took the position that the $3 million in life-insurance proceeds used for redemption should have been included as an additional non-operating asset that increased the value of Crown shares by nearly 80%. The IRS thus valued the estate’s shares at approximately $5.3 million, rather than approximately $3 million.” In 2019, petitioner filed suit in federal district court on behalf of Michael’s estate against the IRS seeking a refund of over $1 million in estate tax. “[T]he estate argued that the $3 million of insurance proceeds used for the stock purchase should not be considered an additional asset of Crown for purposes of calculating estate-tax liability. The estate contended that those insurance proceeds were already effectively taken into account as part of the valuation of the company’s net worth, because any additional benefit from the $3 million in cash was offset by the contractual obligation to use that cash for a stock purchase.” The district court rejected that argument and ruled for the IRS. The Eight Circuit affirmed. 70 F.4th 412.
The Eighth Circuit found that the applicable IRS regulations require that, when a closely held corporation is being valued, “consideration shall also be given to nonoperating assets, including proceeds of life insurance policies payable to or for the benefit of the company, to the extent such nonoperating assets have not been taken into account in the determination of net worth, prospective earning power and dividend-earning capacity.” The court concluded that the valuation “must therefore consider the value of the life insurance proceeds intended for redemption insofar as they have not already been taken into account in Crown’s valuation and in light of the willing buyer/seller test.” “Applying that test, the court of appeals concluded that a willing buyer of Crown at the time of Michael’s death would have paid up to $6.86 million to acquire all of Crown’s shares—thereby obtaining both Crown and the insurance proceeds. . . . The court of appeals further observed that excluding the life-insurance proceeds from the value of Crown would result in a windfall to petitioner, whose shares would quadruple in value solely because of the stock redemption.”
Petitioner argues that the Eighth Circuit ruling conflicts with rulings by the Ninth and Eleventh Circuits and is wrong. On the merits, petitioner says that “in conducting a valuation for estate-tax purposes, it makes no sense to take into account insurance proceeds designated to cover a stock-redemption obligation, but to ignore the offsetting obligation. Simply put, the insurance proceeds are a funding vehicle, not a genuine asset. Because those proceeds exit the company almost as soon as they enter, no rational buyer would consider them as effectuating a net increase in corporate assets for purposes of valuing the company’s stock.” Petitioner maintains that the Eighth Circuit erred because its analysis “is predicated on the hypothetical purchase of the entire company, rather than the shares at issue. . . . [T]he fair market value of individual stock is not assessed based on the price an investor would be willing to pay for the company as a whole. To the contrary, bids that seek control of an entire company generally offer a substantial premium above the fair market value of individual stock.”
NAAG Center for Supreme Court Advocacy Staff
- Dan Schweitzer, Director and Chief Counsel, (202) 326-6010
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