At least five Supreme Court decisions from the momentous term that ended earlier this month could carry implications for years far into the future of wealth management.
The end of a 40-year-old legal doctrine granting deference to federal agencies in their interpretation of laws may pose the biggest impact to financial advisors and their clients, if the ruling in a case involving an environmental rule translates to broader shifts in the guidelines for taxes, financial regulations or forms of investment advice.
However, in addition to that decision, which tossed out the “Chevron” doctrine in Loper Bright Enterprises v. Raimondo, the rulings in Connelly v. Internal Revenue Service, Moore v. United States, Corner Post, Inc. v. Board of Governors of the Federal Reserve System and Securities and Exchange Commission v. Jarkesy suggest newfound strict scrutiny of agency rules, a deluge of future cases challenging the boundary lines of many laws and, in one case, reasons to review certain clients’ estate plans and life insurance.
In sum, the Supreme Court touched on wealth management much more than it does in most terms.
The end of the Chevron doctrine “will have a dramatic impact” in the way that the Loper Bright decision “gives taxpayers a fighting chance to take on tax regulations that have no basis in the code,” and it “really is going to open the floodgates for litigation,” said Leila Carney, a member of the Caplin & Drysdale law firm who represents clients before the IRS. While she predicted that “most of these fights will be hypertechnical,” depending on how any individual taxpayer is affected by the rules, she said that Treasury and IRS standards governing the size of penalties could be one of the agency policies under threat in coming years.
“There are tax regulations that have no basis in the tax code,” Carney said in an interview. “They are expected to do a lot of work beyond the statute, but that work shouldn’t have no basis in the statute. They do need to color inside the lines.”
READ MORE: A tax on ‘unrealized’ income? A test for wealth laws at the Supreme Court
That decision followed ones that supported the government’s positions in Moore and in Connelly, which revolved around a dispute about the value of a family business for estate-tax purposes based on the life insurance proceeds paid out upon the death of a shareholder. In Connelly, the justices ruled that the proceeds increased the value of the business and, therefore, the estate.
Advisors with clients who own a closely held family business “clearly have to review all of the planning that has been done regarding buy-sell agreements” and consider the possible ramifications for valuations of companies that have so-called key person life insurance policies tied to the owner, said Howard Sharfman, a senior managing director at NFP Insurance Solutions. In light of Connelly, the shareholders should consider buying life insurance policies on each other, so that they’re in a position to receive the proceeds rather than their company, he said. The key person policies instead send the proceeds into the company itself.
“That number is coming in, and it will probably have to be valued in my opinion,” Sharfman said. “That makes this more interesting. Advisors need to talk to your clients about this, and talk to them about it sooner rather than later.”
In Moore, the Supreme Court upheld a provision of the 2017 Tax Cuts and Jobs Act called the mandatory repatriation tax by rejecting the petitioners’ argument that the law hit them with duties on unrealized earnings in an overseas corporation. The case garnered attention because it could have ruled out current laws or potential future legislation taxing some forms of wealth if the justices had made a more far-reaching decision. However, the decision left open the possibility for cases in coming years testing whether the income tax authorized by the 16th Amendment extends to any or all types of unrealized income, according to Eugene Steuerle, the Richard B. Fisher chair of the Urban Institute.
“Rules that apply to commodity and other straddles, annuities, undistributed partnership income, zero coupon bonds, contingent debt, futures contracts, swaps, and constructive sales prevent some unrealized income from avoiding tax,” he wrote in a blog for the Urban Institute and Brookings Institution Tax Policy Center. “Arguably, Congress still has been losing this battle. In a future ruling, the Supreme Court could decide it wants to officiate Congress’ game of whack-a-tax shelter. But if it does, the Court needs to understand how open-ended this game can be, the tax arbitrage and shelter opportunities their decisions could easily create and the consequences for tax equity and the economy itself.”
READ MORE: SEC loses home-court advantage: Supreme Court reaffirms advisors’ right to jury trials
Those open questions contrast with more direct answers in the SEC and the Corner Post cases. The former decision gave respondents accused by the regulator of wrongdoing the right to a jury trial in all cases, rather than enabling the SEC to bring some of its civil charges to in-house administrative law judges. In Corner Post, the justices ruled that the six-year statute of limitations to sue under the Administrative Procedure Act begins when a potential plaintiff is harmed by any particular rule rather than its date of issuance.
That shift could mean that the Corner Post case is ultimately “much more impactful” than the end of the Chevron doctrine, Joshua Odintz, a tax partner at Holland & Knight who was chief tax counsel in President Barack Obama’s National Commission on Fiscal Responsibility and Reform, told Financial Planning sister publication Accounting Today.
“Everyone now has their own personal statute of limitations,” Odintz said.
The Chevron case undoubtedly has attracted more news coverage, though. Even though the Supreme Court’s opinion in Loper Bright never mentioned taxes specifically, the possible upshot for IRS rules has loomed large in experts’ reactions to the decision.
And those consequences will apply to regulators of all kinds now, former U.S. Secretary of Labor Eugene Scalia, who’s now the co-head of the administrative law and regulatory practice for Gibson Dunn & Crutcher, told another FP sister publication, American Banker. The son of the late conservative Supreme Court Justice Antonin Scalia, he led business and industry advocacy groups’ successful legal effort to overturn the Labor Department’s previous fiduciary advice rule. The agency’s new fiduciary advice rule currently faces court challenges, too.
“I do think that this decision will make agencies somewhat more hesitant to try to push the law,” Scalia said of the Loper Bright ruling. “I think in the past, agencies felt that they were being given leeway and that if they could persuade courts it was a close call, then they were going to be able to do what they wanted. And now they know they’re going to be reviewed a bit more closely and a little more strictly. And so they’ll probably be a little more careful.”
