Legal Docket: Money and taxes

NICK EICHER, HOST: It’s Monday morning, start of a new work week for The World and Everything in It. Today is the 21st of May, 2018.

Good morning to you, I’m Nick Eicher.

MARY REICHARD, HOST: And I’m Mary Reichard.

I expect more rulings from the Supreme Court this morning.

Last week, the justices issued five rulings, and we will tell you about those before we get on to oral arguments.

The first ruling (Murphy v. NCAA) allows states to legalize sports betting. It found the federal ban a “commandeering” of state power, and that’s unconstitutional under the 10th Amendment. Congress can still regulate sports gambling if it chooses. What it cannot do is force the states to police it.

EICHER: The court also upheld the drug-dealing convictions of twin brothers. (Dahda v. U.S.) The two men complained law enforcement used a wiretap order that went beyond the state jurisdiction of the court that issued it. So they asked the Supreme Court to invalidate the wiretap order and set them free. Unanimously, though, the justices declined to do that. They pointed out prosecutors did not use evidence from outside the state of Kansas, and so the wiretap order otherwise followed federal law.

REICHARD: Next, a six to three majority ruled in favor of a prisoner facing execution. (McCoy v. Louisiana)

Louisiana authorities accused Robert McCoy of murdering three people. McCoy’s lawyer thought the best course of action was to admit guilt and maybe he’d only receive life in prison. McCoy didn’t want to do that, but the lawyer overrode him anyway.

The strategy backfired. McCoy’s now on death row.

But the Supreme Court ruled a criminal defendant has the right to decide whether to admit guilt, regardless of his lawyer’s insistence otherwise.

EICHER: Another ruling (Byrd v. U.S.) recognizes the privacy expectations of rental-car drivers, even if they’re not on the rental agreement.

Police stopped Terrence Byrd on a minor traffic violation, and then searched the car he was driving without his consent. Officers discovered Byrd was not an authorized driver and figured that meant they didn’t need his consent.

A unanimous Supreme Court said they did.

Byrd’s case on drug charges isn’t over, though. The justices sent it back to lower court on other grounds.

REICHARD: The last case (United States v Sanchez-Gomez) had to do with a federal court practice allowing some defendants to be placed in handcuffs and leg shackles, full restraints.

U.S. Marshals placed four criminal defendants in these full restraints during pretrial proceedings — that is, before they’d been found guilty of anything.

So the four tried to form a class action and sue, claiming the practice is unconstitutional.

The question before the high court was whether the case could go forward, even though their criminal cases were resolved.

Unanimously, the court said the challenge is moot and the class action cannot go forward.

But the opinion did not rule out a future challenge to the use of full physical restraints.

EICHER: Now, we need this week and next to finish analysis on the remaining Supreme Court oral arguments for this term. Today, Mary will analyze two of the four we still have left to cover.

The first case today (Wisconsin Central Ltd v United States) has to do with a question you’d think the courts had resolved by now: What is money?

The background on this one involves the federal tax collector, the Internal Revenue Service, and three railroad companies.

IRS collected $13 million in taxes, citing a 1937 law that gives the agency the power to levy special taxes on railroad employee compensation.

The railroads are suing to get that money back.

In 1996, these rail lines started to give employees stock options along with their pay.

But IRS thinks those stock options are no different from wages, and so they are taxable.

REICHARD: At the Supreme Court, lawyer for the railways, Thomas Dupree, says the IRS is misreading that 1937 law.

DUPREE: The Railroad Retirement Tax Act levies a payroll tax on railroad employees’ money remuneration. The question presented in this case is whether remuneration in shares of stock is remuneration in money. We believe it is not for a simple reason. Stock is not money.

After all, Dupree reminded the court, we can’t pay our grocery bill in stock options. So why should the IRS pretend that’s the same as a money wage and tax it?

That 1937 law says any form of quote “money remuneration” to railroad workers is taxable “equal to a … percentage of its employees’ wages.”

Justice Elena Kagan took that and reframed the way Dupree put the question this way:

KAGAN: But that’s why — I mean, in your briefs, you keep on saying you can’t take a stock option to a grocery store. But I think—and that’s obviously right. But I think what I’m saying is that would be a relevant question if all we were asking is what’s the definition of money.

But that’s not what we’re asking. We’re asking what’s the definition of money remuneration. So the fact that you can’t take a stock option to a grocery store is irrelevant to that question. The question is that, when it comes to compensation, is a stock option used interchangeably with money? And, I think in this company and many others, it is. Isn’t it?

DUPREE: Well, I—I don’t think so.

To be clear, all of us have to report gains from when we sell stocks and earn income. But here, the question is narrower, specialized for the railroad employees. When they exercise their stock options as market prices go above the price at which employees can buy the stock, that’s the point the IRS says it’s just like wages.

Justice Kagan made things concrete with this hypothetical:

KAGAN: So let’s say a company has two employees, and one employee makes $200,000 in cash and is granted $5 million in stock-based compensation. Two hundred thousand plus $5 million. And the other employee is just given $250,000 in cash. Now who makes more money?

DUPREE: Well, the—in your honor’s—context of your honor’s question, I think money is essentially synonymous with overall wealth or assets. And that is a definition of money.

KAGAN: Right. So the answer to my question is, of course, the guy who gets the $5 million in stock makes more money.

Arguing to uphold taxing these stocks was lawyer for the federal government, Rachel Kovner. She said the law refers to payments that can be converted to cash, and that policy should not encourage companies to skirt taxes with creative vocabulary. She cited the statute’s objective:

KOVNER: Providing a financially stable, self-supporting retirement system for railroad workers. That objective would be undermined if employers could avoid taxes by paying employees in stock, a highly liquid asset that serves as the functional equivalent of cash for employees.

But Justice Neil Gorsuch had a list of common perks of company life that workers would find nightmarish if they had to consider it all part of their taxable income.

GORSUCH: What do we do about the more general problem, though, that … lots of companies issue lots of things to their employees that are forms of compensation that could be reduced readily to money?

You mention lifetime passes for riding the rails, for example. Sports tickets might be another, home technology might be another … why aren’t all those kinds of benefits—childcare? Why don’t all those qualify as government definition of remuneration, or do they?

Well, Kovner responded, the distinction is between those things than can be readily converted into cash and those things that can’t. Then she redirected the Court’s attention to another aspect: CEO pay.

KOVNER: I mean, it’s not uncommon for a CEO to get $1 in cash and the rest of their payment in stock.

The IRS won in the lower courts on this matter, but the circuits are not in agreement on the issue, so clarity is needed.

This second case (Chavez-Meza v. U.S.) may ring familiar to you because it involves a recurring dispute at the Supreme Court: time in prison and how that is measured.

In 2012, 19-year-old Adaucto Chavez-Meza got caught selling methamphetamine in Albuquerque during a sting operation. He was sentenced to 11 years, 3 months under sentencing guidelines in place at the time. That was the minimum possible sentence.

Later, the Sentencing Commission made some changes that reduced what Chavez-Meza might have received for his crime. Naturally, he sought the lesser sentence, asking for the new minimum 108 months. That’s nine years. Instead, the district court judge imposed 114 months, nine and a half years.

But the judge didn’t explain why he tacked on the extra six months. Chavez-Meza says that’s important so that a higher court could review whether it’s appropriate.

His lawyer, Todd Coberly, had a rough time of it. He heard various iterations of the very same question, this one from Justice Ruth Bader Ginsburg:

GINSBURG: How much of an explanation … would be required? Let’s say and take this very case. What … explanation would have sufficed?

Basically asking, what on earth do you want? The sentencing judge fills out a form that says he or she considered the sentencing criteria.

Lawyer for the federal government in support of the sentence was Deputy Attorney General Rod Rosenstein. He had great poise and demeanor this first time before the Supreme Court, arguing the judge here did exactly the correct thing and no explanation is necessary.

But Justice Sonia Sotomayor had a niggling worry on her mind:

SOTOMAYOR: If we don’t have any statement by the judge as to what he or she is doing or some basic reference as to why, how do we know? 

ROSENSTEIN: And, your honor, I would give two answers to that. The first is that no matter what the judge says, you never know what the judge is thinking and doesn’t articulate. But the second is that under Walton v. Arizona, a long-standing principle, courts presume that district courts know the law and apply it faithfully. If it were to the contrary, we would face this issue really in every case … 

SOTOMAYOR: But if you know no reason … we don’t really know why he picked 114.

ROSENSTEIN: Well, we submit your honor that you do know enough, just as in any ordinary original sentencing under Rita, you know that the court was familiar with the facts and circumstances of the crime, you know that the court evaluated the 3553(a) factors and the policy statements. You have the comments the district court made at the original sentencing, which indicated that the court was aware the defendant had other uncharged conduct … 

Opposing that kind of confidence is formidable all by itself, but here the other side had trouble just answering that basic question of “what do you want?” Poor lawyer Coberly—again for the prisoner trying to get a reduced sentence—was reduced to asking for mere “crumbs” and seemed relieved to get this over with.

COBERLY: The reason I imposed the sentence of 114 months or whatever it is, because of the seriousness of the crime, you know, the defendant’s involved in methamphetamine trafficking, something to that effect…uh, we’re not asking for much. We’re asking for crumbs here and I see that my time is up.

ROBERTS: Thank you, counsel. The case is submitted.

The circuits are also split on this matter of whether an explanation is required when judges hand down prison time sentences. So once again, clarity is needed.

And that’s this week’s Legal Docket.

(AP Photo/Jose Luis Magana, File) In this Feb. 1, 2017, file photo, the Supreme Court is seen in the morning in Washington. 

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