Tax concerns lead judges to hold on to Berkshire Hathaway stock despite 'conflict nightmare,' judiciary is told

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A federal appeals judge is suggesting changes to deal with a “conflict nightmare”: judges with holdings in Warren Buffett’s Berkshire Hathaway.

Judge Ralph Erickson of the 8th U.S. Circuit Court of Appeals at St. Louis outlined the problem in a letter to two judiciary committees last week, report Reuters and Law.com.

The issue: Berkshire Hathaway owns companies that in turn own other companies. That makes it difficult for judges to know that they have to recuse themselves when a case involves a party that is ultimately owned by Berkshire Hathaway.

“In some cases,” Erickson wrote, “judges have presided only to find out later about the relationship.”

He cited an example: Orange Julius of America is owned by International Dairy Queen, which is owned by Berkshire Hathaway. But the federal disclosure rule requires litigants to disclose only parent companies, not parents of parents.

The same issue arises when judges hold CitiGroup stock, which has a controlling interest in about 300 companies, Erickson said.

Erickson said judges are holding on to Berkshire Hathaway stock because they would have to pay a substantial capital gains tax if the investment is converted to other holdings such as mutual funds. Berkshire Hathaway’s stock price has increased 60% over the last five years, according to Reuters.

Erickson questioned whether the divestiture process should be changed to allow judges to defer capital gains taxes if they preemptively divest themselves of the kind of holdings such as Berkshire Hathaway, according to Reuters.

He also asked whether Rule 7.1 of the Federal Rules of Civil Procedure should be amended to require corporate parties to disclose parent relationships going further up the ownership chain.

“It seems to me that more information rather than less is prudent in today’s environment,” he wrote.

The Wall Street Journal reported in September 2021 that 131 federal judges violated U.S. law by overseeing court cases in the last decade involving companies in which they or their families owned stock.

In May, President Joe Biden signed legislation that strengthens financial disclosure requirements for federal judges. The law requires judges to more quickly disclose stock trades and requires creation of a searchable database for judicial disclosure forms.

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