raises on appeal concerning the organization of cross refined coal as a partnership it is especially tempting to abuse the partnership formed to transfer tax benefits among taxpayers so partnerships come under special scrutiny for federal tax purposes share of the downside made claim the tax benefits from across a key element of herships the supreme court tells us and the tower case is that there is a community of interest in the profits and losses  test looks at all of the facts and an important piece of publishing on your lion's share our guest turner so an important piece of that is the downside risk it's not the whole story but it is an important piece of that up side of the story looking at the business operations across a j g c is the only entity here with upside potential from the underlying business of replacing co profit at all i get that one well the the facts of this case are really focused on the cross partnership that is the only partnership issue did you ever dispute what happened and that partnership which was doing the same things this one no your honor but a critical piece is a bit but the the protections of respect to the initial investments and particular for fidelity were quite different in those partnerships with respect to that on the one hand the tax credit grossly overstated the amount of risk and given how important that was to the tax court case here and to looking at the overall partnership the areas of the tax from the down side  had to get to this grossly overstated when we know they they lost looks like everything on the jeffries partnership and and at the time i take it we look at the time they  work well your honor the evidence in the record about what the what the investors anticipated what happened is their internal documents projecting the anticipated a g g see the taxpayer does describe them as a best case scenario for the ladies projections included a range of minimum production and maximum production about one hundred million dollars to about one hundred and fifty million dollars but either way  actual transactions going on right i mean a number of our cases talking about the real chip of the economic substance or where there is not where there's sort of sham transactions but here no one disputes that there was actually coal that was refined and then sold and is to produce energy right so you have the actual activity that congress sought to incentivize and so so why exactly should we be focusing on you know the various economic that the sham partnership analysis focuses only on the question of whether there was not tax business purpose that necessitated the partnerships existence so the question here is not did cross actually refine coal the question is w initiator came in and did due diligence and kept themselves updated on all types of information and were being involved in what was going on with the refining of this had they stuck with it they would have gotten all those profits or at least the lower end of their projections no you're out of the government didn't show that but neither did cross much for the burden of proof here to show that the irises determination  ask you another question about downside absolutely so as i understand your theory is that fidelity and schneider didn't really have much skin in the game and the way you reach fact conclusion is by saying ignore all of their contributions that were made in months one month after the tax credit had been realized because they knew they were going to get some benefit but i mean that's the benefit of two thousand and twenty hindsight when they enter into the partnership they do what partners always do which is they they make a commitment to fund the operating expenses on a pro rata basis and they're on the hook for back and if there's a good month they'll happily do it because it'll produce a profit if there's a bad month they're still on the hook for for funding the expenses as they have to do in many months where they were losing money so what why don't we look to the specific ope of the commitments they made when they formed a partnership instead of ignoring all of the expenses that were funded in months that turned out to be successful the appendix december two thousand and nine at the cusp of formalizing its investment process that ality wrote that can the ongoing operations expenses for a contingent liability that exists only have qualified tax credits are produced and also said refining was minimal compared to the the expenses when chris was refining coal they were they they were on the hook and pay expenses and they did pay expenses in every month where no small amounts at risk from these operations expense contributions and then in the context of the anticipated tax benefits that they thought would result here but that is not a substantial factor in favor of this being a partnership for the tax credits and it's not the irises position that there must be a pretax profit and this kind of situation which is required is some kind of economic upside from the underlying business not just tax benefits a legitimate partners have meaningful upside potential or meaningful stake in the operations of the company they're invested and why they're going to mit and trying to figure out how that works when you have as here a tax benefit if it's time to encourage people to do undertake activities that they wouldn't do absent the tax but it wouldn't be profitable at least pretax and they would have no irises mission is not that a pretext profit is required but the irises decision is that there must be some kind of economic upside in the underlying activities of the business so as an example in this case gallagher  ownership of the technology through its role as the license or the technology through receiving the technology licensing fees from across and through the mechanism of that technology licensing fee gallagher was soley exposed to the ups and downs of the operating expenses when cross refined coal which was the vast majority of the operating x i think i think the difficulty is that the way it looked gallagher and it's lovely technology we're going to go nowhere without partners it wasn't they were going to be able to do anything without partners because this thing just isn't going to work financially even they were not going to be able to do this operationally without other people to come in and share the expenses and share the benefits right so i did get a little odd to say let's just look at gallagher when gallagher said i thought i have partners and congress said you know what we want people to do this and they won't do it people won't jump in and get involved in this unless we give them this tax benefit and i don't understand why it matters and they said ok congress said we'll make this economically viable for you with a tax benefit we're willing to do it in light of that tax benefit is that your position that that's when someone says we're willing to do it because of the tax benefit we wouldn't do it without the tax benefit that is is the into the business of refining coal together mr and this why can't tax credit not be the entire reason for getting into it if the tax credit is the only thing that makes this type of business economically feasible why can't that be the only upside potential for the partners i mean that seems to be a decision that congress quite clearly made and then it reinforced after two thousand and eight when it took away you know in hand value of coal provision so so i guess i mean is the government's position i mean i'm just not sure that the government's position is consistent with the creation of these tax credits by congress i understand the i r s wants to protect the public best can get as many tax revenues as it can but but that doesn't seem to be the policy that was pursued by congress rather congress was certainly intending to encourage refine coal through the tax credit there's no question about that but congress was not encouraging was for the creation of partnerships to transfer those tax benefits where the purported per's had minimal skin of the game and no economic up say from the underlying business here gallagher had t really focused on the fact that the key is a non tax business motive for forming the partnership and quoting an eight hundred and forty four opinion from the nd circuit a national investor's corporation the court wrote that escaping taxation is not business so the business purpose as for fidelity and schneider can't just be to reduce their taxes this idea of a skate being taxation or of aiding taxation very different from benefiting from affirmative tax credits right i mean isn't that a isn't that a and it's not it a different thing in fact i mean it's a very different thing to to create a structure to just simply pay tax versus to create a structure to to take advantage of tax credits right where it went congress creates tax credit absolutely creates a different kind of economic market for the underlying good right here refined coal and so there's a business that's simply taking advantage of that different market incentive that congress has created a winner with respect to how it works on the bottom line of a tax return abating tax and taking advantage of a tax benefit like a tax credit do form the same function short i think it may be maybe it's very different public policy though well your honor in terms of encouraging the refining of coal through the tax credit absolutely there's no question that's what well your honor the tax rate didn't find it that gallagher brought in partners to spread its press whether it would have done it without partners but that's probably a fair resident perhaps or have an interest in doing it by itself so what congress wanted to have happen wouldn't have happened if partners didn't come in or seems unlikely to happen when our congress in fact anticipated that people might join together to refine coal with congress  not anticipate was that entities could come in and put a very small amount of money into a partnership and to reap the tax benefits without really being full full or to spend all the business i'm sorry your honor it doesn't  whether or not that credits were being generated but the vast majority of those payments that you're on are were not truly at risk and so when looking at the risk of these entities in c expenses simply shouldn't have been part of the equation so in context which is important to set my salary this is in the context that it's in the context of you know how much they put going to move the machinery plant that they had water to another utility and so they didn't exercise the liquidated damages cause in time when they did pull out  is that at the time when the partners entered into the partnership they didn't know if tax credits would ever be generated or in what amounts and they could even have failed to recoup their investment just what happened at jeffries i think shows without question that what we put into the partnership was at risk and what we put into the partnership spring the talks about you know this being a small amount what we put into the partnership was exactly what it costs operating expenses each each month and those are the expenses of running an ordinary business and i can refer the court to jay a nine hundred and fifty five which is a and that's what that's what we were doing in n a s a s i'm sorry just happened i was just going to take a day and say so your position makes a lot of intuitive essay has this very broad language which says that either the transaction which is the underlying production of coal or the entity which is the creation of the partnership here is a sham in is a sham in the absence of a non tax business purpose how do we make sense of that language in these cases where no one would have undertaken any of this cross or that the call in a safe and learned hand and and transactions that are so structured structured in the extreme such that they are just a facade and then it talks about that sort of economic practical economic effects of the business apart from texas you know if you look at those things business in the ordinary meaning was a service or other non tax business effects  answer is yes it's not a so we have a plant we have employees we we refine coal at ninety four percent of our revenue comes from the sale do with tax paying our employees buying the chemicals we are running a real business we are putting into their business exactly what it takes to run a refining coal business and what we're getting out of it is two streams of revenue one is for know and not just of no one would enter this business without the incentives of congress provided to encourage this activity you know one of get that you have to run a real business which has its own p it was contingent liability so nothing to do with the picture activity but use we speak business in a papered structured transaction to take advantage of those rules we're doing exactly much smaller amount the tax benefit that was received and the amount of money that we invested and it didn't use the word ratio which the government seems to think is a legal requirement but it considered that we were aware when we entered into partnership as a result of the extensive due diligence of the risks we were even aware bromide risks you're aware of the risks rare of the regulatory risk of those projections the district for said we're a best case scenario and they depended on operating at full production over the full ten year period we knew that that would happen we can put a number on that we did put on an  expert trial who ran monte carlo analysis to to show what the real you know the range of losses and gains could be for bonds didn't do that but they knew that they had significant risks and so you know the know an initial protection particularly in a case where everything is structured where everything is fake all right this is a paper transaction where there's no real risk where there's no upside that is in control returns a guaranteed six on top of codes and doesn't and really doesn't allow you to account for the fact that this is kind of well i'm not sure i'm directly carriage i'm not sure that that's what she's proposing as opposed to trying to put some meat on the bones of you know all those you know the amount of projection of actual knowledge about the pot as to the risks when they made the projections those are all relevant factors but as i read the government it is thinks that that right ratio is  unusual case we have a real partner who is the textbook founder engaged day to day in europe ration this business any any decision to spend more than five thousand dollars at us some way for all three of the partners they were engaged in a day to day business on a day to day basis in operating a business and paying its expenses i do want to address just on the operating the operating cost issue because most bring it to bring us this this claim again emissions reduction with armand's of the statute at trial it put on an expert witness who said that the lab testing that we did was inadequate and that in order to qualify the testing should be done  one of two ways one way of looking at this is as mr bishop said you're doing real stuff they're running a business they're producing coal and that counts as a business purpose even if the business is not would not be profitable but for the tax benefits or the other way you can look at it is you you can understand the phrase non tax purpose to mean that the enterprise or the partnership have to make sense without regard to tax benefits and that seems to prove way business through its investment of technology through the possibility of reducing operating expenses which would have endured entirely taiji g c so easy to see as really different position from fidelity and schneider when it comes to  you know the business of producing call and the question are you saying they might have gotten into this business but for the tax credits no your honor that the point is that a g g had economic upside potential for example from reducing operating expenses at across the telly and schneider a ball had employees who testified that through the technology licensing fee  versus the upside and whether that you know the anticipated tax benefits according to the documents that were to be used to trial whether that some kind of risk based assessment which there is no evidence of in the record here but even a proper comparison the fact is the tax rate simply didn't consider that and not only did it not consider that it mistakenly thought it culbertson barred that kind of contextual comparison and that was a significant error in the tax rates opinion here at the end of the day