as an ordinary necessary business expense under the revenue code section one sixty two as a first issue secondly is this deduction disallowed under section two sixty five a one because it is to tax exempt income for the first damage payments one hundred twenty one thousand four hundred forty dollars the tax exempt income that dr dog you received was seventy three thousand dollars which was back a bank right into parts it's a note he owes it back if he drops out of medical school gets kicked out ok it's a note in there's interest if i ever he finishes medical school in finishes residency but declines to serve for four years in murfreesboro tennessee then the contracts is in a different section that he goes back twice as likely dangers those back twice the amount paid by the middle middle tennessee medical center so when he settled this obligation in two thousand and two because well for two reasons number one the medical center in murfreesboro really breached their agreement they said they would provide him employment opportunities after his residency and then when he said where's my job they said wait a minute we don't things have changed you're going to have to start your own solo medical practice at a cost of roughly five hundred thousand dollars and as a sole practitioner so he made a financial business decision in two thousand and two hundred twenty one thousand four hundred forty dollars to be relieved of it from his service obligation to work for four years and so contract same medical center it's loaned the money yes yes well it wasn't you know they advance the money there was no note no loan agreement there was a services agreement they said we will pay your medical school tuition and other expenses if you agree to work was conflicting in the whereas it said work is a stay at member of the medical center but in the green itself it says we're in the under served area rather for five is that's untrue and a code section you know is it that apply to sixty five applies to the cost of producing tax exempt income ok the payment was made in two thousand and two the taxes and income came in hundred ninety four and so it was a business decision he made later he didn't enter into this agreement and ninety four with the completely he want to get a job after graduation after residency so i guess it was two fold argument you keep saying they didn't offer right you could set up a practice but they didn't offer him my job i'm saying suppose they did offer him a job but germantown was so much better that you then alternatively say wait a minute if you say to sixty five applies at least he can deduct the difference between the one twenty one for forty in the seventy three thousand the iris is no you can deduct any of the less i mean we're kind of going to step two  so far in the oral argument i mean what about the first step whether this is deductible at all i mean the supreme court seems to think that or say that we look to the quote origin and character of the claim with respect to which an expense was incurred rather than its potential consequences upon the fortunes of the taxpayer so that in the gilmore case and so you know we look to the origin of this claim well the origin of this claim is he wants to get an education and so he takes on an obligation which is there after breaches but the origin is he wants to get an education not he wants to do something with extant practice and so doesn't that  suggest that this is a personal expense just like educational expenses are for everybody else ok in gilmore that's the divorce case where the taxpayer wanted to deduct attorney's fees in his divorce because he wanted to protect his income producing assets and the court said no divorce is personal in nature you can deduct your attorney's fees in the divorce educations personal right right right but if you look at the bourse there you just three months after gilmore ninety nine three the tax court in  first to have the sole practice option over here or have this other job in germany he says i can make more money in germantown i'm going to pay this all off to get out of this thing the obligation to really fall out of alimony allergy there i mean you know he gets a bunch of money to pay for his education apparently he didn't pay taxes on that money but it's to pay for his education everybody else is paying for their education post tax dollars and i know he had to pay more back but i mean he signed the agreement he said and if one sets aside that he had to pay more back in fact i mean he's basically looking to pays to ition with pretax dollars at the end of the day here ok the in terms of time that's the origin the earliest point that is true the payment that call's the issue here was made later when the business decision was made what to do but your best sixty five the reason behind the it was to keep people from incurring the expense to produce tax exempt income like borrowing money bought tax exempt bonds and deducting the interest on the loan and not paying income tax only interest so that's a classic situation this is not that situation the colace that was the damages payment in two thousand and two not the scholarship in one thousand nine hundred but the difference at least the different should be deductible equitably there's no reason not to allow that to do it through sixty five of the regulations under that address partial allocate between the tax exempt income the taxable income ok here you've got the earnings in germantown is taxable income and you got the scholarship is tax exempt income earlier so at least it should be pro rated good afternoon here on earth may it please the court i think judge kept lips this morning i think you kind of hit the nail on the head here what's before the court is actually a fairly narrow issue the appellants have conceded there no issue of material fact they've admitted that they have the burden of proving their entitlement this deduction they've conceded that educational expenses are generally nondeductible and he the case law keno top men and i believe the while or case side in our brief clearly all hold that when you get an educational agree to meet the minimum educational requirements for a specific trade or business here or a medical degree it's been the case with a law degree that those are nondeductible personal expenses i just would like to get to a point that they continue to insist that they made a damages payment i think the record here is pretty clear that his reason for entering into the agreement in one thousand nine hundred four was to pay for his medical school education i think that's consistent with his deposition testimony answers to interoperate tori's and in fact the record further shows that when he paid that loan back the notation on the check to repay the university you know indicated it was a loan the receipt indicated a loan while in fact the agreement here did have a liquidated damages provision appellant clearly was under the belief that from the earlier conditional agreement that they had negotiated that out here everything is consistent with mr darkeys understanding that they were paying back the principal of the loan which was seventy three thousand and then the difference between that and the hundred twenty one thousand dollars is interest on that from the time he received that amount to the time he repaid it in two thousand and two you're willing to concede that much that that's what it was that's what he looked at it he looked at is that as a principle and interest that's consistent so again while the agreement did have a  liquidambar liquidated damages provision here he never understood any point in time that he was going to be obligated for that he agreed everything clearly indicates with his own  that he was paying the principle which was the seventy three thousand dollars and then that forty eight thousand and some odd dollars was interest on that from the time he received the loan until he repaid it in two thousand and two so based upon that the district court here magistrate judge kobo determined that the taxpayers weren't entitled to a business expense deduction under one sixty two when they repaid the amount in two thousand and two because the origin of their claim and we submit the gilmore's test which they conceded is the operable test here was the question is when mr received the money is is the key question now would his potential motives were when he repaid it so we submit that the district court here appropriately granted summary judgment to the government on that point and in the alternative just to address the two sixty five argument to sixty five borrowers on tax payers even if they're entitle to a deduction from taking money tax free and then getting session the point is that you can't have your cake and eat it too so while the district court judge found that that issue was moot because they were entitle to a business expense deduction for the educational expenses with with with us funds i believe it was the department of h h s it really is a stink and without a difference i mean the fact the matter is the statute very clear and the holding  just went didn't didn't even get to whether it was a statutory obligation or contractual that's kind of like a subsidiary a little discussion going throughout the court just held that because like here the taxpayer received the money tax free they weren't able to establish that they paid taxes it would typically be tax free when they receive it as a scholarship under section one seventeen of the code so when they repaid it they simply can't deduct it so we think that both the decision in kenya addressing minimum educational requirement expenses to being nondeductible personal expenses as well as the decision in addressing the second component like a no for their bookkeeping purposes so he might have said no to indigenous but really the fact is the contract itself governs what happens the no provision doesn't apply to dorgan the failure to provide the services for four years applies to dargon his payment was a liquidated damages under the contract before course the contracts say that as far as the partial deductibility to sixty five of under two sixty five the regulations the own regulations me provide that you allocate the expense to the tax exempt income and that taxable income ok so it permits an allocation of the deduction what could be more direct than the seventy three thousand dollars the reply what they advance for any i'm the excess over there whether it's ten thousand or forty something thousand would be deductible or he could earn more money in germantown more he paid that is the business reason for doing that he was afraid he would get sued in he didn't have the money to hire lawyers and fight him over this and might be an injunction keep him from practicing medicine someplace you know who knows he was just a layman physician trying to decide what's best for him as wife and two children so he paid this back up or plato at that there's a lot of material they have lawyers and ones that have little if a small amount of