flawed that is that because the fifty two million dollars in free financial aid that was paid by baker hughes predecessor to its russian subsidiary was not alone it somehow did not qualify for a bad debt deduction and because this fifty two million dollars supposedly was not tethered to some underlying one hundred and sixty two dollars deductible expense of the russian subsidiary it couldn't be an expense therefore it had to be a voluntary contribution to capital and nondeductible that promise is legally incorrect and it doesn't square with the unique undisputed facts of this case those unique facts begin in september of two thousand and eight when b j services the corporate parent of the russian subsidiaries south lockmaster some law or b j russia made the corporate decision to shut down p j russia in july of two thousand and nine as soon as b j russia could complete its contract with the russian national oil company t n k b to that same model t it b b j russia notified t n writing that it was not going to bid on a new contract it was not going to extend the contract and wasn't going to perform any more work for t n kid after july two thousand and nine perhaps coincidentally six weeks later the russian ministry of finance threatened to liquidate b j russia when biju received that liquidation letter it had the same interpretation as did the government's expert in this case that it was perform under its performance guarantee performance of the performance guaranteed in this case only could be done by the payment of money by payments to satisfy the guarantee that's because b j had no physical operations in russia or any ability to complete the contract he p j russia no longer existed and there were no other viable alternatives here smoo stock couldn't be issued because that would take at least three to four months assuming the russian federation approved it there was no way to make a loan here because it didn't satisfy the conditions of the liquidation level d j couldn't simply cut a check to b j russia and satisfy the problem the problem here wasn't that they'd have to deal with the russian profits to access just another fifteen million dollars the problem was that the russian currency controls were going to tie up a direct check from the united states to a russian entity for potentially years according to the children's treasury and so the situation that b j faced was it had two options one option was to wash its hands walk away let the performance guarantee be called that was going to result in catastrophic losses and damages to b j calculated by b j at one hundred and sixty million dollars the government's expert thinks it's two hundred one million dollars and it was going to be an incalculable loss to its global business reputation along with the financial damages and yet there's no dispute here have b j walked away and done that that would have been s status as a global worldwide fracking company and keep its reputation which has never been disputed in order to essentially a orderly wind down of a company it is already said it's going to cl and in order to effectuate a discharge of its obligations under the guarantee which the guarantees specifically said would be discharged when the performance when the contract was performed in july of two thousand  now so you're certainly right there are some very difficult choices being given to your client whether the tax code is going to help them out on all of them as it is the only real question for us that discerning understand why you do what you did or your a you have other arguments chub a specific on performance garrity why is this up for film and the performance guarantee how are you performing in a way that guarantee with quartus the guaranteed judge south starting line to perform that and so there is a direct correlation between the payments that are made on the free financial aid and the performance guaranteed because as i indicated there is no other way to perform the guarantee here except on making the payments and so on to the tax code whether we look at one hundred and sixty six is a bad debt or one hundred and sixty two is as a business expense that's to ductile in fact i think that you talked about the tax law judge south we can and part of the problem we have here for example with the one hundred and sixty six dollars claim is that the magistrate judge made three critical errors in how he analyzed the critical error number one was that he looked at this issue from the th factor the state of nixon test of debt versus equity and that is not the test to be applied in a guarantee situation it's telling the government has never advocated in favor of that  and the reason is because the th factor test looks set in advance at the time of the advances made as opposed to a guarantee where you look at the time the guarantee is made so what you're looking at is satisfaction of one cases runs through for example the following case where the guarantor was precluded by the bankruptcy plan from having a right to repay and then the rd critical error that he made was that the discharge has to have some kind of a written release and i think this gets back to your question judge southwick about the relationship between the performance guarantee and the payments and how this is deductible because the discharge was by the payments which allowed b j russia to perform there was no other way for b j rush to perform because of this liquidation situation it was going to be out so at that point the only way to perform on the performance guarantee was to make the funding payments and that was the only way to obtain a discharge because that the only by performing the contract i don't think anybody can seriously say that b j was going to get some because of the magistrate judges there as i think has tried to seize upon this argument that an underlying debt has to be a bona fide debt that's not in the statutes not the regulations it's not the case law and that essentially eviscerates hold the line of cases involving performance guarantees performance upon guarantees and what have you and and so that's the one hundred and sixty six dollars case dealing with the question you asked judge no expectation of return on that this is a capital b j russia that was leading losses it had made a profit in years so there wasn't going to be any return this money wasn't used like in other cases that help a voluntary contribution of capital to put put a new coat of paint on beach in russia it wasn't going to buy new equipment come up with a new business plan to have a new advertising campaign to go out and get new customers this was for one thing and one thing only to preserve the business reputation of b j services as a global worldwide provider of fracking services and that would not be program protected if this guarantee gets called and that guarantee effectively had been called by the liquidation level so in question still we're going the question regarding the voluntary contribution of capital the whole line of cases thing schlepp the mills all of those cases involve one none of them involved where the dominant motivation of the shareholder was to preserve the business reputation of the company and all of those cases in false situations where they were had a desire to promote the future operations of the company by advancing capital helpless not b j smote of here it already had a stamp list the death sentence for b j russia in july of two thousand and nine once that contract was completed there is no other case that the no case that the government has sided or can cite where that of voluntary contribution  capital involved a situation where the company which received the funds was going to be preordained to be shut down not one case now that gets us back to the error that the magistrate judge it is still an expense of the other company that is being paid and you know you didn't pay any expenses o b j rush so what is your best case you don't need an expense at all in order for this to fall an ordinary and unnecessary business expense well the best cases are the ones that we cited allan lots and what have you were they all involve situations where the shareholder makes an advance to corporation in order to preserve its business reputation you are looking at the character of the advance was that was the motivation that's why motivation is so critical here was the motivation to preserve the business reputation you're not looking at the underlying expense or obligation or what have you but if you want to look at that cell that's pretty simple to do here because what we have is j russia had under significant underlying expenses those expenses were labor costs accrued all the costs those expenses had been fronted by the loan that had been made to b j russia  is cash funding those expenses e j it could have theoretically just made periodic advances to pay those expenses because that's what those were for the fifty two million was to keep this company alive so it could perform this contract which necessarily involve these expenses so maurice you ask you must have thought when that actually be a problem the russian government whatever was behind all that was after b j russia because it was not sufficiently expenses with because the fifty two million dollars repayment a portion of the loan which had been for the expenses they took care of it's just under the unique russian law that satisfied the charter capital requirement that avoided liquidation one time sufficient capital and then they can spend it down is what the russian law required them to do not a requirement the russian law required lou to be within compliance for that year and then it goes to there's a following here and then the next year when they can do something about please the court jacob christiansen for the united states in this case the district court correctly held that the transfer of fifty two million dollars from b j russia to the russian subsidiary in order to bring that subsidiary into compliance with the russian capitalization requirements was indeed a capital contribution and was not and deductible business expense or a bad debt expense the effect essentially goes to one of time as a supreme court explained in which in the think case capital contributions are not immediately deductible instead the shareholder adds the basis of the property transferred to his own basis in the shares of the tax benefit results subsequently when the corporation is liquidated or the shares are sold your friend on the other side it gets about capital contribution which they surely were not looking at a future shareholder benefit of having more value to their shares by this company surviving it was to keep it alive for the purposes we all understand and you understand better than maybe the panel so what about motivation and chant that doesn't fit within your capital contribution normal rules so the motivation for making that capital contribution is not relevant to whether the transaction itself is or is not in fact a capital contribution there is a treasury regulation that states provides that voluntary contributions by shell shareholders to the capital the corporation for corporate purposes are capital expenditures but that's a subset of of capital expenditures a contribution to capital doesn't have to be voluntary all the time there are involuntary contributions to capital for example it could be either by a corporation's governing documents that require shareholders to make contributions of capital for example when assets reach a certain minimum or there might be statutes requiring shareholders to make contributions to capital such as in the banking industry those would be what i would call involuntary contributions but but they're still contributions to capital  the statute that defines the term capital expenditure is section two hundred and sixty three dollars and it doesn't limit those expenditures just to voluntary capital expenditures and what it states is that no deduction shall be allowed for any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate and that's exactly what happened here b russia was given an infusion of cash to bring it in to compliance with its capitalization requirements which increased the value of the j russia so these facts fall squarely within the definition of a capital investment under the statute section two hundred and sixty three dollars that said the contributions in this case were indeed voluntary b j parent was under no legal obligation to transfer free financial aid to its subsidiary there had been no default under the contract and b j parent was never called upon to perform by the counterparty t and k so in that sense these contributions indeed were voluntary because there was no legal obligation for p j russia to transfer free financial aid it did so for its own business purposes or whatever those person purposes may have been in order to avoid the liquidation of b j russia protect the assets b j russia's assets from liquidation by the russian government but the point being that there was no legal obligation for b j russia to make those contributions and that's important there may be no motive or purpose requirement for the ordinary understanding of a capital contribution but isn't the whole purpose of the board exception that the st half of it doesn't really matter why they made the fifty two million dollars cash transfer that they made and right i mean it literally says motive or purpose in the decision itself yes and so our response to that under the lorch exception to the general rule motive would typically be the st step why have we made this payment that's irrelevant here because there still has to be an underlying expense in order for there to be a currently deductible business expense the statute says there must be an expense a supreme court said and this case as the district court concluded there was no expense  that was extinguished by the transfer of the free financial aid to b j russia what we really have if you're missing the expense what really is happening is you have a taxpayer that's basically taking money from one pocket and put it into the other pocket shareholder taking money contributing it to the corporation without the underlying expense that's all and it's the way to look at that required in my friend referred the court to the case of allen and this court's decision it looks both of those cases involve expenses in alan we've cited these in a footnote on page thirty two of our brief in allen the shareholder paid amounts quote for the purpose of providing payment in full to the corporation's general predators and in lute's the taxpayer was allowed to duck chains for quote amounts he paid in debt see assumed with respect to creditors unquote of the three controlled corporations so we know all of the cases that baker he's a cited in this brief there was an actual underlying expense which justified baker hughes argues that by requiring an actual expense that the government is elevating form over substance in fact however that's the codes requirement there must be an underlying expense we're not elevating form o substance here that also point out that taxpayers you know once they choose the form of their transaction they're bound by that for the baker he's got have decided does talk about the intent for the payment and then in the intent by baker hughes parent as the priest say was to keep b j russia alive because of the capital requirements of the russian government was placing on it wasn't that the russian government was coming after them because they weren't paying their expenses and were not paying their bill but if p j russia turns around a new says that money to pay their bills and that was to some extent a motivation by baker hughes seems like it at least we're getting close to what loki is talking about if that was understood the north has been argued  particularly heard today that they would then use the money they didn't have to keep it that it was a one shot infusion of capital and you could do with it what they wanted to for as the russian government was considering to respond to that using thank you yes you know with any infusion of cash or capital contribution eventually that the intent is to use that asset or that cash to further the business of the company to edge it's been given so the fact that the aging russia ultimately used this cash to pay down alone you know it could have used the cash for other reasons it could have purchased assets and the record is clear that the cash could be used at b j russia's discretion and so you know with any capital contribution eventually the company is going to use that for some purpose the important thing here is that it wasn't be to russia had discretion how to use that cash which is the classic example of a capital contribution you know and i think the other the other thing that we are b j part was was wanting here was it wanted to reach russian tax benefits and that's why it shows that the form of the transaction that it chose the transfer of free financial aid that was unrestricted so that it could obtain russian tax benefits i didn't instead use the money to pay rd party expenses th it would not have been entitled to those russian tax benefits so busy russia or b j parents specifically chose the form of its transactions for a purpose in order to achieve russian tax benefits and they did so and  in order to achieve tax benefits while we look at satisfaction of the performance guarantee that the parent had with b j rus why isn't that what occurred here case is that there's no bonafide debt anyway the regulations define what a bonafide debt is bonafide debt is a debt which arises from a debt or creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable some of the money if the government doesn't argue that only a formal loan document qualifies under this definition stipulated that they were insolvent at the time is your position and solvency itself doesn't necessarily legally preamp possible repayment at some stage is seen as a pretty good case for them that there was no expectation of repayment r so in this it is not the government's contention in the district court didn't decide the subrogation rights were require the legal right to repayment was required in every how does that i had been a situation at least comparable to what we have here so in my years when myers went ahead and made payments to ensure that the construction projects were completed free of mechanical  there was a contract between miers and cortland wearing cortland oh do whatever amounts myers had to pay out in order to make sure the projects were completed free of mechanical things so there was a and because they were insolvent the debt was worthless and that's why i qualified as a bad day because myers wouldn't be repaid the debt but here we are missing any we're missing a debt or credit relationship or any agreement to pay a fixed or determinable sum of money to b j parent b j the i mean the provision of free financial aid document itself state away or is it that there's no expectation or is or is there an obligation of some sort but no expectation no no it is the the the contract where in the trend where the funds are transferred states that the makes it clear that the threat of the financial aid is free and that there is no expectation of repayment i'm just trying to get to there's no right of repayment the same way here the court would bad gadget generally there's no expectation of repayment and a lot of concern in marcia's no expectation but are you saying there's also no legal right that just would not be performed correct because because here it was clear that the aid was free the there was not being a debt that was created and this is this is how the district court distinguished liars because in meyer's it was actually a contract that said courtland had was contractually obligated to repay amounts that myers paid bonding company for any payments that the bonding company had to make or any losses they incurred in connection with a construction contract so the bonafide debt in that case was the indemnity agreement where the shareholders agreed that they would pay the bonding company any amount or any losses that the bonding company incurred as a result of the construction project so again those cases further illustrate the point that a bonafide before your time expires can we go back to one hundred and sixty two i want to make sure i understand the argument on the expense because we agree under lurky if they have a purpose or motive to satisfy the st part of the test then the next question is this is an ordinary business expense right and it's a business expense of the taxpayer right b j parent or does it have to be an ordinary expense of a b j russia well what the organisation says is that it has to the you know it describes exception as being an expenditure that arises the letter from the russian government says pay the money or make you know satisfy the capital requirement or else sure seems like an obligation to make the capital so the requirement was th or raise your capital levels to a certain thing or we're going to you know take a property or we're going to foreclose on a loan obviously that would satisfy the arguments that somehow this is different but i don't i don't see how where the expense is because you know be there's no it's there's no underlying expense and i guess actually if i might just one more question that's actually my question for you is what would you require for an expense of b j russia to satisfy the nd half of the work exception so if there had dollars loan to the creditor named to the russian government that would be sufficient you could go to lowell and b j perrin instead of giving the cash to b g russia has paid off the russian government that would be a stronger case under the l exception have to determine what was the dominant motive of the shareholder i'm making the advance what was the predominant motiv with the shareholder in making this payment you have to know what that was in order to know whether not the lure key exception a plugins motive in attend also were particularly important in we're dealing with the prefer the relationship between the performance kiran tea in the pavements you have to know those things and the government never question the motive in doing what it did with respect to the the question is just that about the satisfaction at the performance guarantee and the response of the government that there was no bona fide dat because we hadn't complied with performance cure to nobody's question it was valid in forceful in to rush of long and there was a fixed indeterminable sum of money fifty two million dollars so the shouldn't be any question about that about that being a bona fide debt you have to know whether or not that's the dominant motive and what's being paid here we know what got paid here fifty two million dollars we know what that got used for partial repayment of the loan we know what that loan was it was for crew to hold costs and labor costs of the of b j russia there's no dispute about any of those things and that's the problem with the magistrate judges summary judgment was that he respectively trying to look for a little cubby holes to put things in and they don't think miers is a perfect example what you are asking about judge southwick were the magistrate judge says well mars can be distinguished because the there was this contract that had a right of reimbursement that wasn't how the tax court decided that case it looked at the practical issue of the fact that cortland holmes was insolvent there was no way it was go be able to repay anything and it recognized the obvious from the klein of cases going back to putnam that you don't have to have a legal right of reimbursement the question is is what is the status at that time of the debt or will we know what the status of b j russia was it was on the books insolvent it was bleeding losses so we have here a bad debt deductible under one  putting companies like you know like b j in a position where they have to wait for the parade of horribles to pass that makes no sense and it's not the plots so for those reasons we would respectfully request texas grind company vs american arbitration association and others