technical rules under the accounting provisions of the tax code just kind of there been a change in method of accounting and again not addressing the merits of the case there are three aspects of this case that i'd like to highlight for the court today first is just the basic for accounting purposes it was not taxed and not treated as income so in two thousand and four the in kind received a contract right was treated as an open transaction so no taxes paid in two thousand and moving forward in two thousand and six and two thousand and seven payments were made to mr greiner with respect to the are not rights so the contract saying if certain targets are met gross income targets on these product lines you will get payments those payments were made tax was paid on those thousand and six and he's actually paying taxes but it is consistent with your method was adopted in two thousand and four to contrast that with the closed method if you want to look back in two thousand and four how do you pay tax in two thousand and four on receipt of the in kind right change the open and present action of the keep those in the or right no i think that begs the question is what item are talking about and i will agree that it is inconsistent with an open transaction method but it is not a change in method and there's a key distinction so yes in two thousand and four there was an open transaction method so i think to illustrate he receiving kind current contract right two thousand and four and treated as an open transaction it's not what he got in two thousand and six and two thousand and seven there are separate items of income that came in and if you've got separate item of that of income as the federating case says and the capital one case say you have a different item and therefore no change you got a different transaction and you can't have a change in method if you've got a totally different transaction how is the difference in a different item and income between two thousand and four and two thousand and six and seven let's put aside the settlement payments or even though i know those are the harder case because i think those are a little harder but they are not right gave him a right to income in the future correct and that income in the future was to end the two thousand and six two thousand and seven was paid correct i don't understand how those are different forms of income one is guaranteeing it of this are giving this future income later to be terminal and the second is the result of i would turn to the language in the federated case which says and there are very few cases this was a capital at asset well i think we are your honor in two thousand and four we say section eighty three which governs very broadly the receipt of property for services we see that's turned off in two thousand and four because it was converted and the regulations under section eighty three one point eighty three gosh seven a says specifically that although you can read you can defer income when you get a stock option as soon as you exercise a stock option or trade it for something else you close the transaction and it's tax so we say in two thousand and four mr greiner wrist he didn't exercise the option but he got something he traded it for something else could you could get treated that option as it as a capital asset at that term yes  it doesn't determine the accounting method for payments made on the contract right and it doesn't determine the accounting method for dispositions income received on dispositions and i go back to the analogy we dry in our briefs your honor is a share of stock so if i receive a share of stock that is income to me it can be a gift it can be for services provided it can you lot of things make an i somebody gives me a share of stock that's in two years later i get given ends on that stock that's also income but it's a different item of income why if asset the accounting method that usually two thousand and four treated it as a can't and did not treat it capital asset i don't think it spoke to the treatment of capital ordinary it treated it as an open transaction which is entitled to do as if he hadn't received anything that was taxable on the theory that it was too hard to value yeah the burn out versus work when he has received payments in later years you keep saying those payments are not related to what he got twenty zero for and i'm having trouble i'm saying they aren't that connection they are definitely related just like a dividend is related to receipt of the stock just like disposition of stock income on matters related original receipt of the stock it is not the same quote i'm going to income for tax purposes and that's a very important distinction because you don't change methods for accounting purposes just because there's a factual nexus between kind  in comp so this plan is not an item of income this is a piece of property so for for item of income purposes under section forty sixty you don't call it the pet you call it the income somebody gives this to me that's an item of income capital loss so i think the capital asset versus ordinary house it really isn't the issue it's the income bit an asset generates it's an income income statement issued versus a balance sheet the issue here is whether or not monitor anyone else he would have adopted a method of reporting for in kind receipt of contracts but dividends paid on it were disposition of contracts is a different item of income you have to look at the income coming can treatment doesn't care about the balance sheet accounting treatment cares about the income or deductions as well so what is your bottom line of all of this your bottom line is that it never was a changelin items were also ordinary income or you know they were the same that second question they were the same types of payments i know you say they're subtle but events vs payments of the are not right let's just assume they were also don't think you and again it's probably my fault i'm so let's assume that two thousand and six payment was of the or not right was ordinary income that you treated as ordinary income you know what you did print instead of it being a the dividends if you will in info six and seven that would have found him and he did not but he didn't get those ordinary dividend type payments and he not there was a corporate divorce and he got what the papers characterized as buyout payments  the facts giving rise to those are of corporate divorce not dividends paid pursuant to the merged corporation and not in kind contract received in connection with her combination in two thousand and four so you're very close to being out constructively changing their earn out reporting going back to two thousand and in fact the grahams have admitted that all the reporting is interdependent when you look at their administrator refund claims they said that they should have used the open transaction method they should have reported a closed compensation transaction in two thousand and four and they should have paid tax on the fair market value of the earn out payments in two thousand and four how is the two thousand and four  for first three overarching reasons first it's beside the point second it contradicts the record and third it's wrong to matter a lot the reason it's beside the point is because the tax payers have admitted that the open transaction method is a method of accounting and they've also admitted that they need to use the close transaction method as of two thousand and four in order to get three fronts that they seek in this case so that's a claim that would change the timing of when they report the value of the urn outright and they admit that as well there's actually a chart in the court of federal police in there was a material items we're talking about here are really the two thousand so that a payments it's the have to treat it as a close transaction they'd also have to prove independently of the method of accounting issues that there was a sale or exchange for capital asset that's actually a separate hurdle that they have to overcome but your honor is absolutely method of accounting retroactively a taxpayer has to request the i r s permission for a change before changing the method and this is something that capital one actually discusses that if this were not the rule that they use on their returns what capital one did is they had tried they had filed a request change or method of accounting their questions in big us then they reported late fees in a certain way on their returns and then capital  one for the like taxpayers here wanted to retroactively change the message method and say you know we have imported differently starting back then and the court said no it doesn't matter if the taxpayers arguing that the new from the other earn our income contradicts the record because when you look at the amendments to the merger agreement which is how the parties seven who litigation the amendments refer to these payments as the first earn out payment that was the two thousand and eight payment and the earn out obligation that was the two thousand and nine payment so all of these rights arose from the two thousand and four merger agreement mr greiner received an  out right in exchange for the cancellation of his stock options and basically what you settlement of what the amendments reviewing is they were establishing a value and a payment schedule for that right  as part of unwinding the merger essentially another problem with the different item of income argument is that it also misunderstands how the open transaction method works i understand that they're saying they have dotted the open transaction method of accounting but only for the in kind of contract rights the reason that doesn't work is because you can't the open transaction method is when the taxpayer takes the position that they've received something but if the value cannot be ascertained in the euro for seat but the flip side of the open transaction method is that they need to report the income over time in the years that it's received if a tax defined the item of income as the income associated with the earn out right or earn out income for sure but again we don't even necessarily have to get into what is or isn't an item of income because the taxpayers have admitted the open transaction is a method of accounting and that they would have to change the close transaction method of accounting as of two thousand and four in order to get the capital gain treatment that they seek for two thousand and eight and two thousand and nine  another point i would make is that this is not stock so i'm not sure that an analogy to stock is really helpful really what this was is that it was a well it's not a sure it's a question in order to get capital gain treatment they would have to show that they sold or exchanged the capital asset and the taxpayer in this case could not have chosen to urn outright as a capital asset because all it was was a right to future payments analogous to the lottery cases the principle is that if what a taxpayer holds is a right to future payments getting  almost soma in exchange for those future payments there's not convert the ordinary income to capital gain so i would say no and the other issue is that in order to get capital gain treatment they would have to have sold or independent of the reasons other type of income on credit cards is earned and they say finance charges overlimit fees interchange the advance fee and then it concludes that late fees are a separate and distinct item of income so capital one has all sorts of fees coming in on the credit card in the exact same year and the court there at the government's insistence finds that those are separate items of income and fees coming in all quite those to dividends on stock coming in the same year for different kinds of dividends preferred ordinary those are different items of income we have something dramatically different from that here we've got a corporate combination transaction where mr going on gets a contract in current and four years later we have a corporate divorce where he is given payments characterized in the papers and by out so if at the government's insistence in capital one you've got different kinds of credit card fees in the same year being treated as separate and distinct items of income under section for easy how do you have completely different i mean obviously a corporate combination of corporate divorce are not the same transaction facts giving rise of the income from those are not the same transaction so that i think the answer is from our perspective the change  if they're different items you don't have to change me different years i do want to come back and touch just briefly on the duty of consistency doctor because i think that is where if there's any sense of unfairness or windfall or prejudiced of the government that's where the amount in two thousand and six and two thousand and seven such that by the time we get to two thousand and eight we've cleared the decks and there's no info any of the government's not harm the government's not prejudiced and there's this court said the bigger issues case in order to invoke the d some concern about playing fast and loose it's the duty of consistency doctrine comes back and helps the government address that we confront that head on the corner federal claims never address that and the government doesn't address that here doesn't even cite baker hughes that it's in its reach so we are not looking for a windfall we're not looking to prejudice the government we're looking for the proper federal tax treatment of the buyout payments received in two thousand and eight two thousand and nine as a capital asset those payments are for mr greiner properly taxed at one