answers all three of the issues the court faces in this economic substance case one not according to dr kobi yes and that's the second issue and that is that one cannot redefine o to see equals p by excluding revenue one can never calculate profit by excluding revenue we know and this is not our first point that the r min c equals p provides that over sixty million dollars of expected net profit according to the i r s expert that answers the economic such as under the three controlling supreme court cases in two thousand let me ask you this the district judge weighed the testimony of the experts dr kobi against curtis investments experts walker and sick  tell in found dr kobe's testimony to be more persuasive that this transaction lacked any economic substance it was only for the purposes of tax  avoidance and we sort of i mean we defer to the tax court on these determinations point me to a finding of fact that the tax court relied upon that's clearly erroneous in order to make that that one excludes revenue in its argument it starts out by st one excludes revenue that's an error as a matter of law and then it goes on and braces dr colby for and never mention fact that his soul of thaw r t criticizes this idea of excluding revenue that dr kobi says this financing arrangement had no reasonable possibility of profit is an erroneous prospect of profit and we say as a matter of law you cannot calculate profit without considering revenues and dr colby goes in and says i'm doing this based upon briefly in myers and when we look at  myers says you cannot exclude revenue you cannot exclude can't segregate the investment side to do that the phrase that treatise use would be a financial camp camel so one applies t demonstrated at trial that there's a one hundred percent error rate in his good loan bad loan analysis which actually dollars to the conclusion that a prime interest rate loan in two thousand would be a bad lung under his analysis and would therefore lack any reasonable prospect of profit and therefore would be a sham so i attacked of with respect to the methodology because we had just finished proving that his methodology had been rejected by his own authority and that it was a one hundred percent error right so if one corrects for that one co cannot slice and dice judge going to very much like the decision that you had american electric in february of zero one you can't slice the scenes that you can't break them up into parts that dealt with corporate own life insurance many years ago but the if we recognize that we have to consider the whole undertake a proposition that the government can see to page thirty five of its brief as a matter of law the prevailing supreme court of florida requires that we consider the whole theory under his own traders tried to explain to me in a couple of minutes why this transaction had economic substance because these people came in is there's a missing element in the  opinion important missing element that it's presented to them as a zero coupon interest free use of proceeds for thirty years and so you look at that does it make sense to enter into that or not makes sense to enter into that does that make sense or not they but they weren't getting the thirty five million dollar euro what they were they were getting five million five point something million or they were getting the benefit of the thirty five because thirty of the thirty five is covering the interest is that thirty this covering the interested insurers they have interest for a use is what is the value then transfer used jaybird did not accept it as at its face value he went through a detail and now it's an excel spreadsheet and exhibit for j and so it doesn't make sense or does it not make sense it makes sense as the court found so you're supposed to induce i'm trying to figure out how this transaction works and i'm still having trouble figuring it out after reading the tax court's order reading the two briefs i think i have it but i'm not sure that i do they a separate tell me what i wear i get this wrong and i'm going to ask your counterpart the same thing if there is a separate entity that  created a third entity right it's that entity that gets the thirty million plus loan your clients agree to be liable for repayment of that thirty million dollars correct and they get five point something million interest free right ok that's settled that that's a transaction that that's it and you use it every every every thing the account it's about a little shop eight percent about eight percent i'm not asking for percentages how much is due on the loan for thirty million dollars well it's it the thirty million dollars by the end of the loan period is on a do not know the number is on the board and it's a large number and then there's another sixty million dollars  profit beyond payment of all and payment of all front wall and payment of all fees so the net profit from for the live export net profit to whom net profit to our people to the curtis investment company they only got five million they've got five million is there a remarkable thing interest for it is a list it does sound like a remarkable thing well in the end you know again you have to you cannot take it at face value they did not take that face value they went back through in theory because you know this case inside out i'm down here in the weeds and trying to work my way out of a college tax course if your clients see if you can explain this to me your clients are getting a hard  five plus million dollars in cash yes or out of this transaction right to use right to use as they wish right now that so far i'm correct yes or in exchange for that they are guaranteeing repayment of principal and interest on a thirty million dollar loan to a third entity yes ok when is that thirty million dollars due and payable it is on a balloon paces at the end of the thirty minute at reset annually but it's five point five percent plus fifty basis points and so they get that the first year and then it's an adjustable rate debt structure so it's adjusted it end of the year whatever interest rates are due and it's going to be that plus fifty basis point in there and the bar we're is getting paid that interest every year is getting paid that interest from the interest bearing deposit account and so  servicing that debt or the interest due on the debt we get the five million dollars interest free entry for thirty years and that is what exponentially grows to render the sixty million dollars profit that were made with the proceeds from the loan are collateral that the transaction they didn't contribute to the to your client's ability to claim a tax benefit based on the opinion of dr kobi and why is completely inconsistent with the supreme court's theory and gregory vs helvering frank client and the car case which is very similar to what you have to look at as a whole in an american electric if one rejects a supreme expensive conventional loans suffering far less financial detriment why isn't that that's that's why also has its faults i expected face and in this sense he says this idea of their alternative loans available you go pay interest nobody is offering us an interest free loan except this proposition in two thousand and one we tried to get a replacement we're looking the same level of faith nobody and we shop to try to get the letter credit around a number b nobody is giving us that saying interest rate deal right now if i understand this the only way this transaction makes any sense economically is if you get it over seventeen percent return on the five million your s s so you're saying you're willing to borrow five million dollars and pay back thirty million plus interest at the end the only way you can even breakeven is to earn over seventeen percent in the interim and you get there because somehow you're a but you're able to show that well that's how much money we've been able to make on money we borrow and what were the interest rates at the time this transaction was made how much would they have had to paid for the month five million if they just borrowed five million five million and nine percent it would be a lot less than thirty years when put is eating into if you're making seventeen point some percent and if you ran those numbers you wouldn't have the sixty million dollars profit because of the interest free it's that it's geometric growth of interest free money and they tested they had that question do we want to incur this level of debt that's why they made sure that they went back and got their actual thousand five year back testing seventeen point two percent that that's a risky take you to pay it back if you're earning seventeen point something percent it would take you a number of years but you would never get thirty years would not take thirty years it would not get to sixty million dollars of net placed the court my name is jennifer rubin and i represent the commissioner of internal revenue in this case and on and i start with what judge jordan asked you want to go through the transaction and i think most of what you said is absolutely on the money there was a separate entity created specifically for the purpose of taking out a low density held eighty five percent of the proceeds and that eighty five percent is where the money would initially come from either to pay interest or anything else or if the loan was pol so yes when wind kearse investment company like all the other people who took cards transactions out you know took on joint and several liability they also had an agreement that the money would come first from abroad tisbury the special city created with british foreign entities the second thing i'm going to say is yes they say they got five billion dollars in festival funds but they paid two point three million dollars in upfront fees and they have to wonder why is that so important if the goal is over under their theory overall profit at the end of the loan period if you're for example and i'm not i'm not accepting their position but if if they're right that they're going to make fifty plus million two million seems like chump change doesn't matter you're trying to make it seem as though my god they only got five but they would have had to pay two point five for all of their experts and consultants and reviews that's not economically feasible but that takes a very short term view of the investment over a long period of time because the same investment could have been made with any money from any source and then the size of that doesn't matter than the size of the payment doesn't matter if you're right it certainly does because that's where the analysis comes from to say that this loan was extraordinarily expensive you know even their own experts said that they only got two point two five million dollars from festival funds and if you look at the colbert report i'm looking specifically at exhibit extra fees that were put on for this amount of money that mr dr colby said they got which was something like three point three million dollars which is even more than their expert said would have been substantially cheaper than less and with wi tax benefit included there going no tax benefit but in terms of deciding whether there was an economic nor the tax benefit tax payers are allowed to use the tax system to their advantage as long as they play within the rules and every once in a while a company will take a transaction that is economically less advantageous because it produces significant tax benefits right why isn't that sort of what's happening here the be an economic effect other than the tax benefit sure you may decide to take a three percent gain instead of a five percent gain because under the three percent gain under current tax rules you're going to get taxed less is that legitimate not when not when your gain is completely from a separate transaction remember the loss here was entirely based on the cards transaction if there was no investment they take the same loss in two thousand by the same token they can make the same investments using any money and that's what they did that's what i don't understand where is the tax deduction coming from in this three corner transaction the tax deduction is coming from this they say oh well we got this no that was that had a face value of five thousand dollars but i took on thirty two million dollars worth of debt so that's twenty seven million dollars of loss even though they were on the hook for twenty seven million dollars in two thousand and they knew what the others thing to keep in mind mean they weren't on the hook if particularly if the loan got hold the money would first come from the money held by braun disparity which is what happened in two thousand and  one remember the tax court held here based on a number of facts that this loan even though it had a thirty year term on it was never intended to go for thirty years many things had a one year term including most intriguing like the forward contract that they were five million three hundred sixty nine thousand two hundred eight dollars and sixty cents in liquid u s dollars meaning dollars that aren't sitting in some long term investment right send it to be turned into euro's there were almost the exact amount money necessary to close out curtis investment companies and the lonny baxter's cards transactions there's only off by ninety five hundred euros and so what they found was look  ere you're basically paying for a lost you know you're never going to take you know you're never going to eat and the fact is to be sure when you have a truly integrated transaction courts will look at multiple transactions together to determine if there's an economic fact but for two different reasons it's very reasonable to say no no these investments were completely separate the loss had nothing to do with investments that they when they were deemed a promissory note play the small additional mouth was equal to the interest that broad just bury had paid and what happened to the thirty million dollars face value of the loan brought to sperry paid most of it because most of it was in an account that could only be used to pay off amounts related to this loan and where did the rest of it come from of all of it didn't come from brown the spirit it certainly basically curtis investment company returned the money that it received plus million dollars right that's right so you know you have a couple different things going on here the first thing is that and we listed a number of cases going all the way back to james and nicole rose all before two thousand  as well as newer cases that say look you don't look at other transactions that are truly part of the last generating transaction to determine economic facts to determine the economic substance but the end here we know you could make the same investments with other money they did they used they used money from the a b p sales to make the same investment the kind of margin loan in two thousand and one to pay back to pay back the amount of return did anybody besides those two gentleman or women i have on have any control over what brandis barry did with the loan proceeds but the contract required them to keep it in the time one year time deposit at age fifty and that the money and after that well again the court found that it wasn't intended to go on longer than that i know with us now my question but what is the contract say about i'm trying as hard as i can to grasp this transaction and what it means financially for everybody and it seems to me that if brandis barry had not been required to do anything with the thirty million dollars then there might be an argument that there is economic substance to the transaction because if brander's very decided to invest that in you know trips to the moon and that turned out to be a fool's paradise and they lost the thirty million then curtis would really be on the hook for thirty million no matter when the loan was called but if there were strings attached to where the thirty million dollars went then the transaction begins to lose economic substance because there really isn't a risk to curtis that it's going to be required to pay a portion of the thirty million they don't have that anywhere close to right if you tend to think that's right you would probably want to can see that and  situation one that there would be economic substance but i do believe that the fact that there were strings on broadcast very they were required to keep the money on deposit and they were required to have the money from those deposits be used first before any had to come from curtis does it mean that there was not economic substance and that anybody who looked at this would would know that especially people who have experience with loans you know my opposing counsel keeps talking about prime rate prime rate prime rate these were sophisticated people they were getting loans on prime rate they were getting loans even before this based on the libel or rate which was a lower rate and in fact the margin loan that they got from c i b c in two thousand and one was again it was based on l extended warranty are allowed argument at trial as to whether the colby report should be admitted that is clearly qualified and yes you look at exhibit one ninety one das are exhibit a his his education his but i don't think that's an accurate description of the whole textbook as dr kobi explained in his testimony earlier it goes through you need to make sound financing decisions and you need to make sound investing decisions to be sure you need to put them together in the end if the best financing that you could get is is has a higher rate than your best possible return then you're not going to do the deal but everyone agreed you have fact witnesses you had experts everyone agrees if you fund the same transactions with a higher cost financing you're going to make less money it's going to bring result in negative profit and that's what he was asked me and that's what he was calculating was what is the this is there positive return here by using this as opposed to conventional loan or is there negative return and he found and the tax court credited this using its making factual findings that are subject margin loan you know its interest rate was a little bit more than this one but you didn't have the high costs that were attached and you didn't have this risk of being pulled after a year you didn't have the forward contract that was going to require you to take money out of your long term investments that your claim you want this money for and send it to the bank currency dental with the same amount of money basically that you need to repay your land let me ask you to flip to a second issue which is where i have a little bit more of a concern about your case that this is the tax court applied a pretty significant penalty yes but i don't think it really address whether or not although it mentioned that but it didn't really address whether or not it was reasonable in two thousand  before the i r s had really litigated any of these cases where there were not this transaction was a tax avoidance scheme or was perfectly legitimate isn't the tax court applying an after the fact rationale to say oh you know in the last decade these schemes have been found to be illegitimate they've been disallowed accept or accept or a penalty on you even though when you took the deduction back in two thousand there weren't any of these decisions out there a couple things first of all it can't be the case that if you come up with some new tax shelter that you get a get out of jail free card on the penalties but no but this case took this was not a case that went out on summary judgment with the tax court saying this is so painfully clear that rejecting it this was a three day trial with witnesses from both sides heated debates about the economics of the financing whether or not the experts opinions were valid whether or not there was economic substance to a transaction were having trouble or at least i should say we i speak only for my for myself i'm having trouble figuring out the basics of this transaction and the tax court leys what a forty percent penalty is that about right yes in two thousand and fifteen for a two thousand transaction that took three days of trial to figure out that there's something about that that seems odd to me let me say a few things you know the after the child the court said today oh i have some concerns about the ponies i'm going to look at everything and maybe i'm leaning towards the taxpayers and then she looked at everything and made factual findings and said i find that there's no reasonable cause for what happened here and the first thing she said is look the economic substance dr has been out there for a long time and i believe the taxpayers knew they really that this was a fake loss they knew they were over claiming the basis and i know that and and she made findings regarding that the second thing she she said is you know i don't believe that they really make good faith reliance on independent advisers and first made analysis regarding brown and what and said you know on its face you know that on that moreover as first a local advisers you know you look at what they actually said they did and they said well we looked at the opinion and we read some of the stuff and then we just said it was a good opinion and that's what the tax court found was that wasn't good enough especially with taxpayers like this one that have an understanding they have experience investing they have understanding of loans they have really very sophisticated experience with loans you know you look at linebackers when the decision you had it at issue here but you're claiming a twenty seven million dollars loss i think you knew that was not this is too good to be true and at that point you really need an independent analysis not just w there a novel or unresolved question in two thousand there was no novel or unresolved question because the supreme court of thirty specifically said you consider the whole undertaking then it still says you consider the whole undertaking that's exactly what the three trust it it buys or is followed and when considering the whole undertaking one considers are mine i see equals p and they carefully traced through that analysis that led to the conclusion that actually the profit margin was greater than jaybird at it it looked to the tax court erred on this particular point because it never tested those three long time trusted advisers under for two reasons one we say the twenty seven million dollars as of december thirty one two thousand we have a stipulation fifty one that says they have complete personal direct recourse debt and so it i real there were things that happened later that disrupted that but as of the end of the year there's no question that the tax law works exactly as we as they applied it we did  t judgment which parties can see to it for purposes summary judgment there was economic substance that tax law worked exactly as as it was explained by these that advisors to these people now the court ultimately rejected these people on the theory that they didn't exercise independent just the judgment that invokes judge wilson your earlier question is are clearly erroneous finding this is clearly or erroneous funny that answers that question you recall that the court said that  the advisors to advisors from the accounting firm said that the tax would be deferred and not avoid it altogether to be spread over a period time and she said i reject that because i find nothing no documentary contempora evidence that in the record she overlooked exhibit sixty six pete it specifically confirms that they did that independent analysis that is beyond the analysis that was done by the new york law firm a very thorough opinion by the new york law firm but it didn't address this point and these people into their independent analysis identified this particular point of law that said that the tax benefit because it would reduce their bases in the overall asset would be temporary they'd be recovered as the gains would be increased if they sold off stocks in the future so that independent analysis is there by her standard her standard to parch from the c n n tea standard presidential opinion by the tax court which says these people need only be highly qualified to be provide all information and be genuinely relied upon the other error that of concern no dealing as a reference to sophistication they never did law who's a vietnam veteran and lacks a lost his sight and suffers from post traumatic anger issues for these reasons we think these people did all they could possibly be asked of them they exceed the boil standard there