i'm sure you've done that with the court but if you would remind us as well as you begin your argument that would be helpful and with that you may call the first case morning may please the court i would like to reserve three minutes for rebuttal that that is a lot as happened in the past sixty five years since this court decided cleveland allerton and issue that this court described back in one nine hundred forty eight as one of the first impression for which there is no precedent but regardless of whether that decision was correct when it was issued a lot has happened the supreme court has issued a number of pronouncements beginning probably in one nine hundred seventy nine congress has passed some special tax rules that we think mandate not following cleveland allerton in the circumstances today now this court took a bifurcated approach back in one nine hundred forty eight and it split a purchase into a capital element and a non capital element that we submit is no longer permitted either by the internal revenue  court pronouncements in one nine hundred fifty four when the internal revenue code was vastly overhauled the the congress passed some priority order removals these are sections one sixty one  sixty one and they were described in idaho power one of the supreme court cases are reliable again as priority order emails and they indicate that the same exact expenditure which can be deductible in certain circumstances if it's associated with a capital transaction has to be capitalized that resubmit is exactly what happened here we do not dispute that if a lessee has this the the the government would probably say these are one of the same orange and i mean this well it really depends on how that works i mean this particular lease did not have that option ok some leases have the option you can buy it out the lease in the ship case union carbide had a provision for buying out the lease as a matter of fact interesting the enough the price of purchasing the ship was twenty percent less than buying out the lease so that's why the taxpayer in that ship case union carbide bought out the ship  prison situation that you would like to us to believe is so directly analogous to cleveland allerton as to whether it's been abrogated or not ket issue here about whether or not the principle hugh are arguing are not too high a level of abstraction and too far removed from the since my no that's not that that's not what i ask you mean you have to could see if none of the cases is exactly the point you were talking about more abstract principles than the are over arching principles that rot and they're at it and they're at a greater level of abstraction and so the question for us is whether they speak sufficiently to our situation because yes this is this the interesting part about this case is this brings all of those concepts to a hit and it shows what has happened in the past sixty five years and why today's tax concept mandate a different conclusion then with this court held back in one case that fifty six is that a long time ago we can disregard that you know it was interesting because there was a series of cases between forty eight and fifty five including a district court case in the circuit called truck in which these issues came up deduction versus capitalization and then once a second circuit disagreed with this court the supreme court immediately took it and then unfortunately for us had a conflict and then it discovered they didn't and the fact that they decided they didn't have it have a conflict and they would wait for another day but pretty close to what you just rang for doesn't that imply that there is still an issue left for separation well it seems to me in that case arguing against what you're saying that the supreme court i mean we have knowledge of supreme course the supreme were ducked the actual issue they decided that they agreed to take it on the conflict but they did indicate in several places in the opinion that the purchase price what happens what you purchase determines is this a capital transaction or not and the supreme court pointed out that when the military center made the purchase they also got out of the lease so they accomplish two things by the purchase price and now in the building in the land and they no longer have to pay rent and there's a sentence following where the supreme court ducks the issue where they say this is essentially a capital type transaction that is exactly what we think is going on here you can't separate what they did they spent eleven million dollars what did they do they bought the land in the buildings that is a quintessential capital transaction it doesn't matter what the motive was the supreme court pointed out that motive is irrelevant that the primary purpose for a an expenditure that came up the supreme court in several instances in the do contribute to sort of the capital nature of the property whereas here you have a property that's being purchased for everybody agrees were two point seven five million dollars and the other six point two you think that then then i lose but the way i win is the point that what they would what they bought the two point seven five million was not a purchase contract for two point seven five million this was just a an expert's valuation value does not equal price they paid controverted is one conference but the the two point seven five million is the price of property when you don't  transaction incorrectly if they'd structured it differently would your argument be taken away well that according to the lease they did not have an option to buy out the lease and no no i think i'd answer say it you know it if you walked away from it but then when you say it and then we're backing up bought about a month before and they bought you're going to stick with this forever it doesn't make any sense well if you want to visualize when you saw my read times you want to visualize two two commercial structures one both of them completely finished but one is fully rented the other one is not the one this fully rented is going to sell for a much higher price that doesn't mean the person who buys that can separate that into the building price and the lease price everything is folded into the building price that is this case and  so yes except for the fact that the person on site might actually pay more because they would have to move and take your equipment the price of the building for an outsider an insider is eleven million and that should be  could it because i mean why would the outsider want to pay the full value of the lease i mean why wouldn't the outsider be willing to pay something for it but you know the outsiders taken some risks involving whether the less the defaults on the lease i mean there are some other factors that would go into play so saying they're in analogous situations is not strictly speaking correct is it well that would be the case for in the purchase of a commercial building subject to a lease you have to take the risk that they may walk away with that be a factor to consider and consider what price you wanted to pay if you were the outside purchaser sure but that's also the price for the inside purchaser i mean they could they could purchase and then say ok i'm going to go bankrupt or you know whatever so so i think the what i mean for size is tax parity that's also announced in supreme court cases the supreme court says we want the same to apply to an insider please quote the fundamental problem with the argument that the government makes when they say that everything that was paid has to be grouped under a cap and transaction is that there was not just a capital transaction there was as a matter of law two elements of this transaction one being capital the purchase and one being the least terminations which even the i r s in the government has repeatedly acknowledged is always a deductible expense because when this transaction occurs all the tenant has at the end no longer being a tenant is in one hand the property which only has a value of two point seven five million and in the other hand a pure expense there's no law no way that that can be characterized that six point two five million as giving them a future benefit as that terms understood in the law of capitalization in ordinary deductions it you can't sell the six point two five million it can't produce revenue like the building can overhear it is a pure expense the how to how do we look at the phrase subject to a lease like swimming in your argument that the property can be purchased subject to a lease and the lease continues and in that case maybe it's a capital expense or it can you can have a purchase of property that had a lease but the lease is terminated by reason of some sort of a buyout which is essentially what happened here those two types of transactions should be viewed differently for tax purposes very differently very differently here's the reason the purity equipment and built the building that's added in the capital transaction of the building because it's no different then a different party who had to pay somebody to for the equipment to build a building in both those instances the investment is the same so they both should be capitalized in our circumstance a third party that comes in and buys the property subject to the lease such that the lease whatever value there is in the lease and those lease payments will be there that third party now has an asset that has both pieces it has the value of the property in the one hand and it has a valuable commodity over here the premium nature of that lease that's going to continue to pay there  is a collection issue so it's not necessarily the exact amount as what in this case the tenant would have to pay to buy up the lease but there is a valuable asset that will be supported by those lease payments that's an asset that provides future revenue that's an asset that should be capitalized together that payment now when the tenant buys out or buys the property two things occur the tenant has a property in by the doctrine of the merger of title the lease has expired simultaneously not intially simultaneously that taxpayer does not have a future benefit in the six point two five billion that was paid to by a police under the simple arithmetic that cleaving ellerton allowed for that does not provide any future benefit at six point two five billion does not produce income he cannot be sold it is a pure expense and is fundamentally unfair but also just not proper tax law to deny that tax payer that expense simply because that taxpayer in it up with property that's what leave the militant recognized that taxpayer just in clean air it's in the hotel and they had to buy the property to terminate the lease here under the contract the taxpayer a b c had to buy a new lease the taxpayer couldn't simply buy out the lease had to buy the property so they're left with this property two point under any common usage that describes the situation in which a third party buys the property in the lease exists in those lease payments continue to come in common book or been law school it is that is to add the easement language read the deed restriction it doesn't make any sense to say property acquired subject to a deed restriction and then think of it as someone who's bought out a deed restriction i also think it's curious on page forty eight of the government's brief when they're discussing cleveland ellerton and they're discussing the example of the third party situation coming in and buying the property where the lease exists they describe the same way  brief they say a acquiring property subject to the lease even they use it the way it's supposed to be used they only switch that argument when they get to the one sixty seven portion of their origin so i just don't think you can read no there when i thought that the lower court had an excellent explanation and elsa's in its opinion on this order would describe the fact that he's not a sequential the merger of titled actions suspects sequentially you don't have an acquisition and then the the lease goes away it happened simultaneously so there's never a situation where it's acquired sub to lease because the very acquisition w occurs there is no lease these supreme court precedents clearly there is a higher level of abstraction i think though what's also very important is that they support with this queer did back all those years ago with this court did those years ago when you read those precedents shows that this court was actually ahead of its time now behind time head of its time with those cases talk about that and i think it's also worth noting the government has come in and claim that there is a bright line standard that can be divined like a constellation scott in the stars that they found all these supreme court cases can be linked together the to say whenever whatever certain amount is paid in connection with in the neighborhood the capital transaction must all be capitalized well if there was if that was true this case has been around for a long time i tried this case they had never raised this argument they did they raised just a whisper in the lower court in the summary judgment proceedings it the union car in the brief point being though it is not as precedential value but if there were such an obvious rule you would have thought they would figure that out before the time of this appeal there is no such bright line rule in the of those cases supports it and i would say before getting to that i would just note that those cases one of the reasons why they're not i don't believe mention in the private letter ruling in the don't come and union carbide is the clean elgin situation is this distinct situation which two things are going on and it's very simple mathematically to show the amount of the deduction versus the capital acquisition there's a simple mathematical mathematical formula cleaving elton applied that gives the roadmap for this case to do it here to the allocation is simple those cases those supreme court cases in the progeny that the government relies upon deal with situations really where you've got and similarly expenses in there been cases like this going way back where for instance attorney fees and that sort of thing that are incurred in connection with a corporate reorganization or something like that a capital transaction clearly there's a capital transaction and then there's whether the attorney fees incurred in connection with that should be grouped into a capital transaction those cases of exist for a long time in these supreme court cases are similar type cases where there is a capital transaction and the issue is whether nics expense should be grouped with the reason why they're grouped is because it's part of the investment it facilitates the transaction that law's been in existence for a long time that's a very different situation than cleaving ellerton where you've got two separate things going on not just a couple transaction but again what's the thrust of those cases first of all contrary to what the government says it's not that this court should rely upon the labels formalism and an inflexible approach it's the opposite it's exactly what cleveland allerton said i've gone back to read that they've been out in case more times than i can count and it's amazing to me that it answers every single issue and it answers it similar to how the cases are dealing with it today and how the supreme court's dealing with it today including alex in one of the court said we're not going to rely upon legalized formalism we're going to do a realistic pragmatic approach realistic approach that's what each and every one of those cases cited by the government says in particular it urges an individual ised pragmatic realistic approach depending on the special facts of the case not a bright line inflexible rule and was really ahead of its time the other central thrust of those cases is that to the extent you are going to group some other expense into a capital acquisition or a capital transaction it has to provide a future benefit that's not necessarily enough but it has to have some element of the future benefit because otherwise it makes no sense for it to be capital it's not going to produce any revenue in the future it's not going to you're not going to depreciate to match it against you know that those future expenses against the future revenues that it's going to provide because if it's just an expense it has no future benefit then it should be matched to current revenue which is what the government has always agreed is the case with a lease germination that's in the way of damages it relates to bad contract it looks backwards it's not a future benefit it in other words it's not prepaid rent it doesn't give the taxpayer a right to future tenancy they have the fee simple and fair market value rent is subsumed within the fee simple two point seven five million because that's the way you come in part to that appraisal the portion paid above the two point seven five million is purely an expense it's the premium part of the contract the owner is part of the contract the bad dapo really call that out and that is completely consistent with leaving out and such that if i were arguing this case here today and judge maloney had brewed in our favor in the absence of pleading we should be successful even in the absence of pleading out but like i said this circuit has already decided a case that in a way was pression and intice a painted where the law would go in terms of looking at these capital versus ordinary situations in a pragmatic way in looking for a future benefit which allows the court by the way contrary to their central argument allows the court in a situation such as this to allocate because that's what's going on in those cases in the seventh circuit staley case they remained it back to the court for the very purpose of allocating what's ordinary what's capital it's not the rule that everything in the neighborhood or in the and so the rule here is not what the government says the government wants the law to be that it is not the law nor should it be leavin out ten was ahead of its time it was the proper allerton there's nothing in the statute where it says subject to a lease which says the lease must continue if you read their brief every time you talk about it say the lease must continue the work continues not in their secondly though that the private letter ruling in the field service advice they will run these through my office they're not presidential for a reason because they don't have a high level of review and quite frankly they're wrong and this court doesn't have to follow i don't follow  what to allow a deduction in this case creates significant income distortion the whole idea behind capitalization vs deduction is just a timing issue anyway they're going to get the tax relief is just over time under capitalization vs all it wants to allow somebody to bought this property and one time deduction for six point one million vastly distorts their income which is another reason why we have the capitalization rules that's why i am here i look at this decision it comes across my desk and i say this cannot be the way the tax law is and so i urge you to look at the later congressional spends and supreme court rulings and you can see that what the cleveland allergan did in one nine hundred forty eight was on a blank slate the blank slate is written in the now and it should be capitalization ok thank you thank you counsel both of you for your argument today very much appreciate them the case will be submitted