extension in this case were invalid because they were signed ernst and young's urging and direction at a time when the government at least had reason to know are ernst and young's serious and undisclosed conflicts of interest and that is so for two main reasons st the tax court was wrong to conclude that just because taxpayers had notice that the i r s was questioning the transaction they also had noted that ernst and young their trusted advisor was itself under criminal result here in our view is a straightforward application of trance back and black letter contract and agency principals ernst and young ran the show with these transactions the record shows that olson and the taxpayers relied entirely  price to extend limitations period and the ira knew or at least had reason to know the ira knew about the system different conflicts because it was involved in creating those conflicts and it knew that ernst and young was not disclosing those that it would be disadvantageous to people in their tat and the tax payers position to not know this fact because it seems to me that even if you know the fact i'm not understanding what's gained by denying the extension and i know that olson has another rely on all his testimony nelson says that well in some situations if they i r s has a criminal prosecution in mind they might forego a civil proceeding but it just seems to me that that was a conclusion and i wasn't quite understanding the logic behind it why is it that it would be advantageous to deny the extension so i think the best articles testimony is one thousand nine hundred and one to nineteen  statute lapse and if that occurs early in the overall swirl of investigations export the government might be effectively locked into a particular theory because it's going to have to write issue all testify that it's possible that theory would be advantageous to the taxpayer off of that the op would not include finding that it would be necessary to support a later claim of fraud and there's also the possibility that you know there's a desire to keep the criminal investigation confidential and that might be in on another or some of the concerns that occur that have occurred and where you have the target of a civil investigation providing documents or perhaps you know interacting providing information to the government without knowing that there is a criminal investigation so pending you might have and then concerns so there's the need for very careful coordination within the think there's also ordination in here we had the criminal side i think kicks off when the southern district of new york called ernst and young's general counsel and said hey we saw this newspaper article please preserve documents we're considering convening a grand jury investigating and young and that team the record shows had full awareness you know of the criminal side in fact they met with with the criminal investigative division from on this case division in two thousand and three and you have a phillips case from the th circuit which says we're not going to look just at what individual employees within an agency we're going to attribute that knowledge to that to the commissioner as a whole so i think let's take let's you want to take a different approach th that little slices that you find to kind of divide division by division and i mean the degree of knowledge is something that the tax court did not really provide findings on as i read the opinion they more or less agree with us the difference in how to conflict and they read that didn't dispute that the iraqi side awareness of the conflict exports ground of decision was focused on that and the notion that the taxpayers are either should have known or had reason to know  knowledge of the taxpayer is somewhere somewhere where exports it has significant errors that i think even understanding the difficult burden of a clearer standard review there are problems here so for instance the tax court said that t on and so when you look at the other the only other evidence in the record the earlier disclosures there really cramped and if you look at this through the lens of you see arry it's hard to understand wh view artificial to distinguish between bolton who signed a partnership extension here and ernst and young on these particular facts i mean the government raises concerns of what are the what is the practical consequences of our position for their conduct of investigation i think the answer is on the facts where you have ernst and young at the center of the storm and the government went after them st for reading and marketing these transaction and you had ernst and young listed as power of attorney for the individual taxpayers and you have evidence from the record that the ira said ok we know we want to get these extensions ernst and young is going to help us out especially if our jobs are uncooperative  i don't view it as a material extension of trance act and our bottom line on you know what the practical consequences for the government would be is what they should have done here was asked and that's what their own regulations say if you have a reason to know that somebody feed back necessarily into the legal conclusion that you're urging upon us but as just as a matter of what happened once even after everybody knew what was going on there was still an agreement text for their extensions yes  response to that but st we have a somewhat unusual statute extension language here that says if you're going to extend you have to do it before the expiration of that period i think that a five to six of our liberties and so what the statute fired i don't think the subsequent extensions are legally relevant just for that analysis but i take the broader point to be there something unfair about allowing the proposition that we are advancing and i guess i would  say two things one that the calculus about what tax payer might do to change over time we started the discussion of olson and the reason at this early point it might have been the right point to sort of make the choice once you've it wasn't the tax partner who had a conflict but it was an advisor to the partnership that had a conflict with regard to the tax partner or the other partner wasn't a conflict for the five or there was and i don't mean to case using a general trance back proposition would would apply there but in terms of doctrine to get us all the way home that's why we think and they are if you have i don't take it to be disputed that if you have an agreement and that's the word in the statutes here you dream and that's what we're doing extension we're a party knows or has reason shelter and i want to try to figure out how it worked i think i have a sense of how it worked at least as much a sense as someone who has never run a tax shelter before and if if i want to let something like this in the facts section of an opinion i want to see if you think it's right or not one of these limited partnerships claimed a basis in b c p that was equal to let's say seven hundred million dollars that number according to the i r s was high because it took into account the long option while disregarding the corresponding short option i know you would say it's not artificially high but let's put that question aside this limited partnership that has claimed the basis of seven hundred million dollars as a capital account with b c p that is reflected with a three million dollars figure so basis of seven hundred million dollars but a capital account of three million dollars and that's because that three million is what the when the department shipped paid for the options when the premiums were not it together they took a long option premium they suppressed to the short option premiums they received it comes to three claims seven hundred million dollars minus half a one million dollars in losses now putting aside whether that's legal perfectly legal or a little sketchy or completely  purpose and the thing that makes this case different from all the other cases that the commissioner side is that we had undisputed expert testimony about the diversification benefit from this data and that's the part your honour's  didn't talk about what is it that was being contributed and i think that's a hard thing if you're going to write an opinion against us you know what is it you say because for whatever reason on the facts of this case the government did not engage with the expert testimony and if you in fact had a st occasion benefit by pooling you know options from one partner that were in some currencies with options with other partners and by doing that you did with diversification usually does which is reduce variability so a little like putting some money in a bank account and not giving it all in the stock of the company just so since you opened that door let me let me ask here's my thinking the case in here and you tell me why tell me why you think i'm wrong diversification is obviously a business purpose if you are taking money in the bank and deciding how to invest it in a way that will make more more money maybe i'll invest it in bonds and i don't make some money maybe that's in stocks that make some money they don't vested in real estate but you can always just keep it in the bank and neither make nor lose money and your argument seems to be that this was diversification because they took some of the money that they could've kept in the bank and they put it in a place where they were guaranteed to lose money and i don't see how that is consistent with diversification as a business purpose so i think my my fundamental response to that is that diversification needs to be thought of distinct from profit motives and i think the point your honor just made and slave to one way to think about it is preservation of capital is another business and the facts we had here were these were executives who were coming out of companies almost all of their net wealth was in the stock of that company so they needed to diversify and so it's not a question of having their funds in a bank and leaving when there is a question what is the portfolio they can put together that in aggregate will avoid perhaps all will make money but will avoid essentially loss capital and so you know i think the point that there may have been other investments and that these may not be the investments that you know your honor might make but if we're essentially bullish bets on currency and i'd be honest the experts did agree that the taxpayer had essentially a thirty percent chance of doubling their money if the options expired in the money and so it was a losing investment but the question is is that cross over to the business that have no business purpose and that i think to return to what is par for the for the court of human to rule against is what do you say in the portion of the opinion where you say we know we have undisputed expert testimony that there was in fact a diversification evidence of a substantial business and you need to balance the language spoken n a s a s against the other proposition which is that taxpayers are allowed to organize their affairs in light of tax benefits and some not to take advantage  so you said that there's evidence there was a thirty percent chance of doubling their investment i thought that there was something that was either undisputed or was a factual finding by the tax court that there was no way that the amount of money the clients could have made there was no way that that amount would be bigger than the amount of the sea that came along with the transaction i'm sorry to correct thirty percent is if you have a particular auction error what are the chances that thinking about it from a profit potential you have to also take into account to be paid which as i understand it were forty million on top of the sixteen five premium that you paid so if i run that math and you take into account the thirty percent chance of doubling your money it is a losing proposition as your honor stated but the question is you're still preserving some capital i think something like you know you have a chance of preserving sixty percent of your again that may not be the optimal investment what event may not even and this is a friendly clap is a friendly question but i take it that when you're dealing with this much amount of money you can't just safely put it in one bank account and leave it there and say well i know it won't make money or lose money because i guess there's a risk what the bank would go under and there's not that much amount of money is not insured by the osier i mean i don't i'm way over my head here but is that kind of your point that was part of part of the theory that's why it's the fact here you have for executives whose money was net wealth was completely come straight in the stock of the company they had just finished running they couldn't trade you know while they were still there and but there's other places you could get in terms of diversification there's other places you could go that would allow for that kind of diversification without taking in a profit loss that's correct and so but i think the question is not indicated i'm going to address all sixty three but obviously also here to field any specific questions you have about the may row sixty three dollars requires two things basic things one that the judge be sufficiently familiar with the record and that the judge determined that the case can be completed without prejudice on that nd point the rule actually puts an affirmative duty on the judge to make that determination and as the advisory committee specifically cautioned courts risk error to determine the credibility of a witness that's never been seen or heard and that's natural that makes sense right i mean the supreme court's instructed the courts always have to be sensitive to the problems of making credibility determinations we understand that right you need to be able to see these witnesses speak echoing that visor committee you know the court this court and thompson explained that a retrial could be warranted even with the parties consent if the credibility of witnesses is in question so let's talk about these credibility determinations right that judge holmes marwan you have been discussing you know a key question in the case is whether even why misled the taxpayers regarding its criminal investigation when the statute it extensions were signed by charles ball that's kind of core to the case on the timeless point now for their part the taxpayers testified that you know why i never told them about the investigation and certainly never told them that you know i had a desire to cooperate or intended to cooperate with the government but without hearing from the taxpayers judge holmes and that the sites i'm going to give you are from the joint appendix a two thousand four hundred and eight dollars which is the opinion at forty four judge holmes found that he could not believe that even why hits intent from the taxpayers as they claim he also found that as esther and mister le may that they understood quote far more than they let on and that this quote undercut their claim that they had blindly relied on e n y again this is all without ever hearing them speak finding witnesses lacking witness stand mister let me specifically talk about what he did after he got that call that he picked up the phone and called bob copeland in line and said bob what is going on with this and bob told koeppen told him look this has nothing to do with you it has nothing to do with this case it has ernst and young might be up to no good and the reason according to you why it was justifiable for them to continue to rely on ernst and young is because they called ernst and young and said is everything on the up and up and ernst and young said yes  i i don't know that that would be justifiable reliance with the most unsophisticated party but we're talking about corporate corporate tycoons here to tell me why i shouldn't go down that driver i would say that you know the sophistication of of the executives notwithstanding they had been in relationships with you know why since the eighty's they trusted with everything in their financial because they had fallen in part because they had made some decisions based on bad advice from marcia you know your i believe that is correct i believe that is correct and your argument is that it was still justifiable for them even having lost their jobs to continue to rely on the people whose advice cost them their job your honor what i'm saying is even while i was telling them that there was nothing to worry about that they were ok and that this would work out ok and what matters in our context is no one that has decided this opinion has sat and listened to them and seen their faces and had them explain this not me about what they were thinking ok you can that they can be prompted to that they consented to that right they  contracts of a huge and all the time and i'm sure sprint was arguing in court every day of the week that for example the arbitration clauses in this context that he's in should be enforced and i'm sure that there are opposing parties were saying you were we were misled by rd party or you know this isn't a little thing this is a big thing your rd party advisor under criminal investigation after arthur andersen has actually imploded because of a criminal investigation and why it was all hands on deck to try to save that entity i mean that hired williams economy the most sophisticated criminal tax counsel in in d c right they were seriously concerned about this let me go back to the point about you know this unrebutted point we're not talking about a situation where we have one witness to my witness said the light was green and the other witness said the light was red in that you can blame us for not asking for you know for not asking for a trial no witnesses testified to the contrary in all the statements that i was talking about no witnesses contest but the country there's no country documents when iris counsel cross examined this man they drew the same testimony it's all one way and as judge holmes was putting his opinion together is he's thinking to himself i don't believe these people i just don't believe th he needs to ask for recall himself so that he can see what they say i thought they were credible i can vouch for my own client again but it's not for witnesses but that somebody needs to hear them say this as a matter of due process and under rule sixty three  case this case arises from a market attack shelter it was tax piers used to short term self contained guaranteed money losing transactions to generate artificial tax losses are an excess of the money they paid to participate in that the tax court properly upheld timer's us and the substance of the commissioners and minister to us that i'd like to start with timeliness and you know as i was reading through the reply brief it really struck me that the tax payers here are seeking to expand the transparent line of cases in four critical ways and i go three to four and then go through back through them in more detail number one they're seeking to expand to advisors and not just to the signatories on the next extension consensus number two they're seeking to broaden conflict to include any time that a rd party has an incentive to favor their own interests without requiring any iris knowledge that these tax payers in particular likely have different views on extending the time number three that they're trying to rely on institutional knowledge without any showing that the people who obtained the extensions the people in exams had any reason to know of any alleged conflict and number four they tried to expand the understanding of what is a criminal investigation a let's go through each of those  in back in order back to number one can you repeat number two sorry i just want to make sure i get that before you go back to number one sure if you'd like i could start by talking about one it's broadening the concept of conflict of interest to include are more than likely contrary to the wishes and interests of the limited partners all three invalidating cases here actually include those specific facts both at the i r s knew that there were incentives to favor their own interests and that the tax matter carter's interest actually conflicted with the actual or likely interest of the partners transparent the i r s knew that the tax matters partner were aware that they were targets of an active criminal investigation and they knew that the limited partners had refused to sign extensions leather stocking the iris knew that the tax letter partner had a secret plea agreement with the government promising to help resolve the tax claims the tax payers and also knew that the tax that was partner was defrauded in a limited partners who therefore had an interest in expending the investigation in order to  h to learn about the fraud and to stop the fraud number three river city branches the iris knew that the tax marriage partner was defrauding the limited partners and knew that it  lost the st case and that particular tax shelter and it just no time to investigate the tax shelters which was how they uncovered the fraud such as the limited partners had specific reasons to expedite litigating their case you know and what's really interesting is you know the tax payers and their reply brief go into oh here's this tax court man from diversity french's where they they threw out this action but what's really interesting here is that they didn't try all the extensions in the tensions after the i r s learned of this contre interest after the learned about the fall i ask you is it your broader point here i get that there's some detail factual points about these cases that may or may not be salient distinctions but is your broader point here that look there's only so much that the i r s can be expected to investigate and look into before it relies on these extensions because it needs to be able to rely on extensions because that sets the kind of administrative architecture so that they are as can go on to do its work and you'd have to dig really really deeply to figure out what was underlying some of this whereas in some of the cases that you were just talking about it was obvious the i r s already knew is that is that the point or is it that actually the incentive underlying incentive structures were different in those cases as to boast of this one and that in those cases there was actually a reason to want to deny the extensions whereas here there's not a reason to want to deny the extensions because if the latter one there is there is testimony in the record that there was a reason that the taxpayers might want to deny the extensions there is a tactical reason that they might want to deny the extension it takes both point obviously if you argue in our brief we need to be able to rely on might not want to extent is actually quite relevant because they don't have anything of that here they have somebody who comes back after the fact as an expert i don't think actually admitted to talk about this point but in all events comes in and says well theoretically hypothetically it might have been to their benefits and to not extend maybe but there's no indication that the iris was aware that they were more than likely not of wanted to extend in fact the i r s was aware of one very big thousand and six which only taxpayers if you had extended their time were going to be eligible to try to get a hold of and notably you know most taxpayers did in fact seems like they settled their cases for c b s you know very few extended so that they could potentially be offered of the global sentiment and so i would say it's really both of the points that she made because clearly especially when you consider going back to my st point that they're trying to extend transparent beyond just the tax marriage partner who actually signed the extension to the advisor it really does mean that we would have to do an investigation each and every extension particularly in partnership cases and now can i ask you this question though  just generally so so if you have a situation in which let's suppose there is no gap between bolt and the n y let's just take that out of the field of vision i know you don't want to do that and and i think that might have been your st of four points i can remember but let's just let's just suppose that we just collapse it and we only have one can join entity that's an issue so we remove or remove that gap and then we also say that the i r s knows that that joint entity has a conflict of interest but the i r s doesn't know that the taxpayers would have a reason to deny an extension that right but are you saying that even in that situation  we should take the extensions at face value yes because you need to for there to really be a conflict of interest under these cases and i'm getting a point as you need to show both that the tax the person  more than likely conflicted with the interests of the taxpayers you know otherwise you know if you have an interest free for your own interest but they happen to a lying with the taxpayers no harm no foul and that's what the case law says and there's been absolutely no cases cited for not any extension consents where there hasn't been a showing that the i r s was aware of specific facts establishing that the tax payers either objected to extending the time as a transfer act or likely would have objected as in leather stocking for city ranches there's simply no case that supports that and for good reason you need to be able the tax system relies on for the iris to look behind the really need to have some reason to think that these tax payers had a reason not to sign and not just some hypothetical that someone came up with years after the case but actually had facts at the time saying these  taxpayers had a reason not to extend and therefore i have reason to distrust an extension and i'm going to rely on you know there's several one hundred million dollars of taxes that issue here the i r s relied on these extensions so it's not enough that existence of a conflict of interest as between those two doesn't matter unless we the i r s has reason to think that as to the particular issue of granting an extension there be a reason that bolton would want to acquiesce in an extension by the taxpayers might not exactly exactly and you looking for in every single one of these points i think is very problematic but we don't have to win it all for absolutely not they're all independent you know look trying to number three you know they're relying on an institutional knowledge of a conflict and they're not requiring any showing t the employees in examinations knew the illogic conflict and again in each of the cases is best as i can read them trance packed leather stocking river city ranches the people handling the exams lunch actually obtained and relied upon the of examinations and the criminal investigation division to the commissioner but there's there's nothing saying that you should go in reverse and the th and final thing is that they've really expanded an understanding of what it is for there to be an active criminal investigation for anybody to be aware of you know as my opposing counsel described it you know you have this phone call that comes from somebody at the southern district of new york who says hey i saw an article i think you should be you should be referral for and aren't sitting on also that same person from the southern district of new york also talks are insisting young's counsel and says yeah they have not made any criminal referral at this time which they begin to a lot on that at this time language but you know i'm still concerned and based on that they say well there's your there you go there's your incentive to go against our interest which again you know showing that is against their interests but it also is a very problematic but they have expanded it to this extent that if somebody somewhere in the department of justice makes a phone call that there you go suddenly we should be assuming that aren't you know he's acting outside of the interest of the taxpayers  and again i know for hypothetical sake we assumed that bolton had a conflict but again there's absolutely no evidence of that in the record and certainly no evidence that iraq would have been aware that he had any any conflict saying well you know you have to have the extension has to be done before the time has run out and so you should ignore all the subsequent ones we don't think that's true because i think it does go to whether in fact they actually had any conflict of interest here but  all events that really raises the point that since they've conceded everything all the extensions that were done after september two thousand and four they basically conceded time and as for tax year two thousand and one because all the extensions that happened operated in tandem with doing two dollars things that were critical the operation of the tax shelter number one consolidating in one partnership if that basis increased and number two ensuring that you've got some distribution if  mister been act what's the difference between a and illegal tax arrangement and the things that people do all the tonton where they you know instead of putting your money and putting money that you want your kids to inherit in unst innes something in a bank account you put it in a trust or you want you know you want some other status people elsewhere that there is a line that someone can cross and it becomes a legal wow is this different than a parent putting money in a trust so the kilohertz money that's you know more tax free than it would otherwise be well the trust situation is one where somebody is actually taking a material step to remove themselves from having control of that money and put it into some other  that's because that's what the law intended and what the economic doctrine basically is really all about the saying you know congress can't think of every single thing and so we're going to look  to action and say was there a legitimate business purpose or was this simply for tax avoidance and not for what congress intended congress say for instance with your four a one take sample congress decided to give an incentive to people to put money imagined that i'm a tax lawyer and a client comes and says you know i have one hundred million dollars and i want to pay as little taxes as possible that's my only goal give me your advice and my my out answer that question yes you know how to answer that question but you're not allowed to pick a tax shelter that is basically just economics waste done in order to create artificial tax losses that's a lot of the problem here is that there were artificial tax losses you know as if that's my question is is this what's the difference between artificial tack losses and losses ok so for example they paid sixteen really the types of losses that congress intended you to deduct that's an artificial tax loss it's money that you claimed i lost you didn't lose you know and here which you have is  add on in particular it created these absolutely artificial tax losses and had zero chance of being profitable which is at this point really it's uncontested  that being the case you know you look at and say this is really what congress intended it was for someone to engage in something that has zero chance of profiting and order to claim losses they didn't experience on their cash returns and and that's really that's what these cases are really saying is that when you really have this transaction that's actually just a wasteful way of claiming false artificial tax losses without any real business benefit  and you know i stand by our brief as to why in fact there's a st occasion argument really was just a facade because again it was just within the context of this tax shelter that was designed to create artificial tax losses and i up off the top my head of another word for this but the tax enterprise an issue here is a sack is a cousin of a son a boss yes and can you just describe at whatever level generality you choose and  basically you have this transfer to a central partnership a pair of assets one of which is in theory worth a lot of money and the other one dollar which was actually attached had had a contingent liability and then by putting in the partnership they claim the basis for that high value item and ignored the contingent liability even though when they actually bought these two items they paid a net premium that substantially lower then when they inevitably lost money they came back and said oh my trees that just kind of goes through why this is a cousin but that's really what it comes down to is the parent of the asset and the contingent liability while ignoring the contingent liability for purposes of your of your bases ok thank you mis here that the extension with being granted at the urging the direction of somebody who is under criminal investigation is the same as entranced back and the nd circuit found if sensually self evident that  reason to know that the signatories here might about a different interest and the taxpayers trans pac cited the internal revenue manual for this proposition the i r s would i think would at least be on notice of that and that fundamental concept conflict on the institutional knowledge and the question of which agency employees i think the commission to be asking this court to do something different than the th circuit and if you  undisputed expert testimony about the diversification benefits there's all sorts of things that actors do with with an eye towards tax benefits think about pursing municipal bonds an investment you might not make but for that act benefit the court should hold the line on focus and say and and it and stick with the view that if you have a legitimate non tax business purpose that is enough to avoid this very harsh medicine shamming archon there are no further  you counsel thank you to all counsel will take this case under submission