thank you thank you for waiting the next case and the last case our account of this morning amazon dot com versus commissioner of internal revenue when you read from the department of justice representing the commission in this case i'd like to reserve two minutes for rebuttal thank you this case presents a problem that congress and the treasury department have been working for decades to eliminate and it's the problem of us multinationals shifting profits overseas by grossly under valuing intangibles made available to their foreign subsidiaries nine hundred eighty six congress amended section forty two to address this problem directed the treasury department to revise its regulations to trust this problem and emphasized in that history that when parties in or into a cautionary an arrangement if any head start intangibles sometimes called preexisting intangibles made available to that caution arrangement and arm's length payments would require to be made before that cost sharing arrangement be respected for tax purposes jump in before the nine hundred ninety four regulations the definition of an tangible made no reference to residual business assets such as workforce in place goodwill or going or going concern value in one nine hundred ninety three treasury requested public comment on whether the definition should be expanded to include such items the definition in the final regulations adopted year later was essentially the same as before with the change to the language at the catch all provision and light at the drafting history of the roll why should we interpret the hundred ninety four definition as an expansion that includes quote unquote residual business assets because two reasons the first is just plain language itself of the definition of some more items it's written so broadly to include and you need to look at the history that proceed at this me as far back as one thousand nine hundred sixty three when the treasury department issued its first public guidance on the definition of until intervals for transfer pricing purposes totally made clear that included i the business itself and this was the first guidance that was out there that can you point to anything specifically in the treasury's explanation of the one nine hundred ninety four rez regulations that suggests it intended the definition of accountable to be expanded to include residual business assets can you point me anywhere specifically use the word clarified and the reason why they were the interpretation of the definition entails which had always been pride and ninety two proposed regs mark through a monkey wrench in and looked at the post nine hundred sixty eight regulations and said it specifically listed items in items that are normally thought of is an intellectual property property and there's two ways you could have done that you could have added items to the list or you could expand the definition of similar items now and ask for b six which is what treasury did and it's a good thing the treasury did it that way i tax payers are always trying to narrow the first reason regulation to what they had added goodwill going concern for some place we'd still be here today because the argument that it doesn't say growth options they wouldn't have as good an argument they wouldn't mean i'm not disputing that people are always argue regardless of how clever you are but they wouldn't have it but i don't think they would have had a good an argument and i think of it had been there i'm not sure that amazon would have won in the tax court don't think the court needs to get there what we're relying on is the plain language of the regulations itself and the regulatory purpose and importantly regulate this court is told our definite isn't sure that our deference  asking for based on contract that things that happen after this litigation and that seems a pretty big stretch we're just saying if if for if the court thinks it's unclear whether similar items other than a physical attribute it's not i'm looking at the red substantial value independent of the services of in the individual i keep coming back to that independent of the services of any individual that's correct the value needs to be independent but th the intangible itself doesn't need to be independent of services because there's listed intangibles that are related to independent services for example know how and the reason for this and this is something because it is independent of i spend it on services so it's the purpose of the regulation defining intangible in terms of physical property of tangible property and services is not to exclude any particular type of intangible it's to make sure that there's not a double counting in the background principle forty two in the regulations is that anything of value that is transferred in made available needs to be compensated nothing gets transferred for free but you do  want to make sure that there's not double counting and the mechanism of the d c at the discounted cash flow method which was applied here ensures that that does not happen amazon is noted that it's projected to make large intangible development costs into the future not part of those costs are going to pay for the salaries of the research team and that is the value of the services but that has been excluded from the discounted cash flow analysis because it's attracted to the only thing that's  the greater intangible value of the work force and the corporate culture so that and that's what the tax court allowed it was unlocks to access for free and that's why we have a problem there's new legislation  now right and yes congress has now codified our interpretation of the meaning of similar items but they didn't say it was clarifying did they then in the joint committee's report was but let's just assume that what does it say and the plain language of what they wrote that this is clarifying what has always been true did not use the word clarifying in the statutory language itself in the conference report congress did say this is not changing the existing transfer pricing rules and it didn't say that this was just the legislation say it's pacifically in response to amazon yeah i mean not the legislation the legislative history does it drops  law different they didn't say the law was always what you're saying it is now they're saying when congress resolve the dispute one fact that can be a factor that the statute is in fact clear fine not changing again you need to look back at the history and if you look at the history of three sixty seven if you look at the history of when section forty two was a forty two i'm sorry ninety two when congress enacted the definition of intangibles nine thirty six said how does it work in terms of ok it's in response to amazon and very toss but all but what they've done up to this point has already occurred and there that it's clarifying right it doesn't say that it's in there but it also says it's no inference should be drawn with regard to treasury's ability to apply the law by regulations prior to the date of the of the legislation and when congress enacted the definition of intangible in one thirty six in one thousand nine hundred two it noted the definition is very broad net that was excluded in that legislative history sided revenue suspect that there's other people out there that i mean amazon happens to have the firepower to go you know i mean that go up against the government there's a lot of people that maybe don't have that same economic ability to do that but if i'm saying this hypothetically if we were to agree that the tax court got it right then are there other people i mean just that mean you can't go out you can't go after other people out there that did the same thing that hypotheticals i know that you don't want me to do that and i'm not a no but but i'm i'm hypothetically trying to understand the consequences says people go forward so if we don't have from the tax court then amazon loses and then i'm assuming there's a lot of other people out there that you would go after under the same theory that you went after amazon right if amazon wins is the consequence of that that those people in that window prior to the new legislation there are a oxen free well i mean that is definite possibility and the problem is if you firm this is terrible precedent to have on the books that assets the value can be transferred for free that that completely inconsistent the entire purpose for forty two i know because that's refute that i'm just trying to in my mind i always like to understand if i write an opinion or i sign on to opinion how does that work in the real world you know how do parties behave when they you know relative to that because you know i think that we don't really want i don't like unintended consequences i want to decide something i'm going to decide according to the law but i like to understand the consequences to reverse what the tax court did the rewriting of section four the definition intangible the rewriting of the realistic alternatives principle would just set the rules compensable it would be to allow the commissioner to use the realistic alternative principle which is central to the arm's length standard which is the concept that a party dealing honestly this is not going to accept  price that's less than one of its realistic alternative where a list of alternatives and that can be applied and that's when the problems in this case is the court just did more in the language of the regs and rewrote them and so one of the rewriting with realistic alternatives principle is the tax court said well you only apply that if the transaction locks economics up and you can't restructure a transaction that has economic substance and the realistic alternative principle doesn't restructure the transaction have an action about kosh airing the and regulators regulations seem to refer to intangibles as assets that result from r and d efforts do i don't like it well going going concern value and other residual business assets new intangibles would rely on its corporate culture of innovation that was the really key and tangible that was being used to develop its new intangibles member culture will last as long as the corporation is there the know how the limited useful life was determined by the tax court applied to the website technological and tangibles and that's true that had a limited life of t naff years for usefulness for further r and d but the know how and innovative culture that made with that original technology and subsequent technology that had an indefinite useful life but i will make this point fisher's cash flows his analysis projected twenty years plus terminal value which is common core now admitted that that's what's commonly done when you have a bunch of as handles a has something that will last for a long time but it wasn't dependent on the terminal value the court itself determined that marketing intangibles were very valuable for twenty years the court could have rather than throw the d c s out altogether for a limited the cash flows to twenty years the value is really a small amount and we're not asking this court to apply the d c s or determine a value would solve but just to allow the commissioner to use the d c at the very valuable tool it's commonly used by economists and businesses including amazon and in fact  my name is carter phillips and i represent amazon morning seems to me that the argument of the government really comes down to a pretty simple proposition that says that other similar items meaning that they are those that derive their value not from the physical attributes but from intellectual content or other intangible properties has to be read completely in the abstract without regard to the history or to anything in the context of this case that if you just read those words you could envision a circumstance in which those words could be applied to going concern value and other elements of intangible properties that are the residual intangibles but what we know and we've known this since that one nine hundred sixty three revenue ruling and every statement by the i r s and every statement by congress up until about two thousand and nine in two thousand and seventeen is a recognition that there is a fundamental difference between the kinds of intangibles that are listed in the twenty eight listed in the regulation and all of the residual intangibles and the fundamental difference between them is that the specific intangible the ones that can be independently transferred or all generated as a consequence of expenditures for which the taxpayer received a deduction and so when you then begin to offload those and that's when you're making income if you can push the income out at that point you end up with a serious tax that they've asian but with the residual goodwill one you can't transfer that unless you're going to transfer the entire business and second of all in congress is always recognize this goodwill going concern all of those values are the product of income a product of successful operations of the genius of the individuals and it's that fundamentally different element that has always caused in the past both the entire business community congress and the s to recognize there's a fundamental divide there and you can as congress didn't twenty seventeen make a fundamental change and say look we're going to we're going to change the very definition of similar because we couldn't use the old definition because we had to because i just talked about independent of and now we get it move it and change the causation to attribute and then we're going to and we're going to specifically identify good will going concern at cetera and what does that tell you that tells you that this didn't exist congressman is that clarification argument that i was there that i r s is obviously at the commissioner's arguing that it was a clarification you're arguing that it was sent that it's new law and how to tell me what are the best indicators to look at for that the i mean i think the best indicator is the conference report that itself specifically calls it a revision of the definition and specifically it's interesting in the in the in the legislative changes that they made in tw when when they talking about methods of valuation they talked about that it specifically used the term clarification but when they talking about the definition of an handles they describe it as a revision of the definition there's the to me that's the strongest indication of it but second candidly i have to do is read the language i mean nobody could realize it in a against this history no one could realistically think that adding good will going concern value workplace and force isn't a vast shift in what you're going to consider as part of this undertaking it's important to put it in context this was as part of an enormous restructuring of the tax code and a revision of the relationships of multinationals in general and as a consequence of that it's not nearly as startling to think we're going to make a fundamental shift in two thousand and seventeen but the idea that remotely suggest that this existed in one thousand nine hundred four is is to my mind just a bridge too far i asked about this what the consequences are hypothetically if either side when certain loses so if if if we were to affirm the tax court what does that mean about other people during that period of making and you know and all of that so i mean what we do know is that the entire business community relied upon the understanding that those intangibles weren't clued in and therefore structured their joint projects across the across the pond in both directions with the expectation that it was just the twenty eight designated intangibles that were in play now how many of those cases are still going on from that period of time up until two thousand and nine remember two thousand and nine the i r s adopted the platform change and said look we're no longer going to be bound by the twenty eight and so from that point on there would have been changes and i suspect probably shifts in terms of who's going to make what kinds of zany arguments a fair notice would be different yes that that point to you at least have noticed that some elements under this platform theory are no longer going to be regarded as as limited to the twenty eight specified intangible my understanding this tax court did not agree with you one hundred percent in terms of that that your valuation they took your method of valuation but they change the numbers and you're not appealing that right and if and that's worth putting and keeping in mind just in terms of valu because there's this old sense that somehow we're getting something for nothing out of all this in the hours or that they got something for nothing but the truth is we are paying what we paid we received more than eight hundred million dollars for pretty much static intangibles with a limited shelf life we have received billions of dollars since the sharing agreement and the government's experts said tens of billions of dollars will in fact be paid to amazon as a consequence of this and so what are we talking about we're talking about eight hundred million dollars for a business in two thousand and five that have been around for ten years had begun to do its significant work in the in the intangible space but then ended up having to as a district as the trial judge found in a comprehensive opinion judge lauber been extraordinary jumpier he specifically found that by two thousand and twelve almost all of this intangible effort is go dissipated and yet fifty eight percent of the value of first use discounted cash flow method arises after all that's gone and the reality is that that the end of the day the reason this works is because we have a joint  program we're going to own it jointly we're going to work you know most of the work obviously being done in the united states on they are and decide but done in a way that's formulaic that doesn't end up requiring additional fights day in and day out between the i r s and amazon we have a safe harbor going forward and how in terms of how all that works that is precisely what the cost sharing arrangement when it's done quite correctly should lead to in terms of the overall outcome in this particular case thinking go back and explain your  expertise i think clarification the opposing party sites many times amazon's experts statement that value would be paid an arm like transaction for this type of an asset and then i think you came back and testified and to clarify the difference between buying buying entire company versus just buying it is partly right and what professor cornel explained was that and actually it's all about me and it's also stated really nicely  the in the professor's amicus brief because what they basically say is that if you if you look at residual business assets right there they do arrive their value from the tangible and intangible assets and services employees that make up a business and so they're utterly inseparable from the entire enterprise and that's what cornell was saying is yeah there are times when if you sell your business you obviously end up conveying the going concern and they and the other larger intangibles but then nobody sits down and tries to do that independent of the sale of a business not largely because it's almost impossible to figure out what's the value what the cash is going to be for an entire enterprise trying to allocate what you think the cash is going to be to some subset of the assets within the enterprise and how that operates is is a remarkably complicated process and what's interesting about it expand to include what they get back in response one was a question is will this statute allow them to expand it that way through was a question as to whether or not it was consistent with the international treaty obligations of the united states and three was that it be absolutely impossible and unworkable to do and in the face of those comments what did the i r s do it adopted this very strange language that i quoted to you at the very beginning that tells you've essentially nothing and what's missing right what it what this i where is the bark that you would have expected from the dog under these circumstances which is the explanation for you know we did this and we did this because notwithstanding the comments that were made we believe this that and the next thing and that a consequence of that this is the way we're going to change this and they didn't do any of that having asked for comments about whether they should expand the definition they came back with a change that was designed to quote clarify the definition and i submit to you that that what we again you've got to do it against the backdrop of an entire array of tax reforms and i appreciate that and i think that the history here the lesson if history is compelling it's just that when when i look at this particular part of your experts theory but again what i said is the question is at the time with the tools you had and what you were taken into account under the circumstances what would you do the business community said this is going to be really really hard to do well and that an i r s took a pass right action that they asked they did not respond to the request to expand by in fact expanding never took any action along those lines we entered into aren't we undertook this deal in good faith based on the regulations as they existed at the  time and frankly the programs worked exactly the way you would want to to we we infact received a very significant amount of money for the for what i think are limited value to intangibles that were transferred and going forward programs worked exactly the way it should have if i like to ask you a question about when the statute regulation has a specific items followed by a phrase like and other similar items that can and i think that you generis or whatever which everyone wants to invoke at some point but would usually be appropriate but the regulation here defines what it means to be similar in a certain way and they say if it derives its value not from its physical attributes but from its intellectual content or other end tangible properties to the items the commissioner refers to as residual business assets meet that definition i don't think so actually because in some ways it kind of depends on which ones you time it was so if you're talking about the culture and you know this i don't know how in the growth opportunities those are all driven exclusively by enthusiasm and energy of the individuals analysis is that you would just be taking the language on its own and not looking at anything else to see what the context is and the reality is it's a very strange notion that you would adopt twenty eight items of intangibles each of which is in fact independently transferable largely intellectual property and what you describe is a similar catch all language which is largely amorphous and somewhat difficult to understand and say what that's designed to do is to capture a set of intangibles that you had an enormous debate about and have been discussing for decades but you say we didn't do it is residual business assets are residual business assets commercially transfer of all property or is your answer is that they are but it's really hard but it but they weren't included before is that well i think they clearly weren't included before and they and they now clearly are under twenty seventeen or the reason i think they weren't included before was because they would be difficult to do but i also think it's a fundamentally different the point i made earlier which is what the statute is designed to deal with is businesses who accept the doctrines create these intangibles that are transferable then transfer them at the point when they become valuable it's not something you can do with good or growing concern and growth options and those things because all they're all they are all part of the tangible intangible and the individuals they are the essence of the say that used i'm generous argument here is somewhat peculiar because instead of simply saying and and similar items they then give us a definition of what they mean by similar items and that definition is really broad it then i read the definition of similarity and they're picking out a different definition of similarity than the one you want they don't say similarity because these are the product of investment and so on they don't say that all right but  understand your definition of similarity but that's a that's a very tidy and good definition but that's not the one that text gives me but if they if they intended it to have the boundless meaning th right then you would almost certainly expect in the face of unanimous opposition of the business community invite the comments you get comments that oppose it you say you can't do it and then you come back and you use this language  anything i've said the only way i can get to where you want me to get is to do that i can't do it based simply on the language i don't disagree with that i mean if i think you could go either way in terms of that i said that i started to say that i think the language itself is the question is could it possibly have been intended then that way and could any reasonable taxpayer ever understood it as having that meaning in the face of a history that says there's an eight hundred pound gorilla and it's hiding in a mouse hole i don't think so that's not how the government works or not the way the government should work how the government does work and how the government should work to your question of stipulate your o few quick points number one we're not asking this court to read some more items in the abstract asking this court of the plain meaning in language of other similar items as well as looking at the history and the history include the expressly defined intangibles as including good will and that's consistent with congress's understanding when it mended through section three sixty seven one thousand nine hundred eighty four that intangibles included goodwill going concern value certain intangibles foreign goodwill foreign going concern and then certain marking intangibles utilized by the foreign brands the use of name so this was understood taxpayers are always trying to push back tax fisher still claiming that cost sharing is a safe harbor all you have to do is share costs that's completely inconsistent with what congress wanted ninety six it's completely inconsistent with what treasury did nineteen of the in one thousand nine hundred four saying that to be respected for tax purposes caution arrangement has to have a buy in and that compensates for all preexisting intangibles made available in discussion how it might be hard to the al you this intangible versus value and subtracting everything and then that remaining value covers everything you don't have to say this much for systems this much for process this much for noel that's why we're desperately fighting to  very effective it also but the change using that method and the changed legislation will give the treasury's going to get a lot more money right going forward but there's open  hundred ninety five regs with regard to the two thousand and nine in two thousand and eleven regulations was designed to correct the problem exists in this case by cutting off the need to bait over what the definition tangible is is that no matter what you call it if it's provided to in a caution or ranger you have to pay for treasuries being faced by taxpayer citing the amazon decision saying no we can transfer items for free no you can apply the realistic alternatives principle even though it's right there in the two thousand valuable intangibles can be transferred for free thank you very much thank both sides for a very good argument amazon dot com versus commissioner now submitted for decision and we're now in a jam thank you