head the affiliated companies that mr murray way low had a substantial interest in fifty percent interest had those affiliated companies sent the monies to mr  low and mr murray way low then sent them to mirco there be no dispute in this case that there was a bona fide indebtedness what the government argues and what the tax court decision below found was that the affiliated companies sent the monies directly to mirco and therefore there was no indebtedness that mr murray way low could claim on his tax return can i ask you just a quick question that i think your opening kind of tease up for me is i read the rag there are two requirements and tell me if you disagree with this one there's got to be bonafide indebted which is what you are about to talk to and to separately that indebtedness has to run directly to the taxpayer wrecked yes so true i think in your opening had the affiliated companies sent to a while oh well oh since to marco it's coming directly out of his pocket but here it seems to me the transfer is visa  so i'm sort of less interested at least for present purposes and bonafide indebtedness and i know that that's what the whole appeal is about what about this separate standalone requirement that the indebtedness must run directly to and it does run directly to him through the incorporated pocket but that sounds to me like indirect when you say directly to through something else like indirect cases have held that incorporated pocketbook does work to meet that standard a couple of a couple of threshold things i think are important here one is that there are no rigid rules here in making this determination and when you hear the government talk about general federal tax principles but but that does not pinpoint what the issue is in this case yes bonafide indebtedness obviously is the threshold the beginning but he was indebted as a result of those transfers now what this this always reminded me of when i looked at this tinker is to evers to chance i'm sure that hopefully you remember tinkers to evers to chance a double play combination from shortstop to second to first to evers to chance would be the affiliated companies to murder way low to mirco that would be tinkers to evers to chance and there'd be a double play and the runner would be out but if tinkers simply stepped on second base and threw to chance then the runner would be out there too and so the point is evers the taxpayer right in your analogy ever has the second baseman is the taxpayer that but he's not he's not a participant in that but the question is the end result and that's what i'm focusing on the end result is the same the runner is out the end result here is you just read directly run saturday reg it seems to  me because when one looked directly runs you have to look at it in light of all of the cases and this ties into debt because debt is part of this i mean it is not just simply to say directly runs is the end of the incorporated pocketbook i think the threshold problem with the decision below is it started with actual economic outlay and that said dying times in the in the decision below is not the  seems to me to be kind of beside the point because it's so clear that this didn't run directly to the taxpayer but one looks just prior year instead of the affiliates and cullen and i mean you see the same kind of patterns in these cases i mean beginning with rocker eagle which says it's not unusual to can talk business through multiple entities and that's really what we're talking about here he's conducting business not be unusual but that doesn't mean that ran directly to the it it it does it does because when this was booked when this was shown on the records after the fact well after the fact it's interesting if this was two thousand into the air five to day and this i think plays into way the court has described it the way that the i r s is described in the rag but again that that would be direct in terms of two key strokes what is the difference between being direct by virtue of the account at the end of the year booking these because these were these were loans basically that morello was responsible for so there is no practical difference i mean i think that the difficulty here is is  that the tax court below and the government's going to argue that there was no bonafide indebtedness just newsome you you suggested perhaps you do see some bona fide and deadline not sure about that i just wonder if there is sort of a separate stand alone issue that nobody seems to be talking about this this runs directly two prong which i read to be a separate stand alone requirement and if it is i mean i don't know and the incorporated pocket book cases in the tax court remind me or those like constructions of that phrase or those interpretations of the phrase runs directly to or they just kind of like substance over form no i think i think i think they address exactly that under the broader concept that there are different ways of doing business and you still can have a direct i mean that dealing with holy young corporate entities right where the taxpayer has a practice of using that early on corporation to pay money to third parties on his behalf exactly right and that's what's happened in this case it was habitual it was done he was a fifty percent or holier and corporation but i don't think the distinction judge pryor is based on wholly owned or not i think that may be a fact that was present in those cases but for example in the ates case there were skipped steps in yates there's foxtrot was a was a farm  that the ate his head and there was money transferred from a dina this other company to a joint account and then transferred by misess yates to foxtrot and the court said that's all right so was that director was an indirect it was it was something that was done it was recognized it was it was booked in the proper way and the court found that this met the incorporated pocketbook here tell me this and i'm quite sure that you know yates and colin better than i do but are those cases back to my earlier question or those interpretations of the phrase runs directly to the tax court in those cases saying we see the runs directly to language and we think that the incorporated pocketbook theory meets that or were they talking about bonafide indebtedness or something else and not really dealing with runs directly i'm looking i'm looking at conan and it talks about explaining the statutory requirement that the indebtedness of the s corporation must run directly to the shareholder we made it clear that indebtedness that cetera et cetera to an entity with pass through characteristics so they do use that and then they adjust his basis would be the portion that he owns from the corporation for mirko and this is a loan that's been made again that example it's been made from is affiliated company to him and then to mirco that's how it's book that's how it shows that's the reality of it and so that would meet the kind of of indebtedness that would meet the direct even though i understand you know words are interesting here and this point about as direct also mean indirect no but it means is is that there is an obligation in the obligation or way lho had the obligation and the obligation was constitutes an incorporated pop company i don't remember that of the tax court decision but again you know judge barr you know that that wouldn't stand in my way of making an ardent i understand the way it's this is the way it should be  viewed because it's the practical way i mean what what was done here here was exactly what is done in these incorporated pocketbook theories and the only that's why i start out with the example i started out with because  really had the key stroke you said ok this is more whale owes money and now we're way low is sending it to mirco we would we wouldn't be here well that doesn't make any sense in terms of the reality of the situation and in terms of this case in terms of even this all of those i think there are thirteen in disha most of those are present here you don't have to have all of them present but again let me say the balance of my time for for rebuttal but i stick to my guns this revenue it's interesting we talk about the evers to chance because i'm originally from chicago and lifelong cubs fan and that was the cubs combination that's the first i knew of that thank you prob course is that the play here went directly from tinker's to chance that the do you know what to add to divide us so you don't we speak different languages among the affiliated group or all down at the corporate level they were money flow to the corporate level they were booked at the corporate level there was no correction it was no i wouldn't say correction there is no adjusting entry may tell well after the year close to tax time what really is going on here is that question we just affirm based on the debt it even if there were a debt and that it didn't run directly to the taxpayer yes you could affirm on that the debt ran back and forth amongst the companies the affiliated group taxation is based on analyzing the transaction as it occurred at the time it occurred here you've got to just tell us help us i want to make sure that i'm not getting carried away with some pet theory because you guys nobody really talked about this in the briefing at least you know in any great detail about the runs directly to component of the reg but it just seems to me that there's a pretty stark difference between something running directly to and something running in directly around and but so tell us i mean help us if we're off on a tangent here you know you are you're absolutely correct their debt must run directly to the shareholder in fact if you look at the example three in the regulations where the flush score loans money to the needy escort then there is a reorganization and it's only after the reorganization is done where the needy escort now is to the shareholder and no longer ost the flesh as corporate the shareholder gets basis the taxpayer is cited treatise in their reply brief and their treatise especially their own treatise makes quite clear this initial loan from the flush s corp to the needy s corp did not create shareholder basis you have to get a loan running directly to the shareholder i believe in the philips case where you are on the panel also said that philip raise i would say that the corporate pocket book is based on two tax court cases yates and conan that it those are is very special cases that do not at all match here you have a whol owned corporation a wholly owned corporation that was who bitch will be used by the taxpayer to make payments on his behalf that's the first step here we have a bunch of affiliated companies group of companies partially own making payments on behalf you don't have the visual practice of using the money to pay the tax payers creditors you have that money moving among an affiliated group to help out the affiliated group you don't have contemporaneous or almost contemporaneous accounting certainly within the tax year saying ok fine this is really the taxpayers money sitting in the pocket book you don't have the booking of it officially within the tax year of the company receiving the money recognizing the debt it within the tax year running down you don't have mr merivale oh never compensated these affiliated companies for the money they paid on their behalf it's in color and you have the taxpayer saying yes indeed this is being booked as my liabilities and every so often i'm going to liquidate some assets and pay down what i owe the flush corporation this case is not incorporated pocketbook case it does not match any of the indicia that the tax court has recognized in my thinking is that i think i understand mr position that incorporated pocketbook is by definition almost as is in direct and he says you know sort of how is it that with that incorporated pocketbook sort of co exists as an indirect transfer with this requirement in the reg that there be a direct traceability to the taxpayer but i mean far be it from me i guess any way to get too far ahead of the tax court on sort of its understanding of an application of tax principles but i mean language matters and i'd be hard pressed i think to extend a doctrine that exists only in the tax court so far as i'm aware we have not sort of embraced bearhug this incorporated pocketbook thing and i'd be hard pressed to extend it beyond where the tax court has taken it in the face of language that says it's got to be a direct transfer i did you are correct the only two cases were incorporated pocketbook was recognized were tax court cases no other appellate court has recognized that this would be a large extension of that theory to a case where the facts are just quite different and i would say the court should not extend it and should just go with the reg and say that you know we've argued in our brief that there back and forth among the affiliate companies and it was not until tax time that any characterization was done but tax taxes are not done that way the transaction controls the tax returns the tax returns don't control the transactions you're all the stands between me and a protein shake the twenty fourteen final regulation which is the one that we're operating under here the terms basis of any indebtedness of the s corp means a shareholders adjusted basis and a bona fide indebtedness of the s corporation that runs directly to the shareholder the language you point to that has to some whether in deadest is bona fide indebtedness to a shareholder is determined under general federal tax principles and depends upon all the facts and circumstances and i think it's a very cramped reading to view directly to the shareholder as meaning the money has he go into the shareholder apartment as meaning directed directly to the shareholder as meaning directly to the shareholder in circumstances in which you have back to back loans in which you have affiliated companies in which the only difference is you had the money been sent to him and then from him to mirco we wouldn't be here it would be satisfied but just in fairness the language of the regulation this goes back to the question i first asked you points up to kind of met or requirements bonafide indebtedness number one runs directly to number two then in the back half of it it defines the first of those two matter requirements bona fide indebtedness to refer to general tax principles and facts and circumstances it does not say that general tax principles and facts and circumstances inform the meaning of runs directly to it doesn't break that out like that i agree just to some but the point is when you look at these cases you're looking at the realities of the situation the fact that this money and that's the only difference is had had it gone to him and then from him to mirco we would have met everything but the point is it is in transactions in all the cases to talk about how businesses work this is how businesses work and it was booked properly it was shown on the books as an indebtedness and so the indebtedness did run directly to him by virtue of how it was shown in the books and records of the companies and therefore this met the requirement  disappearing court said taxpayers are ordinarily bound by the form of their transaction may not argue that the substance of their transaction triggers different consequences a taxpayer is free to organize his affairs as he chooses nevertheless once having done so he must accept the tax consequences of his choice whether contemplated or not it may not enjoy the benefit of some other route you might have chosen to follow but did not that's what i think about when i think about your two key strikes argument we we  accept the form and we believe that the form meets the standard under the regulations thank you mr rogan we have your case and we'll be in recess until tomorrow morning