please the court arthur catterall of the justice department on behalf of the commissioner and i'd like to reserve five minutes of my time for rebuttal if i may the taxpayers in this case do not seriously dispute that a sale of the stock of a corporation holding nothing but cash in essence an exchange of cash for cash is an economically meaningless gesture nor do they suggest that arizona courts which applies substance over form principles in a variety of situations are for some reason prohibited from doing so in fraudulent conveyance or fraudulent transfer cases rather they maintain that the substance of their reported stock sale effectively their receipt of all but six million dollars of the corporation's cash at a time when it face a fifteen million dollar tax liability cannot be held against them under arizona fraudulent transfer law unless their advisors should've known that the purported stock purchaser had no viable means of eliminating the tax liability now finding no arizona cases on point the tax court adopted the tax payers position on the strength of its memorandum opinion in a case called alterman trust in which the courts finding no florida cases on point relied on its memorandum opinion in a case called starnes in which the court finding no north carolina cases on point relied on a second circuit case h b e leasing with an entirely different fact patter h b e leasing involves a situation where one party engages in a fair exchange with the debtor and then the debtor transfers the property it received in that exchange to a second party for no consideration applying new york fraudulent conveyance law the second circuit held that if the first party in that situation knew or should have known of the debtors planned to retransfer the property to the second party for no consideration then the routing of the property through the debtor may be collapsed i e treated as a direct transfer from the first party to the second party and this would have the effect of rendering the first party a recipient of the debtors property for no consideration thereby subjecting him to the constructive fraud provisions of the relevant fraudulent traceback and yet from then and i'm sorry let me back you up certain of this i don't regard my tax experiences being among my more glorious moments on the bench so when you said that the they did transfer the stock was price that was paid for the stock did not take into account the tax liability exactly in fact that the purchase price was determined as a specified percentage  the tax liability did they know what did they have to know that the buyer had had borrowed the money and wouldn't be able to pay the tax liability i don't know that they would have to they also knew according to this so called business plan that was circulated that the vast majority of the cash sitting there in the corporation was going to be withdrawn immediately to repay the exact so do they have to under the statute just requires a transfer that rendered where you're posing council suggest that you failed to show that level of insolvency at the trial and that was a fatal failure well  suggest is necessary and proper what you have what you end up with is a you know a corporation with x amount of cash and then a large tax liability and they are making a liquidating distribution to their to the shareholders leaving themselves without enough money to pay the tax lightly so it with the one thing that i was really confused about is that if you commissioner add to a trial stipulated that there was a in fact a valid debt recovery business created in two thousand and one we did not stipulate that the company the company that was  purchased sloan broadcasting which changed its name to arizona media we did not stipulate that they entered that they engaged in an asset but this is amazing to me because they put the other side says not only did you stipulate that in fact arizona media wasn't gauged in a viable business of deborah coverage but that you also stipulated at least according to them that the total earnings over two years was one point six million dollars and then i see right now my understanding is and this was this was during the trial this was not part of the stipulation of facts that's entered into you know before the trial this was at the trial during you know when the counsel was the forgetting the name of the corporate sloan broadcasting arizona media holdings you know they were going to engage midcoast they were basically going to passively invest their cash their remaining cash handed over to midcoast to engage in this asset recovery business so i think we have stipulated that medco certainly kept its business its business of you know asset recovery kept moving along with that but we did not stipulate the monies in the account there were some seven million dollars put in right at the time of the closing you're suggesting that arizona media ran a debt recovery business and i thought i thought the commissioners the people in the second page for ten of the transcript it was centrally say that but i would stipulate that there was dead recovery business going on shortly afterwards that's mr duncan right but i think what you're saying is that the business there is in fact the viable business which is going on after of this transaction but not through this corporation that was purchased it was always going to be and always was  executed this business executed by this separate entity midcoast and so they may have continued that business but well what was the role that they played in the critical transaction well allegedly you know what i think there was going to be after after the rest of the cash was siphoned out of the corporation i think they were supposed to supposedly going to be like two million dollars passive investment you know they would turn this money over to this third party midcoast who would use that money in their business of asset recovery  bad receivables you saying that had nothing to do with the tax consequences of the sale of the stock to the other corp well yeah i mean i mean basically again the idea was that whatever little amount of cash was left in that corporation was just going to be passively invested in the corporation sloan broadcasting slash arizona media was not going to be engaged in an asset recovery business that they were going to have any employees they were going to have any office space they just had cash that this other third party was going to use allegedly i asset recovery business so we did not stipulate that the purchased corporation engaged in an asset recovery business so anyway so you stipulated that that was the place that they sent the two corporation directs you look at their tax returns over the euro over those two years the first two years is like five thousand dollars of interest each year and you know over six or whatever many how many years before it got its license revoked it never had any income and this is it just is really confusing to me because they say the other side suggest that you were entered into a stipulation during the course of the trial then i look at this during the course of the trial in which you say that arizona medio was engaged theoretically in this business and that their claim is that you also implicitly agreed the one point six million dollars was raised in the in pursuit of this business during the first two years and what you're suggesting is that's totally a different company  know i mean we did not we stipulated that yes an asset recovery business was going on we didn't stipulate that it was arizona media's business you know  we sided our reply brief in the remain proceedings where we said no we did not stipulate that the purchased corporation continue no engaged in an asset recovery business we stipulated that there was an asset recovery business carried on by someone else anyway getting back to this knowledge of the scheme requirement in the h even leasing context it makes sense to in that situation to condition the first party's potential liability in this regard on a showing that he knew or should have known of the deaders intent to retransfer the property for no consideration because absent that retransfer of the property that second leg of the transaction there would be no legal basis for treating the exchange between the first party and the debtor as anything other than what it purported to be a transfer for fair consideration in contrast as judge and then unrecognized in his separate opinion in the first appeal of this case a sale of the stock of a corporation holding nothing but cash has no substance in and of itself regardless what the new owners may subsequently do with the corporation so in other words the legal basis for required arising such a stock sale in accordance with its substance as a liquidating distribution by the corporation to its historic shareholders is not dependent on the subsequent actions of the party with whom the shareholders transacted fellow then but he was the dissenting judge though he just the senate yeah right right he felt that the record was clear enough to where there's no substance and i didn't have to be remanded on that issue correct correct  you have sloan do when they're there they're exploring the legality of this particular proposal and they're confronted with representation that everything is above board we're not going to have to actually file anything which suggests that we are doing anything illegal but we're not going to give you our proprietary information you have to accept the fact that we are representing to you that you're not doing anything illegal and that you've also  you know got a lot of a lawyer and an accountant to say that there could very well be that they're not doing anything illegal isn't that is that enough to warrant any kind of suspicious activity and is that enough to do to justify you know reliance on representation well i would say you know just the nature of the transaction a sale of the stock of a corporation holding nothing but cash is suspicious in and of itself the fact that the purported stock purchaser won't disclose how he's going to get rid of this tax liability it's proprietary that's another red flag i  mean the under the then existing definition of tax shelter in the internal revenue code for tax shelter registration purposes that provision specifically flagged transactions claimed by the promoter to be proprietary so again it's the it's what the advisors should have known that we're focused on and there's no dispute that that constructive knowledge can be i to the taxpayers in this case so we would say yes there's there's plenty plenty of red flags that should have gone but they did say that there was no tax avoidance issue that they were going to have to comply with by following by filing disclosures right and those basically the representation was you can't reckon tell you what we're going to do because this proprietary but we will say that we're doing nothing illegal and we're not going to have to file those representation about tax avoidance well planned what say what they represented was that the purchasing corporation had not yet you know had had their two for not engaged in any listed transactions entity had been in existence for just a few months you know i would i would think you would you would demand a representation that you know however you're going to have or you say you're going to get rid of this tax liability is not a listed transaction and if i may and let you have for the question let's stop stop the clock will give you the full three minutes i have two questions for you that just to help my confusion the first is you see want  to reverse the tax court's ruling on the state law component of this yes and let's say we did that you then say and furthermore you all should just go on and do what judge noonan told you to do originally and then and so let's say we did that but then you say but then and then this court could also perform that exercise in the first instance but i appreciate the fact that you know if you're if you were to rule in our favor in this appeal you might want to you know leave that exercise to the tax court guys don't want to come back here a third time i certainly i'm certainly happy if you take care of this all in one fell swoop ok so the second question is did you happen to argue that case on friday that's kind of real i'm sorry did you happen to argue that case that was argued on friday of last week that's involved yeah i did not know ok do you have any knowledge of what relationship the issues in play there might be to all i mean it's it's the same basic transaction that was my understanding so that's why i was asking is there they would have priority you know in terms of any overlapping issues but you're not aware of how exactly their issues line up with ours on you know it's different state law but again you know you talk about the u f t a so and i mean again the  you know i know counsel say well every every case stands on its own facts and of course there are every every case has unique facts but i mean the basics are the same corporation sells all its operating assets and it's holding nothing but cash and then made coaster for trend swoops in and says hey we will pay this huge premium for this empty shell of cash because we know how to get rid of the tax ok great thank you will hear from you  rebuttal that's here from comes from taxpayers thank you i'm steve so over may please the court i am somewhat anxious to get up here and carry on what judge sessions said unfortunately there's been a lot of misstatements in the record by the government the bank records showing the amounts collected was in an account for arizona media and it's in the record s e r one zero four dash to ten so that's just for starters what  that page of s c r purport to show the the their record the the account in which the one million six hundred thousand dollars was collected was of arizona account counsel basically indicated that it wasn't an arizona media account so what about the tax returns ok well we're going to ok i'll address tax returns first of all the tax returns that were filed by by this company were false the i r s determined they were false that this company was engaged in a massive fraud scheme so rather than look at their tax returns the government went to other evidence and it's the other evidence that was developed and came out in this case that was very helpful i just want to make one mention of another point in the record that supports or indicates that the judge sessions record s c r one sixty one this is a document that clearly shows that  midcoast the company that was the debt recovery business a legitimate company to the extent it held assets it was holding those assets on behalf of arizona media so just just putting the those aside what does that have to do with anything appreciate your attempt to clarify the record but what does that have to do with anything that's before us now it supports the record in the sense that this was a real transaction and to go back to how you have to collapse it what's required under arizona law we're here for just the state prong under the uniform fraudulent transfer act and i underscore the word fraudulent and in order to collapse and disregard brylin out of this company you have to show by actual or constructive fraud here the government took the position there was actual fraud the trial judge ruled against them on appeal the government conceded there was an actual fraud so now they say well there's constructive fraud so let's see what the parties looked at and the one hot document in this case is exhibit twenty six j e r two six six and what happened is in most transactions when this was presented to the c p a for the taxpayer he says well i think we need a lawyer a competent lawyer to get involved and so this fellow named steve phillips a very known well known lawyer been a professor university of arizona law as a tax she got involved and basically did the due diligence and  his memorandum they can't get around it you read his memorandum which which is in evidence and he describes the transaction he describes his discussions with with the opposing or the other counsel and they describe a transaction which under the tax law worked the transaction and i know he did not mind one bit on the legitimacy of the underlying tax transaction terms of whether this swap for the whatever it was going to say that's how i read his memo you have to get to how he got to that point he got to that point in this memorandum based upon discussions with the counsel for the other party and they told him the tax strategy and there's nothing wrong with tax strategies that tax strategy contemplated a section three fifty one transfer and what it means is when you have assets here and you want to transfer to another company that other company takes those assets and they get to use the basis that that asset has it was valued at ten dollars for cost and it was only worth by the the company gets a ten dollars then what they said they were going to do is they had these assets that they were going to transfer in to th arizona media which was the change in name to sloan broadcasting and they could offset the losses from the gains and i quite frankly and that was said well can you give us the details on that so that we can figure out whether there's a really a legitimate basis for doing that and they said no those details are proprietor and they said ok we're going we'll go now and i don't think i don't think that is legit is sufficient at all in terms of what your client should have done again and i'm talking about the trust advisors here right well with all due respect your honor where i have a i'm counseling i'm meeting with other lawyers talking in them and they're telling me exactly what they're going to do and then in terms of any more specificity it's proprietary but they tell me this is what they're go do this is a same testimony we had in the ultraman case the same exact testimony the same script was used and ultraman was a case it was really in favor of the taxpayer much on many of the same facts we have here so what i'm trying to do is show you that what we had is a glitch in the system and i'm going to use the word people tell me not to use it lupo this was a loophole and so what congress did it two or three years later they passed section three sixty two and section three sixty two when you read the caption of it it said hey we're going to now not allow you to take built in losses and offset it against gains in the future so what you had here is tax strategy that was presented to a competent lawyer he looked at it he thought it worked he doesn't know stop right there because where in this memo does he say that i think this tax strategy as you're calling it is going to work it's in there your honor i  three fifty one and three sixty two did work and if these parties on the other transaction had been honest and had done what they said they were going to do we wouldn't be here today because it's our border ok i want to get back to the basic the word into another provision which is really confusing to me and that's you know there's a black letter law which says that any particular provision which is designed directly to avoid taxes u with self that's it is clearly illegal from your perspective when sloan looks at this arrangement you sloan must know that the only way this would ever work is that duly owed taxes fifteen million dollars is going to be erased and that is tax avoidance and i i don't know if there's a particular provision which would necessarily relate to that directly but isn't that just almost a basic fact that they must have known that fifteen million dollars which they legitimately zero out of the sale of their assets was going to be avoided well your honor we have a group of cases it's all been digest in the briefs that tax strategies that are designed to eliminate or reduce taxes is ok and so we start with that principle the question is whether under the circumstances presented to mr philips it was ok under the state prong and let the and so i submit to you that the undisputed facts of the trial testimony supported the fact that this was a leap to be a proper transaction and to get to the rack kiln so to speak in order to collapse the transaction under uniform fraudulent transfer act and i e fraudulent and disregard burl and that in this transaction the government had the burden by clear and convincing evidence to show knowledge of an illegitimate scheme that's it knowledge of an illegitimate scheme and i said look to your your honor that the undisputed evidence in the memorandum that phillips wrote back in two thousand and one i'm sure he didn't think he judges would be looking at it now but he he he presented to this other he did not know the details of what that transaction was going to consist of him i mean do you have it in front of you yes or i don't let's take your two sixty seven i think that paragraph two is the description he give i mean first of all he just goes through and describes what what we've been told is going to happen right and i'm looking at paragraph two the second buyer intends right that's what you're talking about yes or so he describes it he never says and this is going to be upheld as legitimate he doesn't have any basis to apply on that because they told him the details o the transaction proprietary so he just i mean that's why when you keep saying we had these reputable tax people look at this and they gave the green light on it i don't think that's what he did well that the testimony at trial your order the government called mr philips is an adverse witness and his testimony supported the belief that the transaction as he understood it would would be held up and his memorandum the contemporary now how could he opine on that when they told him the details are proprietary and we're not going to tell you they told him the other details are proprietary they apparently told him per this memorandum that this is what they were going to do a three fifty one transaction and they would offset the the gain in the company by the losses created now that's the that's what they did tell him there's no dispute this memorandum is contradicted and it was prepared back in two thousand and one without any wouldn't you need as a competent tax lawyer before you were going to opine on whether that strategy would work work in the known debt recovery business midcoast that name came up and mr phillips did the due diligence to see whether they were a real actor in the field he was told midcoast is going to we're going to reengineer this company just like an alderman into a debt recovery business where then going to go out and get credit card debt and we're going to we're going to have some credit card debt that will we're not going to be able to collect on it we're going to write it off and this will be a proper write off against the game mr phillips testified when asked if tell me if i'm remembering this right when asked to what did you understand about the nature of the business going forward that the arizona media corporation would be go i thought he said i didn't understand we did not know what this company was going to be doing and that was part of the problem right is that they needed to have some basis for saying that the nature of the ongoing business was going to be legitimate and then when they're asked about it well you know we didn't really understand it and we didn't bother to try to find out more ok your hon or here's a case we cite in our brief show petroleum and it talks about section three fifty one and knowledgeable lawyers and i'm actually a tax lawyer and it said quote as any knowledgeable tax lawyer would known and then it goes on to describes a section three fifty one transaction this stuff is rather routine you know section three fifty one you know how it works you know section one section three sixty two came along you know opes congress is going to allow this any longer but put our focus here is on the state prong and i'd like to just get this out make sure i have enough time again knowledge of an illegitimate scheme now there is no arizona case indiana case that don't require knowledge of the scheme but they still require guess what you've got to prove one of three things the government didn't do it or you have to prove insolvency so forget about it i don't have knowledge scheme you've got to prove insolvency the government didn't prove unsolvable insolvency is defined though as not enough money to pay the known liabilities and there was no way this company was going to have fifteen million dollars to pay that tax liability and everybody knew that the only way this transaction could possibly have made sense is if in fact they could eliminate that liability and everybody went in knowing that what judge i think a trial is that from my perspective that's the main event we tried this case based upon what was going on government acknowledged in their reply brief here they don't prove insolvency so beyond anything else they say they didn't prove insolvency salut let's look at the other two issues that they didn't prove and they were required to prove in order to get d in essence it said respondent the government did not elicit test going to trial regarding value of assets controlled by burl anetta as of the closing of the stock purchase agreement and the government says all relevant now if they're going to deny that deny it but having assets is required the weintraub case the government brought an expert in to show there was a lack of assets here they didn't put any on any testimony and it was their burden it to do so the the third element is inability to pay their debts has a become due and here there were debts that were obviously paid over two and a half year period as judge sessions noted there was a stipulation i had a government agent on the witness stand and the government didn't want me to examiner him and he says austin late to exactly what mr silver sent and what mr silver said is in the record there was a debt recovery business it operated for two and a half years and had one point six million in collectibles and so what that does to the third element which they never prove is it is it is your inability to pay debts this company at one point showed around two million dollars in extra cash in their bank account and they pay debts for that actually in written in response to your request for us the pilatus them in the transcript don't recall the exact message they responded by saying yeah we will stipulate that there's a debt recovery business we may differ as to the amount and the words they never suggested the one point six million dollars was stipulated as a part of the business for two years of two and a half years so there that was left open but they did in fact stipulate that there was a debt recovery business going on but they didn't as they say now they didn't say who the business was is a mid coast or is that arizona media or whomever while you your trial judge and based upon the way that thing came down i thought my statements were broad and inclusive and the government was stipulating to it and there was no need for me to further examine the revenue agent with respect to these points but moving on though the facts you know sometimes become relevant and i i'm wondering on the part of your clients the sloan's they are offered this particular proposal all of a sudden they're going to get nine million dollars more than they would have gotten to what extent did they have an obligation to really pursue in depth what's really going on here because the most logical reaction that anybody would have is gee the government's going to get ripped off of fifteen million dollars what how big a shin do they have before they agree to benefit from this particular proposal to really explore what is going on i think the record shows sufficient due diligence in this case based upon the testimony there is another case there have been many cases citing sloan since this case some have steak and some of the finest factor of slowness say aha they had that there we don't have that here we really against you others have said hey sloan's did this this was good this show the due diligence and i'm suggesting to you that what phillips did is is adequate due diligence he did his due diligence who these people work for true and did not have a bad reputation they had reputable accountants and lawyers and all of this was trial testimony that went into the record that the government did not dispute we had that trial so i  want to bring up a couple of other things and wasn't and we fortunately found it you make a request for a foil on these cases and we came upon some records in the government's file the revenue agents report she had seven million dollars of deposit to burrow in his bank account didn't come from us she had a letter with a footnote on it that indicated the lawyer that did it the opinion from for the company that purchased us that there's eighteen million dollars it was used for the purchase now there was a ridge reservation of a hearsay objection in the stipulation but we jointly stipulated to the exhibits and the judge received the exhibits in evidence and the revenue agent was testifying your honour's and there was no hearsay objection made to the testimony as it related to this letter were you aware of the fact that there was a statement made of eighteen million dollars that was paid by with berlin funds yes did you do anything to follow up no nobody objected to hearsay nobody objected to hearsay on the seven million dollars that she found in the bank account so and we know the girl and i had sources of funds available to elsewhere we've never had a financial statement ever scimitar abril anetta once you think the government would have done that in a normal transfer reliability case dealing with the uniform fraudulent transfer act as they did in weintraub weintraub government void they pay a fine tuning they show there was no other assets they didn't do it here so in going through the the the  state issue only the state issue because the federal issue has never been altered we decided by the trial court as we know the the state court or the federal district or the federal judge in this case looked at it under arizona state law and he found under our arizona state law and he applied the majority rule granted there's no arizona case that they never show the government never showed knowledge of the illegitimate scheme knowledge of the illegitimate scheme and so and then all those other elements those other three under the provision the arizona revised statute government never put any evidence on that and then to finally just kind of collapses because i'm going to be if you're over your time i'm over my oh i'm summer if you want to sum up that's fine all ok thank you your honor i appreciate it the problem that we've had in this case from the beginning the government's had two bites at the apple this case was remanded government did not want to open the record but they said ok we'll go with the record they don't want to if they wanted to reopen any of the record i assume the trial judge would have done that so they stayed with the record we're we're at a third point and now they say there has to be a real man you should remounted and i'm saying to remount for what the government has the burden of proof by current convincing they've had two bites  apple they have not apparently even to hear them say not met their burden yet thank you once a thank you we have a little bit time for you to is that issue here so all of this stuff about you know a seven million dollars deposit here in this eighteen million dollars figure that came out of thin air from a tax opinion it's all beside the point  yes the government went after arizona media to collect the tax yes but again what we're looking at the point in time we're looking at is you know at the time of this stock sale the debtor is slo broadcasting company where they insolvent where they rendered insolvent by this transaction and again if you look to the substance of the transaction what we have here is a distribution of all but six million dollars of cash out of this company a gratuitous transfer at a time when that company was facing a fifteen million dollars tax liability that's obviously rendered them ins and you know if you re characterize the transaction as we say you should that's the answer you get to regarding this this this change in the law in two thousand and four that is a red herring as well it's basically a technical basis for section three sixty two says and nothing about the ability to offset an existing gain with a built in loss from an asset that you contributed to the company it talks about what your basis is says nothing about offsetting gains and losses so that's that's a red herring so can i just go back to the insolvency question because i thought really the i thought the significant issue is whether sloan would have known that arizona media would be insolvent or not if if because if sloan knows that they're going to be insolvent then  the arizona media is not going to be insolvent therefore no fraudulent scheme i would i would i would agree that that would that would be helpful if they could show that but i mean i don't think that in order for us to prevail i don't think under the u s d a you have to show that the transferee knew that this was making the transfer or insolvent but that's transaction in accordance with its substance the sloan's or their advisors knew or should have known this the entire scheme that this was just a tax scam the u s the arizona you  says nothing about that and they're in and like i said there's no cases on point either and but again we suggest that arizona courts apply principles of substance over form and various situations and and they would do so here as well and again you don't have the justification for the knowledge of the scheme requirement that you have in that h p t leasing context because here you know the stock sale had no