good morning my name is ken brass key and i'm counsel from taxpayer alex this case involves one of the most fundamental and foundational concepts in tax all the facts just the same case but maybe the understanding of what was really going on here was not properly conveyed argued the seventh circuit case and i think properly it should have gone to a reconsideration that was prohibited by other circumstances what does that mean simply fletcher at the between the time of the decision and the time for reconsideration went back with ernst and young she was a virus that very might possibly be the potential of a conflict of interest if she were to consider if she were pursued that none of this is in got a higher amount of amortization depreciation deduction as a result of treating this as constructive receipt that's correct write a script yes so you have a situation in which the parties characterization of the thing is involving constructive proceed immediately lead to a tax benefit the cap gemini and now you're trying to be characterized transaction at a time when perhaps the statue of limitations has run on any government challenge to the amortization by cap gemini right except just the parties didn't agree that this was an out but deliberately it is my statement correct i mean that you are asking to re characterize the transaction at a time when the stench of limitations may have run on the government challenge to the amount of the cap gemini amortization correct  but there are some circumstances that aren't readily apparent with respect to the running of that statute of limitations the bottom line is the form of the transaction here is not something that is spewed we aren't challenging or changing the form of the transaction well i don't think in danielson these other cases are necessarily changing the point of the transactions just a question of they're there saying for tax purposes we're allocating so much to the hard assets and so much of the covenant not to compete and they're trying to recapture to arise it soley for tax purposes in the danielson context doesn't have any consequences for the reality of the transaction doesn't well there was i'm confused i thought there was i thought that that was in a dispute that the agreement required of your client to treat this as constructively received and fall tax returns on that basis absolutely not not explain there is nothing in the agreement stating an agreement to constructive receipt or an agreement to report the full receipt of the cap gemini stock in two thousand for was that part of the purpose of the transaction order for there to be a clean break at a separation between the auditors and the consultants was that there had to be this scene a break in part of that would be in the receipt of these i cap gemini here was something that could only be transferred over time in other words kept gemini was not just purchasing the ownership interests of the former consulting practice of ernst and young that indeed transferred at the may twenty third two thousand and closing date in this transaction but as arthur gordon who was the designated spokesman for cap gemini  and who also was the director of taxes for instance young just prior to the closing of the transaction became the director of texas for cap gemini just after the transaction was as he made absolutely clear the predominance of what was being purchased  was the personal goodwill of each of the consulting partners their connections their knowledge of the workforce and place and those were to be the training to be transferred to camp gemini over the four plus year period that they were to receive the cap gemini stock well they have the right to follow that the date of the clause i'm sorry they have the right to that on the date of the closing gemini and it and the problem is the vast goodwill could only be transferred by the time being with cap gemini over that four year period the whole idea was their personal goodwill the work force in place their contacts everything else it could it and good will when you bring good will to a company i mean if you bring it all the very first day that you are that you know that if i if i'm hired by particular company and i show up to work and i'm but the point is what was being paid for is the effect of transfer of that good will over time if that partner were to have left two days after the closing so that goodwill goes with that partner and the whole point here is don't fall off the goodwill pose with a partner i mean maybe that seems to me that it's not a question of the goodwill not the transfer is a question you're saying that the what was going on here is characterized if they left early the goodwill that they were bringing was not effectively transferred to cap gemini and in fact and this is a key point the purchase price to be isn't this saying that the tax return is supposed to reflect the ownership of newco by the credit partners on that day the extent of the credit of partners own newco stock yes and they transferred indeed that stock to cap gemini all that money to be saying that it's to be treated as though they owned it on that date not at some future date of the ownership of the stock yes absolutely but there was another thing being transferred here and that's what arthur gordon was emphasizing this estimate not just the ownership of the former consulting practice interests but the personal goodwill of each one of the nuns on the part i mean if they own the it that you believe well first of all if you just disagree i take it the danielson argument is with respect to at the fourth circuit applying yes the what it what is it that you disagree with with respect to the seven seven eleven circuit adam and by your climate two thousand as being actually or contract only received in the year two thousand and that's the issue that's before us obviously if i've looked at the other cases at the level of that and the other there is no difference between the this case and any of the other cases that were decided either factually or legally the facts are identical in the other cases in all material respects and all of the legal arguments that have been made by the taxpayer in this case have been made in a variety of in all of the nine cases that have been considered and the government has prevailed unanimous unanimously in each of these cases is the fact that we have patents on the books here change that i don't think so because i think if you look at patent actually the court and patent distinguished a situation that is more akin to this case than the issue that was addressed in patent patent that dealt with a situation where the question was whether the taxpayers had received corporate dividends so first of all it did not involve the sale or exchange of property governed by section one thousand one which is the operative tax provision here in that case there was a different relationship that govern that question it was  somewhat similar to the constructive receipt regulation but i think the standard is is actually higher if you look at the language it says that a taxpayer has received a corporate distribution if the proceeds are made an qualify and lee available to him so or to his demands in that case the court looked at the fact that i guess the dividend was paid in the form of certificates of deposit that were issued in the taxpayer's name but they were retained by the issuing bank so th the corporation with practically insolvent at that point it had only distinctions at the corporation had control over the subsequent events i think just looking at the balance of the factors the shareholders had very little control over whether they would actually receive the proceeds in this case the circles it was in a situation where was the help and guaranteed cheryl correct and the shareholders had no control over whether those contingencies would be met that depended on the corporation's financial performance in this case of that distinction doesn't appear in the language of regulation well i think the language says you look at the constructive receipt doesn't exist the taxpayers control of the receipt of the property is subject to substantial limitations or restriction and as the courts that have interpreted that regulation over time and all of the courts that have considered this particular transaction have correctly observed the essence of the regulation is control so you look at what are the various factors indicating control the court in the patent case distinguish a situation was at the sarang case from the seventh circuit where the taxpayers received checks from the corporation a corporate dividend but then they had a contractual agreement with a third party to immediately return that money to the corporation and this court distinguish that situation and said that's fine in that case they didn't receive the dividend because they voluntarily put themselves under an obligation to return the money so a voluntary choice to dispose of property in a certain manner doesn't defeat receipt of that property in the first instance so it that and so does that mean that we have to conclude that that all of the restrictions that were placed on the partners with respect to their future performance were voluntary decisions on their part is that is that that the assessment that we have to make well the in this case the consulting partners accepted the stock they received the stock and accepted th stock with those conditions those were conditions that were put were not conditions actually they were none of this was termed as a condition precedent to receipt they did immediately they kept gemini immediately delivered all of the stock and then in the transaction documents the partners agreed to speak to basically two restrictions on a stock one was not to sell the stock until six scheduled offerings in the testimony is that that was done to protect the value of the stock because the market in france where the stock would be sold a smaller market and if the market was flooded shares the stock price would decrease so one was a restriction on transfer and the second was the the forfeiture provision which basically said if you breach your employment agreement or are terminated for cause or for performance then you may forfeit your stock it with specifically called a forfeiture provision it was specifically called the liquidated damages provision it was not a condition precedent and it was not called a testing schedule but it's do we have to conclude that that the partners were essentially in control of whether those foreclosures would occur in order for us to to find that that it doesn't run afoul of the regulation i don't think well i think here the evidence is that they did have control over whether it will work with us yes but i think that's the only factor that i don't think that's the only factor that  argues in favor of finding constructive receipt here i don't think the case basically you know all the other side well the fact that the can the contractual agreements specifically provided for delivery of all of the stock at the closing and that is what actually happened the stock actually was transferred to a merrill lynch account in the taxpayer's name it wasn't merely credit on cap gemini bucks it wasn't actually doled out to merrill lynch in tranches over the years it would all put in an account intact in the taxpayer's name she bore the the sole risk of increases or decreases in the value of the stock to receive dividends on the stock she was able to sell the stock part from the dividend distinction other things provided for delivery of the stock dielectric book entry and that's what happened and if you look at the merrill lynch brokerage statements that are in the record they reflect so is a special word to understand what the certificate never left the city in control of the bank but they know they i mean i don't know frankly in the same age if it's physical actual stock certificates are actually transferred in modern business deals i think most of that is done by electronic book and three and half what was done here  and unlike patton the the stock went to basically the merrill lynch account could be analogized to an escrow account it didn't remain with cap gemini it wasn't just a book entry on tap him and i don't see what the benefit of the electronic stock was not kept it was kept gemini explicitly disclaimed any legal or beneficial ownership of the stock in the contract the contracts provided for delivery of all of the stock at the closing and that happened in the wasn't a disability that the shareholders voluntarily put themselves under in patent there was no contract what that still isn't exactly voluntary here in the sense that at the date of the transaction the shareholders could walk away from the stock and say well we're not going to put it in we're not to make the agree to be subject to these restrictions the only way they got the stock was to agree to be subject to the restrictions correct that's correct but they made that decision when they voted in favor of the transaction but the result of not voting in favor of going at the stock right they wouldn't get the stock that they could say with ernst and young they could resign and get their capital count and the record says that some chose to do that all of the courts that have considered this transaction had unanimously rejected the suggestion that the partners didn't have any real bargaining power the evidence in the record is that the consulting partners of the most profitable segment of ernst and young at that time generating over forty percent of the firm's revenue the the the taxpayer in this case i don't know that they've got a you've got a method there's a big difference between a situation in which they were given the stock and the you could voluntarily decide whether to put it into the escrow account and subject to the forfeiture provisions of a situation where they could and this is a situation which they couldn't they didn't have the ability to walk away with the stock and say we're not going to account right that's true that would be the difference between actual receipt and constructive receipt if they'd been able to immediately demand the stock then they would have actually received it and the government's not arguing that there is an actual receipt situation in this case we are argument is that the courts are correct in finding constructive receipt based on the very factors and what one other factor i'd like to mention that i have had just a chance to get to yet is the fact that even if the stock was still subject to the forfeiture provisions they could agreement are at that provided for delivery of all of the stock at the closing and the tax consequences are on pages the forty three forty six and forty seven a one forty  language well there is that in the master agreement itself doesn't say you shall report all of this on your two thousand tax return and that's or agreement provides for all of the delivery of the stock at the closing and provide that it should be treated as a taxable sale now the the consequence of that under section one thousand one of the tax code is that you have to report all the big issues and say it has to be reported taxable so let's see that's in section seven of the master agreement  i think this is let's see the b one twenty one transaction documents but in those documents it said that the that provided for the consulting partners to rely on that in making the decision but if you decide you disagree that captive and i at least partially refuted those documents that's that's not true and i'm not really sure where that argument comes from because if you look at it six twenty four of the appendix and this is the consulting partner transaction agreement it said it acknowledges you have read the partner information document in the transaction documents you are not relying on any material oral or written representation which is not contained in the partner information documents or the transaction documents for the p agreement expressly allows them to rely on the partner information documents even though it wasn't technically defined as being one of the transaction documents i'm not aware of cap gemini or disavowing the partner's information document in any way the agreement did or did not obligate the partners to report this as having been received in the year two thousand and be happy to send such why don't we give you  so i just want to make one thing i want to just make one final point before my time's expired at the issue of testing i heard my putting counsel say the documents don't speak to the best thing at all the partner information document on  seven twenty one of the appendix does provide that it says explicitly the partners will vest in their shares immediately upon closing which which says that that's it's a partner information document page seven b seven twenty one of the i understand that you need to address that question of whether the partner information documents bind your submission ok ok thank you thank you sure expressly under the agreement couldn't sell anything not only could they not sell it they couldn't directly quote directly or indirectly sell a signed transfer plates granting the option that the state but the point is that they voluntarily had no believe do so in that right and it was to their benefit not to have it because i think to the extent they agreed not to sell their shares right away they prevented everyone else from selling their shares right you say they couldn't borrow against it for instance where where in the document that is that found that to express lee in the  consulting partners from the category of sure hold that they were not signatories to the shareholders agreement that was signed by all actual shareholders and while the transactional documents acknowledge that all stock was to be potence only by ca that's because they delegated the voting rights to someone else that they know that's very interesting in the in the part of yes the answer is it says that their designated someone else and in the merit it says that whoever they say merrill lynch is to look to and you go to the merrill lynch agreement and merrill lynch's england says that this is two weeks before the closing of the transaction it's very clear the way this is structured that there never was any voting rights there's nothing in these agreements that says the voting rights are in the owners who aren't consulting partners former consoling part  ernst and young what it does say is that the voting shall be done by cap gemini doesn't say who's voting is being done well they ultimately became cap gemini did they not consulting partners yes no i mean maybe they had voting rights as part of cap gemini did they not know not in the stock no not even through their design