they please the court counsel i'm cheryl snyder for the appellant i like to reserve three minutes for rebuttal please i think the beginning point in interpret the soul agreement is to reflect upon the purpose served by the basile agreement which is that the surviving shareholders may buy the shares of the deceased shareholder thereby preclude them from being inherited by the errors and sold to third parties at fair market value in consideration for the obligation to sell those shares to the surviving shareholders the basle agreement sets forth the consideration to be paid to the estate and in this particular case the parties chose not to have a fair market value arbitrate about an arbitrator which often happens in these basel agreements but rather to have a double value plus the right to remain as a shareholder of the corporation and therefore to participate in the future growth of the corporation for a period of time we all agree in this case that that period of time is six years the question is which six years compose the six year period that this fight happened because i take it this would not have happened if i had but that ecl ephraem two thousand  just take it to two thousand and fifteen or sixteen the earnings revenue were the exact same every year in other words this dispute happened i take it because a later year was particularly good or an earlier year was particularly bad is that the only reason we have this dispute am i right in thinking you would not be here if the earnings in revenue word zaki the same from five to fifteen because in other words then it would be the same under either approach no  magic counter factually not what happened to the earnings of this company just hypothetically imagine this company had the exact same earnings exact same book value nothing changed for whatever reason promote five to fifteen so that's going beyond the potentially years at issue my assumption is you wouldn't be here right this is all about whether to count the last year not and presumably that's because it was either a very good or a very bad year no your honor it is not a chosen for their estates to participate over a period of time rather than having an appraiser set a fair market value at the date of death because of that the trim would hopefully be up and therefore the heirs would participate in an uptick but the issue in the case is whether the six year period stops with two thousand and twelve or includes two thousand and thirteen so the earnings for one year is what is at stake there is an extreme there correct and paragraph five point four refers to the time period as the year of death and the five years thereafter we say what that means is the estate has the right to participate in the earnings earned in the year of death and the five years thereafter they say no what it really means is the estate gets to participate in their earnings in the year preceding death and the year of death and the four years thereafter and the way they get to that interpretation which a district judge bought is the inclusion of the reference to the i r s form k one in that sentence because they say a k want to reports earnings for the prior year so what this really means is you go back step each year so the cake  your your opponent suggests i think i just heard you say that the years of payout sturt a year earlier that your proposition would  there were so we're talking about the same number of years the question is which six years which six years that's correct or not so it's just a different six year you're you're talking about six years they're talking about it a six or six year period that starts a year earlier than your proposition would would hold yes that that that's correct and that's why i say the issue is whether we get the earnings for twenty thirteen or not and under their interpretation it i'll be glad to under their internal body else probably understands this go to hell no under under their interpretation the six year period includes earnings for the year preceding the year of death yes  right well the awnings for the year preceding the year of death were already aren't about mr howard when he was alive the the the form k one it in every case like this the earnings will have been a ten forty in mr howard's name and he had already earned those earnings so to say that the parties here intended that the six year payout period would include the year preceding the year of death is an illusion it briefing just was clear but you may be a bit of a proceed but i but i do think that's that that's the key reason why giving this talismanic significance to the form k one is not a reasonable interpretation of the agreement because it requires you to say that the first year of the six year payout is the year preceding the year of death and that's already been armed by the shareholder before he died so if his heirs are going to get the year of death and the five years thereafter that has to mean the earnings for the year of death and the earnings for the five years thereafter and the reference to the k one is simply a reference to quantify the earnings that are paid out doesn't make any difference when during the particular you're the very early version of january second as opposed to december thirtieth it does not make a difference to the payout your honor it makes a difference in the calculation of the value the agreement was amended in two thousand and four to provide that if the death is in the first six months of the year or you used the year before for the book value and if the death is in the second part of the six years you use under there you have to separate the calculation of book value from the five year payout the first half of the year of the second half of the year applies only to which the year you used to calculate the book value but this relates to another very important part of the agreement and that is when the image was done in two thousand and four it was changed to exclude from the calculation of book value the earnings in the year for which book values being determined but then in order to make clear that that didn't mean you didn't get those earnings they were just not be used to calculate book value you still get them paragraph four point one sub three was added in that paragraph very clearly refers to five point four if you read those two together and it's also consistent with paragraph five point two which sets the date for the closing it refers to the first day after the end of the fifth fiscal year following the year of death and they argue that you have to include the year of death in that will clearly the fifth fiscal year refers to five full fiscal years consistently with four which refers to the year of death and the five years thereafter those two i think if you look at the purpose of the agreement the context of the agreement the purpose being to fairly payout the heirs of the estate it's simply not as you question maybe companies in general you are making the point that it's a loser read to say you're getting the seven earnings because you would have already gotten that but aren't there sometimes undistributed earnings from that year so that that's not quite accurate  i'm not sure you used you said pretty forcefully it's an illusion and i'm asking you whether that's completely true i'm not sure i'm following the question i thought the point you were making is if you if you count o seven as part of the counting here that's an illusion because this individual already had obtained those earnings they would have been reflected in the the whatever it is  and so to count that year was in this fact double counting and i'm just saying isn't it sometimes the case that at the end of the year or so the end of the calendar year zero seven if the k one reflected you know five hundred thousand there may have been some undistributed earnings from that year that companies sometimes distribute over time to i mean for cash flow purposes and other purposes is that not possible it's certainly possible you're on about two things one i don't think that it's not an illusion no you're not i don't think that impacts my point at all that to count the year preceding the year death is the loser e in the sense that those earnings were already earned without regard to when they're distributed the k one that is given to an s corporation shareholder he's taxed on all of the earnings whether the distributor or not and that's the key point of what the reference to the k one in section five point four means  it requires the company to distribute all of the earnings reflected on the quay want meaning during the six year payout period the company cannot retain earnings it has to pay the estate the full amount of money shown on the  because one is the fair thing to do to make sure they get what they're entitled to so the i think the key point to retained earnings here is the reason for the mention of the k one in section five point four is to define t all earnings all earnings reflected only k one record as reflect so so that there is an obligation to distribute those earnings to the estate during the year of death in the five years there after not retained earnings during that time period so i don't i don't think that concept impacts my point that to say this six year period includes the year preceding the death would save the six year period includes earnings that the shareholder has already earned that the estate is therefore already entitle to it doesn't make common sense it doesn't make business sense to just say we start this reference of the k one in the middle of this sentence for the sole purpose of making a one year less than it otherwise would be that just doesn't make common sense of the company that has lots of been distributed are things i think factually you're on to do this would be adequate you're paying taxes it makes this point it seems even stronger they're paying taxes on hypothetically a million and they're only getting five hundred thousand surely you would want the rest of us would refer to those seven as the time for the rest now your honor they've there's a million they distributed five  thousand at the end of zero seven the k one reflects a million don't they want the remaining five hundred thousand and that could be what this is referring to i mean i have no idea what i'm talking about i'm just i'm looking to you to try to figure this out three man partnership set up as an s corporation the our names are basically paid out into paying mr in the course of the year and they're paid out that's the way they operate as a as a business practice i don't think anyone would have a concern that you need to this doesn't make sense in the context of this company that the point you're making i think the point i think you're constructing a hypothetical that doesn't apply to this particular case and it's a hypothetical that sort of begs the real question here and that is what was the meeting of the minds as to what the six year payout period was what's the common sense interpretation of section five point four when it says the year of death and the five years thereafter does it mean what it said or does the dropping of the k one in the middle of that sentence say we don't really mean what we said we said the year of death and the five years thereafter we really mean the year of death and the four years thereafter because this reference of the k one changes that by rolling everything back a year that doesn't make common sense from a businessman sta and they should get another year at the end actually you're exactly right the section five point four by including zero seven earnings make sure that earnings that have been  are actually distributed as a dividend after the death of the shareholder it keeps the two remaining shareholders from not distributing the earnings for that zero seven year  so it is actually protection for the remaining shareholders of state and makes perfect sense and that you would focus would think the inclusion of the edge of distributed focused on the opinion rests on a few key points one of which is the district court's opinion reads the provision five point four as it is actually written and as it is actually written and it's on page three of then all earnings if there's been an election to do a buyout then all earnings of the corporation as reflected by the k one issued by the corporation during the year of the five years thereafter shall be paid to the state one comes out the next year for the proceeding years earnings so as reflected by the k one issued by the corporation during the year of dead means in this case the eight k one reflecting  so that includes in part of the consideration for the redemption those zero seven earnings which could be undistributed it gives them those earnings like true in this case that it had  seven earnings had been distributed that that is not in the record the earnings had been earned and the k one had been issued but i believe what's in the records says that the corporation would customarily distribute in april or opto and installments in the following year mr howard died in march if the first distribution is not until april after he dies absent this provision there's nothing assuring that his estate gets those earnings at all so is this a fight about good year bad year no it's not a fight against a good year i had here just to make sure i'm understanding this it's not about whether zero seven was a good year or thirteen with no in fact when the case commenced no one knew what thirteen was going to be good year bad year but there's going to be something there it's just which years are to be there and the district court's opinion is not economic i just cannot figure this case out you're making it sound like the state's getting the same either way it's a six year period either way seven is not an illusion you haven't gotten a dime of that yet so i still don't understand you guys are fighting the meaning of this agreement for the sake of fighting about the meaning of this agreement right the issue i'm one is getting her benefit economically i can't figure out if that's correct and it is going to be whether the obligation to pay them the state for the shares or for the earnings terminates with the earnings of twelve of twelve or includes thirteen does it go from seven three twelve or as they would suggest seven hundred thirteen they or their interpretation actually stretches it out another year because they say oh we get no seven just because they were already earned and we should get b thirteen earnings too because of how we interpret section five point four it said that that's the real argument is do they get thirteen or not i think the company's position would be that the estate would not receive earnings whether distributed or undistributed as to the other partners the state would simply not receive the earnings at all from twenty zero is that is that it is not the position of the corporation the position of the corporation that is that section five point four in the original agreement  says that what they get when they exercise the option and it will be we should just walk through it said they've exercise the option then all earnings of the corporation as reflected by the k one issued by the corporation during the year of the death ok the k one issued by the corporation during the year of death which was a weight is the k one reflecting i was seven earnings so that's what one thing they get they get the seven earnings because those earnings were shown on the k one issued during the year of death and peripatetic and were it not for that provision would it be the company's position that those those twenty zero seven earnings would simply have been distributed to the surviving partners and with no because i don't with no payout to the state well your honor that the company doesn't have just and general all purposes position or policy on that the requirement that earnings go to be a state is contained in section five point four because section five point four says during earnings of the corporation as reflected by the k one issued by the corporation during the year debt that the k y no way that reflects the seven earnings so that's where they get the earnings otherwise the corporation could make policy on distribution of earnings according to the best interests of the corporation presumably and simply sees the earning the earning deceased of the which is own which is all the more reason why they did that that would be legitimate under the under prevailing law that i wouldn't i wouldn't go with the terminology of c s they could retain but that's why all three of the shareholders agreed to put this provision in the buy sell which make sure that that doesn't happen and it sounds like you're making progress but it sounds like it i and another supporting the i'm trying to imagine the book the situation that would prevail in the absence of that provision if that if the provision had simply been eliminated or there or if there were not the special agreement at all i think it was he would be managing the extreme situation this personal agreement didn't exist he dies in march of zero eight he was alive and kicking and running the company doing wonderful things  all of those seven company made a lot of money in zero seven his estate gets none of it is that is that the is that was is that the implication of the law it is the way it read it right i think that is a theoretical possibility one you getting them before april fifteenth but it can't pay what just hang in there so i'm sure you have an answer just i want you to answer this question so you get your k one early in a way the k one makes you responsible a liable for the taxes on the earnings but that does not compel a distribution of all earnings necessarily in some years there can be tax liability the corporation might not be able to do just a normal  thing i'm now starting to get about his point is this is supposed to be above and beyond what you you know this is that's the whole point here you know you're getting this is the buy sell agreement and you're not going to go we all know you wouldn't go back and say oh we're going to let you keep what you got in zero four right she stopped us don't say anything and you're i'm right that you would never have an agreement that says oh you get to keep what you earned and pay taxes on a four you have to agree with me on that yes you know several years before the guy dies of course he gets to keep that money right if the money has been distributed to him he gets to keep it your honor i'm this time not not following your line of reasoning  course going to be that so the all i'm saying is you think of what this means under the not normal situation the normal situation is you pay taxes on it if you pay taxes on something it's coming to you so we assume that we don't assume that as part of the consideration for the vice that but that does not make it unreasonable to confirm in the buy sell here there's no definite right amount of consideration that you're going to get by so should a set and you get to keep everything else that not we're taxed on for the prior to now but the buy sell is quite reasonable in saying the first year for which you get our names is going to be the year preceding death because otherwise there's  legal requirement for distribution pairing though that's how i think that's the key to the answer to my question earlier and probably is the key to what judge sutton is concerned to stand him to be concerned about that the principles of corporate law especially as corporation infect the the company can elect to lay off the tax liability but keep the money and reinvested by something something of that sort so that these so these key ones represent a centrally phantom income and that can go on for a long long time precisely that but there's nothing wrong with that corporate law that's that's the essence of your point i think precisely and so that it was this company doing that not to mind it's not in the record but i'd have no knowledge that they were but that is why it is reasonable to include an express grant of a right to the seven earnings as part of the consideration then the issue just becomes ok and how much more consideration do you want to include and that's where we get to the issue here which is why if they can have all this phantom stuff and this is what they were guarding against why just one year that's not what they were getting at now it may be that they just based it on the practice that had occurred or that when they did the agreement all earnings had been distributed previously they just concluded that one year was appropriate as part of the consideration been the question just becomes how many more years if i may be while i still have a moment one point that needs to be made is section five point two when this was supposed to close and mr schneider said that section five point two said five full fiscal years after the year of death and it doesn't it says that the closing takes place the first day after the end of the they at the beginning of the fifth this year following the day to day of the shareholder which is the way it is the first fiscal year nine ten eleven twelve takes you out there which is the same place that section five point four takes you in the purpose of that was as long as they are still a shareholder before the redemption is become they are going to stay shareholder and have the right to the redemption at the same time their shareholder status ends in other words their shareholders through two thousand and twelve so they're entitle to get through two thousand and twelve the two provisions sync up perfectly and under their per interpretation when they're supposed to get earnings for another year thirteen they will already have ceased to be a shareholder at the end of twelve so i'm very interpretation creates an inconsistency between the period of time for which they remain a shareholder and the period of time for which they're entitle to get earnings and that inconsistency just doesn't make sense ok thank you thank you it please the court you know all of the briefs have been filed in this case the never before argued that the reason for including the k one was to make sure that the earnings of the your preceding death were distributed i heard that for the first time at the podium with trying to make sense out of it  go ahead is it a bad argument or did they come upon a really good argument in the end of the day the purpose for including the k one is not to insure that the earnings for the year preceding death are distributed there are there are three shareholders in this company if you don't distribute their earnings to the estate you also don't distribute the earnings to the other two shareholders and it's their livelihood so the notion that they're going to withhold all of the earnings for the year preceding death addressing agreeing with my proposition do you also agree that as a matter of corporate law as corporations especially it is imaginable that a s corp could elect to retain and to not distribute some or all of its earnings for a given year it certainly is your honor and in fact we argue that the reason for the inclusion of the k woman is to make sure the during the five year payout the earnings are distributed and that's the point i was getting to which is are you are you looking at the inclusion of the k one in five point four as backward looking to make sure that the earnings in the year preceding death are distributed or is it forward looking to make sure that it's distributed during the five years because what we're trying to do what we're trying to interpret here is the phrase during the year of the death and the five years thereafter what does that mean does that mean the earnings in the year of death in the five years they're after and i take your point thank you i took your point and the important part of section four point one is the addition in two thousand and four when they excluded four and the other thing that was added into your response to his five point to point out this your interpretation creating an oddity about whether you're still a shareholder and i told the distribution i don't i don't think it creates an oddity at all your honor when one read in context with the other provisions the twenty's referring to is this the closing shall take place on the first calendar day after the end of the fifth fiscal year following the date of death of a shareholder now the question is does that mean for a half years or does it mean five years it says the fifth fiscal year it does it a fiscal year is an entire year it doesn't say four and part of the fifth it says the fifth fiscal year if you read that  can junction with the addition to five point four that was done in two thousand and four the one sentence at the end and five point four itself it's very clear that the payout period is a five year period after the year of death and that's completely consistent with with five point two reading fifth fiscal year as being five full years which is also five point four provided so i don't think it creates an anomaly at all the last thing i would say to the court is the sentence that was added to five point four of the two thousand and four min that is referred to as a supplement if you take five point four and don't view that supplement is sort of a separate paragraph but stick it at the end dramatically like it's intended to be and then read five point four including that since then five point four concludes with the words the provisions of this paragraph provided for payment of dividends for the five years following th part of five point four the five years following the year of death it couldn't be more clear the what's intended here is the year of death and the five years thereafter not the year preceding death the year of death and the four years thereafter thank you thank you mr snyder i