transactions that occurred across the united states for the past several years while this case arose in tax court the main issues before this court or of state law in that is whether first  insolvent out of tennessee uniform fraudulent transfer act into whether the tennessee supreme court would allow all what the government refers to as recasting taking the transaction as it was originally intended and had below in the record begin with the opening balance in morris manning's outlook held on november twelfth two thousand and three that balance was two point six million and that's conceded by both sides the government conceded the blow  trial both sides also agree that the same day of the closing of member twelve two thousand and three whole global cache four point two million was wired into that account later that day three point four  dollars everyone agrees that on the closing november third two thousand and three or twelve the estimate of two thousand and three tax liability for the corporation was one point two million so if you take the four point two that we had cash to get wired into that account and then follow so as we get eight ninety two but that leaves them in three point three million with a one point two million tax liability and they're completely solve this only works if you don't collapse the transactions though that is correct your honor in what if and i thought the heart of the matter from your perspective was whether under tennessee law there's a you know a good faith defense in other words  about intanon your client's perspective and i thought that was that was really the heart of the debate under tennessee law and i'm missing that it is your honor the is the tax court noted because if you don't i guess just to tell you where i'm coming from if you don't need to show bad faith just to make sure i'm speaking the right language here i thought there was you actually have two different collapsible issues on the six nine zero one threshold question there's a question there about collapsing when it comes to who is the transfer e but then in our tennessee law simu get to that that also affectively is doing something similar when it comes to constructive fraud and i write about that as well the commissioner versus stern stands for the proposition that you can't the federal analysis does not come into play it's a state issue is whether the state allows you to collapse so the commissioner has tried in these various cases to argue that we get to recast it at the federal level to sixteen on one level and then put that through the state test and basically skip that analysis down to the state level to apply the statute agree we can't do that but they lock kleis what's your best argument that tennessee doesn't recognize constructive fraud because that seems like it's the heart of this part of the case so stern requires that when you look at the recasting issue at the site of a tennessee law do until a see that is the touch court noted to see has no case saying court was asked to look at a similar issue in that being we're a trustee of a trust for the benefit of a brother had an ex wife who was trying to collect spousal benefits from him her allegation the wife's allegation was that the husband colluded with the sister to get those distributions out of the trust to avoid paying them to the sister to see court of appeals looks at tufton says we find no provision where a trustee because the problem can be a statute requires to be a transfer on behalf of the debtor in the debtor was the husband it was the trustee that was making the transfer to as equal bill says we were strictly considering the statu and we do not find any provision in the statute that would allow us to say a transferee is or trust as a transferee on behalf of this debtor but what about the argument that top there was supposed to replace a law uniform proposed law and not have a good faith bad faith in cory what he did with that i would argue that the start requiring you look at state law under tough though it's got to be under tough you've got you've got cases that reflect that the court that to see courts would not necessarily allow a collapsing of this transaction and i would say to the court keep in mind that the ruling here would not only impact the wrist it's going to impact every non interest creditor that the statute itself i would argue was was never designed to deal with this type of a transaction but it was very complicated steps involved it you know the courts generally say under the uniform under the uniform are going to transfer acts that you can look at the reality or the substance of the transaction as opposed to just the formalities of it so your honor and in the other circuit cases that have built with this issue they have cited to a specific state of the case where that court has said under their fraudulent transfer all of the uniform was if i'm recalling correctly don't they all have a provision that says hey we like to we like to you interpret our audit be consistent with everybody else's interpretation of these uniform was uniformity tennessee has a uniformity provision right we do your on and i think that goes to the tax court method of getting to the collapsing but pointing to the statute and saying we will incorporate equitable principles under the statute i would point out though that in that definitional section of the statute it also talks in terms of mistake as well of alternatives was we have a valid loan here there should be respected can i ask you this question so this case looks a lot like feldman without the sequoyah loan right you would agree with me distinguishable on the basis that the loan in film came struct it's between holiday bowl and midcoast you still have the issue you ask for cash minus or plus tax liabilities the distinguishing factor between zero sum feldmann your own or is that the tax court found there were post closing transfers were in the record he found there was money moving through the account post closing let's forget feldman wouldn't have a problem if it was just one pile of cash with some tax liabilities straight to medco  i think you still independent financing just day to day here's my cash here's here's the cash back with a little accounting for the fact we're not going to you don't have to pay the tax liabilities but i think the distinguishing factor that would that be a problem it would be a problem but i think the way we over because you wouldn't respect you would you would allow them to unload their tax liabilities that way if made cosas in a real and right but think what your owner is asking is the what what was midcoast saying to the shareholders was the tax strategy the tax minimisation strategy and what the shareholders understand when they were being told this moment coast yes asset recovery business which the government's expert testified on cross examination that there are always legitimate ways that the shareholders could have understood that in operating the sense that recovery business they would losses could be generated and carried back  returns could be filed so what's the answer to the question everything else is the same in this case the knowledge they have made cosas who midcoast is there's no sequoia loan at all so they're just out of the transaction what happens attorney that would have said this is a kosher transaction that the above did not your own invite the issued their own it opinions to the shareholders that supported the legitimacy of the transaction now my point was you could have gotten that opinion without whether there was truly risk involved whether they you know that that part of the sham or not and i guess here you're not resting your hat entirely on that legitimacy as a coriolanus what i take it be saying well i would argue that  affect if you could help just help me make sure i'm understanding tax law so you have under six not a one this threshold question of whether you're actually a transferee or as defined history distribute t so if if one is skeptical of the sequoia loan is that it is that relevant to whether you're a transferee distribute tea in other words if it's a perfectly legitimate mom there's true risk everything about it is perfectly fine but that mean you'd you you would even get to tennessee law because they would even be a transferee is that how you would look at it a single time your own or both born so there's three alternative ways we number one i love it if you answer the question i asked her and then you can say that but i would just never helps for you to go back to what you know or not answer the question i i honestly your question is absent the support you alone will make sure i understand so the let's just assume it's you right it's a perfectly legitimate loan everything about it is legit the paperwork's legit there's true risk involved as to cruel collateral i'm asking you if that's all true does that mean we don't even get to tennessee law because at six nine  you can start however you wish but i just be curious the last question i asked just trying to make sure i'm understanding when legitimacy or illegitimacy of certain parts the transactions what they go to so know if you heard that last question  you know you have to be a transferee under section sixty nine zero one force to get there you apply the federal substance over form doctrine to require to revise the transaction so my question is if the sequoyah law everything about it's one hundred percent legit they're acquiring tax gains and let's just say using the sequoia part of the transaction and legitimate way in all respects but we still get into collapse ability is ok  and so you're going to collapse ability of both stages absolutely yeah you know you have to and as counsel indicated that we had initially argued that you apply the federal doctrine and then you know you keep that characterization and apply state law to the transaction as we characterized under federal law that's been rejected and we're no longer making that argument so yes you have to do that you have to repair yes i potentially have different outcomes it's collapsible at the federal level yes and not collapsible at the state level yes yes if i may let me first address the question of insolvency the taxpayers are arguing that the transfer of the three point four five million dollars to the shareholders out of the escrow agents i owe to account on nov twelfth did not render the corporation solvent because tennessee law allegedly dictates the conclusion that all  eight hundred ninety two thousand dollars of that amount consisted of other people's money kept in the aisle to account now even if that were somehow correct the corporation would undoubtedly be obligated to replenish the drained accounts of its unwitting benefactors and that's another obligation so you know that's a two point five million dollar obligation right there at that at the one point two million dollar tax liability you get three point seven million of liability and that would exceed the three point three million dollars of assets that the corporation would be deemed to have retained under that rather fanciful theory  boles cash came in and so they're making this argument that well in this five zero analysis you know other people's money went out to the shareholders and even if even if that somehow true clearly the corporation is going to have to replenish these the other people's accounts and that's you know there's you know there's a two point five million dollar liability right there and added to the tax liability i think i get i think i g this point to tell me is there a way they could've done what they set out to do without creating these problems so in other words it is it is legit in the abstract to have tax i and do a transaction merger or otherwise takes advantage of a company that is in the business of generating tax losses presumably not forever but it's very difficult to do there's a plethora of not only judicial doctrines but what they have had to do here because they've done it here with midcoast and and this just everything else the same way the family has this cash they sell the bowling alleys it has imbedded corporate tax liabilities and well no i don't think you can do it you know i don't think you can do it when you start out when you've already sold all the assets of the corporation and all i've got is that because i mean is this court held in case a sale of the stock of a corporation that's holding only cash is an economically meaningless gesture and it's cash it's a cash for cash exchange that's a minute well i guess is what i'm trying to figure out it doesn't seem meaningless say there's real economic substance to it because they have these imbedded tax obligations and it it seems like it happens quite often that companies want to match that there's a benefit to someone with tax l don't think it happen that's the essence of the transact i don't think it happens often where you've got a corporation that sells all its assets and it's only holding cash and a tax liability and you know somebody  wants this transaction gets legit if they do everything else the same except sell it while they still have the bowling alleys yeah sure i mean i mean it if they didn't sell the assets first they wouldn't have the tax liability that they're trying to get rid of but you know i mean if you're asking it are there legitimate ways that that you know third party purchasers can acquire a corporation with a tax liability utilize that there is but i mean it's first of all there's a there's there's a code section two sixty nine which basically says any acquisition of a corporation solely for purposes of utilizing that corporation's tax attributes can be disregarded how did they get these tax opinions did they get opinions i mean that their innocence in one sense they they may have thought it looked like a great deal in that sense they're not innocent but they certainly don't like tax payers who didn't think this was fraud again i mean it's it's it's not so much the idea of ost you know the purchase serve it's going to generate this these these has nothing to do with this it's an independent it is just it's problematic transaction even if all parts of the loan are real real risk real collateral all the papers signed it would make no difference to your position and we have had that it was a questionable transaction i don't know but did they know how could they have known that they there was no point and actually pay the tax because a silly way the transaction works economically i mean you know why would you pay  the the the the midcoast is buying you know x dollars with an you know a larger line you know a liability that they could believe that there's an ongoing business because make use of the tax liability from the company that they're purchasing right i have i have a need for your tax liability so you know ok so it's not that you intend to write the check it's that you intend to discharge the liability right you think that that ability is going to be discharged because it's going to get wrapped up in all of the other assets and tax liabilities of the purchasing  you're answering the right the question i think he's asking i would have thought you would have responded to all of this by saying wolf tennessee laws require some form of intent bad fate you lose your homework we're saying there is know i said if tennis only law requires bad faith or some intent you lose and i thought the promise of his question was that hey their innocence and i don't think there's the question is whether transaction under state fraudulent transfer law there is this sort of knowledge of the scheme requirement that in and that you know that that the taxpayer should grade they didn't have that here no i do not agree that with that and the and the court found that they did that that they that they should have known that this transaction was not above board and i write that there's two types of jurisdictions you give me the terms that but there's a debt caught in the between a and b i would have thought it was simply bad faith versus no evidence of bad faith the and the no evidence of bad faith would be the constructive fraud jurisdictions and the others would be ones where you have to show some evidence of fraud and mike if i got that they caught me right  stage there is two different questions i mean there's there's the question of constructive fraud under the u s d a and that there's no requirement of of you know that there's no get out of jail free card for the transferee if they had good faith or you know didn't know that the transfer was going to render the guy insolvent that which which question are you asking i'm not sure i understand that there's the constructive fraud question and then there's the question of can we re characterize this transaction constructive or whether they should have been what is the evidence that would have know that they were that their taxes weren't going to be paid and mean that's the constructive knowledge question right ok well i believe you said constructive fraud and work that's what got us that's what got us going around here so again some courts have held that in order to wreak air drys the transaction under state fraudulent transfer of all the tax payers you need to have either known or should have known that the transaction was not above board and the tax court here found that there's the record this is full of evidence that indicates that that these taxpayers and their advisors this this transaction should have given them pause and and the main thing in my view that that should have given them pause is this idea that you can says that a sale of a corporation that holds only cash is going to be respected for tax purposes and i mean the sixth circuit you know they had they if they had looked they could have easily found that owen's case i mean it had been cited in thirty eight judicial opinions by the time zones a case about  using built in tax obligations to be set off against someone that generates it is actually it is a case about a corporation that had only cash and a tax liability and the shareholder attempted it basically said ok i'm going to sell this this this corporation to these other folks these other folks said hey we've got these net operating losses that we can use to  you know to take care of the tax liability and the court not only found that a sale of stock of a corporation holding only cash is meaningless and will be disregarded for tax purposes but it also said something to the effect of you know it is beyond doubt that this scheme that the purchasers were talking about about using their you know wells to offset the income of a separate business that they have purchased think every is saying makes sense from the perspective of a toxic lawyer i'm not sure it makes perfect sense from the perspective of a run of the mill citizen well and if you know explanation of that well x obligation will be paid that when it's action says they must pay it right i mean all transaction did say that right right but again you know we are sort of looking at it from the perspective of professionals because the you know the the knowledge or constructive knowledge of the advisers is imputed to the taxpayers and so the advisors should have known that or you know what if they have an opinion that says it's ok well imputed to them then i think what the tax court said was that you know the whatever researched or due diligence underlying that opinion was just one fully insufficient that you know if they had truly looked into this they would have advised against doing this transaction because it just again it for them how much of the how much of the taxpayers paying above what they would have paid had they done it the right way initially i'm sorry how much did they save from i'm just making the point that it looks like they're the taxpayers have to pay more taxes than they would have paid had they paid taxes immediately after the holiday bowl asset sale in other words if you fit factor on the penalty or the ok everything else and part of me i'm right right there is there some if you try real it's it's conceivable that if you factor in the penalty is it what is it fifty percent more forty percent more one hundred percent more i honestly have not i'm not sure i have  i mean again that the result is intended to get where you would have been you know if they had just that's why i'm asking the question if i if i think these people are generally innocent doesn't seem fair that they're paying more yeah and  i think that's attributable to the penalty and you know the penalties you know understatement penalties under sixty six sixty two are not discretionary they're mandatory you know if you if you got it under payment of a certain amount it's a twenty percent penalty unless you can you know shows some kind of reasonable cause and again we're talking about the corporation here and obviously the corporation could show any reasonable cause case makes you think we should have a special ice court of appeals for tax cases and i mean just on the sequoia loan point i mean i take it there's nothing new you can add to your briefs that you know you don't think there was risk here not really legitimate collateral they didn't even sign all the paperwork so you just feel like there's no reason to respect it i guess is the point right you know in like i said that there have been certainly in the right and i think you know possibly one of the differences is you know if you get the loan from a outside party that that certainly would it would w know in your favor that you've got rambo bank neider land even though they did hundreds of these you know it makes it a little more suspect when it's you know when it's a related party that is purportedly providing the phones and just you know the idea that it's getting paid it's getting repaid immediately in a matter of you know a single day there i mean there i think you know yours with regard to owens the storms decision of the fourth circuit clearly distinguishes this but from oceans and it points out that owens is not a sixty not a one case which is what the government is alleged here to recover the way it was just characterize what was being represented to the shareholders was the cash itself was central to the operation of the asset recovery business for for midcoast they represented they intended to use that cash to purchase debt photos which the government's an expert mr its tax attributes and defer that tax or minimize that tax going forward tax avoidance i would argue your honor was was not proven by the government of the other point i want to make is with regard to the inquiry not