but yes he started with the basis of using their cost reporting he backed out a couple of things because their costs were actually not necessarily out of pocket costs they included the cost of acquisition of a bunch of property and then on top of that mr parsons dr parsons added a developer profit in turkey component based on market data how much of a how much would a developer demand is a reasonable rate of return to to install and build this equipment before the sale but before we go a little deeper and we're going to have to go deep can you explain to me just how all your different theories interact you alternative theories were coming down but the basis is or at least what the basis was found to be yeah i appreciate the question there are two three basic theories that we have in order that we think can help reverse on this case one is that the tax payers did not follow the residual method in determining fair market value of the individual assets why are they backed into that number by saying we're going to start with the purchase price and we understand that but i want to know how try and figure out whether it's the sale price or one of the parsons cost method that is the right way to determine the basis yeah the way this trial should've happened is or should if the court should have found the ten sixty applies to the residual method so that means you've got to classify all your you've got to characterize all your assets by class asset class so you would determine you would a lot of a chance a tangible assets here would be under class five you'd have to value those assets on a asset by asset on an market value and so you would have a fight over what's the fair market value because you just so we would say that it would be cost what the developer and turn key value value component and they say now it's independent in the independent separate lane from your residual method theory no no because in order to apply the residual method as i said you have to figure out what the there's a true method maybe it would be helpful to explain sort of where the residual method comes from to i think provide some useful way to just see how it applies in this case there is your method came from this idea that because the harder it is because of intangible property and an identifiable asset such as goodwill and going to concern yourself hard to value what would happen is taxpayers would shoe horn as much value in the asset that they saw most beneficial and ignore the asset they saw as we spent official you can't at one point in time you couldn't amortize goodwill and going concern value so what would happen taxpayers would sure and all the value into the tangible assets and basically say that we were purchasing the business for anything we were just buying a bunch of assets and so congress said listen let's short circuit a lot of these disputes let's keep the government from getting whip sawed because purchasers and sellers were both cared our kate assets differently because they had competing interests in that regard and so what would happen was under the residual method the congress mandated it said listen we want you to start with the easiest assets class one is cash take cash you're here to tell you start with your purchase price you deduct out the cash and then you're left with you know this is called the waterfall method for a reason you have a certain bucket that captures the cash and so you move on to class two and then class three and each assets whatever value was attributable to the the grand would not be included as part of the value of the right track so off ten sixty that th part of basis but the statute only allows them to recover the cost of the tangible assets a month ago right here on our bet that's the key point here is that it is that with respect to the residual is a residual method the what's important to keep in mind is that they didn't just buy always of all assets they bought when foreign businesses but includes a whole bunch of intangible property and it's a because they valued the purchase price on the basis of not the assets that they are acquiring a value based on the income streams that they were going to get because this was an unbelievably predictable business and so they said listen we know we've got all this when data we know basically it's a regulated industry we got hurt we've  we've got a customer wind up for the next twenty four years they're not going to go bankrupt they're one of the biggest you utilities in the country and we know what sort of revenue streams are going to get and so guys what what points for acquiring was not just the assets they were firing an income stream they were parting business and so when you look at it from that perspective you have to segregate what's a fair market value the individual purchaser to pay in excess of the fair market value that is what the test is so it doesn't have to be highly inflated which is what the court of federal claims of fire here it doesn't have to be the fact that there was the market dictate what the basis is because that's what people pay let me just tell you what's on my mind because the matter that sticks out for me the most recent the moment is the government subsidy and how that arguably got baked in to the sale price and so as i understand your particular circumstances argument with respect to that subsidy you're not arguing that the subsidy itself is the big deal your circumstance gets the indemnity correct ok so then exactly  can't quite see and understand what is it about the indemnity that causes a peculiar circumstance if it is the case that the subsidy itself is not a peculiar circumstance and it turns out that the law permits the sale price to be the basis then the indemnity doesn't matter if you're the person is entitled to that high sale price and then if it turns out that no it's not going to be the sale price is the basis but in fact it's going to be this cost method then again and the indemnity is going to be irrelevant so maybe i'm not quite understanding what your indemnity argument is with respect to saying it's a pure circumstance but to me it seems like that the potential more core killer circumstance is th sure like let's say toyotas sells a car for twenty five thousand dollars and then the government announces and passes a law anybody that owns a toyota says we're going to give you ten thousand dollars congratulations to you owners and then all of a sudden the toyota dealerships want their price up to thirty thousand dollars ok and then the toyota dealership say anybody that buys a toyota from us you know we promise you're going to get ten thousand dollars  the sale price of the twentieth and twenty five to thirty am i right or am i wrong about what is it about the indemnity that now somehow distorted the sale price i mean it seems like it's more of the the la passage that gave the toyota dealerships the opportunity to raise their prices i don't disagree with respect your hypothetical but there's one key fact that's different from the hypothetical you laid out in the facts of this  so change my hypothetical you get thirty percent of twenty five k or thirty percent of the the sale price yes and if there was a if if what toyota was selling is is that by virtue of basically what charge him with saying is you agree to this purchase price because it will increase your sixteen zero three payment and if the government doesn't end up being on the hook for making that full payment will come in and we'll pay you the difference and so this idea of you pass one hundred million dollars and you put in for a thirty million dollars sixteen zero three payment but if you don't get the thirty million dollars six hundred sixteen zero three payment if you only get a fifteen million dollars six just they they distinguish between eligible property on one side and a knowledgeable property on the other and so then they determine what that would be and said that it was a reasonable way to allocate basis as between her out kate the purchase price as between total development construction costs for each of these businesses and then they multiplied that percentage based on the purchase price and said that's our goal to eligible to be eligible assets and everything else is in so than how it was that they were doing fair market value they didn't look to the market value of the acquired assets well there i would i would i would imagine what they're going to say is they it yes i mean they said everything they said basically the cost of the each in each case they said that the eligible assets are the cost plus whatever the answer is that because ultimately the question here is there a basis in the eligible property what what parsons what the government is concerned with is looking at facts and phone and other so you  were when they were originally purchased no your honor because i say they're going to say that they paid a tremendous amount of tax on this because remember and if you add up all the costs it comes up to forty it's only sixty percent of what they got for the swim farms so they pay if they think they this was a huge great deal for carriage and they end need yeah but we need it but the thing is is that they didn't allocate appropriate way there was the getting to term and what the proper basis of the eligible assets compared to the entire wind farms where they didn't they didn't they should horned all the value into the tangible eligible assets and basically said there's nothing left for all these intangible and the what they what these points were actually ok thank you honor let me start with the question that you all asked a number of questions about which is how do you treat the cash grant you didn't see significant briefing of that because the government did not argue to this court that the error was including the value of the cash honor that under their congregation back that absolutely not your honor because the law is perfectly clear that the value of the tax be it a tax credit or whatever it is considered part of the value that's your argument about how it should like if someone were to build a house so we've called the bottom of the well no that would be considered well that would their cost it's what they paid but but remember plaintiffs here are buying property the cost to and they of course would pay no income tax at that point of any kind but once but i think the point is that if parents in the supply for the grand itself yes it hadn't have this that congress would want to leave the value of the grand because people entered into a purchase and sale trends because it's not being inflated your honor that not know you abs it is that's because in your honor if i could if i build a building myself and it cost me but your honor let me just because it and it cost me eighty million dollars to build it i depreciate based upon the eighty million dollars if i qualify for an investment tax credit i do it based upon the eighty million dollars if rather than holding ownership i sell it to someone else for one hundred million dollars that person claims depreciation on one hundred million dollars they claim the investment tax  the in the sale transaction so that if if parents sell and applied for the grant the number would be one hundred million dollars but if they sell it to somebody else suddenly the grant is three hundred million dollars why why why does that fit into the purposes of this program the purpose of the program was to was to duplicate what r d existed in the investment tax credit and for that's absolutely clear this was not a new program this was a program that substituted for a certain period of time a cash grant in lieu of an investment tax credit but based on the same precepts that would you use for both and an investment tax credit context basis is what the taxpayer paid for the property that constitutes that gives rise to the tax credit and if the person felt it themselves what they paid out of pocket to build of themselves is their basis if they purchase it it's what they paid to purchase it and they all said the all setting why would congress have this system in place because they know that if there is a sale law anybody that owns a toyota we're going to pay the ten thousand dollars we go to all the sudden start selling their point of this for thirty thousand dollars and of course a lot of people maybe that wouldn't have bought the printers are now buying considerations of the law take a recent example there's now a limited to duct ability as to property taxes that just happened if you read the newspapers that may have a depressing impact on home prices housing prices because there's you no longer qualify for that what people pay for their homes or will you pay for the homes may go down as a result what they pay for that house is still the fair market value of the house so when they go to pay property taxes your question of how has the law treated that issue and this is not materially brief because the government did not raise this issue in its pleadings to the court except tangentially in the reply brief it is dealt with it laying in our proposed in our findings of fact in conclusion of law which is docket one fifty eight paragraph two fifty eight to sixty four but as an example in the sax decision by the ninth circuit the court said investors may ta depreciation deductions and tax credits based upon the purchase price they pay even though what they paid was in to supply of those benefits that is on all fours with the questions of the court is the supreme court is recognized that the tax savings generated by an asset can be indemnified of all component of its value its meaning of the assets value and we all know from buying a house ourselves that whether be based on the the existence of the grant or to increase the grant and it's difficult to see that that's what congress intended here congress intended that whatever happened it to congress said the grant will be based upon the basis of the property and it said that we want this to mean the exact same thing it already means for purposes of the investment tax credit the law is crystal clear i've provided some examples of how the law how the courts have dealt with this issue there are many other examples it's uniformly the case that you want to include in the value of the property whatever benefits come along with those property and in this particular case it was only the eligible property that qualified for the cash grants of my definition the benefits here are associated with the eligible property and this would be exactly how it would have worked had the cash grant program not of any real value so i'm just wondering is that the right way to look at it going from the top down rather than from your ground law i would describe it a little different what your honor as follows the definitely started with the proposition that we think is unassailable that basis is determined is the same as fair market value and fair market value determined by the price established by arm's length to go she ations so one of these facilities transacted a five hundred fifty million dollars that's the fair market value and then the question becomes of course well what was in that transaction and if you assume ten sixty applies and we have some arguments that it doesn't but let's assume tense if you does apply you have to allocate the purchase price to the various asset classes so what the judge said is let's see which asset  actually transferred as part of this transaction now the waterfall will tell you how you allocate the purchase price sequentially but the first thing is does it exist use an easy example class one cash you know was any class transfer to the answer is no then obviously there's nothing to allocate to class one you don't worry about the order in which you do it he went through all the classes and he determined and there was then your support of factual find the would have to be set aside so that the entirety of the testimony would be considered right well your honor we think otherwise because what parsons did is to say i will just consider there to be goodwill are going concern value without applying any definitions as to what those terms mean i'll just call that the money that's left over but that's an argument that it's definition based upon the considerations that were applied by judge wheeler then there is nothing left over that could possibly be put into a class other than class five and and that's the fundamental conclusion dr parsons but beyond that our view is that if that these facilities had not gone into operation yet that they cannot be good will are going concern value under those circumstances and because i think it both i mean i mean he was applying what he understood to be the legal test of any analyzed a number of facts and said based upon those facts i conclude that it doesn't exist he did place special emphasis nd i'll get to why dr parsons is irrelevant as to that as well but the law is perfectly contract can be can be classics asset but only if it's above market the law is very clear on that point there was copious testimony that none of the contracts here what about were above market and therefore none of them qualified as separate assets that was the conclusion that had been reached by k p m g a originally and you won with a question with what g do one of the think katie m g was looking for assets to which the purchase price might properly be allocated and they said they talked about goodwill and going concern value concluded there wasn't any they looked at all these other potential assets and found they didn't exist that was confirmed by our by what i call non classics non classified excuse me assets included there weren't any and doctor and so  judge wheeler's decision would be would be changed fundamentally the waterfall tells you in what order you would sign the purchase price but the waterfall doesn't tell you which buckets exist that honor i mean that's you know the purchase price has told you what the fair market value is of the assets that were transferred that's not yet leaving aside there but the usual method then obligates and requires all of us  into these different class in into the assets that into the classes of assets that actually exist and so as i to use my example again if class one doesn't exist nothing gets allocated to it kids it doesn't fit into any other class class five but i mean in the sense that class five would capture any asset not otherwise done if i dodged the definition of class five but in this case of another intangible that would be classics i we agree with that but the there was a particular there are protests for determining i mean that the principal indicia that the government points to is the gist of contracts and there's a particular legal test as to whether or not a contract contract can be an intangible and a question about that but it is a prerequisite which is that it be above market otherwise it's not deemed to be a separate and tangible this was addressed a great length and considered by the judge and the law straight for on that point so if and of course these are issues on which great deference is owed to the judges factual findings this is a clearly section one ninety seven intangibles and dr parsons did directly speak to two of its students two of the big ones would be that power purchase agreements and the interconnection agreements and i would also refer you to that that what a court should do is to try to figure out whether there is goodwill or going concern value and if there's if they can't if it can identify it then we can allocate anything to that bucket that's contrary to the residual method and it puts the cart before the horse part of what the residual method is designed to do is to figure out whether the unidentifiable assets of residual goodwill and going concern value actually exist and if you can substantiate the fair market value of the classified assets as being the full purchase price then the residual method requires you to allocate those either in classics or class seven why not host fit very well in any other bucket that's what classifies as far right no the assets and selves that's what class five is for the value is what we're talking about the purchase price the idea  statute doesn't say you get a grant based on class five it's that you get a grant based on the value of the angelus right and again within the within class five then you have to allocate between hours for an initial which is i think the fundamental point what point if council keeps asserting is that well if i buy you know if i sell my house the house is whatever the fair market value is but here they think to sell a house clissold a myriad of assets including both tangible and intangible so that only begs the question the