my name is burgess raby and i'm here representing the taxpayer appellant metro leasing and development corporation like a reserve three minutes from the bottle  on we are here today on an appeal from two tax court decisions one of which supplements the first regarding cases of accumulated earnings taxed and unreasonable compensation  tax what we are talking about today and what is on appeal is the method of calculating the amount of that tax there is one case decided by corporate manufacturing in that case the court of appeals for the fifth circuit determined that and calculating the accumulated earnings tax the amount of paid taxes that were contested point is that the supreme court not even alan determine that the accumulated earnings tax is a penalty and therefore should be strictly construed the government has added the language unpaid tax but has argued for the tax for it and the tax court itself has decided that the language unpaid tax is not relevant and basically that language in the regulate should be read as if unpaid was not present so that any tax that is contested cannot be judge hall of our court when she sat on the tax court and one of the interesting points that she made in her opinion was that the real purpose of this penalty is  encourage rather strongly the taxpayer to distribute the accumulated earnings rather than to hold them improperly and that therefore it's not unfair to treat the penalty in this case differently dividends but the actual amount of the tax is determined by the i r s it is not unlike the personal holding company tax where there was some confusion in the tax where the person holding company tax is something that the taxpayer assessed itself at the end of the year but i think her point is that because of the fact that it is the tax payer which determines the amount of earnings to distribute or to withhold or retain that in essence the risk is on the taxpayer that credit for that that's not a fair well but the point is your honor that it is a penalty yes and we are not disputing that we had an cumulated reasonable cumulation of earnings what we are disputing or what we are asking this court to decide is the proper manner of calculating the amount of those earnings to which the tax applied and we are submitting that the only circuit court to review this matter rather rocks looked at it and said it is only fair to take they admittedly are contesting them but they are demanding that there is a likely that there is at least a reasonable likelihood that they will lose would not it be totally unreasonable for a taxpayer to be paying a  penalty as opposed to a simple facet and that's how i understand this i understand but then what is the purpose of the i rest of the treasury in putting in the word unpaid in the regulation they draw distinction there between pay yes your honor we are saying first that that is only logical in the context of the tax itself the purpose of the tax we are saying that the language of the regulation is to be strictly  tax court and by the government in this case would hold then that there are no taxes that are ever the document because if you look at the tax accounting taxes that have to be accrued by the end of the year and paid by the contested taxes that were paid before the accumulator earnings tax was why i keep harping on the same point why wasn't judge paul correct and goes along on the tax court when she said that your argument ignores the fact that the accumulated earnings tax is a penalty tax it is designed to discourage taxpayers from using corporations to avoid income tax we would require such circumstances we would require some evidence of a congressional desire for mitigation of the penalty before we could accept the taxpayer's profit redefinition of reeks of a cruel we are excited no authority showing that congress was concerned that persons in the position of petitioner may never receive  contested but clearly you are contesting this you're right you're right it's still hasn't been determined because we're here on appeal trying to decide what the what the proper amount is that still never been resolved but your honor how can we pay dividends out of amounts that we've already paid and you're in the argument i understand you're saying is your argument as well that's just your problem because you didn't pay your you didn't make a distribution at the right time in other words what she is that it's not my argument just falls right which appeals to me as a matter of logic and that is that the law is designed to require a closely held corporations that sweep out of its bucket of retained earnings every single dollar that it doesn't need for ongoing operation so that it can be declared in the form of a dividend and taxed by the closely held shareholders when they receive them that's what congress is trying to encourage taxpayers to do it with these kinds of corporations congress is also allowing economic performance test or to apply the analysis of state taxes when those are good optimal is not appropriate because federal income taxes are never the duct of all in determining income tax liability they deductible and the terminating cumulated burning steppes congress clearly intended for that the question then becomes at what point and the i r s through the treasury department has adopted regulations that regulation goes beyond the intent of congress but that is not the case here what we simply are arguing is that because you can later in fact is a penalty and it's to be strictly construed because the treasury department the government our opposition in this ca promulgated a regulation that referred unpaid contested taxes they should be prevented as the pit circuit held in right direction from going forward and saying unpaid is immaterial we put that word in there but it has no and how judge barbara reached its decision it was decision this was not part of the reviewed case that was the subject of the second opinion critical disagreement here is the recapture which is merely an accounting tax accounting phrase it still represents cash that was received in excess of the basis of the property and in doing so said after these adjustments we will take only the ta income into account especially the capital gain portion that was recognized during the year what the taxpayer believes is that the amount of game that should have been taken into account for the year was in fact the  based on taxable income they make decisions based upon financial accounting it is financial accounting which is that is beach specific method designed to provide feedback to managers and investors about the amount of income derived by a corporation and in a financial accounting sense that gain was derived during the year one thousand nine hundred five from the efforts of the officers and that full amount of the game should be brought to be used for determining reasonable concert that year there are no other further questions i will be having reserve my time i will circuit reasoning essentially that circuit reasoning involved some equitable concern that it was under the under the personal home holding company you if if the tax is ultimately determined as the tax court determined then does the taxpayer get any credit in the year in which the cruel standpoint and also from an income tax standpoint wouldn't the taxpayer be allowed to get a credit for the amount of that payment ok hence in the in the year in which the final there had been a contested income tax from some previous year and that was actually let me just use the years we have here in this accumulated earnings tax year so for the  provide ample support provide an ample basis on which to affirm the decision of the tax court today now i want to turn and mind remaining time to to the second issue in the case of reasonable compensation it's important to know the standard of review and that's the definition of the practice by which the very clear because the tax court followed this court's opinion in elliot's which lists five factors the role of the employee in the company comparable salaries the kind character and condition of the company was the compensation statute looks at the amount of compensation it's reasonable for the task and it was a lengthy and complicated computations do not some purposes but not for others but the reason that you don't take into account anything that the reason to eliminate depreciation recapture in this case is obviously it has nothing to do with compensation for the commissioners reasonable compensation determination was wrong because we are entitled to the gain on the sale of this but the entire gain on the sale of this property that is the new issue not properly before the court and the record would not allow the court to make such a determination even if it were not thank you not form to dispute that settled tax court precedent that's why we're here on appeal because there is no real form we had a determination of unreasonable comp we submitted our figures based on the method that judge herbert stated he used which which we calculate those amounts by dividing the increased amount of income earned by the monies effort between the officer employee and equity holder which when added to respond to seventy six eight hundred fermentation resulted in an annual reasonable compensation of eighty determination of reasonable comp because all of these gains that were derived of the activities of the taxpayers and also because of the amount of gain what we're now discussing is how we can how we calculate the amount of that on reasonable cop we only the installer the amount that was included on installment basis for that year we are not suggesting that the taxpayers and and i will correct that misunderstanding we are not suggesting in any respect that the which is the only thing we can evaluate judge gerber applied that he should have used financial accounting numbers not income tax numbers and not limit the amount of gain to the installment amount that was recognized for tax purposes for that year we are not asking this court to determine that amount we're not asking this court to say that the bonus should include all of that game we merely are saying that it is not appropriate to stay that the company derived a one point eight million dollars gain  sales price the next bases but in determining the amount of bonus we're going to take out the depreciation recapture which again is a tax accounting fiction it's still represents cost it is a recapture of depreciation but it still is an amount of gain it merely converts capital gain into ordinary income which hurts the corporation as a material for these years and we are asking that the amount of gain that is used by judge gerber in calculating the bonus amount if you will which appears to be an application of the independent investor test on top of the five factor test we're not very clear on that because we know what he did but not exactly how he arrived that we are staying that in doing that financial counting is the proper measure of the amount of income not the tax collection of installment basis but we are certainly not requesting th determination that the full amount of the of the gain is the amount of the bonus but we are saying that the full amount of the gain for the year should be included and would be included by an independent investor in evaluating the efforts of the officers during that year but if we agree with you then are procedurally we would have to re mansa the tax court with instructions to apply your theory and then go back and recalculate yes your own