only point of entry is a test defined and measured by the federal courts without regard to the words used by congress in defining that little world or does those words matter do we get to look to statutory text to decide whether and to what extent congress actually intended for a substance or economic type test to apply only that latter view of the economic substance doctrine admits for the proper role of the federal courts and is also consistent with basic principles of statutory construction we see everywhere else in the us code and that's the view that this court should take in deciding mr tucker's case the economic substance doctrine whatever it may mean cannot mean that in every circumstance the i r s and the courts can simply override the plain language of the code because they don't like the results worked by that plain language now it is true undeniably true that most of the provisions of the tax code implicitly require transaction to have certain levels of economics and whenever that is the case tax payers have to do more than just comply with the plain language of the they have to step through those additional tests there are some provisions though that don't require economics some of those provisions in fact disregard economics and they either capture or reject all transactions that fall within the scope  the codification says that the economic substance doctrine will only be applied will will be applied to quote any transaction to which the economic substance doctrine is relevant and implies that there are transactions in the code to which the economic substance doctrine is not relevant how do you determine that how do you determine that in the world we have to get inside the world you have to look at the code you look at the words that congress use so the court has to take into account those actual words and let's talk about some of those actual words section nine eighty eight section the foreign currency contracts are governed by nine hundred foreign currency contracts are complicated they're intertwined you can have a put you can have a call you can have a sale you can have a purchase that all of us might look at from an economic perspective and say those cancel each other out ok economically they cancel each other out congress specifically ignored those economics when it wrote ninety eight it deemed foreign currency transactions to be standalone it literally said that losses and gains will be computed separately ok because the rule itself not something that mr tucker did but the rule itself ignores economics economics can't override that rule the thirty day rule is similar the thirty day rule literally said it's gone now but the thirty day rule early said if there's income or loss was in this thirty day period we'd nort it could be a billion dollars it could be one dollar it could be a billion dollar loss it doesn't matter we ignore it for tax purposes so you can't have an economic substance doctrine that overrides a rule like that a thirty day rule the check the box selection is another good example check the box election rules literally allow taxpayers to choose do i want the benefits and detriments of a company or do i not want the benefits and detriments of a company that election specifically allows taxpayers to override corporate realities now in such a circumstance barring malpractise those elections will always be made in ways that are taxpayer favorable ok those those rules are as the all form and no substance so tax avoidance motive economics substance things like that cannot override those sorts of elections the three sixty seven election is someone when the three sixty seven election was existence it's no longer there it literally said there are two games two games textor you pick so it doesn't matter whether it's a big one you can pick the big one if you want to but you can pick the one that's literally what the election you can't have an economic rule that goes in and overrides that taxpayer election so it's also i think important for the court to understand as it looks at this case that the rules at issue here have been changed by congress and the treasury department issues were raised with those some of those issues rightly known to three sixty seven rule there was a the treasury department knew that they had an issue with that rule when they enacted if they didn't fix it they kept it in there in existence for another year that let mr tucker use it but those rules have have been removed so how do we look at this case under the federal circuit's decision and caltech which largely has been adopted by most circuits and certainly cited favorably by this court the transaction to be analyzed is the one that gives rise to the tax benefit that's what we look at the core of mr tucker's transaction the part that gives rise to the benefit was the sale of lost property now in some cases but not in this case there's a question about whether something was actually sold whether the benefits and burdens of ownership transferred it you know whether somebody retained an interest in it and in those circumstances you would look at whether there's actually a sale there's no question here about whether there was a sale there's no question that in fact mr tucker parted with these options and they were bought by lehman brothers they were that there's no question about that so the question here like can caltech really is what's the basis what are the transactions that give rise to the basis that mr tucker had in this property now the detailed and mechanical rules that i just went through result in mr tucker's investment having two pieces of property that they're actually sub properties but if you'll forgive me generally two pieces of property a piece of property that has gained in it and a piece of property that has lost it again is simply tax basis you know less than value and losses simply tax basis in excess of value the code literally taxed the loss that let the loss come in to mr tucker's return and it specifically excluded the gain now that does not mean that the loss can be overridden by somehow putting these two together again nine hundred eighty eight says the two are separate ninety eight separates those two transactions nor does it make it artificial for the court or mr tucker to recognize the last link they literally have two transactions two sets of investments one has lost one has gained one is recognized for the code and one isn't congress directed that treatment in ninety eight in those circumstances math is what determines the loss it's not economics and are we really to believe if we work through this and think about what would have happened if the two transactions had been flipped if the gain had been treated had been recognized aftermath determines the mathematical moment and that's really the difference in the well math is to simply just taking you know x minus y equal c that's math economics at least the way the economic substance doctrine has been applied sometimes is we have to look to see what the profit potential was on any given circumstance and how do we look at that from what the tax payers motive was that's what i mean by economics and the profit potential here was low on the it was a lawyer and it was five hundred thousand dollars which to me is a low but to the tax court that was low relative to the rest of the transaction and i think it is important though while we're on that point you want to understand this case there's a lot of this discussion about the abusiveness of this case of this case in the year this before the court if the court were to over rule the tax court would result in mr tucker getting two thousand dollar loss because he had two thousand dollars worth of bait the two million dollar loss aren't because he had two million dollars worth of basis and  it's a dollar for dollar he gets a dollar of loss for a dollar basis and in future years he's only going to get bases to the extent he contributed additional property to cycle that is not in it just from a tax perspective that's not an abusive transaction typically you get lost for basis but the amount of profit in this case was about five hundred thousand dollars but to deal with these things economics is not really the answer to the law when it talk it's about tax losses it doesn't say  what your economic loss it says what your tax laws and those two things can be separate if you look at college savings in college savings they have the savings and loan savings had a property it sold that property for tax purposes recognized a loss for tax purposes but it didn't have a loss for accounting purposes it didn't have a loss for economics purposes but the supreme court said well it had a tax loss and that's what i mean by math basis is calculated through these rules and it says what the losses and again in mr tucker's context in this important understand he had again transaction and he had a last transaction the code just didn't tax the gain and it's not for this court to try to put those two things back together it's also there's a lot of th in the government's argument that the timing somehow shows that there's something wrong with this transaction many taxpayers sell property at the end of the year specifically to recognize tax losses that is normal garden variety tax planning you don't disregard those transactions because they happened at the happened at the end of the year i mean this courting compaq said you know even assuming that a taxpayer suck primarily to get otherwise unavailable tax benefits in order to offset unrelated tax liabilities and really capital gains that not that need not invalidate the transaction that's the same thing here and i think a good case to look at for that is granite trust very trust involved too to code provisions ok one that resulted in a deductible loss for the taxpayer and one that didn't and the taxpayer planned into that specifically entered into transactions so that they got their the percentage ownership that they had in the company right to the level that they needed to and the court said that's fine to do that whenever you have a bright line test like that you have to assume that congress understands that taxpayers are going to plan around that bright line if they're well advised so again we talked a little bit about this before judge graves about the you know the five hundred thousand dollars that mr on their expert saying that in the match between the two sets option should be less than that so the court basically said it probably is less than that but there's no finding this less than that your honor so i think let's say for around about forty percent that's why sit around about around about forty percent at at you know five hundred thousand dollars the court found that even the experts you know warn agreement on that profit potential are expert in that and the government's expert but so why wasn't that enough the court held that that wasn't enough because of it erroneous view of the law and it was you did get it viewed this the economics of the talk and works the way i said like this little world he said we have to actually analyze mr tucker's transaction abstractly not looking at the actual code provisions that issue just out here outside of the little world of the tax law and determine first where there has economic substance that's not right as as the provisions apply as to the provisions that are political here as long as the transactions actually happen there and the otherwise code compliant and substantive set of transactions and is said years before and for the brightness of the motives cannot be permitted to blind our eyes to the existence of substantive events so that the same thing is true here mr tucker's transactions actually happened they were real and the law in effect at that time saw the results of those transactions without regard to economics therefore they have to be respected i would also again say this is not an abusive transaction this is a transaction where m tutt there was a part of this transaction that was abusive and mr tucker having found out that keep him she sold him that part of the transaction litigated the issue with k p empty and conceded that part of the transaction what we're dealing with now is the rest of the transaction which is simply a dollar of loss for a dollar of basis and in closing your honor i would say that the tax laws are perhaps the most complicated and detailed set of laws on our books there might be another one i can't think that there's great benefit to taxpayers and the government if those laws are certain in their application and provisions that impose bright line rule they give taxpayers favorable elections that actually override economic results should not be redrawn by the courts based on notions of economics or substance instead in those circumstances as long as the transactions to which the provisions actually apply you know to which those provisions apply are actually real and really happened the law should be a good morning may it please the court and also from the department of justice for the commissioner this case is a textbook example of the economic substance doctrines proper application and binding precedent of this court and the supreme court recognizes that doctrine and hear the evidence in the court really hasn't presented a very strong opinion holding that each of those problems were met here mr tucker set up this transaction after he found out he is going to have this big forty million dollars chunk of income from his exercise of stock options he was looking for a tax shelter in the record plainly shows that here and he entered into this transaction where he claimed an artificial fifty two million dollar tax laws he didn't really suffer that economically because he had this all set in ga r economic loss nothing compared to the actual loss that he claimed i mean this is exactly the kind of wash transaction where losses claim but what really happens is is no economic significant a change of position that the economic substance doctrine was designed to address and the the spring course opinion in frankel and i think very coherently explains that that the tax provisions that allow certain elections and create deductions and credits under the code are designed to deal with a bit real business transactions not transactions that are designed just to create a tax loss like this one was and i think if the expert report in taxpayers arbitration with k p m g which talk about this transaction at page six zero six six of the record and which taxpayer swore was true in a declaration page six zero nine nine of the record really really says it best it explains that these were offsetting transactions all starting options that were structured to minimize risk and it goes on to say the only residual opportunity for gain and risk of loss were built into the transaction and an effort to sustain the intended tax benefit by showing economic substance the investments were not related to mr tucker's general investment needs or to his personal or business situation their nature and timing were dictated by the perceived requirements and i think that really makes clear that this was a plan transaction for tax benefits that had no business purpose and was really the minimal profit potential and loss potential was what's been called a narrow collar in many of the cases similarly addressing our setting options that was just designed as window dressing that was minimal compared to the tax benefits that are going to be claimed and i think  the taxpayer suggestion that it's being what's been issue here is only two million dollars and the sixty five year the potential profit of five hundred thousand in the actual loss of six hundred ninety five thousand is significant comparison really hides the ball here because what happened here were two sets of almost identical kind of schemes involving using offsetting options and then splitting the gains of last using very technical of it very technical timing  scheme and and he's conceded the part of it was intended to inflate basis so that he could take the whole loss and the other part was intended to generate the loss but when you the fact that he has conceded the basis shouldn't make the other part of the scheme suddenly a viable economic transaction we had the same tax avoidance motive and it was designed in essentially the same way and i think so and he's still trying to claim is that high school pointed out the whole transaction because he claims he can carry forward the rest to future years and in fact there's a case pending that's now stained in the court of federal claims involving his two thousand and one tax year so certainly the we're not just talking about the two or two million dollars that's still at issue in this case doctrine not come into play in this court recognized in the south korea case that little compliance with the code doesn't preclude the economic substance doctrine to paul and we lay out a footnote fifteen of our brief some real questions about whether the transaction is permissible under the code reach things like section one sixty five which limits loss losses to bona fide losses from transactions entered into for profit and we would read section nine eighty eight differently than my opponent w math i think you really really is a very clear case of lack of economic substance the objective inquiry looks at whether the loss claimed as real and as i've discussed this last year the sixty two million dollar loss he claimed was artificial  additionally the the narrow window for profit or loss as compared to the client to the the claimed loss and when it's minimal the course of recognize that is just window dressing to try to save the transaction and i think as an saw of where there was a five hundred thousand dollars potential profit and a twenty billion dollars claim tax benefit and the court applied the economics of his doctrine the same reasoning applies here and this court's divided partner's case same and the federal circuits to be creek and j trading cases are all in that same vein of addressing similar offsetting options situations and looking at this narrow little window that was preserved for the risk and comparing it to the tax benefits and saying that doesn't give it the transaction economic substance and i think the expert reports also dr de rosa's report very credibly explains that in these with these auctions the tax payer more likely than not wouldn't prevail on in a situation where to make a profit he had to prove he had to win on all his bets that was really something very unlikely to happen and so the even the minimum four hundred eighty seven thousand profit that the experts agree whether there was a real business purpose or whether the transaction was simply for tax of soul or for tax avoidance and as the court records the southgate those do relate and they both i think are shown to be met here by that expert report i read earlier that states that this was not about business investments the didn't relate to mr tucker's business investments but rather that their timing and their planning was off for tax purposes moreover the record  a whole is just replete with evidence about his correspondence with k p m g where he's looking for some mechanism to offset his income from his stock options and looking for some tax solution and also entered into the transaction g laid out or to get the tax benefits he didn't exercise his own financial expertise which was considerable to make a decision based on what made sense from a profit perspective so i think those those  amply support the tax court's holding that the subjective prongs of showing a non tax business purpose and whether the transaction was for tax avoidance indicate also that this transaction lacked economic  e wisconsin centrals the only controlling case and it has nothing to do with economic substance doctrine it was an employment tax case that dealt with whether her retirement tax applied to stock benefits and it was interpreted in the definition of compensation that statute as any form of money remuneration and trying to determine whether the money the word money was a limiting for terms or was a plain statutory construction case dealing with very real payments for real services render d and it was again an employment tax on income tax case so it really has no bearing at all in this case the summa case and venison case involve the exact same transaction i think the first circuit dealing with the exact same transaction  followed the sixth circuit but that case is readily distinguishable and doesn't bind the court first of all neither of those cases purported to overrule and because they were pair of decisions couldn't overrule prior decisions of both those circuit that have recognized the economic substance doctrine applies when you have a an artificial wash transaction in a situation even if it's formally code compliant and i would point the court to the dow chemical case in the six circuit  santerre case in the first circuit the both apply the economic substance doctrine fairly recently in summa it was the court applied a distinct action the substance over form doctrine which is entirely different doctrine as the tenth circuit explain rogers that deals with a situation where there the parties have engaged in a real transaction money really changed hands or property really was exchanged that wasn't a wash but what happened was that the commissioner looked at it and said what they've claimed as  tax result is something different from what really happened and that very different doctrine was at issue in summa and suma also involved a very unique situation and the one of the entities used in that transaction where they shifted money from operating company to roth iras owned by shareholder family members with a use something called a domestic international sales corporation which is something that congress created as an unique type of entity that can like economic substance it can be basically a show and transfers of money can be made from an operating company to it's related to most akin to national sales corporation without any arm's length exchange and it was designed as an export as an incentive for domestic companies to have  that's very different from its general provisions like the corporate ization provisions that issue in gregory be held during or at the check the box provisions here that are meant to deal with real transactions and have no express carve out from the general rules about arm thank you your honor there are two questions here one is at what level do you apply this economic substance doctrine the government's position and i will give them that is supported by some of the case law is that you literally apply it without looking at the statutes ok imagine a world is what we do imagine a world in which the code said x is the answer even if you don't have economic substance under the government's reading and some of the cases you wouldn't even know that because you would never get inside the little world of the tax law you would look out here and determine whether the transaction even is respected such that the judiciary should apply the rules the law to it that we argue is inappropriate it's inappropriate from a statutory construction perspective it's and in a proper from a separation of powers perspective the court should not be doing  now when we look to summa mike my colleague wants to distinguish summa by saying well in disc congress was was not word of word about economic substance if you read those disc rules they don't say economic substance doesn't apply they don't say we don't care about economic substance they just have literal mechanical rules and we have literal mechanical rules here too like rules that literally says if something happens within thirty days it doesn't matter another rule that says a taxpayer gets to pick between two different gain amounts it's the same there's no analytical difference between those two things finally i would say the tax motivation there's a lot that gets thrown at mr tucker in this with respect to tax one of the good motivation the courts have been clear the tax motivation does not matter i mean get let's the supreme court has said because the coach codes plain text permits the taxpayers here to receive these benefits we need not address this policy concern the policy concern being that taxpayers would experience a double windfall for some to the government you have to look past the noise of motivation and things like that and look to what the statutes actually say and if you do you would reverse the tax court thank you thank you