good morning your honor sir richard stack representing the coopers in this particular case i'm going to go where the money is in this case and i think the most interesting issue is the taxation of the   technology licensing company and assigned to what praga in like early to mid two thousand and six the second family of patents is the projection patents which ends a number zero three  done and a way that would permit a favorable tax treatment the question really is whether the holder of the patent informally control the entire corporation so that the capital gains treatment is  have why did the tax court clearly make a mistake in finding a fact and concluding that the other people involved in the corporation basically simply operated exactly as mr cooper told them to even when it wasn't in their own financial interest and that the others were just figure hence what's wrong with those findings well your honor i think the initial issue that we have with the  court is applied an incorrect legal standard it in grafted on to the plain language of section twelve thirty five in direct control requirement and as you know you know you think that it's it's it's just supposed to be a form and no substance that if you control twenty four percent or less the corporation can be just as if you individually have the patents and you can do what you wish and that's all the tax code requires well your honor as you're as you're aware of there is this sham transaction doctrine so if all you have is a form that has no substance whatsoever you can just sham out the transaction  any evidence in this case beyond the relationships themselves to show control sometimes there can be formal control some some separate trust document or the simon of voting rights or contractual provision for voting rights sometimes there can be reform as a matter of practicality like a transfer to a minor child in the transfer or is actually the guardian with authority to vote the shares and sometimes there could be an informal understanding that everybody really understands and there's testimony to was there any of that i'm not aware of anything your honor i believe that the tax court's the basis you know if you look at the net result the the amount of the patents that mr cooper received was no more than about fifty three to sixty percent on average which is actually a lot less than in charleson where there was an eighty twenty split the inventor got got eighty percent i think one thing that maybe wasn't really brought out we alluded to it in our brief that was really brought out of the trial mr cooper testified to that effect at pages seven thirty two and seven thirty three the record he did not control it's undisputed he didn't have any control over ip innovation or acacia all we had was i believe a one third vote as a as a as a as an officer and you know he just there was no way for him to exercise control over those companies those were controlled by anthony brown who was the  in charge of commercializing those very lucrative patents so i think that's i think that's something that really has been missed in this case by the tax court remind me how to type tie into the  theory well it basically ties into the theory that there is no monopoly right that t l c could have exercised authority over a control over such that mr cooper could be deemed to have basically not valid that's probably the wrong word it was valid but whether he controlled it or not whether he controlled something else because i think that was the way the issue was framed as i understood it the tax co problem arguably an insuperable problem that he gave cooper back the app patent rights that cooper took back for his children and no consideration was paid to deal c you're talking about the believer right of first refusal that i thought some patents were transferred to the new corporation that was have by his children i think walter coulter signed off on a transfer of rights back to mr cooper without receiving consideration for the t l c i believe that was an early twenty six if i recall the reason for that is that the  brief and that's something that this our narrow alleyways do not consider arguments that are raised for the first time on appeal because the tax court didn't have a chance to consider those who were make findings about it or anything it's been it's been fully brief course i can give any other reasons that were good any other reason why that doesn't why that transfer does not prove had that it was a shame that the transfer of rights was insubstantial well i believe we've shown that there was a there was a royalty of i believe seventy two thousand dollars that was paid by what time got to t and that's in the stipulation of facts i believe it was paragraph fifty if memory serves generally care some deference to the fact finder do we not yes i i understand your honor i believe we've pretty much you know addressed each and every one of the inferences that the tax court made and we've by a large refuted it fairly effectively i mean obviously that's you know it's my opinion i would like to obviously persuade you folks to to embrace that as well  let me just say here you know i think that the think that you know let's get into the control issue here as to as to t l c again you know it's difficult to see how this cases is different you differentiated from situations in charleston and lead in those cases the courts found against the government they found there was not in direct control over that over the company and again we've we've  me yes i mean you know for example i unlike mr charles and mr cooper never participated in litigation as a joint plaintiff with the patent commercialization commercialization company situation of charles and mr mr cooper did provide assistance in terms of the patent commercialization and i mean that's really the the same thing that happened in  well it's just difficult to understand you know how it's any different from from this particular situation there really isn't very much evidence that you know that mr cooper controlled  c all we have a some circumstantial evidence that your honor has mentioned about the transfer of the low patents that you know we submit that actually benefited t l c because they ended up getting seventy two thousand dollars that they hadn't gotten before when it was t l c that was doing the patent commercialization and they basically had fallen flat on that and not done their job so what you're saying is yes t l c transferred patents for no consideration so far as the record before the tax court shows at two a new corporation for the benefit of cooper's children but at the practical effect was tiel see made money it wouldn't have made because the royalties from the patents went to t l c that's correct that's correct another thing i'd like to point out is that if you look at why does that disprove control and and not paid t l c anything back once those patents were commercialized the low patterns the real question is whether it was a genuine transfer of all substantial right if they grew to it asli transferred the patents back to him that would perhaps support an inference that it wasn't a bona fide transfer or that it was a sham transfer on the other hand not sure i see why that shows that it was not a sham transfer of all substantial i don't think you know i think i think carefully using the word sham because the the tax court specifically asked the government at the end of the trial whether they were relying on a sham theory and the answer is no we're not and the tax court judge judge marvel made it very clear that that was no it's whether their subs substantial rights their phrase and i'm very familiar with that and again the statute talks about direct or indirect transfer between related persons ok it doesn't talk about indirect control so you know i think our primary argument is that the everybody got it wrong as far as what the correct legal standard was you have got to look at the plain language of the statute you can't just do you need d n a data you're saying that even if the tax payer did exercise the actual control over the transferee that it would still amount to a transfer of all substantial rights it would be you would meet they would meet the literal terms of the statute which i think the tax court found had been met right but then she we're going to work ourselves bring the little terms are enough well yes but but by the same token she also found it wasn't a sham so that you know t l c was a real living thing i mean as much as a corporation can we can be living it was a bona fide entity there was no question as to whether it was a correct a properly constituted density the formalities were followed so that's not really the issue i think the  is you know it's a transfer that must not be directly or indirectly related person it doesn't have the statute doesn't talk about you know in director direct control did you wish to save some remodel morning your honour's clint carpenter for the commissioner of internal revenue may please the court by definition a patent holder cannot transfer all substantial rights to a patent without relinquishing control of th counsel i have a problem with the tax court's view and it's reading of the facts and the ideas that he was close enough to what was at his sister in law or sister in sister and run to his wife's friend and his wife's friend and his sister in law it was i suppose it was a practical matter they would do whatever he wanted so it should not be treated as a transfer of substantial rights ad because  it really kept cooper in control of the patterns that that would be a part of it i think that the what the tax court found was that mr cooper retain control in that any corporation that has a genius is likely to be highly differential for example when edwin land was alive i have no doubt that the board did anything he said my guess is that warren buffett's corporation does anything warren buffett says even though there are a whole bunch of directors and they're not a sister in law or his wife's best friend when the big bucks come and issue though for example if warren buffet decided to buy this corporation for a particular price and they were deciding whether to sell at that price or seek a higher price or not sell at all that's when  closest of friends and relatives become enemies i mean i'm i'm just dealing with another case right now where the brothers wind up litigating with each other even though they've been brothers and it's been a family business for the better part of a century happens all the time so i just don't see why the fact that they deferred to their genius as long as there was nothing to fight about shows that he had control fact of the matter is he had twenty four percent and  that's less than the statutory bar which was lowered from fifty percent to twenty five percent as so he's ok there and his wife's best friend is not even related to the sister in law well he could get into an argument with his wife in the sister in law might side with her sister instead of with him the fact that they all follow his lead  when there's nothing to fight about and he's the genius who came up with all these lucrative inventions i don't see why that proves control sure i don't see why it's even evidence that he has anything like actual control as opposed to people just deciding it's in their best interest to let him do what he wants because he's the guy that knows more and makes more money than they do sure i think  certainly that could be a possibility i don't see why it isn't the only possibility well twenty four percent means you lose if you lose the loyalty of fifty one percent sure and  no question on paper it was a transfer of all substantial rights and as far as i can tell the only evidence that the tax court relies on to conclude that it wasn't really is he was close with these people it was for the moment and that they gave him back that stock that for  lets inventors take capital gains treatment is obviously to encourage inventors and the reason that they dropped it from fifty percent to twenty five percent was to  work a little more precisely on just what the incentive to inventors has to be that they want inventors to have the incentive so he goes to his lawyer does the twenty four percent of the separate corporation and it's sis ter in law and his wife's best friend and best friends forever are often are not forever yes i think that the difficulty comes in that the alternative i think i'll turn of that you're proposing is essentially that a paper transfer is enough no council no council look at it this way if you would it's possible these people exercised i mean just the fact that they agreed with them that doesn't get you there they could exercise independent judgment and reach the same conclusion so what's the government strongest argument they really just totally deferred to him as opposed to independently doing their homework and agreeing with him sure that it's the examples  of times when they took actions that were against president or against their own interests in the first one is that they return valuable pounds to him for free cases but just because he wanted them back the second what's your next argument well that they were compensated as dumb as directors all directors are but ordinarily receive nominal consideration or small consideration what's your next argument you are going through your bill appoints sure testimony and the tax court made a finding that that testimony was not credible ok so if we if we look at this bundle of this this data points and we could reasonably decide either way is your position the government they didn't meet the burden of proof is it isn't that's correct i mean from from a sort of big step back the point of allowing the capital gains treatment is a bundle of rights has been sold off to someone else just like selling off you know other assets you know real estate or something that it's gone and therefore it's entitled to capital gains treatment so whether it's sensible or not we're getting at the same thing as is where is the control and in if there's where is the in dish if control and i don't think just that the only point i'm trying to make is in response to judge kleinfeld question it doesn't seem to me that just that they agreed with them  here i think that point i think however it does it does support the tax court finding when they're sick they are when the decisions are being made are decisions that that benefit cooper mr cooper to to the  meetings of the district court small court small meetings the chief judge was a very very experienced judge it there were several occasions where i thought we should do one thing he thought we should do another and i thought about it and i thought well on the one hand my opinion is we should do this this thing on the other hand he has a lot more experience than i do and i trust his judgment more than i trust my own judgment i can't see why that would not be exactly the same thing in this corporation that they have independents they can vote the way they want but they'd be fools actually not to trust cooper's judgment more than their own judgment and so long as it's not going to affect them deeply now if it was something where it was a proposed by out and it could mean they get millions of dollars more or less depending on whether the his judgment which means they get less or their own judgment which means they get more that's when they're likely not to trust his judgment anymore and to assert themselves more but i just can't see why where they've got no matters where their interests are so sharp as to lead them to reject his judgment why their difference to a group control the any more than when i was a nudist with my difference to the chief judge would prove that he had control over me he didn't write i think even though it was two to either their own or the company's detriment and so for example in giving those those four patents back to him one of those patent wells three of those patents five days later mr cooper didn't transfer them to that the other entity that had essentially the same officers and basically the same structure and then over the course of the next year that patent brought in one hundred twenty thousand dollars and so if t l c had kept that patent in just will and sub licensed it itself instead of giving it back to mr cooper who gave it his other entity those hundred twenty thousand dollars would have come to t l c that the record doesn't reflect conclusively why mr cooper did that it but it certainly made it what kind of revenue are we looking at here compared compared to the hundred twenty isn't nickels and dimes or is it a major part of the revenue it's that issue it's over the over the course of the home the corporation from its inception to two thousand and eight was about thirty million dollars in the tax years edition i don't recall specifically but it was in the millions so wasn't it wasn't a huge portion but but but again how companies acting in their own interest don't give away assets for free the only reason for them to do that was because mr cooper wanted them back and there's no evidence that he gave them reasons why it would they probably would as they probably wouldn't do when they think the can that otherwise alienates the guy who makes the big bucks for example a corporation giving a charitable contribution to the c e o s or chairman's whoever is the the most valuable person thinks of as a pet charity it may not be all their pet charities but if he says we have to give one hundred thousand dollars to my pet charity it's a wonderful for si it that that's possible but they're there that's not what the tax court found and there's no evidence that that's what they were doing it's sort of in speculation that perhaps that's what was going on but that's not what the evidence showed again if you can't look it's a little hard for me to tell because their their discussion wasn't necessarily that precise for example you said that they rejected the credibility of the persons who testified and so on cooper side they don't go that far and they don't explain he just says we do not find credible any testimony by petitioners that c was an independent corporation that mr cooper did not control a conclusory unexplained rejection of any credibility that would undermine their conclusion but they don't even say what testimony they don't think was credible well believe the testimony that i don't know what they wanted that was contrary to what the other evidence tended to do so their conclusion this will say what testimony was contrary no there's not specific statements or things of that nature  one other point i want to bring out of the right that was that was centrally handed over to mr cooper when t l c entered into these some licenses with the a k c subsidiaries t l c had rights under those under the written agreements that provided the t l c which still had participation and in one agreement could even veto but participation in the decisions that the u k seed companies would make about commercializing patterns  evidence showed that it was actually mr cooper who was exercising those participation rights and then in two thousand and five t l c made that what was actually happening that explicit and entered into an agreement that expression provided that that ask for more they might well have said no that might have been a little touchy form and we don't know and we don't know what testimony might or might not have them believe by the tax court  surely if someone were on polaroids board and it would land wanted something that didn't seem to make a lot of sense but he wanted it they would probably think our number one job here is to keep it w land happy and they'd be right to because once he died polaroid failed and went bankrupt i think i understand that that's probably true and again it's possible that's what was going on here but but that it's speculation there's no evidence that that's what was going on here the burden was on the taxpayers to prove that mr cooper actually gave up the rights and didn't retain control over his patents and the evidence showed that that in all the instances that are in the record that mr cooper still was exercising control over his patterns now is it possible that to say anytime a request you give away all the patent rights and you hold less than twenty five percent of whoever you give them to then it's capital gains that's what congress right everything else is not what congress said it's applying the  but didn't the taxpayer agree to the standard yes and then there's this whole waiver issue that we haven't gotten into where in terms of their challenge to that the legal standard the sort of charleston standard you might call it  it is alan j didn't not only did they not challenge it they express lee embrace that standard they advocated for that standard and now they're asking for a do over and there's significant prejudice there not just to the government but to the point out one thing here the you know as as kleinfeld as mentioned a few times mr cooper is a genius he is he's the holder of many many patents which we use every day that the question here isn't whether it's sensible for people to listen to him or not it's whether he really and truly divest himself of the patents and and so it really isn't about whether other people would defer to him or not it's about whether they did in fact exercise independence or not and if they didn't whether it's because they were related or friendly or because they thought he was so much of a genius that they didn't wish to even think about these issues i'm not sure why that matters if he in fact didn't really divest himself of the pounds is that sort of  fundamental factual issue here yes yes it is your honor and it's our it's our position he did the best and still well i understand that but if if if he in fact exercised the control which i know you don't concede the reason why he exercised it doesn't matter either does it whether it's because he was smarter than other people and they knew or not or whether because they were friends or whatever if he control exercised all that he loses now if you didn't exercise control he went and i guess i'm not sure why the reasons behind it matter well it's you know obviously if you're the inventor you know you know the most about your pat t you know how it's most effectively used you could you know advise as to how it should be used which he did with the patent commercialization companies with regard to the biz walters and  coulter they were professional one and i believe one of them was the c e o or c f o of the of a charitable organization another owned a construction company counted but you're just fundamentally not engaging in this in their data point is getting at ok well you know it's our it's our position that they're really the tax court really did not specify how control was actually sized other than the fact that these people were all closer to be related to each other in which case the ultimate  conclusion to be drawn is that the tax court or that that the court in charleston should have found for that for the government as well as the court in leave so that so that it's another words i guess to sum up that finding here a factual finding about control was clearly  that the tax court really did not focus on you know exactly how mr cooper controlled t l c other than to talk about you know you know various factors and really there was very little money