messina kirkland and stephanie lane one thing i will do is this is a tax case and i've been a tax lawyer for years i will try to speak in english not intact so that everyone will we can communicate today in the oral arguments i'd like to start with stating restating the issues that are stated at the opening of the brief because i think it's relevant st question is whether taxpayer like the commissioner can apply the substance over form doctrine to determine the proper tax treatment of a transaction i think based on the precedent in both the supreme court this circuit and other circuits as well as in the tax court where this case originated the answer to that is yes so i mean that's the case the next question for this court which is actually i think an easy question as well is whether the substance of kirkland and messina the taxpayers here purchase our loan of fourteen thousand and four one hundred and seventy five thousand dollars to camp g i and affiliated corporation to club one acquisition core the last corporation in this case created indebtedness of club one acquisition to kirkland in messina for purposes case the answer to that question is yes as well now sort of a summary of the opponent's position i think will point to the salient issues in this case st unlike many of the cases in this area the purchase of the zoran loan a loan that was used to a creature only acquire club one casino was not done for tax planning or tax avoidance purposes rather the purpose of the note was because it had mature by its terms and was do number two if kirkland messina had purchased the loan directly we would have had no issue because under the government's failure of direct that's right that's not my question is why didn't they just do that well because in order to purchase th club one casino is a card room that is regulated by the california gambler gaming gambling control commission commission approval is required and interestingly i'm not an expert in gambling in california but what i can tell you is even though kirkland and messina were approved to own stock in club one they were not approved to purchase the debt they had to have a separate approval in order to do so and what the record shows is when they applied to get that approval subsequent to the years an issue it took almost a year to get that approval now what happened in this case factually is kirkland in messina starting in late two thousand and ten the note again  and twelve we're looking for someone else to provide the money to buy those who are no they bought this in a leveraged transaction putting less than a one million dollars into a twenty seven million dollars acquisition the note which was originally in excess of twenty one million dollars was now in the one thousand five hundred and fifteen dollars a half range at that point in time and like a lot of people in the in their business world they use debt financing to acquire the company and they wanted someone else to take that place in lieu of them number one number two with the time they did not have the personal acquitted he to do it that came later much later on something that contradict what was stated by the commissioner in their briefs was totally unrelated to this transaction so what happened is the four became g i what i call a shell company judge laura may disagree with me but it was a shell it had no assets it had nothing at that point in time to use that as a vehicle for someone else to provide the money to buy the debt and had they done that we wouldn't be here either but that didn't occur and they hired investment bankers to look for them they spent a significant amount of effort in time as the record clearly reflects to try and find that rd party investor or purchaser or lender to take the place of the current holder of this war alone unfortunately they were unsuccessful they had a sale they had some liquidity and they had the possibility of doing that but again the unrefuted facts in the case it was a stiff fully stipulated record at the tax court so they were looking for other people's money still they were going to commit there but what they did do because they were knowledgeable they said let's get k m g i approved to buy a part of the loan get our foot in the door which is what they did see apply per approval again i'm not an expert it's not in the record my understanding is because k m g i had nothing and no history it was much easier for them to get approved as it might be for me or someone else who they would run you all my financial transaction for years and everything else and do extensive investigations so that approval occurred to you and yours became the gambling commission correct so what have i begin the gambling commission versus the commission or i apologize for the similarity but again thank you for i'm happy to clarify so what happened at that point in time was in their concern about long priority as well there wasn't your honor because that is a misnomer in this case these were a loan was subordinated to two notes two and a half one million to do that as claimed by the appellee no anyone could have done that i could have done that had the same benefit of the subordination agreement so that is factually incorrect so what happened is they approach weren't it's clearly in the record and talked  and eleven the markets are terrible we don't think you will find that and they talked about a brief extension of the note on terms that were not commercially reasonable so the net effect is in november of two thousand and eleven and the dates are important kirkland messina's said we don't have a shot we can't get someone else to do it or to have to reach in our pockets pull out fourteen dollars almost fourteen and a half one million dollars that we pay tax on it's our money and we're going to have to put this into the deal now they still are working with a potential investor buyer through global hunter also clearly stated in the record and what happened is there was a proposal but the two selling shareholders had there was litigation with them they weren't going to cooperate and so that potential option evaporated again at the end of two thousand and eleven what also happened is steps were taken by those where it was they went to the gaming commission and said will you allow k m g i not to buy two hundred dollars of the note but all of the no so which is an increase now it's very interesting the staff report which is in the record where the gaming commission said you think about it you have a shell company that in september in order to buy the two hundred dollars kirkland at messina put ten thousand apiece and load another one hundred apiece so it had a total of twenty thousand  and two hundred thousand in debt all from kirkland messina no business nothing else just that to buy the two hundred dollars if you were fortress and you held a note that was almost fourteen and a half one million dollars and someone with twenty thousand in equity and two hundred thousand in debt said i'd like to buy it i would say i'm not wasting my time the gambling control commission was approached to say we want you to approve to do this and as a staff report clearly shows kirkland in a scene a put in their financial statements and commitments to provide one hundred percent of the funds to do that so they could get gambling commission approval which occurred now meanwhile in that time frame where they were seeking that approval which took a couple of camp became the holder and on the th day all but nine hundred and forty five dollars was returned to kirkland messina now when you look at this and what's also in the record one of the other shareholders testified in a deposition involving the battle over with the shareholders who bought the no kirk limosine the gaming commission knew it was kirk limosine as money fortress knew it was kirkland messina's money the one hostile shareholder knew it was kirkland the messina's money everyone knew it was kirk limousine's money so that's what happened as payments were made they went right through came g i the same day or within the day or two and pushed out to kirkland i now what's interesting in this case is that because they provided all of the funds what they did when they prepared their tax return again this isn't a year and moved to try and take a loss what this was was they sat down with their advisers and said how do we report this and they said well it's easy the commissioner and the courts in tw it said who made the true economic outlay and who is poor in material sense the facts here this is not technical tax this is common sense the person who put the people who put in the fourteen and seventy five and change to buy the note made it to economic outlook they were clearly poor in a material sense they took all the risks there was no risk on k and g i and if you look at its balance sheet think about it they loan the money to came g i it had a debt it used the money to buy this were a loan it had an asset and the impact on its balance sheet was zero because what it acquired was fully offset by oh so it it had no out money at all from a financial statement and the proper time to test is when the transaction was done and so what you have in this case is a situation where i think it's for if the test was for then the cases where the taxpayer lost because it was a year in circulation of funds or it was a year in maneuvering to try and get basis in a debt where the money came from an affiliate that would not be available here but that's not what happened more importantly one dollar of the questions is the concern if this court allows a taxpayer to search sub so before which is has based on my count on seven other occasions consistent with five occasions when the us supreme court has done that and numerous occasions where other courts have allowed that is a simple rule a taxpayer has the right to assert priority of the substance of a transaction over its form where the taxpayers position is consistent with the position taken by the commissioner and followed by the courts in other cases following similar or  same transaction and the taxpayer's tax reporting and other actions are consistent with that and they are there's a statement here that the taxpayer tried to take the basis twice that is factually not correct the record was clear they took it as debt bases and club one acquisition they did not take it in came g i and you can try to muddle that but it's incorrect i have fifty two seconds left i will reserve that for  you please the court take up christianson for the commissioner the issue in this case is whether the taxpayers mr kirtland and mr messina can invoke the substance over form doctrine in order to avoid the plain terms of the statute  able to later claim that the substance of the transactions was something different in order to gain a tax advantage nd even if they could the transactions in this case their substance matched the form of the transaction and sixty six dollars the amount of the loss or a deduction that a shareholder of an s corporation can claim from the s corporation is limited to the shareholders basis in the stock and any and dead in this s corporation to the shareholder so that the courts of appeals have interpreted the language of that statute to mean that the debt must run directly from the s corporation to the  shareholder in the case of bros that we've cited the th circuit decision in two thousand and thirteen the court stated and s corporations indebtedness to another entity even one wholly owned by the shareholder does not increase the amount of created by the taxpayers in this case in other words the indebtedness did not run directly from the s corporation to the shareholders who are the taxpayers in this case so in order to get around that the taxpayers have invoked the doctrine of substance over form we think that the supreme court was quite clear in the case of national alfalfa when it stated that this court has observed repeatedly that while a taxpayer is free to organize his affairs as he chooses nevertheless once having done so he must accept the tax consequences of his choice whether contemplated or not and may not enjoy the benefit of some other route he might have chosen to follow but did not this court we submit has it here to that rule d this court followed national alfalfa and paraphrased it in the wilkins decision on page twenty two and twenty two of our brief this court has even gone so far as to give the policy reasons for that rule stating in the malaya this case that we've cited that the commissioner should have the sole power to sustain or disregard the transactions form or the opportunity or otherwise the opportunities for manipulation of taxes would be practically unchecked in the case form of the transaction that they have chosen themselves would encourage post transactional tax planning unwarranted litigation on the part of many taxpayers it would raise a monumental administrative burden and substantial problems of proof on the part of the government so this court has followed the supreme court's instruction in the national alfalfa case my opposing counsel has cited cases from the th circuit that he claims stand for the proposition that this court has made exceptions we disagree with that characterization of each of the cases that have been cited most of the with several of the cases that have been cited involved what i refer to as a mere mislabeling for example in in the contract an individual was referred to as an employee rather than an independent contractor or another example is a contract may have been titled as a lease an option to sell rather than an outright sale and so those circumstances involve a mislabeling extraordinary circumstances we would submit that that is inconsistent with the supreme court's instructions in the supreme court case as we've cited and and also with with the way that we read this court's prior precedents many of the other some of the other cases that my opponent has cited also well a really old cases actually in predate the supreme court's instructions the more recent instructions  national alfalfa for example so i will say that you know as to my nd point you know whether or not the taxpayer can ever invoke the doctrine of substance over form this case certainly does not present the exceptional circumstances that would be required for that to happen and the st of all the taxpayers argue that  which they created to actually purchase and acquire the loan should be ignored or disregarded for tax purposes or that its purchase of the loan should be disregarded that those arguments lack of merit st of all with respect to the k n g i corporation you know in moline properties the supreme court held that s corporations and corporations are separate legal entity is and must be respected for tax purposes the one exception could be is if the corporation acts as an agent of the shareholders and in this case taxpayers have conceded that they will they have not raise renewed their argument on appeal that messina and kirkland were agents of came g i the tax court below found that they were not agents and in their reply brief they've conceded that they have not renewed that argument on appeal so can g i being a separate entity must be respected for tax purposes they also argue that the purchase of the loan by came g i instead of them by themselves directly should be disregarded and and the the reason that argument fails is that they had as as my friend has explained this morning they had several many business reasons for using j g i to purchase the loan instead of doing it directly the taxpayers could have purchased the loan directly there was no law forbidding them from doing that the gambling commission eventually approve think the bottom of that was that they wanted to avoid the delay that would be required if mr mist on the scene and kirkland were to have to seek approval from the gambling commission and then you know st seek that approval and then purchase a loan that would have taken too much time time was of the essence because the loan was already in default there was a risk that fortress could you know seize the collateral that was secured that secured the loan which was the assets of casino and also all of the stock of casino and mr kirkland in the scena were also obligated under their own personal guarantees under that loan so if it was already been approved to purchase a portion of the loan and so they all the needed to do was to seek further approval for k n g i had to acquire the entire loan and it was really to avoid delay and that's because there was a valid non tax business reason for forming j and g i and for using k m g i had to purchase the loan it simply cannot be disregarded under any doctrine of substance over for tax payers argued that they'd used k n g i had to purchase the loan because they had to do so to comply with state law and that in considering the doctrine of substance over form the court shouldn't give weight to requirements of state law and can ignore those as not being valid business reasons to the contrary however when transactions are carried out for the purpose of complying with state law that is a valid business reason that gives substance to the transaction and the support for that is actually the supreme court statement in frank lyon which was a substance over form case it's also been cited for the economic substance doctrine but in frank lying the supreme court stated that when there is a genuine multi party transaction with economic substance which is compelled or encouraged by business or regulatory realities is imbued with tax independent considerations and is not shaped solely by tax avoidance features then the form of the transaction is respect i would say here that again the tax payers have a valid business reasons for creating can g i they were free to do that they could have structured the transaction so that the taxpayers shareholders you know themselves purchased the loan they chose not to do that the only purpose for which they asked the court to disregard k n g i is for tax purposes for every other reason they have treated k and g i as a separate corporate entity and the tax court actually found that they always intended for k n g i to be treated as a separate corporate entity  i had a cite for that but that's in the tax court's findings that they always intended to treat j m g i as a separate corporate entity your honor asked about loan seniority and whether that was a reason for creating k in g i the answer from the opposing counsel was no that that was not a reason what i would say is that whatever transaction they carried out in their tax planning they wanted it to point was that they could have ended and individually purchased on and kept this order right and i think that's correct and we would agree with that and there were reasons why they did not do that as as we've touched on my opponent suggested that everyone involved in the transactions knew that it was really mr kirkland and messina that were purchasing the loan and not k n g i the tax court actually made a finding i did not hold itself out as an agent of the taxpayers so the tax court's findings contradict the assertion that's been made this morning that everybody knew that it was really kirkland and messina that were purchasing the loan that is not what the tax court found in the tax court found the opposite  the last thing i would say is with respect to the economic outlay doctrine that is a doctrine that has been applied in cases for example that may involve a back to back loan where a shareholder receives a loan from a rd entity and then then turns around and loans of the proceeds to the s corporation in those cases where this doctrine has been applied there is always still an indebtedness that runs directly from the s corporation to the shareholder in applying this doctrine the courts have imposed an additional requirement that the shareholders actually make the have an actual economic outlay and so that is an additional it's a requirement in addition to the requirement under the statute the debt and debt and it's run directly to the shareholder in this case you know the government does not dispute that and kirkland made an economic outlay in providing funds to k n g i but then came g i did the same in purchasing the loan i see that my time is up yonder so i would ask again that for these reasons that  very recently less than a month ago the tax horton ad processor said you can assert subsets of four so it's allowed the last point i would like to make in the in this case is one of the key factors that has been misconstrued is the release of the guarantee when they came she i bought the paper because kirkland messina put up the note they released the guarantee because why should they guarantee themselves it speaks bundles about what was really going on here this is a substance test this is a substance case and i would respectfully request that the court reverse the tax court rule in favor of the taxpayers and follow clear precedent in the supreme court  and others the other final real quickly final point judge laro acknowledged that the step transaction is a two way street and misapplied the rule this court's decision in brown shows that he was wrong on the law it's a clear error of law and if you want  her decision and will be in recess for the morning