is the same scenario one except that a private party these wells fargo one hundred and fifty million dollars over five years to do what i just described if wells fargo's entitle to a foreign tax credit in scenario one it must be an idle good excreted scenario too because that transaction produces even more economic benefit for wells fargo this case is scenario two the government's only reason for invoking the non statutory judge made doctrine of economic substance to deny wells fargo's a statutory right to a foreign tax credit is that a british bank designed a transaction soley to enable  to get british tax credits from the british taxing authorities but the economic substance doctrine is not exist to police perceived abuses of or in tax systems like for income the b x payment though somehow linked to that tax payment doesn't wells fargo benefit via the b x payment from barclays tax credits and that's one of the issues i'm struggling with in this case how to characterize the b x payment and how to take it into account as we're trying to analyze whether or not this is a sham transaction sure you're under the direct payment was calculated at the front of the transaction partly in reference to barclays anticipated tax credit and it was a deal that either party could back out of on i think thirty days notice right correct up if the b s payment is made wells fargo is and keep that even if barclays doesn't get tax credits that is but if i can your honor and ask how do we account for that be x payment doesn't come from the tax credits the answer is no and that's what the federal circuit said in another star's case salem it said what do the fungibility money you can't trace those funds and say they came from barclays tax benefits and you say any more than you could say that came from barclays general revenues or that they came from other pacs so how do you characterize the b x payment then it remind me i mean how would you describe that in the context of the overall transaction p x payment of these payment from barclays to wells fargo in exchange for wells fargo agreeing to engage in this transaction mainly by putting  none of the benefits the barclays got came from the us actually overseas it's all happening over in britain but yeah to be extreme was calculated by reference to that and the federal circuit in stable financial said that's fine the fact that you benefit and even if it had that's barclays money to do with that what it was right when i got a tax refund from the government i can use that money anyway but i want i can give it to my kids i can spend it nobody would say that i was somehow unwilling m into its general funds and meet other payments including the one hundred and fifty million dollars that paid to us over five year period and that was absolutely income to wells fargo trust does the trust part of this have any other purpose other than to take advantage to utilize the earth would not take advantage but utilize the the tax laws of the two countries to is that the theory in that the argument here that it is their theory and it's absolutely get it wrong well it's either dead wrong or it's the case in every foreign tax credit he said let me explain that the only way that you can get a foreign tax credit is to pay t taxes on the same in you have to be doubled habsburgs the best you can do with the foreign tax credit is breakeven the best you can do is go to the united states and say look i paid twenty dollars in tax to the foreign government and thirty dollars in tax to you that's double get any tax benefits in the way to be typically understand that term we didn't get something actually credit that just kind of came out of nowhere or was somehow engine here through some you know machination under the u s tax laws the only thing that we got tax wise was a predator attacks that we needed the foreign government the money that we paid to the united states for taxes nobody was challenging they got to keep that so we had in one sense this piece is about whether wells fargo has paid two taxes on the same income right now we have and the reason we asked for the refund is we said look we pay that money to you and we pay tax on the same money that the united states we just want to get back the double tax so yeah you know from barclays point of view they have other things going on but from the u s taxpayers point of view which is how the economic substance doctrine is evaluated this from wells fargo's point of view was a fairly simple transaction we're going to put our assets into foreign trust which we could do at any time without objection from the taxing authority but it's not a matter for the federal government because they don't police extraterritorial activity right there at the root of the economic substance doctrine as i said is not to police perceived to be uses of foreign  of foreign governments can handle that every bit on their own there's been no abuse of the us tax system the government wants to say well the us came up a loser on this because it got less tax revenue that's the same as in every single case that involves foreign tax credit by definition the united states asked me about some of the money that was that was taxed that was congress's policy choice that was congress choice to save to encourage people to deal with international business and barclays as it is a foreign bank we want to encourage people to do that by not exposing them to double taxation we're going to give them a tax credit for what they've created a foreign government that's a policy choice that conversely they put that in the statute and the government has an illustrated why this is any different from that the only downside there i mean the u s government here is the same one that exists in any now lower tax rate the jury determined that there was no economic substance or business purpose outside of the tax considerations we break to correct in this case is not about the jury that's our position is that under frank lie in the u s supreme court he's under this court's cases the characterization of the transaction for purposes of tax is clearly well i think it's good these court cases are clear and pipeline is clear that is the noble review i don't think of the word facts of the jury to find obviously in general rules that factual findings of the jury are entitled to a clearer view but that's not the that's not the case here this was a legal determination that and for judges to understand you know just tell me but i'm struggling with on the u k side of this this twenty two percent tax credit that barclays was receiving because of this the only question is whether wells fargo's payment of tax to the u k is an expense of the transaction that should count against it or be balanced against the income this court has already answered that question and i yes and said no payment of foreign tax is by law on that question and the service well and they've recognized that all right so this court and the th circuit have already gone one way on this the other circuits have said we respectfully disagree and have gone their way but that is the only way that those courts especially the cash flows occurring here in the united states and in transaction that fictionalized international commerce this is an artificial u k tax imposed on us and come the us circular in us and the circular cash flows  value of anticipated foreign tax credits because there is no other value in this transaction the transaction was tax additive for the u k and it was provided benefit to barclays without any economic activity and it's all being funded by the tax savings realized by the foreign tax credits claimed an economically empty activity in this is illustrated by the one hundred dollars sample that the party's use of these questions were all properly put befor jury and let me address the frank lyon standard frank client standard view which was applied by the three other circuits that address stars says that the overall characterization of a transaction is either an economic sham a legitimate business purpose legitimate business transaction is a question of law but critically that question of law is based on the particular fact findings and the particular fact findings are does the transaction create any sort of economic benefit and related to the challenge tax benefits what are the economic realities of any given cashflow such as the b x payment in this case which i'll discuss in the nd and finally the rd major inquiry is what was the tax care motivated by all these questions were pert to the jury and the solve them against walls fargo and in the government's favor the jury's finding that the payment was a tax benefit that was just the sharing of the foreign tax credit value supported by the evidence days and days of expert testimony which analyzed cash flows in this case as well as wells fargo's own candid assessment of what the b x payment was wells fargo referred repeatedly the b rejected tax payers will lie and sign it in applying the negligence penalty and santander in salem have concluded the transaction i it's nothing like the stars transaction other than the fact that in both cases there was a foreign tax credit decision itself said that it was based on the specific facts and circumstances of that case and the facts and circumstances of that case were very different the court emphasize there were no artificial features or straw and it is in that case the court income do you count in the profit analysis one hundred percent of it or just eighty five percent of it the tax there was actually economic risk into the other things that distinguish i yes there was no effort in the i d s case is there is here to disguise the transaction or in this case the original justification for the trust was this purported low cost loan where the jury saw through that saw that the was artificially attached to the trust was not in fact it at least stands for the proposition at least one proposition among many possibly is that we consider the reasonable possibility of profit apart from taxes back to the government the does that principle apply in this case according to the government's view yes that principle does apply that's the basic standard for profitability and the economic substance doctrine and in this case there is no profit once you disregard the b x payments so if they are so what under i specifically do we disregard we disregard the b x payments in that's the we consider that a post tax benefit to wells fargo in my in my following you are yes that's correct it's just the of the foreign tax credits ok as as the nd circuit explained and the court doesn't need to reach because the court can just affirm the jury on the basis of its findings at the b x payment is a tax benefit not economic income but i would point out that on the foreign tax expense side of the equation i s to not purport to adopt across the board rule that would preclude foreign tax from being taken into account under the economic substance doctrine  courts have distinguished i yes because in that case of course the foreign tax was not the quid pro quo for gaming the income issuers in this case it is wells fargo had to pay two dollars and foreign tax to get one dollar well let me ask you this way as a understand the argument that was made a few minutes ago it is basically that this has economic this is the trust part of this at economic substance because wells fargo receives compensation for participation in this in this arrangement and that's the economic that's the economic benefit as zander say in the arguments it's really that we should focus on  tax laws and the ability of barclays to benefit from the from the nature of u k tax laws and that this really doesn't involve  transaction this was not a u k tax shelter this tax shelter was a tax additive for the u k because it's been allowed to tax income u s source and come that it never would have been able to otherwise tax and in fact barclay explain that to the u k in order to get pre approval of the transaction explain that yes barclays is going to be claiming some u k tax benefits but it's going to leave a small amount of the original tax paid by the u taxpayer with the u k and the u k did not challenge the transaction but it did alert the united states the fact that it was abusing the u s tax system and hence abusing the u s taxes these are u k does a challenge because because it is a winner exactly that's exactly right but it did inform the united states that this was going on and but for that treasury probably never would have discovered the stars transaction because it's so well hidden on the tax returns now with regard to the penalties in this case the district court correctly determined that wells fargo was liable for the negligence penalty counsel in that regard don't you think that the kaiser decision by the u s supreme court changes with the hour difference  just record utilized i don't think that the kaiser opinion set out with limitations are you know it reaffirm the fact that there is our deference that said you know there are certain limitations to its use and i think the district courts analysis is consistent with limitations but i will say this you don't need to get to the deference because our primary argument is is that the text in context of the resource base is standard it's  the language in the regulation that wells fargo's relies on that the return position has a reasonable basis it has a reasonable basis will excuse negligence the negligence penalty but what the regulation it did defer to the interpretation the agency has set out in the preamble and that could be a basis but this is the nova review the question of whether the negligence penalty requires looking at makes clear that the focus of the negligence penalty is did that did the taxpayer take reasonable care or you can avoid that  times that this transaction took money away from the united states fisk and it was tax additive to the u k that is soley because as part of this transaction we were asked to and were paid put assets into a foreign trust we can do that anytime we want the i r s does not get to step in and say you taxpayer must conduct your affairs in a way that best benefits the u s fiscal that's just absolutely not anything that's in the economic substance doctrine or anything else so when the government complains that well the u k got a bigger share of taxes than it would have that is just how these transactions work there is nothing in the law that allows the i r s to complain that they're not getting enough tax because a taxpayer made a decision to do something completely illegal and completely appropriate and that's where the tax additive part to the u k comes in nd the federal circuit held squarely that the be x payment in this case is pretax profit and sense because it was x that we were it was it was a payment that we got before we paid taxes on it we had to pay us tax on that amount and don't dispute that we had to do it rd consul tries to distinguish i e s and says well there are different facts surely there are different facts every case that comes to this court has slightly different backs this court lays down rules of law and the rule of law yes was that when you are balancing the the income and the expenses of a transaction to decide whether satisfies the pretax profit you do not count foreign tax payments on the expense side and that only makes sense because they are by definition post tax iras it's absolutely agency the i r s was reading the the regulation it's worth noting that that reading is a litigation position it's never been offered before it is nowhere in ensconced in anything it does not represent the considered view of the agency as kaiser required and last point it's not supported by an authorized signature from an appropriate person that the i r s that's very important because like kaiser at that period keys that it's the agency that is making the decision to impose a penalty the i r s in this case did not impose a penalty the agency itself declined to the only time the penalty came into this case was when the lawyers at the d o j decided to do it after but thank you thank you very much