F I L E D

United States Court of Appeals

Tenth Circuit

FEB 22 2002

PATRICK FISHER

Clerk

PUBLISH

UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

ROBERT B. ROGERS, Successor

Executor for the estate of Ewing M.

Kauffman, and JULIA IRENE

KAUFFMAN, Executrix for the Estate

of Muriel I. Kauffman,

Plaintiffs-Appellants,

v. Nos. 00-3013, 00-3030

UNITED STATES OF AMERICA,

Defendant-Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF KANSAS

(D.C. NO. 97-CV-2666-JWL)

Kelley D. Sears (Stanley P. Weiner, Sylvan Siegler and Susan A. Berson, with

him on the briefs), Shook, Hardy & Bacon L.L.P., Kansas City, Missouri, for

Plaintiffs-Appellants.

Kenneth W. Rosenberg, Attorney, Tax Division, (Eileen J. O’Connor, Assistant

Attorney General, James E. Flory, United States Attorney, and Richard Farber,

Attorney, Tax Division, with him on the briefs), United States Department of

Justice, Washington, D.C., for Defendant-Appellee.

Before BRORBY , HOLLOWAY , and HENRY , Circuit Judges.
-2-

HENRY , Circuit Judge.

Plaintiffs-Appellants Robert B. Rogers and Julia I. Kauffman (“the

taxpayers”) brought this tax refund suit appealing the denial by the Internal

Revenue Service of a bad debt deduction. The district court granted summary

judgment in favor of the United States on the issue of the characterization of the

transaction forming the basis for the requested bad debt deduction. See Rogers v.

United States , 58 F. Supp. 2d 1235 (D. Kan. 1999) (“ Rogers I ”). The taxpayers

now appeal that ruling. The taxpayers also appeal the portion of a subsequent

summary judgment ruling in which the district court denied them a partial refund

for overpaid taxes under the doctrine of equitable recoupment. See Rogers v.

United States , 76 F. Supp. 2d 1159 (D. Kan. 1999) (“ Rogers II ”). Finally, the

taxpayers appeal the district court’s denial of their motion to strike the reports

and testimony of one of the government’s expert witnesses. We have jurisdiction

pursuant to 28 U.S.C. § 1291, and we affirm the summary judgment orders of the

district court and decline to address the expert witness issue. 
-3-

I. BACKGROUND

Because the facts of this case were set forth at length in the district court’s

opinion, see Rogers I , 58 F. Supp. 2d at 1236-39, we will repeat them here in less

detail. This case arises from a series of transactions between Ewing M.

Kauffman, the deceased former owner of the Kansas City Royals Major League

Baseball franchise (the “Royals”), and Avron B. Fogelman, a former part owner

of the Royals. In 1983, Mr. Kauffman was the sole owner of the Royals, which

was organized as an S corporation pursuant to Internal Revenue Code (“I.R.C.”) 

§ 1361. At that time, Mr. Kauffman sold a 49 percent interest in the team to Mr.

Fogelman for $10 million. For an additional $1 million, Mr. Kauffman also sold

Mr. Fogelman an option to purchase Mr. Kauffman’s remaining 51 percent

interest in the team. The option exercise price was $10 million. In 1987, Mr.

Kauffman also sold Mr. Fogelman an additional 1 percent of the team—leaving

each with a 50 percent interest—without disturbing Mr. Fogelman’s option.

Beginning in 1987, Mr. Fogelman experienced severe financial difficulties

in his real estate business which resulted in him owing almost $1 billion to his

creditors. His only unencumbered asset was his interest in the Royals. He began

negotiating with the team in order that he might use that interest to obtain cash to

fund a reorganization of his other business interests. After protracted and

contentious negotiations—which also involved Major League Baseball and Mr.
1

 In order to transfer “good and marketable title” to the Royals as required

by the Stockholders Agreement, however, Mr. Fogelman would presumably be

required immediately to retire the loan by repaying the outstanding balance. 

Aplts’ App. vol. IV, at 555.

-4-

Fogelman’s creditors—the parties reached an agreement on July 31, 1990. 

Under this agreement, as characterized by the parties involved in the

transaction, Mr. Kauffman lent $34 million to the Royals, which in turn lent $34

million to Mr. Fogelman. This nonrecourse loan was secured by Mr. Fogelman’s

ownership interest in the Royals and his option to purchase the rest of the team. 

Mr. Fogelman’s nonrecourse note to the team was due on January 3, 1991, unless

the team was sold before that date at an auction the parties agreed to hold. In

addition, Mr. Fogelman granted the Royals an option (the “KCRBC Option”) to

purchase both his share of the team and his option to buy Mr. Kauffman’s share. 

The Royals “exercised” this option contemporaneously with the execution

of the agreement on July 31, 1990 but deferred the “closing” of the option until

January 4, 1991. Under the terms of this option, the purchase price for Mr.

Fogelman’s interest would be “an amount equal to the principal balance

outstanding and all accrued, unpaid interest on the KCRBC Loan on the KCRBC

Option Closing Date.” 1

 Aplts’ App. vol. IV, at 555 (Article VII of July 31, 1990

Kansas City Royals “Stockholders [sic] Agreement,” setting forth terms of the

KCRBC Option). The parties dispute, however, what would have occurred with
-5-

this option in the event that Mr. Fogelman had repaid the full amount of the loan. 

The auction process, conducted by J.P. Morgan & Co., was held in the fall

of 1990. As the interests of both Mr. Kauffman and Mr. Fogelman were for sale,

the entire team was available for a minimum bid price of approximately $80

million. Although several parties initially expressed interest, there were no

bidders, and J.P. Morgan subsequently issued an opinion asserting that Mr.

Fogelman’s 50% interest in the team was of only “nominal” value. See Aplts’

App. vol. III, at 309.

On January 3, 1991, the repayment date of the nonrecourse note, Mr.

Fogelman signed an agreement in which he transferred his Royals interest to the

team in lieu of its foreclosure on the note. Although this was only six months

after the Royals had “loaned” $34 million secured by this stock without recourse

(i.e., made a loan assuming the stock had at least $34 million in value), the Royals

claimed this collateral as being without value based on J.P. Morgan’s assessment

and subsequently deducted the full amount of the note, plus interest, as a bad debt

pursuant to I.R.C. § 166. Because of the Royals’ S Corporation status, this loss

was passed through to Mr. Kauffman, who deducted it from his 1991 joint

individual tax return. The Internal Revenue Service later denied the deduction

and assessed additional taxes because it determined that the transaction claimed

as the basis of the bad debt question was in substance a redemption of Mr.
-6-

Fogelman’s Royals stock and not a loan. After paying that assessment and

mounting an unsuccessful administrative challenge, the taxpayers brought this

action. 

Before trial, both sides moved for summary judgment on the issue of

whether the transaction was properly characterized as a loan or as a sale. In

response to these motions, the district court ruled that the government’s position

in the suit was “properly characterized as a substance over form argument.” 

Rogers I , 58 F. Supp. 2d at 1240. The court cited a number of cases in support of

the proposition that “[i]n applying this doctrine of substance over form, the

[Supreme] Court has looked to the objective economic realities of a transaction

rather than to the particular form the parties employed.” Id. (quoting Frank Lyon

Co. v. United States , 435 U.S. 561, 573 (1978)) (citations omitted). 

The district court further concluded that 

the plaintiffs’ attempt to characterize the transfer of $34 million to Mr.

Fogelman as a debt is improper because the economic realities of the

transaction, even granting the plaintiffs all the factual inferences to

which they are entitled , overwhelmingly dictate the legal conclusion

that a sale, or more properly, a redemption of Mr. Fogelman’s Royals

stock, and not a loan, took place.

Id. at 1241 (emphasis added). After reviewing the facts of the case and deciding

that there were no material issues remaining, the court granted summary judgment

in favor of the United States on the issue of the characterization of the

transaction. 
-7-

In response to this ruling, the taxpayers filed a summary judgment motion

to recover a refund for various tax payments they had incurred on the basis of

treating the transaction as a loan and not a redemption. Since any refund of these

payments was barred by the statute of limitations, the taxpayers requested that the

court apply the doctrine of equitable recoupment. The district court ruled

partially in favor of the taxpayers and partially in favor of the government on this

motion. See Rogers II , 76 F. Supp. 2d at 1173.

Finally, the taxpayers filed a motion during the course of the litigation to

strike the reports of and preclude testimony from four of the government’s expert

witnesses. The district court denied the taxpayers’ motion with respect to three of

the four designated experts, including Mr. Andrew Zimbalist.

 The taxpayers now appeal the district court’s grant of summary judgment in

favor of the government with respect to the characterization of the transaction as

a sale. The taxpayers also appeal the portion of the district court’s grant of

summary judgment in favor of the government relating to the refund requested

under the doctrine of equitable recoupment and the district court’s ruling with

respect to the expert testimony of Mr. Zimbalist. We now affirm the district

court’s summary judgment orders and decline to address the issue of Mr.

Zimbalist’s expert testimony.
2

 The terms used in dealing with tax-avoidance cases are often confusing. 

As one court has noted, “‘economic shams’—that is, transactions which actually

occurred but which exploit a feature of the tax code without any attendant

economic risk . . . [—stand opposed to] ‘factual shams’—transactions which

either did not occur, did not occur as reported or were performed in violation of

some of the background assumptions of commercial dealing . . .” Horn v.

(continued...)

-8-

II. DISCUSSION

A. Characterization of the Transaction on Summary Judgment

1. Standard of Review

We review the district court’s grant of summary judgment de novo ,

“applying the same legal standard as the district court” under Fed. R. Civ. P.

56(c). David v. City & County of Denver , 101 F.3d 1344, 1355 (10th Cir. 1996). 

We must resolve factual disputes and draw inferences in favor of the taxpayers,

who are the nonmoving party. “Summary judgment is warranted only if the

uncontroverted material facts establish that the moving party is entitled to

judgment as a matter of law.” Id.

2. The Applicable Legal Standard

On appeal, the taxpayers emphatically assert that the district court applied

an incorrect legal standard in granting summary judgment. They argue for the

application of a tax shelter doctrine called the substantive sham—or economic

substance—doctrine. 2

 Although the government originally sought summary
2

(...continued)

Commissioner, 968 F.2d 1229, 1236 n.8 (D.C. Cir. 1992). In order to avoid

confusing economic/substantive shams with factual shams, we note at the outset

that we choose to employ the term “economic substance doctrine” in place of the

term used most often by the taxpayers in this case (i.e., “substantive sham

doctrine”).

3

 Because of this fact, the government bears part of the blame for the

confusion surrounding this case. 

-9-

judgment under the economic substance doctrine, 3

 the taxpayers state that the

district court incorrectly concluded that the government’s argument was properly

characterized as a substance over form argument when the court decided that “the

substantive sham and substance over form doctrines constituted separate and

distinct doctrines.” Aplts’ Br. at 30-31. The taxpayers characterize this as

“mistaken.” Id. at 31. “No distinction,” they contend, “exists between the

substantive sham and substance over form doctrines. As a matter of law, they are

the same.” Id. at 32. 

In support of this proposition, the taxpayers cite Bohrer v. Commissioner ,

945 F.2d 344 (10th Cir. 1991). In Bohrer , this court stated that in Gregory v.

Helvering , 293 U.S. 465 (1934), the Supreme Court “focused on substance over

form and held that the ‘transaction upon its face lies outside the plain intent of the

statute’ and would not generate the desired tax benefits. The disallowance of

sham transactions has since been applied in a variety of contexts.” Bohrer , 945

F.2d at 347 (quoting Gregory , 293 U.S. at 470) (citation omitted). The taxpayers
-10-

argue that Bohrer thus recognized no distinction between the economic substance

and substance over form doctrines.

Under either of these doctrines, they propose, a court “may not inquire into

the substance of a transaction” unless it first determines “that the transaction was

a sham, that is, not bona fide.” Aplts’ Br. at 33. In essence, they argue that only

a tax-avoiding transaction lacking any business purpose may be recharacterized by

the government for tax purposes. The taxpayers state that a transaction which

“has practical economic effects other than tax avoidance [] must be upheld if (1)

it ‘has a business purpose or economic substance which is compelled or

encouraged by business or regulatory realities and is imbued with tax independent

considerations and is not shaped by tax avoidance features that have meaningless

labels attached,’ or (2) it objectively affects the taxpayer’s net economic

position.” Id. at 36 (quoting James v. Commissioner , 899 F.2d 905, 908 (10th

Cir. 1990)). The taxpayers also contend that there is no difference between

business purpose and economic substance. As the transaction that is challenged

in this case “resulted in the parties having a different set of legal relationships

than before the loan,” the taxpayers conclude that the cited cases require the

transaction to be deemed a loan. Id. at 37. “No other court,” they boldly assert,

“has rewritten or allowed the government to disregard a transaction unless it was

designed to manipulated [sic] the tax code to create tax deductions.” Id. at 31
-11-

(citing Northern Indiana Pub. Serv. Co. v. Commissioner , 115 F.3d 506, 512 (7th

Cir. 1997)). Put another way, their argument is that if a transaction has economic

substance or a business purpose of any kind, its taxpayer-designated form may not

be recharacterized.

In response, the government states that “[i]f the sole purpose of a

transaction is to create tax deductions, that is sufficient reason to disregard it for

tax purposes.” But, the government continues,

the absence of such a purpose does not establish, as taxpayers would

have it, that the form of the transaction has economic substance and

therefore must be respected for tax purposes. The doctrine of substance

over form is a fundamental principle of the tax laws that has application

whenever tax consequences turn on the true nature of a transaction.

Aple’s Br. at 31. In support, the government cites several cases, including United

States v. Phellis , 257 U.S. 157, 166 (1921); Riley v. Commissioner , 649 F.2d 768,

773 (10th Cir. 1981); and Hamlin’s Trust v. Commissioner , 209 F.2d 761, 764

(10th Cir. 1954). 

The government also distinguishes several cases cited by the taxpayers. 

For example, the government contends that the Northern Indiana decision was “a

far cry from holding, as taxpayer contends, that the substance-over-form doctrine

applies only where the transaction is first held to be a sham”; instead, the

government claims that case only held that “‘a [foreign subsidiary] corporation

and the form of its transactions are recognizable for tax purposes, despite any tax-
-12-

avoidance motive, so long as the corporation engages in bona fide economicallybased business transactions.’” Aple’s Br. at 36 (quoting Northern Indiana , 115

F.3d at 512). The government states that the “[t]axpayers’ attempt to bootstrap

limitations on the sham transaction doctrine into limitations on the substanceover-form doctrine simply is misconceived.” Id.

It is evident that the distinctions among the judicial standards which may be

used in ex post facto challenges to particular tax results—such as the substance

over form, substantive sham/economic substance, and business purpose

doctrines—are not vast. Indeed, one academic commentator has described them

as “fairly gossamer.” See Martin J. McMahon, Jr., Random Thoughts on

Applying Judicial Doctrines to Interpret the Internal Revenue Code , 54 SMU L.

Rev. 195, 195 (2001). Another article characterizes these doctrines as “closely

related” to one another. See Joseph Bankman, The Economic Substance Doctrine ,

74 S. Cal. L. Rev. 5, 12 (2000). Nevertheless, for several reasons, we cannot

agree with the taxpayers’ assertion that there is no difference among these

doctrines. 

First, the bulk of the academic literature on the subject indicates that there

are meaningful differences in the practical applications of the doctrines. For

example, one commentator states:

The major purpose of the substance-over-form doctrine is to

recharacterize transactions in accordance with their true nature. The
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economic substance doctrine, . . . in contrast, seeks to deny tax benefits

on the ground that the non-tax basis for the transaction is insufficient

to warrant application of those benefits.

 

John P. Warner, Statutory, Regulatory, and Common Law Anti-Abuse Weapons ,

485 PLI/Tax 883, 889 (2000). Supporting this distinction, another author argues

that in considering challenges to “real world transactions” (i.e., transactions that

are not economic shams), a tax analysis

attempts to divine the substance of the transaction to determine whether

the form adopted properly reflects the substance. If so, the

consequences expected to result from the form will in fact obtain. If

not, the transaction may be recast with tax consequences appropriate to

the substance and not the form. As noted, the re-characterization can

benefit the government or taxpayers.

 

Peter C. Canellos, A Tax Practitioner’s Perspective on Substance, Form and

Business Purpose in Structuring Business Transactions and in Tax Shelters , 54

SMU L. Rev. 47, 65 (2001). In contrast, in considering transactions attacked as

mere tax shelters, the same article states that “this refined [substance over form]

analysis is secondary. The court’s analysis focuses first on the bona-fides of the

transaction . . . [seeking] to determine whether they truly arose from business

exigencies or [from] attempts to generate unreasonable tax benefits.” Id. In other

words, the court does not apply the substance over form analysis where the

transaction is not bona fide; rather, if the transaction lacks economic reality, it is

analyzed using the economic substance doctrine. These articles indicate both that

there is a distinction between substance over form and economic substance and
4

 It states:

Generally, the tax results arising from a transaction (or series of

transactions) are obvious, uncontroverted, and based on the “form”

(continued...)

-14-

that the district court was correct to characterize the government’s position as a

substance over form attack. See also Bankman, The Economic Substance

Doctrine , 74 S. Cal. L. Rev. at 12 (the author’s statement that a “[d]etailed

discussion” of other common-law doctrines, including substance over form, is

“beyond the scope” of an article on economic substance makes clear that there are

distinctions between the two). 

Additionally, we take note of a comprehensive analysis performed by the

Department of the Treasury that delineates the difference between the substance

over form and economic substance doctrines. See Dept. of the Treasury, The

Problem of Corporate Tax Shelters: Discussion, Analysis and Legislative

Proposals 46-58 (1999) (discussing the judicial responses available when

addressing tax avoidance schemes) [hereinafter the “Treasury Department White

Paper”]. The Treasury Department White Paper envisions the appropriateness of

applying the substance over form doctrine in a case like the present one while

reserving the economic substance analysis for situations where the economic

realities of a transaction are insignificant in relation to the tax benefits of the

transaction. 4 
4

(...continued)

of the transactions the taxpayer has chosen. In some rare (but

important) cases, however, the “substance” of a particular transaction

produces tax results that are inconsistent with its “form” as embodied

in its underlying documentation . . . . Under the substance-overform doctrine, the IRS and the courts may recharacterize a

transaction in accordance with its substance, if the substance of the

transaction is demonstrably contrary to the form.

Treasury Department White Paper, at 46-47 (internal quotation marks and

citations omitted). It goes on to make clear that

[t]he third, and final, way the IRS can use non-statutory standards to

challenge the tax benefits of a particular tax-advantaged transaction

is through the application of the economic substance doctrine. This

doctrine allows the IRS to deny tax benefits if the economic

substance of a transaction is insignificant relative to the tax benefits

obtained.

Id. at 56.

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Second, the doctrine of substance over form has been recognized in a

number of our precedents. For example, in True v. United States , 190 F.3d 1165

(10th Cir. 1999), we held that substance over form was a “fundamental tax

principle,” and applied it to “look beyond the taxpayers’ characterization” of the

challenged business transactions. Id. at 1174 (citations and internal quotation

marks omitted). In Kornfeld v. Commissioner , 137 F.3d 1231 (10th Cir. 1998),

we observed that “[t]he taxation scheme set out in the Internal Revenue Code is

complicated and the tax consequences of many transactions depend on form, how

the transaction is structured,” but that at the same time, the “incidence of taxation
-16-

depends on the substance of a transaction.” Id. at 1234 (internal quotation marks

omitted). And in United States v. Scott , 37 F.3d 1564 (10th Cir. 1994), we stated

that “[t]he income tax consequences under the Internal Revenue Code depend

upon the substance of the situation, not the form.” Id. at 1572 (citing Diedrich v.

Commissioner , 457 U.S. 191, 195 (1982)); see also Riley , 649 F.2d at 773 (10th

Cir. 1981). 

Third, we disagree that the cases cited by the taxpayers are sufficient to

establish that this court has, as they put it, “recogniz[ed] no distinction between

the substantive sham and substance over form doctrines,” presumably for

purposes of stare decisis. Aplts’ Br. at 32. Bohrer ’s passing reference to

substance over form can hardly be characterized as supporting the taxpayers’

argument, much less as having sufficiently “articulate[d] a point of law” to

mandate the respect of subsequent panels. See United States v. Meyers , 200 F.3d

715, 720 (10th Cir. 2000). Moreover, even if it had somehow abolished any

distinction between the economic substance and substance over form doctrines,

Bohrer would then conflict with earlier panel decisions applying substance over

form (e.g. , Riley ), and earlier decisions prevail in the case of an intra-circuit

conflict. See Haynes v. Williams , 88 F.3d 898, 900 n.4 (10th Cir. 1996). Bohrer

therefore provides an insufficient foundation for the taxpayers’ argument. And

while James could support the taxpayers’ position if one assumes there is no
5

 In its order, the district court explained: “Whether Mr. Fogelman had a

subjective desire to structure the transaction as a loan would be an issue of

material fact if the question before the court were whether the transaction was a

sham. There was, certainly, on the summary judgment record, a clear business

purpose for the notion of putting money into Mr. Fogelman’s hands to satisfy his

creditors and protect the baseball franchise. This was not a transaction entered

into for ‘the creation of income tax losses.’” Rogers I, 58 F. Supp. 2d at 1241

n.10 (quoting James, 899 F.2d at 909). This being true, James indicates that the

economic substance analysis is inappropriate in the current context.

-17-

difference between the doctrines of substance over form and economic substance,

it more clearly fits neatly into the category of “tax shelter” cases described by the

academic literature—in other words, those that apply the economic substance test

when the transaction was entered into only to create a tax loss. James is thus as

damaging to the taxpayers’ argument as it is supportive. 5

But perhaps the clearest discussion we have found elucidating the

differences between these doctrines was not supplied by the parties in their briefs

but by the district court in its order. Judge Lungstrum, during his discussion of

the differences, references a number of cases and authors. See Rogers I , 58 F.

Supp. 2d at 1240-1242. One of the cited authors, David P. Hariton, discusses the

means by which the Commissioner—and, by extension, the courts—may challenge

overly-mechanistic characterizations of tax related transactions. Mr. Hariton

specifies three separate methods that may be used by the Commissioner to mete

out equitable tax outcomes. They are: 1) applying subjective rules set out in the
-18-

statutes and regulations; 2) re-characterizing the form of the transaction under the

substance over form doctrine; and 3) applying the economic substance doctrine in

cases where the economic or business purpose of a transaction is relatively

insignificant in relation to the comparatively large tax benefits. See David P.

Hariton, Sorting Out the Tangle of Economic Substance , 52 Tax Law. 235, 238-39

(1999); see also Treasury Department White Paper at 46-58. Speaking of the

substance over form option, Mr. Hariton notes:

The second way in which the Commissioner can challenge technical

results is through a recharacterization of the form of the transaction. 

. . . Standards must govern the factual characterization of relationships

and arrangements to some extent, and the Commissioner must have the

ability to challenge the taxpayer’s description of the relevant

facts—otherwise the taxpayer’s advantage would be insurmountable.

Hariton, Sorting Out the Tangle of Economic Substance , 52 Tax Law. at 238-39. 

By recharacterizing the way in which the taxpayer has designated the form of the

transaction, the Commissioner and the courts are thus able to apply the

appropriate objective rules to the transaction.

This method is distinct from the economic substance doctrine, and it is

applicable here. The transaction in question was not an attempted tax shelter

entered into for the creation of tax losses, a mere sham devoid of economic

substance. Since the transaction clearly had real-world economic consequences,

application of the economic substance doctrine is not appropriate. Rather, this is

a case in which the taxpayers seek to characterize a substantive transaction as one
-19-

thing rather than another and force the Commissioner—and this court—to accept

the automatic consequences of the characterization. As Mr. Hariton’s article

points out, however, it is not up to the taxpayers to have the final say on how it is

characterized. 

We reminded the plaintiffs at oral argument of Abe Lincoln’s riddle that

has now become a dictum (in the non-legal sense of that word): “How many legs

does a dog have if you call a tail a leg?” The answer is “four,” because “calling a

tail a leg does not make it one.” This transaction—clearly not a sham—must be

treated by the tax code under objective standards based on its form. Accordingly,

and in light of the aforementioned reasoning, we hold that the district court

correctly identified the substance over form doctrine as the legal standard

governing the transaction’s characterization for tax purposes. 

3. Grant of Summary Judgment

a. Arguments of the Parties

The taxpayers further contend that the district court’s grant of summary

judgment was improper because a sufficient factual dispute remained with respect

to the substance of the nonrecourse loan transaction. 

They first suggest that the loan was valid because the debt was bona fide. 

The district court, they argue, found that both parties in this case “agreed that the
-20-

value of the collateral on the loan date exceeded the loan amount,” which would

normally indicate that the debt was legitimate. Aplts’ Br. at 40. However, the

court found that the debt was not in fact bona fide because of the nature of the

option that Mr. Fogelman granted to the Royals at the time of the note (i.e., the

KCRBC Option). See Rogers I , 58 F. Supp. 2d at 1242-43. The option reads in

part as follows:

Section 7.5 Exercise Price . The aggregate purchase price (the

“Purchase Price”) for the Fogelman Interest subject to the KCRBC

Option shall be an amount equal to the principal balance outstanding

and all accrued, unpaid interest on the KCRBC Loan on the KCRBC

Option Closing Date.

See Aplts’ App. vol. IV, at 555. The district court stated:

Setting aside for the moment the unlikeliness that Mr. Fogelman, an

insolvent debtor, might have . . . miraculously come up with $34 million

in five months to repay his “loan” to the Royals, there was a large and

specific disincentive for him to have done so . . . [U]nder the terms of

these agreements, any money Mr. Fogelman would have paid on the

alleged loan would have reduced the amount he received from the

Royals on the option closing date. Not only did Mr. Fogelman have no

economic incentive to pay the alleged loan, it would have been a

financial disaster for him to have done so without first obtaining Mr.

Kauffman’s and the Royals’ consent not to close on the option the

Royals had exercised.

Rogers I , 58 F. Supp. 2d at 1242-43 (footnotes omitted) (emphases in original).

The taxpayers propose that this conclusion was incorrect, at least for the

purposes of summary judgment, for several reasons. For instance, they state that

“an equally reasonable construction of this pricing provision is that if Fogelman
6

 Section 10.2 of the “Stockholders Agreement” states, in pertinent part:

Section 10.2 Transfers after Termination of Marketing Process.

If the Marketing Process has been terminated prior to the KCRBC Sale,

Fogelman agrees that he shall not sell . . . any shares of Common Stock

. . . until the outstanding balance of the KCRBC Loan, including all

interest accrued thereon, has been paid in full. After the KCRBC Loan

has been paid in full, Fogelman may transfer his shares of the Common

Stock or any interest therein to any Person; provided, however, that as

a condition to such transfer, such Person shall execute an

acknowledgment and agreement that such shares or interest are being

transferred subject to the KCRBC Option.

Aplts’ App. vol. IV, at 563.

-21-

paid the loan, then the Stockholders Agreement contained no price. Literally, for

a price to exist, the loan must have existed with an ‘outstanding’ balance and

‘accrued, unpaid interest.’” Aplts’ Br. at 41. If Mr. Fogelman had paid the loan,

they argue, the exercise price “would have been the reasonable value of the

collateral or the option would have ceased.” Id. at 41 (footnote omitted). In

support of this proposition, they cite Koch Hydrocarbon Co. v. MDU Resources

Group, Inc. , 988 F.2d 1529 (8th Cir. 1993), and Northwest Cent. Pipeline Corp. v.

JER Partnership , 943 F.2d 1219 (10th Cir. 1991).

With respect to the possibility of repayment, the taxpayers also state that

“the parties contemplated” a possible payoff of the loan “when they agreed in

Section 10.2 of the Stockholders Agreement that Fogelman could sell his stock to

others if he paid the loan.” Aplts’ Br. at 41-42. 6 They propose that buyers would
-22-

not be interested in acquiring Mr. Fogelman’s share of the team if the KCRBC

Option would allow the team to reacquire that share for nothing once the loan had

been paid.

The taxpayers then propose that “if Fogelman paid the loan and the Royals

attempted to take his stock for nothing, Fogelman would not have allowed that to

occur without a fight,” because he desired to remain an owner of the team. Aplts’

Br. at 42. In support, they cite several excerpts from the deposition of Mr. Jack

Magids, an attorney who represented Mr. Fogelman during the negotiations of the

agreement. Mr. Magids stated that Mr. Fogelman negotiated the option because

he wanted to remain an owner of the team; in the taxpayers’ view, this “makes no

sense if the Royals could have taken Fogelman’s stock for nothing after Fogelman

paid the loan.” Id.

Next, the taxpayers argue that the district court was incorrect in concluding,

for the purpose of summary judgment, that ownership of Mr. Fogelman’s interest

had been transferred to the team. Under cases such as J.B.N. Telephone Co. v.

United States , 638 F.2d 227 (10th Cir. 1981), they contend that Mr. Fogelman did

not give up all the benefits and burdens of team ownership on July 31, 1990,

indicating that the substance of the transaction was a loan, not a sale. 

The taxpayers admit that the district court identified two ownership burdens

given up by Mr. Fogelman on July 31, 1990: the obligation to make capital calls,
-23-

and any risk that the value of his interest in the Royals would fall below $34

million. They argue, however, that the obligation to make capital calls was not an

inherent burden of corporate ownership, and that “because Mr. Fogelman desired

to retain his Royals Interest,” the possibility of losing that interest “was a huge

risk for him.” Aplts’ Br. at 46. 

They also dispute the other ownership benefits that the district court

determined Mr. Fogelman had given up. As stated by the court, these were: the

ability to exercise his option to purchase Mr. Kauffman’s share of the team; his

right to vote his shares of stock in the team; his right to be an officer and director

and participate in the team’s management; all his perquisites as an owner,

including the right to attend baseball games at the Royals’ stadium; the right to

receive distributions of cash during the period the loan was outstanding; and the

right to bid for the team during the auction process. The taxpayers state that Mr.

Fogelman had already (in 1988) agreed that he would not exercise his option

without Mr. Kauffman’s consent; that he had already given a proxy to Mr.

Kauffman (in 1988) to vote his stock and could not have reconfirmed a proxy if

he did not own the stock; that an agreement not to seek office in the corporation

does not indicate a transfer of ownership; that the same held true for the removal

of Mr. Fogelman’s perquisites; that Mr. Kauffman also had no rights to receive a
-24-

cash distribution; and that agreeing not to bid in the auction “reflects only an

agreement,” not a sale of Mr. Fogelman’s interest. Aplts’ Br. at 46-49.

The taxpayers note the district court also recognized that Mr. Fogelman

retained two benefits of ownership through January 3, 1991: the right to receive

a pass through of the team’s net operating losses, and the right to receive “upside”

rights in the auction, if any. The court stated, though, that Mr. Fogelman “had no

power to retain these benefits beyond January 4, 1991 . . . because the Royals’

option to purchase his stock was set to close on that date.” Rogers I , 58 F. Supp.

2d at 1245. The taxpayers argue that “[a]n owner cannot logically continue to

receive significant ownership benefits and, at the same time, transfer ownership

before the benefits stop.” Aplts’ Br. at 50.

Finally, the taxpayers argue that a list of “sale indicia” from Leahy v.

Commissioner , 87 T.C. 56, 66 (1986), demonstrates that there was no change in

ownership and thus that the loan was bona fide. The taxpayers state: that legal

title to Mr. Fogelman’s interest did not pass until January of 1991, when he

transferred it in lieu of foreclosure; that all the parties treated the transaction as a

loan; that the Royals did not acquire an equity interest in Mr. Fogelman’s property

until January; that the team gained no control over the stock until January; that

the team never accepted the risk of loss on the property; and that the team did not

enjoy any benefits from Mr. Fogelman’s interest until January.
-25-

The government disputes that any of these arguments demonstrate a

genuine issue of material fact. With respect to the KCRBC Option, the

government states that the taxpayers’ position “is contrary to the plain wording of

the option.” It was not error, the government says, that the purchase price under

the option would be nothing if Mr. Fogelman repaid the loan; instead, “it

reflected the core agreement of the parties that the Royals would acquire

Fogelman’s stock for $34 million, whether he defaulted on his ‘loan,’ as was

preordained, or whether the impossible happened and he repaid the ‘loan.’”

Aple’s Br. at 37. The government also states that “[i]f the parties had

contemplated that the option would terminate if the ‘loan’ were fully repaid, the

termination clause would have so stated. The absence of any such provision

confirms that a zero balance equaled a zero purchase price.” Id. at 38. And,

according to the government, the fact that the Royals exercised their option in

July of 1990, at the very time the agreement was made—although closing of the

option was deferred until at least January 4, 1991—shows that there was no intent

to wait for the possible repayment of the loan and that “the parties believed and

understood that Fogelman’s ownership in the Royals was ended” as of July, 1990. 

Aple’s Br. at 39; see also Aplts’ App. vol. IV, at 687 (Notice of exercise of the

KCRBC Option by the Royals on July 31, 1990).
-26-

The government then challenges the taxpayers’ position on the burdens and

benefits of ownership. It argues that the taxpayers “identify no burdens that [Mr.

Fogelman] retained,” and that prior to the Stockholders Agreement of July 31,

1990, he was in fact obliged either to contribute capital to the team when called

upon to do so, or to forfeit “a commensurate amount of his stock.” Aple’s Br. at

40-41. The government also points out that many of the parties with an interest in

the outcome of the transaction were concerned about Mr. Fogelman’s possible

authority to exercise his option to purchase Mr. Kauffman’s share or to vote his

shares. Thus, the government argues, Mr. Fogelman’s subsequent relinquishment

of this authority in the agreement supports the district court’s conclusion that Mr.

Fogelman was relinquishing ownership at the time of the transaction. The

government concludes that the district court was correct to find that the

transaction was, in substance, a sale.

b. Analysis

In True , we held that:

Cases involving the issue of substance over form require resolution of

significant questions of fact. Nevertheless, the mere presence of a

factual question does not automatically preclude summary judgment.

Even in cases where some issues of fact remain, if no reasonable factfinder could find in favor of the non-moving party, then summary

judgment is still appropriate.
-27-

190 F.3d at 1176 (footnote omitted). It has been suggested that in the present

case, the factual analysis is complicated by the contested nature of the underlying

contract (i.e., the Stockholders Agreement), precluding summary judgment. As

the district court observed, however, “[i]n the field of taxation, administrators of

the law and the courts are concerned with the substance and realities [of a

transaction], and formal written documents are not rigidly binding . . .” Rogers I ,

58 F. Supp. 2d at 1240 (quoting Frank Lyon Co. , 435 U.S. at 573). How the

agreement in question is to be construed “depends not upon any particular

phraseology used in the document[] but rather upon what the parties actually did,

gleaned from a consideration of the written instrument[] . . . and the surrounding

circumstances . . . . [And] in the light of the record as a whole . . .” Estate of

Franklin v. Commissioner , 64 T.C. 752, 763 (1975), aff’d on other grounds by

Franklin’s Estate v. Commissioner , 544 F.2d 1045 (9th Cir. 1976). Thus, this

panel must look at the circumstances surrounding the transaction in question to

determine whether any reasonable fact-finder could find in favor of the nonmoving party. If not, then summary judgment in favor of the government was

appropriate.

As explained above, the taxpayers forward six main arguments in support

of their view that the debt was bona fide and therefore that they should be

allowed to claim the bad debt deduction. These arguments, which we will address
-28-

in order, are: 1) that the value of the collateral in relation to the amount given to

Mr. Fogelman indicates that the transaction was in reality a loan; 2) that the

provisions in Section 7.5 of the agreement meant that there was “no price” if Mr.

Fogelman repaid his loan, thus contradicting some of the district court’s

reasoning; 3) that Section 10.2 of the agreement anticipated the actual repayment

of the loan by Mr. Fogelman, further undercutting the district court’s reasoning;

4) that Mr. Fogelman expressed his desire to retain ownership in spite of his

mounting economic troubles, suggesting he would not have sold his share of the

team; 5) that an analysis of the burdens and benefits of ownership suggest that

Mr. Fogelman was still the owner of his share; and 6) that the “sale indicia”

suggest the transaction was a loan. After carefully reviewing the parties’

positions, we hold that the district court correctly concluded that this transaction

was in substance a redemption of Mr. Fogelman’s stock and not a loan to Mr.

Fogelman. As the district court observed, the most obvious support for this

position derives from the incentives that the KCRBC Option gave to the parties

involved. However, it is a full analysis of the context of the transaction that

convinces us that no reasonable fact-finder could support the taxpayers’ view.

 i. the value of the collateral

With respect to the taxpayers’ first point, we agree with the district court’s

reasoning that the value of the collateral at the time of the purported loan is
-29-

hardly dispositive. The nature of the arrangement—and specifically the

interaction of Sections 7.5 and 10.2, as discussed next—eclipse any support

provided by the taxpayers’ first point, even on a motion for summary judgment. 

The taxpayers acknowledge that the purpose in looking at the value of the

collateral is whether there was incentive for the borrowing party to repay the note. 

See Aplts’ Br. at 40. However, as discussed below, the incentives were clearly

against repayment of the note, and thus a consideration of the value of the

collateral is of little help to the taxpayers’ position. Indeed, the very case relied

upon by the taxpayers for this point, Saviano v. Commissioner , 765 F.2d 643 (7th

Cir. 1985), states that “‘in a true lending transaction, there exists the reasonable

likelihood that the lender will be repaid in the light of all reasonably foreseeable

risks.’” Id. at 646 (quoting Gibson Products Co. v. United States , 637 F.2d 1041,

1047 (5th Cir.1981)) (emphasis added). As discussed below, there was apparently

no likelihood of any such repayment—thus, Saviano ’s reasoning suggests that the

value of the collateral is relatively inconsequential in proving the transaction was

a loan.

 ii. Section 7.5 of the Stockholders Agreement

As for the taxpayers’ second argument—that the agreement contained “no

price” upon repayment and thus the district court misconstrued it—we must begin

with an analysis of the content of the agreement. Although the parties did not
7

 As previously mentioned, the taxpayers cite Koch Hydrocarbon Inc. and

Northwest Cent. Pipeline Corp. in support of their proposition that a “reasonable

price” should be imposed as the exercise price of the KCRBC Option in lieu of

the Section 7.5 exercise price upon full repayment of the $34 million. The

taxpayers provide no explanation of how these cases support their view and

include no pinpoint cites to these cases. These cases state that when a price

provision in a contract is ambiguous, parol evidence should be considered in

determining the parties’ intent with respect to the price. See Northwest Cent.

Pipeline Corp., 943 F.2d at 1227. Only when the court determines that the intent

of the parties cannot be ascertained from parol evidence, however, is a

“reasonable price” provided by the court. See Koch Hydrocarbon Co., 988 F.2d at

1535. Since we find the provisions to be unambiguous, neither of these cases

applies and the taxpayers are incorrect in asserting that they impose a “reasonable

price.”

-30-

brief the issue of which state’s law was to apply, and the district court did not

explicitly mention it, the Stockholders Agreement specifies that it is to be

construed in accordance with Missouri law. See Aplts’ App. vol. IV, at 567-68

(Section 12.7 of the Stockholders Agreement). Under Missouri law, “[t]he

primary rule in the interpretation of a contract is to ascertain the intention of the

parties and to give effect to that intention.” Speedie Food Mart, Inc. v. Taylor ,

809 S.W.2d 126, 129 (Mo. Ct. App. 1991). A contract that “is clear and

unambiguous on its face is not open to judicial construction”; the “initial question

to be determined” is thus “whether an ambiguity exists.” Id. Regardless of the

taxpayers’ hypothetical assertions as to what might have happened had Mr.

Fogelman paid the loan, the KCRBC Option unambiguously states that its

exercise price is to be equal to the balance of the loan remaining to be paid. 7
8

 Nevertheless, we reject the taxpayers’ argument that Section 7.5 implies

that if Mr. Fogelman had repaid the purported loan that the amount the Royals

would have to pay Mr. Fogelman for his interest under the KCRBC Option would

be “no price,” meaning that the option would have terminated. See Aplts’ Br. at

41. Not only does this interpretation conflict with the plain language of the

agreement, but the government rightly points out that the parties would (or

should) have included language in the termination clause of the agreement had

they intended any such construction. But the clearest manner in which the

taxpayers’ argument on this point is shown to be without merit is the fact that the

terms of Section 10.2 explicitly contemplate the existence of the KCRBC Option

after full repayment of the $34 million: “After the KCRBC Loan has been paid in

full, Fogelman may transfer his shares . . . to any Person [] provided [] that as a

condition to such transfer, such Person shall execute an acknowledgment and

agreement that such shares or interest are being transferred subject to the KCRBC

Option.” Aplts’ App. vol. IV, at 563 (emphasis added). Since the terms of

Section 10.2 make it clear that the KCRBC Option still existed in the eventuality

of full repayment, the taxpayers’ argument that the option extinguished on

repayment is simply wrong.

-31-

Where the language of the contract is clear, it is sufficient evidence of the intent

of the parties. Tuttle v. Muenks , 21 S.W.3d 6, 9 (Mo. Ct. App. 2000). We

therefore have no need to consider parol or extrinsic evidence, such as the

taxpayers’ claims about what Mr. Fogelman might have done had the Royals

attempted to take his interest for nothing. 8

 iii. Section 10.2 of the Stockholders Agreement

As a third general argument, the taxpayers emphatically point to the

possibility that Mr. Fogelman could sell his stock to others upon repayment of the

loan—as stated by Section 10.2 of the Stockholders Agreement—as an indication

that the purpose of the transaction is at least debatable and therefore that
-32-

summary judgment is inappropriate. We disagree. As already mentioned, the

taxpayers assert that no buyer would be interested in purchasing Mr. Fogelman’s

share of the Royals if the KCRBC Option would allow the team to acquire that

share for nothing (as the district court’s determination would require). Thus, they

argue, Section 10.2 would be rendered meaningless or nonsensical. 

It appears from the nature of the transaction, however, that this kind of

disincentive to potential outsider buyers is precisely what the parties to the

agreement intended. To begin with, the taxpayers seem to acknowledge that

partial repayment would have reduced the price of exercising the KCRBC Option. 

For example, if Mr. Fogelman had repaid $20 million, the unambiguously-defined

exercise price of the KCRBC Option would have been $14 million (plus interest). 

Thus, any partial repayment by Mr. Fogelman would decrease the amount he

would receive once the Royals closed on the KCRBC Option. The taxpayers

provide no argument refuting this very real disincentive to repayment. Further, it

was in the parties’ interest to find ways to discourage potential buyers from

interfering with the complex arrangement they had devised for the sale of Mr.

Fogelman’s share in the Royals. At a minimum, the provisions of Section 10.2,

viewed in light of the entire transaction, do not support the taxpayers’ objections. 

To the contrary, this arrangement reinforces the idea that no reasonable factfinder could rule in favor of the non-moving party on summary judgment.
9

 The taxpayers have given no other explanation for why the option was

exercised at the same time the agreement was finalized. The only reason we can

imagine is the one offered by the government: that the exercise of the KCRBC

Option was specifically used as a disincentive for repayment, thus supporting the

characterization of the transaction as a sale.

-33-

That the parties envisioned a sale or redemption of the stock is further

shown by the Royals’ decision on the day the agreement was finalized to exercise

the option to purchase Mr. Fogelman’s interest. See Aplts’ App. vol. IV, at 687. 

Indeed, apparently all parties contemplated this specific action before the

Agreement was finalized. See id. at 577 (Resolution of the Royals’ Board of

Directors, dated July 13, 1990, directing the Royals to exercise the KCRBC

Option contemporaneously with the finalization of the Stockholders Agreement).

The exercise of the KCRBC Option would presumably preclude an attempt by Mr.

Fogelman to repay the “loan”; the exercise of it on the day the “loan” was made

suggests the transaction was never intended to be anything other than a sale of

Mr. Fogelman’s interest. 9 

The taxpayers suggest that the Royals could not have invoked this option to

acquire Mr. Fogelman’s interest if Mr. Fogelman had repaid the purported loan. 

In their view, this construction of the option supports their characterization of the

transaction as a loan. To the contrary, however, the evidence reveals two critical

facts. First, the possibility of Mr. Fogelman repaying the loan was never taken

seriously. Mr. Magids, Mr. Fogelman’s attorney during negotiation of the
10 For example, the deposition of Michael Lobdell, a representative of J.P.

Morgan & Co., reveals that at the time of the structuring of the auction there was

no discussion of the possibility that Mr. Fogelman would repay the loan and there

was an understanding that Mr. Fogelman lacked the resources to do so. See

Aplts’ App. vol. IX, at 1995-96. 

-34-

agreement, testified that:

It was quite clear that, based upon the totality of all the agreements,

that Mr. Fogelman’s continued interest in the Royals would come to an

end some time in early January 1991 in the absence of the parties

reaching agreements to modify the documents that were signed in July

of 1990.

See Aplts’ App. vol. VIII, at 1884 (emphasis added). Other evidence in the

record reinforces this view. 10 Indeed, in the words of the government, “[i]f the

parties had intended that the [Royals’ option to acquire Mr. Fogelman’s interest]

could not be exercised if the ‘loan’ was fully repaid, the exercise date of the

option would [have to have] been deferred until the note came due to allow for

that possibility.” Aple’s Supl. Br. at 9. Second, as previously mentioned, the

terms of Section 10.2 of the agreement explicitly contemplate the Royals’

exercise of the KCRBC Option upon full repayment of the loan. Thus, the

taxpayers’ argument on this point is totally without support.

With regard to the transaction’s substance, as the district court found, there

was clearly no incentive for either Mr. Fogelman or Mr. Kauffman to take any

additional actions once the Stockholders Agreement had been reached. If Mr.

Fogelman had repaid the loan, with interest, the Royals would have been able to
11 And, as noted, any partial repayment of the loan would have resulted in

Mr. Fogelman walking away with only part of the $34 million loan amount under

the unambiguous price terms of the KCRBC Option.

-35-

acquire his share of the team for nothing. Mr. Fogelman thus had no reason to

make any payments. 11 Knowing this, the Royals had only to wait for the due date 

of the nonrecourse note, and the corresponding default—made inevitable both by

Mr. Fogelman’s financial situation and by the contractual language—in order to

gain control of Mr. Fogelman’s share of the team. In addition, if the Royals had

wanted to exercise the option before the note’s due date, and Mr. Fogelman had

not then made any payments, the option exercise price would have been $34

million. Mr. Fogelman presumably could not keep that money, though, because

he would have had to retire the note on the property he was now “selling” in order

to provide “good and marketable title” as required by Section 7.4 of the

agreement, thus resulting in the exact same consequence: Mr. Kauffman owning

Mr. Fogelman’s share of the team and Mr. Fogelman with $34 million as payment

for his share.

 iv. Mr. Fogelman’s ownership desire

The taxpayers’ fourth assertion—that Mr. Fogelman’s subjective desire to

retain ownership of his share of the team indicates that the transaction was a loan

and not a redemption—is of little relevance in light of the overwhelming evidence

that the agreement provided profound disincentives to repayment. This argument
12 See Aplts’ App. vol. VIII, at 1871.

-36-

is further undercut by the apparently universal view—shared even by Mr.

Fogelman’s own attorney 12—that Mr. Fogelman would have been unable to find

the money necessary to repay the amount of the purported loan. While Mr.

Fogelman may not have wanted to give up his share of the Royals, the fact that he

owed nearly $1 billion to his creditors makes his desire irrelevant to this

transaction. No reasonable fact-finder could believe that Mr. Fogelman’s wishes

on this subject were sufficient to indicate that the transaction was a loan.

 v. the burdens and benefits of ownership

The taxpayers’ fifth point is also of little help to their appeal. As discussed

above, the taxpayers point to the ownership benefits retained by Mr. Fogelman

during the interim period between the signing of the agreement and the closing of

the KCRBC Option as evidence of the fact that the transaction was a loan and not

a sale. However, t he district court described these rights as “not at all

inconsistent with a sale,” as “it is not uncommon for [a] seller to retain certain

benefits of ownership” between the date a contract of sale is signed and the date it

is closed. Rogers I , 58 F. Supp. 2d at 1245 n.16. We agree with the district

court’s reasoning on this issue. 

 vi. sale indicia

The taxpayers’ sixth general assertion also does not support a reversal of
13 Before concluding this analysis, we take note of the fact that the

taxpayers paid a statutory loan fee to the state of Tennessee at the time of the

transaction, although the taxpayers do not emphasize this fact on appeal. 

According to the district court, the fee amounted to 0.115 percent of the $34

million, or approximately $39,000. See Rogers I , 58 F. Supp. 2d at 1241. We

agree with the district court’s conclusion that this relatively “paltry” amount is

“not a material consideration.” Id. Based on the totality of the evidence relating

to the transaction, this fee appears to have been an attempt to inexpensively cloak

the substance of the transaction with the form of a loan.

-37-

the district court’s order. They argue that the list of sale indicia from Leahy

supports the characterization of the transaction as a loan. While some of the

indicia from Leahy might support viewing the transaction as a loan in another

context, the point in the cited section of that case is that the characterization of a

transaction as a sale is to be determined by looking at the written agreement in

light of the surrounding circumstances. See Leahy , 87 T.C. at 66. As already

discussed, the attendant circumstances overwhelmingly show that the transaction

in question was not a loan. 13

The analysis above reveals the parties’ understanding about the

“loan”—namely, that the transaction was in substance a sale, regardless of the 

form in which the parties happened to cloak it. We find it particularly telling that

the parties contemplated a direct sale of the team when drafting the agreement

and that, apparently, the only two hurdles for drafting the transaction as a sale

were 1) Mr. Fogelman’s fondness for the team and 2) the negative tax
-38-

consequences to the creditors of a direct sale. See Aplts’ App. vol VIII, at 1803

(deposition testimony of Mr. Magids, dated Feb. 20, 1999). As Mr. Magids stated

I think . . . toward the end of the process [of negotiating the

agreement,] when it became more evident that the benefits of the

loan as originally conceptualized[—] includ[ing] Mr. Fogelman’s

being able to both take care of his creditors and keep the

Royals[—]were fading, [] we revisited the idea of a sale internally,

quite frankly, and with the creditors. They were interested in it, but

there was no way that the thing could work with a sale, as I recall . . .

[b]ecause . . . the 1990 taxes would have taken cash out of the pot.

Id. at 1803-04. While the parties may have found an alternative form to avoid

paying these taxes, the substance of the transaction was that of a sale of Mr.

Fogelman’s interest in the Royals. No reasonable fact-finder would be swayed by

the assertion that a man owing nearly $1 billion to his creditors—who borrowed

$34 million secured by his interest in a baseball team and who granted an option

eliminating his ownership rights in the team—nevertheless had the subjective

desire to retain his share of that team. 

As stated by the district court:

The transaction gave Mr. Fogelman no incentive or obligation to

repay his purported debt . . . and he parted with all of the burdens,

and all but two of the benefits[,] of his Royals interest on the date the

“loan” closed. Moreover, he had no way to continue to retain even

those two benefits beyond January 4, 1991 and had absolutely no

right to retain his Royals interest simply by paying off his purported

debt in light of the option he granted to [the Royals] as an integral

part of the transaction. This is the stuff of substance. Legally, it

overwhelms the nominal form of the transaction, in which the parties

paid a minimal loan tax . . . [and] overwhelms any evanescent desire

Mr. Fogelman may have had to perpetuate his dream of Royals
-39-

ownership by having the transaction structured as a loan. Mr.

Fogelman agreed on July 31, 1990 to a transaction that gave him no

right to retain any ownership in the Royals even if he paid off his

“loan.”

Rogers I , 58 F. Supp. 2d at 1245 (emphasis in original). The conclusion of the

district court comports with our analysis. 

The substance over form tax doctrine allows the court to ensure that

“business transactions do not permit some taxpayers to avoid tax at the expense of

others in a way that was not intended by the political system.” Hariton, Sorting

Out the Tangle of Economic Substance , 52 Tax Law. at 236. We agree with the

district court’s conclusion that “the economic realities of the transaction, even

granting the plaintiffs all the factual inferences to which they are entitled ,

overwhelmingly dictate the legal conclusion that a sale, or more properly, a

redemption of Mr. Fogelman’s Royals stock, and not a loan, took place.” Rogers

I, 58 F. Supp. 2d at 1241 (emphasis added). The analysis above shows that the

transaction was properly recharacterized as a sale for tax purposes. See, e.g. ,

Twenty Mile Joint Venture, PND, Ltd. v. Commissioner , 200 F.3d 1268, 1278

(10th Cir. 1999) (substance prevailed over form where form did not reflect the

“reality of the situation”). Because we conclude that “no reasonable fact-finder

could find in favor of the non-moving party” that the transaction was not in

substance a sale, summary judgment was appropriate. See True , 190 F.3d at
14 The taxpayers do not state any amount of interest that was actually paid

by Mr. Fogelman during the course of this transaction. Rather, it appears that

they “recognized interest income” on paper for tax purposes and then later

claimed the loss of that interest income as a bad debt. Rogers II, 76 F. Supp. 2d

at 1162.

-40-

1176. We therefore affirm the district court’s order on summary judgment

regarding characterizing this transaction as a redemption.

B. Equitable Recoupment

Upon the district court’s finding that the transaction in question was a

redemption rather than a loan, the taxpayers filed a motion for judgment in their

favor on the issue of whether they were entitled to a tax refund since they had

treated the transaction as a loan for tax purposes in 1990, 1991, and 1993. In

particular, the taxpayers pointed out two things. First, the Royals had claimed

interest from the “loan” as income, passing through the income interest to the

taxpayers. Thus, the taxpayers paid taxes on this income (the “Interest

Overpayment”). 14 Second, the Royals had allocated 50% of the Royals net

operating losses for 1990 to Mr. Fogelman, allegedly based on the assumption

that he was a 50% shareholder at the time, thus precluding the taxpayers from

claiming for themselves the tax benefits of those losses (the “Partial Operating

Loss Allocation”). 
-41-

The taxpayers asserted to the district court that since the transaction was

deemed a redemption, they were being unfairly taxed on the amount of the

Interest Overpayment. In other words, the government was receiving tax

payments from the taxpayers by treating the transaction both as a loan (with taxes

assessed on the interest income from the “loan”) and as a redemption (by

prohibiting the taxpayers from claiming the benefit of a bad debt deduction). The

taxpayers objected to the negative tax consequences to them from these

inconsistent characterizations of the transaction. 

Similarly, the taxpayers asserted that the Partial Operating Loss Allocation

was assigned to Mr. Fogelman solely based on the assumption that he was a 50%

owner of the team at the time. Since the district court found that Mr. Fogelman

had sold his interest, the taxpayers complained that they should have been able to

claim the Partial Operating Loss Allocation for themselves. In essence, they

claimed that the government was penalizing them by preventing them from

claiming the bad debt deduction stemming from the default of the “loan” while

also asserting an inconsistent position that the taxpayers could not claim the

amount of the Partial Operating Loss Allocation. Hence, the taxpayers requested

a tax refund on summary judgment for both “overpayments.”

The district court determined that, in general, the taxpayers’ refund request

was barred by the statute of limitations contained in Section 6511(a) of the I.R.C. 
15 On appeal, the taxpayers only challenge the district court’s refusal to

apply the doctrine of equitable recoupment to the Partial Operating Loss

Allocation, and so this court need not address the district court’s findings with

respect to the statute of limitations and mitigation statutes contained in the

Internal Revenue Code.

-42-

See 26 U.S.C. § 6511(a). However, the court also found that the doctrine of

equitable recoupment allowed the taxpayers to recover some of the requested

amount from the I.R.S. See Rogers II , 76 F. Supp. 2d at 1169-71. Specifically,

the district court allowed the taxpayers a refund for the Interest Overpayment but

determined that the doctrine of equitable recoupment did not allow them a refund

for the Partial Operating Loss Allocation. See id. at 1173.

In light of our finding that the transaction is properly characterized as a

sale or redemption, the taxpayers appeal the portion of the district court’s order

that denied them a refund for the Partial Operating Loss Allocation. 15 Since the

district court made the ruling as a matter of law during summary judgment, this

court reviews that specific judgment de novo . See Goatcher v. United States , 944

F.2d 747, 749 (10th Cir. 1991).

The doctrine of equitable recoupment was first articulated in Bull v. United

States , 295 U.S. 247 (1935). Bull states that when the government uses

inconsistent theories to obtain more money than it is fairly entitled to when

examining a single transaction for tax purposes, a refund may be allowed in spite

of the expiration of the statute of limitations. See id. at 260-61, 263; see also
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United States v. Dalm , 494 U.S. 596, 608 (1990) (“[A] party litigating a tax claim

in a timely proceeding may, in that proceeding, seek recoupment of a related, and

inconsistent, but now time-barred tax claim relating to the same transaction.”). It

is evident from Supreme Court precedent, however, that recovery using the

doctrine of equitable recoupment is restricted to situations where a “single

transaction or taxable event ha[s] been subjected to two taxes on inconsistent

legal theories . . .” Rothensies v. Electric Storage Battery Co. , 329 U.S. 296, 300

(1946) (emphasis added). Indeed, “the same sum may in different aspects be used

for the computation of [two separate taxes that are not inconsistent.]” Bull , 295

U.S. at 256. In other words, if the multiple bases for a tax assessment are not

inconsistent, then there is no occasion to apply equitable recoupment.

As the district court keenly observed of the transaction between Mr.

Fogelman and the taxpayers:

There were actual operating losses which arose not because of the

characterization of the transaction but from conducting the business.

The parties to the contract agreed to allow Mr. Fogelman to claim 50%

of the deductions related to those net operating losses, which he did

until January 3, 1991. The IRS had no part in this allocation agreement

between private parties and has not asserted a deficiency against Mr.

Fogelman related to the deductions. Preserving that allocation is not

inconsistent with treating the transaction as a redemption. Rather, the

parties allowing Mr. Fogelman to take the deductions is properly

viewed either as part of the consideration for the sale of Mr. Fogelman's

Royals stock or as a reflection of the parties’ intentions concerning who

would enjoy certain fruits of ownership until the date on which the sale

would “close.”
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Rogers II , 76 F. Supp. 2d at 1170. We agree with the reasoning of the district

court on this issue. The taxpayers and Mr. Fogelman presumably decided to

assign the Partial Operating Loss Allocation to Mr. Fogelman for specific reasons

that do not contradict the tax characterization of the transaction as a redemption. 

Therefore, the taxpayers cannot claim that the government is attempting to impose

upon them tax consequences for the Partial Operating Loss Allocation in a

manner that is inconsistent with the redemption. 

Additionally, we note that cases applying this doctrine strongly suggest that

“if the subject transaction involves two or more taxpayers, equitable recoupment

will not be available unless a sufficient identity of interests exists so that the

taxpayers should, in equity, be treated as a ‘single taxpayer’.” Parker v. United

States , 110 F.3d 678, 683 (9th Cir. 1997) (quoting Stone v. White , 301 U.S. 532,

537-38 (1937)); see also Estate of Vitt v. United States , 706 F.2d 871, 875 n.3

(8th Cir. 1983) (“Absence of an identity of interest may result in the denial of

recoupment.”). Such an identity of interests is not present here. Further, if we

were to grant the taxpayers’ request, there is “a tax [that] should be paid, [but if

the taxpayers] are permitted to recover no one will pay it.” Stone , 301 U.S. at

537. The equitable concerns articulated in Stone further militate against

application of equitable recoupment in favor of the taxpayers in the present case. 
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Since there is no inconsistent tax treatment, and since equitable concerns

suggest that the doctrine should not be applied in situations involving two

unrelated taxpayers, there is no occasion to apply the doctrine of equitable

recoupment to the Partial Operating Loss Allocation. We thus affirm the district

court’s order on this issue.

C. Admissibility of the Expert Report

The government submitted with the district court the deposition testimony

and report of Andrew Zimbalist, an expert who offered a valuation of the Royals

on July 31, 1990. His testimony was relevant since the bad debt loss claimed by

the Royals was dependent on the proper valuation of the team at the time the

“loan” was made. The taxpayers filed a motion to strike the report and to exclude

Mr. Zimbalist’s testimony. The district court subsequently denied the taxpayers’

motion, and they appealed that decision.

The use of Mr. Zimbalist’s testimony was solely for the purpose of valuing

the Royals on the date of the purported loan. Because we hold that the

transaction was a sale and not a loan, the value of the team at the time of the
16 We note, however, that if we were to address the issue, the taxpayers

have not satisfied their burden of showing that the district court abused its

discretion in admitting the expert testimony of Mr. Zimbalist. See Kumho Tire

Co. v. Carmichael, 526 U.S. 137, 152 (1999) (applying abuse of discretion

standard in evaluating the district court’s expert testimony decisions).

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transaction is inconsequential to our decision. Thus, Mr. Zimbalist’s testimony is

not relevant, and this issue need not be addressed. 16 

III. CONCLUSION

For the foregoing reasons, the summary judgment orders of the United

States District Court for the District of Kansas are AFFIRMED.