Opinion ID: 64710
Heading Depth: 1
Heading Rank: 3

Heading: Did Carnrite's failure to pay taxes on the 2000 transaction create a tax liability for Villa Rayos within the language of the Agreement?

Text: Because we have assumed in our analysis that the 2000 transaction was a taxable event, we must determine whether Carnrite's failure to report or pay taxes on the transfer created a tax liability for Villa Rayos. The district court did not answer this particular question. Instead, the court focused on a different potential breach. Relying on Fifth Circuit caselaw, the court concluded that Villa Rayos had a liability because it had an interest in an asset that had appreciated significantly over the original, adjusted basis for which it faced capital gains tax liability. The court thus held that [b]ecause the Gales were assured by the contract that Villa Rayos had no liability `of any nature,' that contract was breached. [6] We see some difficulties with the district court's approach. No party argues that the court's specific reasoning should be sustained. The Gales expressly abandoned the district court's low-cost basis theory at oral argument, explaining that they were relying solely on their contention that a breach occurred when Carnrite failed to pay taxes on the 2000 transfer. Because of its abandonment by the parties, we do not review the district court's legal analysis. To understand what is argued, we examine Section 3.01(h) of the Agreement, which contains the warranty provision at issue: