[00:00:00] Speaker 01:
Case number 24-1048, a state of Joseph A. Insinga deceased by Amanda Gilmore, personal representative of balance versus commissioner of internal revenue, Mr. Muhammad for the appellant, Ms.

[00:00:13] Speaker 01:
Aveda for the appellee.

[00:00:17] Speaker 02:
Good morning, counsel.

[00:00:20] Speaker 03:
Good morning, your honors.

[00:00:21] Speaker 03:
May it please the court, us and Muhammad for appellant B, state of Joseph Insinga.

[00:00:26] Speaker 03:
Your honors, without repeating our briefs,

[00:00:29] Speaker 03:
There are three points that I think the panel should consider when deciding this appeal.

[00:00:34] Speaker 03:
First, what was the IRS trying to prove with respect to the transactions?

[00:00:38] Speaker 03:
The IRS was trying to prove that the factoring transactions were really just a loan from the Dutch bank to the corporate taxpayers, X Corp and V Corp.

[00:00:48] Speaker 03:
Two, what evidence did the IRS use to prove that the transactions were just a loan?

[00:00:53] Speaker 03:
The most direct evidence was the Dutch Bank credit applications, which were basically a confession that the transactions were just a lie.

[00:01:01] Speaker 03:
Three, who did the IRS exam teams try to prove this to?

[00:01:05] Speaker 03:
The IRS exam teams tried to prove this to IRS appeals.

[00:01:09] Speaker 03:
They were the ones who persuaded the taxpayer to settle the case.

[00:01:14] Speaker 03:
And the appeals case memos for IRS appeals really demonstrate that IRS appeals relied on the whistleblower material in pushing the taxpayers to settle.

[00:01:24] Speaker 03:
In the appeals case memos evaluation sections, appeals says that the government's position is stronger on economic substance than the taxpayer's position.

[00:01:34] Speaker 03:
And in describing the government's position, appeals starts by discussing internal Dutch bank credit applications.

[00:01:42] Speaker 03:
And if there's one thing that the panel does before deciding this appeal, we ask that the panel please read the appeals case memos where the Dutch Bank information is discussed.

[00:01:52] Speaker 03:
And we cite the relevant passages of the appeals case memo in our opening brief.

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And that's also especially important because the Form 11369s

[00:02:02] Speaker 03:
which were the evaluation reports by the IRS submitted to the whistleblower office in this case, were submitted before this case went up to IRS appeals.

[00:02:13] Speaker 03:
And so the whistleblower office had evaluation reports from the IRS exam teams, but the whistleblower office never had any sort of Form 11369 evaluation reports from IRS appeals itself.

[00:02:25] Speaker 03:
And the appeals case memos are really the only evidence that we have regarding how appeals used and relied on and looked at.

[00:02:34] Speaker 00:
Where are those in the record?

[00:02:36] Speaker 03:
The appeals case memos?

[00:02:37] Speaker 00:
That you want us to look at?

[00:02:39] Speaker 03:
Yes.

[00:02:39] Speaker 00:
So we cite... Are there particular pages?

[00:02:41] Speaker 03:
I don't have the particular pages at the tip of my fingertips, but we cite the relevant passages of those appeals case memos in our opening brief, Your Honor.

[00:02:52] Speaker 04:
Isn't the most important document, though, this 2007 presentation made within the IRS?

[00:03:02] Speaker 04:
Because the real question is not what you contributed.

[00:03:09] Speaker 04:
It's what you contributed above and beyond what the government already knew.

[00:03:15] Speaker 03:
There's no dispute that the government was looking into this transaction.

[00:03:20] Speaker 04:
He had to figure it out.

[00:03:21] Speaker 04:
In their view, there was no economic substance to these transactions.

[00:03:26] Speaker 04:
They had worked all of that out.

[00:03:27] Speaker 03:
Yes.

[00:03:29] Speaker 03:
That was their position.

[00:03:31] Speaker 03:
But it's one thing to take that position.

[00:03:33] Speaker 03:
It's another thing to prove it.

[00:03:35] Speaker 03:
And to prove it, they had to prove this basically to IRS appeals.

[00:03:39] Speaker 03:
And when they were planning on... I didn't hear that they had to prove it... To IRS appeals.

[00:03:43] Speaker 03:
That's who they were ultimately trying to persuade, both IRS appeals and the taxpayers.

[00:03:50] Speaker 03:
And to persuade both of those entities,

[00:03:53] Speaker 03:
They cited in their economic substance notices of proposed adjustments to the Dutch Bank credit applications in the argument section of those notepads.

[00:04:04] Speaker 03:
That's the very first thing that they cited to.

[00:04:06] Speaker 03:
Notwithstanding that they'd accumulated all this other evidence over the years in investigating these entities.

[00:04:11] Speaker 03:
That's the first thing that they cited to.

[00:04:14] Speaker 03:
And it makes sense, because that's the most persuasive evidence.

[00:04:18] Speaker 02:
Persuasive evidence that there's a lack of economic substance?

[00:04:20] Speaker 03:
Persuasive evidence that these transactions were really just a loan.

[00:04:25] Speaker 02:
How does that establish lack of economic substance?

[00:04:28] Speaker 03:
It establishes a lack of economic substance because the taxpayer's position to the IRS was that these were legitimate bonafide factoring transactions.

[00:04:40] Speaker 03:
They were investments by the Dutch Bank into securities issued by these offshore special purpose vehicles.

[00:04:48] Speaker 03:
The offshore special purpose vehicles then bought the accounts receivable at a discount.

[00:04:57] Speaker 03:
the internal Dutch bank credit applications basically established that no, that's not what these transactions were at all.

[00:05:04] Speaker 00:
These were just alone.

[00:05:05] Speaker 00:
So my understanding is, correct me if I'm wrong, is that they didn't look just at how the Dutch bank viewed the transaction because the credit application just showed that the Dutch bank viewed this as alone.

[00:05:17] Speaker 00:
But they were saying the entire setup didn't make economic sense.

[00:05:23] Speaker 00:
And that wasn't just based on how

[00:05:25] Speaker 00:
the Dutch bank viewed the loan, because that's all the credit application shows.

[00:05:30] Speaker 00:
There was just a lot more to it.

[00:05:32] Speaker 00:
They were looking at the entire structure and the way it all worked, and it just didn't make economic sense.

[00:05:38] Speaker 00:
And it seems that the credit applications went to one small sliver of one aspect of the analysis on economic substance.

[00:05:47] Speaker 03:
But that's the sliver that they chose to present front and center in their argument section.

[00:05:52] Speaker 03:
And they use that sliver.

[00:05:54] Speaker 00:
But where they put it doesn't seem to mean that he's substantially contributed.

[00:05:59] Speaker 00:
He has to substantially contribute, we agree?

[00:06:03] Speaker 03:
He does have to substantially contribute.

[00:06:05] Speaker 03:
And he's substantially contributed because the ultimate conclusion in the economic substance notices of adjustment is that the transaction was just a loan.

[00:06:15] Speaker 03:
And the conclusion in the chief counsel advice memo was that this was just a disguise for a loan.

[00:06:22] Speaker 03:
And they cite to the Dutch bank credit applications as their evidence.

[00:06:25] Speaker 00:
But that's just one part of the whole economic substance theory.

[00:06:28] Speaker 00:
It is one part of the whole.

[00:06:29] Speaker 00:
Whether it's a loan or not.

[00:06:30] Speaker 00:
There's all this other stuff.

[00:06:32] Speaker 00:
That this whole structure doesn't make sense.

[00:06:34] Speaker 00:
Like, who's benefiting from this?

[00:06:36] Speaker 00:
There's no reason to do this except to get a tax benefit.

[00:06:39] Speaker 00:
There's more than just how one

[00:06:42] Speaker 00:
party to the transaction, which isn't even the taxpayer, the Dutch bank, views this particular aspect of the problem.

[00:06:50] Speaker 03:
So the fact that the Dutch bank viewed this as just a loan speaks to, and they cited this in their notice of proposed adjustment, it speaks to the taxpayers' stated business purpose.

[00:07:07] Speaker 03:
The taxpayers' stated business purpose

[00:07:11] Speaker 03:
The IRS found in prior audit cycles that that was something that we really couldn't refute.

[00:07:16] Speaker 00:
So even if you may be right, it's a deferential standard of review we have here, too.

[00:07:21] Speaker 00:
And it just seems to me, I'm wondering, is there room for some deference?

[00:07:27] Speaker 00:
And this is a pretty complicated tax transaction.

[00:07:31] Speaker 00:
WBO tax court have more expertise in these matters than we do.

[00:07:34] Speaker 00:
And I know we review the tax court de novo, but WBO is reviewed for abusive discretion.

[00:07:41] Speaker 00:
understand tax better than I do.

[00:07:43] Speaker 00:
Isn't there some room for deference for their assessment that this did not substantially contribute in light of everything that was before the WBO?

[00:07:51] Speaker 03:
Not in this case, Your Honor, and that's because the wrong legal standard was applied by the whistleblower office.

[00:07:58] Speaker 03:
The whistleblower office relied on the 2012 proposed regulations, which even the IRS agreed later on.

[00:08:05] Speaker 00:
And if we don't think that they did, just putting that aside for a moment.

[00:08:09] Speaker 00:
Yes, Your Honor.

[00:08:11] Speaker 00:
It's a differential standard of review.

[00:08:13] Speaker 00:
If we don't think that they applied the wrong legal standard, then even if you have a good point, we should defer to the way they assess these facts if it's not wrong, necessarily.

[00:08:25] Speaker 03:
Well, it is a de novo standard of review.

[00:08:27] Speaker 03:
The tax course summary judgment determination is a de novo standard of review, Your Honor.

[00:08:33] Speaker 03:
So I don't think there's any difference.

[00:08:35] Speaker 04:
De novo as to the tax court, but not as to the whistle-blower office.

[00:08:39] Speaker 04:
I'm sorry.

[00:08:39] Speaker 04:
Say that again, Your Honor.

[00:08:40] Speaker 04:
Not as to the whistle-blower office.

[00:08:41] Speaker 04:
right?

[00:08:46] Speaker 04:
The tax court is deferentially reviewing the whistleblower office.

[00:08:49] Speaker 04:
Correct.

[00:08:50] Speaker 04:
The tax court is deferentially reviewing the whistleblower office.

[00:08:52] Speaker 04:
Looking through their decision to deferentially review what the WBO did, correct?

[00:08:59] Speaker 04:
That's correct, Your Honor.

[00:09:00] Speaker 04:
That's correct.

[00:09:01] Speaker 03:
Back to Judge Pan's question about- Yes, but you can't sustain the whistleblower office's determination.

[00:09:08] Speaker 03:
this case when the whistleblower office is relying on a 2012 proposed regulation no and I understand that before we get to that argument if we don't think that that they applied the wrong standard then we would just defer to what they did no your honor because

[00:09:24] Speaker 03:
The tax, the whistleblower office when it made his determination was also unaware of material facts.

[00:09:31] Speaker 03:
So the whistleblower offices determination is unsustainable for two reasons.

[00:09:35] Speaker 03:
Number one, they applied the wrong legal standard and it can't be sustained using the 2014 regulations because they never applied those regulations.

[00:09:44] Speaker 03:
They weren't in effect at the time.

[00:09:46] Speaker 03:
And the 2014 regulations have an irreconcilable conflict with the 2012 regulations.

[00:09:52] Speaker 00:
And we're just relying on those two claims of error that otherwise they act within their discretion.

[00:09:59] Speaker 00:
The WBO acted with this discretion, but for these two asserted claims.

[00:10:06] Speaker 00:
Because that narrows our analysis significantly.

[00:10:10] Speaker 03:
So I don't think.

[00:10:15] Speaker 03:
I don't think you can say that they acted within their discretion when they're applying the wrong legal standard and when they're unaware of material facts.

[00:10:21] Speaker 00:
Right, so you're only about relying on those two.

[00:10:24] Speaker 00:
That's what we're relying on.

[00:10:24] Speaker 00:
That's the way they.

[00:10:25] Speaker 03:
That's the way we view this case.

[00:10:27] Speaker 03:
Yes, your honor.

[00:10:28] Speaker ?:
Thank you.

[00:10:28] Speaker 02:
It is substantial.

[00:10:32] Speaker 02:
So I don't think there's this doesn't appear to be any dispute on the record that Mr. Nsenga's information was helpful.

[00:10:40] Speaker 02:
Yes.

[00:10:41] Speaker 02:
And the question really is here the adjective, substantial.

[00:10:46] Speaker 02:
Substantial contribution.

[00:10:50] Speaker 02:
And put aside your argument about legal error on how they measured, whether it was substantial or not, because a tax court applied regular substantial contribution.

[00:11:00] Speaker 02:
I'm not dismissing it.

[00:11:01] Speaker 02:
I'm just trying to understand how to think about this.

[00:11:04] Speaker 02:
If we were to decide that there was not a legal error,

[00:11:09] Speaker 02:
Which always vitiates everything.

[00:11:12] Speaker 02:
Is whether the contribution was substantial a fact question?

[00:11:21] Speaker 02:
I know you say it's irrelevant.

[00:11:23] Speaker 03:
Yes.

[00:11:24] Speaker 03:
So there are a couple of points here.

[00:11:26] Speaker 03:
The whistleblower office never applied a substantial contribution test.

[00:11:31] Speaker 03:
So right from the get-go, they were applying the wrong test.

[00:11:37] Speaker 03:
And the tax court can't salvage the whistleblower office determination by, after the fact, trying to apply a substantial contribution test.

[00:11:47] Speaker 02:
Yeah, I understand.

[00:11:47] Speaker 03:
Our point is, yes, we believe that there was substantial contribution.

[00:11:51] Speaker 03:
There was substantial contribution because the Dutch bank credit applications are cited as evidence

[00:11:58] Speaker 03:
for the ultimate conclusion of the economic substance adjustments, which was that the transactions were really a disguised loan.

[00:12:04] Speaker 02:
Is whether it went from helpful to substantially contributing.

[00:12:10] Speaker 02:
Is that a fact question?

[00:12:15] Speaker 02:
What role did this information play in how this case went forward?

[00:12:22] Speaker 02:
Feels to me like

[00:12:25] Speaker 02:
which is really what this case seems to be about.

[00:12:27] Speaker 02:
Because they don't say, oh, it was garbage.

[00:12:29] Speaker 02:
We never needed it.

[00:12:30] Speaker 02:
They used it.

[00:12:31] Speaker 02:
And you've cited a lot of things to show they're like, oh, great.

[00:12:34] Speaker 02:
This is helpful.

[00:12:36] Speaker 02:
But we would have to determine that there was error in finding that it was not a substantial contribution.

[00:12:42] Speaker 02:
And so I'm going to ask one more time that question in this case.

[00:12:48] Speaker 02:
I got your arguments.

[00:12:50] Speaker 02:
And when I say put aside, it doesn't mean I'm resolving them against you at all.

[00:12:54] Speaker 02:
I'm just trying to categorize the decisions we have to make.

[00:12:57] Speaker 05:
Yes.

[00:12:58] Speaker 02:
When we get to this stage, was it helpful or substantially helpful?

[00:13:04] Speaker 02:
I'm using that for contribution.

[00:13:05] Speaker 02:
Substantial in its helpfulness.

[00:13:09] Speaker 02:
Is that a fact question?

[00:13:11] Speaker 03:
That is a fact question, and it was never properly evaluated.

[00:13:14] Speaker 02:
I get you have your argument that it wasn't evaluated both for legal error and record.

[00:13:18] Speaker 02:
Yes.

[00:13:19] Speaker 02:
Right.

[00:13:19] Speaker 02:
OK.

[00:13:19] Speaker 02:
But just to understand that it's a fact.

[00:13:22] Speaker 02:
Yes.

[00:13:23] Speaker 02:
And, you know, they definitely cited the information that was provided.

[00:13:32] Speaker 02:
They liked it as part of their opening montage.

[00:13:39] Speaker 02:
You can imagine another case where there's

[00:13:43] Speaker 02:
800 pieces of evidence that the IRS points to.

[00:13:47] Speaker 02:
And a different whistleblower comes along and provides one piece.

[00:13:53] Speaker 02:
I know you did more than one.

[00:13:54] Speaker 02:
This is hypothetical.

[00:13:56] Speaker 02:
Provides one piece.

[00:13:58] Speaker 02:
And it's the first piece they talk about.

[00:14:01] Speaker 02:
Would that mean by itself make it a substantial contribution?

[00:14:05] Speaker 02:
Or do we, through the tax court, through the WBO, have to look

[00:14:11] Speaker 02:
at its role and sort of the ultimate outcome of the case.

[00:14:16] Speaker 03:
I think the law office has to look at its role in the ultimate outcome of the case.

[00:14:20] Speaker 03:
It has to look at its substantial contribution.

[00:14:23] Speaker 03:
Of course, our position is that test was never properly applied here.

[00:14:26] Speaker 02:
Sure.

[00:14:27] Speaker 02:
And then, and your position, I think also is that if it was applied, your, your client would, your state would prevail.

[00:14:34] Speaker 02:
Absolutely.

[00:14:35] Speaker 02:
Okay.

[00:14:35] Speaker 02:
And then can you explain to me again how

[00:14:40] Speaker 02:
Because even if this is a loan, loans can have economic substance to them, right?

[00:14:48] Speaker 02:
Most loans do have economic substance to them.

[00:14:51] Speaker 02:
So showing that this was a loan, how does that, and this is my ignorance of tax law, to be clear, I'm being honest with you, how does that

[00:15:02] Speaker 02:
contribute to their determination which at the end of the day what the horse they rode on was economic lack of economic substance and that's what caused the taxpayer to fold or to compromise and pay

[00:15:17] Speaker 02:
Explain to me how the status of it being a loan is a substantial part of determining that there was a lack of economic substance.

[00:15:27] Speaker 03:
Because the substance of the transaction is one thing if it's a factoring arrangement, which is what the taxpayer was telling the IRS.

[00:15:35] Speaker 03:
It's a factoring transaction.

[00:15:37] Speaker 03:
That's the substance of the transaction.

[00:15:39] Speaker 03:
It's a legitimate factoring transaction.

[00:15:41] Speaker 03:
We get these particular tax break based on the fact that it's a factoring transaction.

[00:15:46] Speaker 03:
The IRS's position was no, it's not a factoring transaction, it's a loan.

[00:15:50] Speaker 03:
The tax breaks you get, the deductions you get are entirely different when it's a loan.

[00:15:55] Speaker 03:
And that's what the IRS was trying to prove was that it was a loan.

[00:15:59] Speaker 03:
And the documents that the IRS got from the taxpayer went to the IRS, went to the taxpayer's position that this was a factoring transaction.

[00:16:07] Speaker 00:
I thought that we didn't have to get into the details of the transaction.

[00:16:11] Speaker 00:
If your claim of the abuse of discretion is simply that they applied the wrong legal standard or they

[00:16:17] Speaker 00:
misunderstood the facts, we could just focus on those two claims.

[00:16:20] Speaker 00:
Because I will tell you, I feel uncomfortable trying to wade into this whole tax transaction and deciding what was substantial and not, and deciding this is economic.

[00:16:30] Speaker 00:
It just seemed to me that you had agreed that your only claims to support your claim of abusive discretion were, number one, they applied the wrong legal standard because they relied on the proposed rule standard.

[00:16:41] Speaker 00:
and not the final rule standard.

[00:16:43] Speaker 00:
And number two, they misapprehended a fact.

[00:16:46] Speaker 00:
They didn't know that the credit application came from your client as opposed to from another source.

[00:16:51] Speaker 03:
That's correct, Your Honor.

[00:16:52] Speaker 00:
So we need to focus on those two things and not figure out what this whole transaction meant and how important this was, correct?

[00:16:58] Speaker 03:
We can certainly do that, Your Honor.

[00:17:01] Speaker 03:
So with respect to the 2012 proposed regulations, they limited

[00:17:08] Speaker 03:
the circumstances under which the whistleblower statutes requirement that the IRS proceed based on whistleblower information.

[00:17:18] Speaker 03:
They limited that statutory phrase to only three circumstances.

[00:17:23] Speaker 03:
which is when the whistleblower's information causes the IRS to initiate an action, expand the scope of an action, or continue to pursue an action that it otherwise would not have done.

[00:17:33] Speaker 00:
So my understanding is that that proposed rule said you can only look at those three things.

[00:17:38] Speaker 03:
Correct.

[00:17:38] Speaker 00:
Whereas in reality, the final rule and the standard is that those are just examples.

[00:17:43] Speaker 03:
Those are just examples.

[00:17:45] Speaker 00:
But your argument that they applied this erroneous proposed standard

[00:17:49] Speaker 00:
is kind of what you glee, like they never say outright that we're applying this standard and we're applying it as an exclusive way, but you infer that.

[00:17:59] Speaker 00:
So we have to look at, you know, what they said, and I agree there's like some sentences that seem to suggest that, but we have to look at the entire process that they took, which doesn't seem to focus only on those three things.

[00:18:14] Speaker 03:
We can be reasonably sure that they applied the standard.

[00:18:19] Speaker 03:
And here's why.

[00:18:20] Speaker 03:
Because in denying the award, they cite to, they parrot that same language as the basis for denying an award.

[00:18:28] Speaker 03:
At the time that they denied an award in April 2013, the only regulations that were in effect were the proposed 2012 regulations.

[00:18:38] Speaker 03:
And the only place where these three factors, this three-pronged test appeared, was in the proposed regulations.

[00:18:46] Speaker 00:
But the overall analysis didn't just focus on those three things.

[00:18:50] Speaker 00:
And if they were taking an only approach, that's all they would have had to address.

[00:18:55] Speaker 03:
Right, but it affected their view of everything else.

[00:18:58] Speaker 03:
When they said, when they recognized that one of the IRS exam teams said that this information was helpful, they said to themselves in their analysis, yeah, but even though they said it was helpful, it doesn't fit within one of these three buckets.

[00:19:11] Speaker 03:
So we can't give an award.

[00:19:16] Speaker 03:
And then the other thing I would say as to the irreconcilable conflict, and we do talk about this in the brief,

[00:19:24] Speaker 03:
Under the 2014 regulations, those three factors are now just examples of when the IRS does proceed based on whistleblower information.

[00:19:36] Speaker 03:
So because they're just examples, you can only use those three factors as a basis for granting an award.

[00:19:45] Speaker 03:
You can't use those three factors as a basis for denying an award.

[00:19:49] Speaker 03:
Because if you're using them as a basis for denying an award,

[00:19:52] Speaker 03:
then once again, they're an exclusive three-factor test.

[00:19:58] Speaker 02:
Judge Katz has mentioned the slide deck, which is relevant to X Corporation.

[00:20:03] Speaker 02:
Yes, Your Honor.

[00:20:06] Speaker 02:
And the slide deck at the end has a number of sort of questions for discussion.

[00:20:13] Speaker 02:
Discussion questions and the discussion questions are questions we still want to answer, I take it.

[00:20:22] Speaker 02:
None of them seem to me to be, how did the Dutch bank treat this money?

[00:20:31] Speaker 02:
It doesn't seem to me that they're saying that the information you were able to provide was what they were still missing or trying to pin down.

[00:20:40] Speaker 03:
Yep, they were unaware of it until even though they were unaware of it, but they did.

[00:20:44] Speaker 03:
There are some later emails.

[00:20:46] Speaker 03:
in which they're saying, we're trying to pin down how the Dutch bank treated this transaction.

[00:20:52] Speaker 03:
What can we do?

[00:20:52] Speaker 03:
What should we do?

[00:20:53] Speaker 02:
Right.

[00:20:53] Speaker 02:
And they say that's for this equity debt approach as opposed to the economic substance.

[00:21:01] Speaker 02:
Yes.

[00:21:02] Speaker 01:
And I'm happy.

[00:21:03] Speaker 02:
Yeah.

[00:21:03] Speaker 02:
Like I need waiters on.

[00:21:05] Speaker 02:
I'm going in so deep here on what I don't quite understand about tax law.

[00:21:08] Speaker 02:
But if, do we,

[00:21:13] Speaker 02:
To answer that fact about substantiality of the contribution, don't we need evidence that understanding the Dutch bank treated this as a loan was a big breakthrough for the economic substance analysis?

[00:21:36] Speaker 03:
And we have that evidence in terms of how they characterize the Dutch bank credit applications in the argument section of the notices for adjustment.

[00:21:45] Speaker 03:
They use the Dutch bank credit applications to one, refute the stated business purpose of the taxpayers.

[00:21:51] Speaker 03:
Business purpose is one of the two factors in economic substance.

[00:21:55] Speaker 03:
They use it to show that the Dutch bank treated it as a loan.

[00:21:59] Speaker 03:
And if you're shown that the Dutch bank treated it as a loan, that necessarily means that the taxpayer recognized that it was a loan.

[00:22:05] Speaker 03:
The taxpayer is the one that's signing the credit applications and giving it to the Dutch bank.

[00:22:10] Speaker 00:
I'm sorry, maybe this is my lack of understanding of tax law, but I thought they were talking about it's a loan between the taxpayer and the SPV.

[00:22:18] Speaker 03:
No.

[00:22:19] Speaker 03:
And that's part of the confusion.

[00:22:22] Speaker 00:
It's a loan between... I'm looking at one of the ACMs that you told me to look at.

[00:22:27] Speaker 00:
And it says, the exam team concluded that the arrangement was a sham and in substance, the true nature of the transactions represented a finance arrangement loan between the taxpayer and one of the SPVs.

[00:22:38] Speaker 00:
This is at A3663.

[00:22:40] Speaker 03:
So that might have been a misstatement.

[00:22:42] Speaker 03:
Wherever else you see them talking about the transaction, they say it's a sham transaction.

[00:22:48] Speaker 03:
and the true nature of the transaction is that it's a loan from the Dutch bank to the corporate taxpayers, X Corp and V Corp, and that the SPVs were just sham entities that had to be disregarded.

[00:23:02] Speaker 00:
I mean, I'm just looking at what you told me to look at.

[00:23:05] Speaker 00:
That's not what it says.

[00:23:09] Speaker 04:
Okay.

[00:23:10] Speaker 04:
hoping we can avoid some of the details as well.

[00:23:14] Speaker 04:
What is your understanding of the relationship between the economic substance inquiry and the is it a loan inquiry?

[00:23:25] Speaker 04:
I had thought those were essentially the same question because the question is whether all of these complicated transactions are

[00:23:38] Speaker 04:
what they purport to be, which is a sale of receivables for legitimate business reasons.

[00:23:48] Speaker 04:
or whether that purported sale of receivables is in reality just a loan.

[00:23:55] Speaker 04:
And those have different tax consequences.

[00:23:57] Speaker 04:
Is that oversimplified?

[00:23:59] Speaker 03:
So that's exactly the economic substance of the transaction.

[00:24:02] Speaker 03:
But I think Your Honor might be asking, what's the difference between the economic substance theory and the debt versus equity theory?

[00:24:10] Speaker 04:
Yeah, the conclusion that this is in reality just a loan

[00:24:15] Speaker 04:
Is that anything more than saying that what purports to be a bona fide sale of receivables slash factoring just has no substance?

[00:24:29] Speaker 03:
It was the same exact conclusion in both debt versus equity and economic substance that the transactions were just alone.

[00:24:37] Speaker 03:
The only difference was whether we disregard the structure of the transaction altogether

[00:24:44] Speaker 03:
which is what they did with economic substance, or whether we keep the structure of the transactions, which means keeping in place these offshore special purpose vehicles,

[00:24:53] Speaker 03:
Um, but we then have to deal and then we re-characterize the underlying securities as debt instead of equity.

[00:25:01] Speaker 03:
But they decided not to do that because the chief council advice memo said, well, then you've got some other internal revenue code issues that you have to deal with, namely losses between related parties.

[00:25:10] Speaker 03:
We discussed that in footnote eight of our reply brief.

[00:25:13] Speaker 04:
So the conclusion that it's debt by itself goes a long way toward

[00:25:23] Speaker 04:
proving no economic substance, but it's not the same thing.

[00:25:27] Speaker 04:
Correct.

[00:25:27] Speaker 03:
And that's only because it's whether you disregard the entire structure or whether you keep the structure in place.

[00:25:32] Speaker 03:
I think I got it.

[00:25:34] Speaker 02:
Thanks.

[00:25:35] Speaker 02:
Any other questions?

[00:25:37] Speaker 02:
All right.

[00:25:37] Speaker 02:
We'll give you a couple of minutes on rebuttal.

[00:25:38] Speaker 03:
Thank you, Your Honors.

[00:25:45] Speaker 02:
Is it Aveda?

[00:25:46] Speaker 02:
Did I say that correctly?

[00:25:47] Speaker 02:
Aveda?

[00:25:54] Speaker 05:
Thank you, Your Honors, and may it please the court, Julia Vetta for the Commissioner.

[00:25:58] Speaker 05:
I think it was clear from before the receipt of the whistleblower information that the service suspected that this tax shelter, this tax avoidance transaction was a disguise for a loan, and the inquiry was actually, what disguise is it wearing?

[00:26:13] Speaker 02:
Not what kind of a loan is it or to whom or they suspected but suspected is not enough.

[00:26:19] Speaker 02:
Correct and is not that's where you begin your investigation.

[00:26:22] Speaker 02:
That's not precisely enough.

[00:26:24] Speaker 02:
No, but so they suspected it was a loan.

[00:26:26] Speaker 02:
Yes, and you have you get gift wrapped to you evidence that this is I mean hard paper evidence that this is alone.

[00:26:36] Speaker 05:
That is a bridge too far, Your Honor.

[00:26:38] Speaker 05:
That's not what happened.

[00:26:39] Speaker 05:
There was not gift-dropped evidence of a loan delivered here.

[00:26:42] Speaker 05:
What was delivered was information.

[00:26:44] Speaker 05:
It certainly was.

[00:26:46] Speaker 02:
Credit application, which is a good sign if someone's looking for a loan and other information and told you what things to go get from Dutch Bank.

[00:27:01] Speaker 05:
Respectfully, Your Honor, the taxpayers

[00:27:04] Speaker 05:
denied that they had applied for credit applications.

[00:27:07] Speaker 05:
The whistleblower suggested that we should ask for this information from the taxpayers.

[00:27:12] Speaker 05:
We did so.

[00:27:13] Speaker 05:
We did not receive it.

[00:27:14] Speaker 05:
And then as a follow up, we sought it directly from the bank and obtained it from the bank.

[00:27:18] Speaker 05:
Now, there was a factual question about whether the whistleblower provided that information initially.

[00:27:24] Speaker 05:
And in one case, it is resolved that he did.

[00:27:26] Speaker 05:
But that information was not recognized as coming from him or used in the time before it was also received from the bank.

[00:27:33] Speaker 05:
Regardless, I want to refocus the court on the actual process that was followed here.

[00:27:42] Speaker 05:
It was not a question of what the IRS was trying to prove to someone.

[00:27:46] Speaker 05:
It was, as you note, an investigation.

[00:27:48] Speaker 05:
They weren't seeking to prove anything to anyone.

[00:27:50] Speaker 05:
There was not some arbiter of fact.

[00:27:51] Speaker 05:
They were not preparing a case to take to appeals in an adversarial process and say, here is our position.

[00:27:57] Speaker 05:
Here's someone else's position.

[00:27:59] Speaker 05:
Be our judge.

[00:28:00] Speaker 05:
Tell us what the answer is.

[00:28:02] Speaker 05:
They were coming up with an adjustment.

[00:28:03] Speaker 05:
They were coming up with an audit position, and the audit position was, how can we tax this?

[00:28:09] Speaker 05:
How can we best capture the economic effect of this irreducibly complex transaction?

[00:28:16] Speaker 05:
And there were a number of different theories that they were testing, and they were testing them all before they received the whistleblower information.

[00:28:24] Speaker 02:
Including them, but then they were able to prove that the whistleblowers explanation of what this transaction was, was false.

[00:28:34] Speaker 02:
Can shutting down, so there's one thing, there's a firm to be building the IRS case.

[00:28:43] Speaker 02:
And then you have to do that, but you also have to be able to counter whatever innocent explanation the taxpayer is going to proffer.

[00:28:51] Speaker 02:
That's how one proves matters.

[00:28:55] Speaker 02:
If whistleblower information is powerful at shutting down the taxpayers' counter, and so then your affirmative case sort of go forward, although I think it was like described as a 50-50 case, then why is shutting down the taxpayers' innocent explanation and at the same time corroborating

[00:29:24] Speaker 02:
suspicions and suggesting avenues and pointing to avenues of further investigation and further documentation.

[00:29:32] Speaker 02:
Why is that not a substantial contribution?

[00:29:36] Speaker 05:
Had it actually shut down the taxpayers position, it probably would be.

[00:29:41] Speaker 05:
The only thing it did here was subvert the taxpayers position that they had never actually applied for credit from the Dutch bank.

[00:29:48] Speaker 05:
It was evidence that they had, but that was not key to the economic substance determination.

[00:29:53] Speaker 05:
That was key to

[00:29:54] Speaker 05:
a characterization of how to characterize various securities in these entities created to facilitate this transaction.

[00:30:02] Speaker 02:
But also, I think their argument is that this whole factoring theory flounders once you start realizing that this was paid out as a loan.

[00:30:13] Speaker 02:
And applied, asked for as a loan, paid out as a loan.

[00:30:17] Speaker 02:
Doesn't that?

[00:30:20] Speaker 02:
blow a hole in their whole effort to demonstrate this was some sort of legitimate factoring?

[00:30:27] Speaker 05:
To the extent that it does, and I'm not persuaded that that's the loan that is significant here, as Judge Pan observed before, there were different transactions that they were weighing through the lens of, is this a loan?

[00:30:42] Speaker 05:
Is this an investment?

[00:30:43] Speaker 05:
Is this debt or is this equity?

[00:30:45] Speaker 05:
How is this money changing hands?

[00:30:47] Speaker 05:
What is being received in return?

[00:30:48] Speaker 05:
Is this just collateral or are you obtaining equity in an entity, in a going concern?

[00:30:55] Speaker 05:
And there is necessarily, on a record like this, by design, there is ambiguity in that because that's how these shelters manage to hide this activity, which we won't call economic substance, from taxation.

[00:31:10] Speaker 05:
What the whistleblower evidence provided was insight into, and the second part of your question there, did it corroborate a theory?

[00:31:19] Speaker 05:
Yes, it absolutely did.

[00:31:20] Speaker 05:
And it was for that that it was cited, which was that this was not an equity investment.

[00:31:24] Speaker 05:
This was alone.

[00:31:26] Speaker 05:
This was the bank extending credit in exchange for collateral, not purchasing equity and obtaining a stake in an entity.

[00:31:37] Speaker 05:
And that was the 13-factor test.

[00:31:39] Speaker 05:
That the whistleblower information did cause the IRS to change its mind on one factor about but that theory was jettisoned that theory was not the basis for the ultimate adjustments they were thinking about it before they received the whistleblower information.

[00:31:55] Speaker 05:
It was discussed prior to the March 2007 meeting.

[00:31:58] Speaker 05:
It was discussed at the meeting.

[00:32:00] Speaker 02:
What I'm starting with is you say suspecting, thinking about, looking into, none of which seemed to me at all inconsistent with, and then information came along that brought us a long way home.

[00:32:16] Speaker 02:
At least got us to third base.

[00:32:19] Speaker 02:
And that,

[00:32:23] Speaker 02:
It seems to me, if the IRS's view is that as long as we were thinking about these transactions and had the theory, but not yet the evidence, all the evidence that's needed, giving us that evidence is not a substantial contribution.

[00:32:41] Speaker 02:
Is that your point?

[00:32:42] Speaker 02:
If that evidence were conclusive, it would be a substantial contribution.

[00:32:45] Speaker 02:
It has to be conclusive.

[00:32:46] Speaker 05:
You have just posited that it is.

[00:32:48] Speaker 02:
No, if I understand your question, I did not get you home.

[00:32:51] Speaker 02:
All right.

[00:32:52] Speaker 02:
So if it is your position that it has to be conclusive, no, that's an overstatement of the position.

[00:32:59] Speaker 05:
The position is it has to have an effect.

[00:33:01] Speaker 05:
It has to affect the outcome.

[00:33:02] Speaker 05:
And moving it to third base is an effect.

[00:33:04] Speaker 05:
And had the IRS proceeded on the debt versus equity theory where there is a measurable effect in its position based on the receipt of whistleblower information,

[00:33:13] Speaker 05:
that would be a tougher challenge to push back and say it wasn't substantial.

[00:33:17] Speaker 05:
But here we know, and as you've observed, this is a deferential standard of review to the conclusions of the whistleblower office.

[00:33:23] Speaker 05:
We know that they concluded, based on this record, that the whistleblower information was at most a minor factor in the determination of economic substance that was far outweighed by the reality of these transactions themselves, which is exhaustively documented.

[00:33:40] Speaker 05:
That's your 800 pieces of evidence.

[00:33:41] Speaker 00:
Can you explain how

[00:33:43] Speaker 00:
The fact that this was a loan plays into the substantial effect argument, because it seems to me that there was the debt versus equity thing.

[00:33:53] Speaker 00:
I understand your position on that.

[00:33:55] Speaker 00:
But the fact that this was a loan and the whistleblower information goes to whether it was a loan or not also plays into the substantial economic effect argument.

[00:34:07] Speaker 00:
And I thought the argument was just that,

[00:34:09] Speaker 00:
This is just one small piece of it.

[00:34:11] Speaker 00:
So can you explain why this is just one small piece of the substantial economic effect?

[00:34:16] Speaker 05:
So there are two, we're thinking of a loan in two different senses or at two different phases.

[00:34:22] Speaker 05:
One is when the bank is participating in this transaction, what does it think it's doing and what does it think it's getting?

[00:34:27] Speaker 05:
What do the parties call it?

[00:34:29] Speaker 05:
What labels do they use?

[00:34:30] Speaker 05:
That's the debt versus equity theory.

[00:34:32] Speaker 05:
And the credit applications read in that context show that the bank thought that they were giving a loan, that this is debt.

[00:34:38] Speaker 05:
And the IRS had already concluded that they were going to view it through a debt lens based in part on that factor, even before the whistleblower information tilted that factor in favor of debt.

[00:34:51] Speaker 05:
The second overarching conclusion is

[00:34:54] Speaker 05:
Once you clear away all of the smoke and mirrors, what has actually happened here?

[00:35:01] Speaker 05:
Because money has changed hands.

[00:35:03] Speaker 05:
There is a transaction that happened.

[00:35:06] Speaker 05:
If it isn't a factoring entity, if it isn't an investment in these various structured vehicles,

[00:35:19] Speaker 05:
What is it?

[00:35:20] Speaker 05:
The answer there is a loan in disguise.

[00:35:24] Speaker 05:
So those are two different loans.

[00:35:25] Speaker 05:
One is, what is the bank contributing to this transaction?

[00:35:28] Speaker 05:
And the other is, what's left when you look through all of the subterfuge?

[00:35:34] Speaker 00:
Part of the subterfuge versus the underlying.

[00:35:36] Speaker 00:
It just seems to me that a more simple way to look at this is when you concluded or when the WBO concluded that this is one small part of the sort of economic substance theory

[00:35:48] Speaker 00:
it seems far more telling to me that the taxpayers kept the accounts receivable.

[00:35:54] Speaker 00:
It just seems like there are other things that seem so much more clear that this was not for any reason other than for the tax benefits than how Dutch Bank viewed the loan.

[00:36:03] Speaker 00:
Precisely.

[00:36:04] Speaker 00:
So what I'm trying to get from you is, what are the things that made it clear that this was not for an economic substance?

[00:36:13] Speaker 05:
In our brief, we cite the analysis that

[00:36:19] Speaker 05:
that the exam team performed in the aggregate.

[00:36:26] Speaker 05:
It was more than simply looking at whether the whether the bank treated its investment in the entity as credit or equity in the entity.

[00:36:39] Speaker 05:
There were

[00:36:43] Speaker 00:
I remember general things saying like, oh, the whole structure of this, the way things are, we looked at all these things that made it clear this is an economic substance.

[00:36:51] Speaker 05:
That's right.

[00:36:52] Speaker 00:
But I just was trying to understand what are those things?

[00:36:54] Speaker 00:
Because it will give us some perspective on how important was this one particular fact.

[00:36:59] Speaker 05:
The IRS in its investigation considered the transaction documents and the agreements and functional analysis of the accounts receivable process.

[00:37:10] Speaker 05:
a computation of cash outlay compared to the tax benefits that were received, whether the taxpayer and the factoring entity were truly investors in each other or had the subsidiary or investor relationship that they claimed, how their cash flows worked.

[00:37:25] Speaker 05:
Exactly.

[00:37:26] Speaker 05:
And who actually did have the accounts receivable at the end.

[00:37:30] Speaker 05:
All of these were factors that went to the economic substance of the transaction, not what the bank thought it was getting in exchange for its money.

[00:37:39] Speaker 05:
Now the fact that when you eliminate all of the subterfuge, what remains is that the bank has tendered funds and those are in effect a loan is concentric with the sense that the bank thought it was making a loan to this entity at the time.

[00:37:51] Speaker 05:
But you've disregarded the entity now.

[00:37:54] Speaker 05:
The loan is just what's left.

[00:37:55] Speaker 05:
Those are the funds that changed hands.

[00:37:58] Speaker 04:
I'm sorry, but that just sounds to me like you're saying point one, the bank thought it was making a loan.

[00:38:09] Speaker 04:
Point two, the bank in fact was making a loan.

[00:38:14] Speaker 04:
To a different card, yes.

[00:38:15] Speaker 04:
As a debt state rather than something else.

[00:38:18] Speaker 05:
The bank, the evidence that the whistleblower provided indicated that the bank did not, or did not indicate that the bank thought it was making an equity investment.

[00:38:28] Speaker 04:
And does that go to, I'm sorry.

[00:38:29] Speaker 04:
Which just seems to collapse the two, seems to collapse the debt or equity question into the economic substance.

[00:38:37] Speaker 05:
It does not, because the economic substance inquiry is not, as you observed earlier, concerned with what the bank thought.

[00:38:43] Speaker 04:
It's concerned with... No, but you're asking the same question.

[00:38:46] Speaker 05:
Did the bank think it had... I'm asking the same question of the bank, yes.

[00:38:50] Speaker 04:
Did the bank, question one, did the bank think it had a loan, had made a loan and therefore held was holding debt?

[00:38:59] Speaker 04:
Question two, is that the substance of the transaction?

[00:39:05] Speaker 05:
And to put a finer point on that, did the bank think it was loaning money to the factoring entity?

[00:39:10] Speaker 05:
And then I'm sorry, to the to the to the one of the entities in the structure.

[00:39:15] Speaker 05:
The in the tax shelter structure, SPV.

[00:39:19] Speaker 05:
I'm I'm I am I don't recall which entity the bank was precisely contracting with.

[00:39:25] Speaker 05:
But that ultimately went to its intent in participating in the transaction.

[00:39:30] Speaker 05:
But when that's disregarded, what's left is that the bank has effectively made a loan to the taxpayer, regardless of whom it thought it was extending credit to in the credit applications.

[00:39:43] Speaker 02:
But it's not just how the bank thought about it.

[00:39:47] Speaker 02:
You have a credit application from the corporation here.

[00:39:51] Speaker 02:
So you're getting all this information both about how the bank thought about it, but you got pretty powerful evidence of how the taxpayer thought about what they were doing, right?

[00:40:01] Speaker 05:
Which is why we changed our position on the equity versus debt sub-factor.

[00:40:06] Speaker 05:
Because that goes exactly to that point.

[00:40:08] Speaker 05:
That said, oh, taxpayer, you were telling us that this was equity.

[00:40:14] Speaker 05:
look, you told the bank you were asking for a loan, that's death.

[00:40:18] Speaker 02:
You lied.

[00:40:18] Speaker 02:
Taxpayer did.

[00:40:20] Speaker 02:
The tax, yeah, I didn't mean you personally.

[00:40:23] Speaker 02:
Yes, that's correct.

[00:40:24] Speaker 05:
That's good evidence.

[00:40:26] Speaker 05:
And that is good evidence and caused a change of position.

[00:40:29] Speaker 02:
It's not that, it must be the other.

[00:40:30] Speaker 05:
Precisely, and it caused a change of position on the sub-factor in the 13-factor test in the rejected theory.

[00:40:36] Speaker 05:
That was the effect of the whistleblower information.

[00:40:38] Speaker 05:
So there's no dispute here that the whistleblower information had effect.

[00:40:41] Speaker 00:
The reason there are two theories is not because

[00:40:44] Speaker 00:
they're conceptually distinct in terms of what the loan was there are two theories because it has different tax consequences that's right and there were more than two years and in the presentation they they enumerate right because a number of them because they're still flushing it out they're trying to figure out how do we have standing is if you want to treat this as debt versus equity.

[00:41:02] Speaker 00:
then there are different deductions you can make for your tax returns.

[00:41:04] Speaker 00:
Correct.

[00:41:05] Speaker 00:
If we say there's no economic substance, then there's a whole different set of things you would do in terms of your taxes.

[00:41:11] Speaker 00:
Correct.

[00:41:12] Speaker 00:
But the analytical idea that this is a loan as opposed to an equity investment, that's just a fact that could go into either theory.

[00:41:21] Speaker 05:
It is a fact that goes into the

[00:41:29] Speaker 05:
It's a particularly relevant fact in a debt versus equity analysis because you're trying to determine, are you making a loan in the first instance or purchasing an equity stake?

[00:41:40] Speaker 05:
It's a shaker factor.

[00:41:42] Speaker 05:
But in a larger sense, in an economic substance inquiry,

[00:41:46] Speaker 05:
It goes to what Judge Mollett flagged as the disingenuousness of the parties who are pretending that they're doing something that they're not.

[00:41:54] Speaker 00:
It just seems to me that for an economic substance theory, the overarching question is, is this really a factoring transaction at all?

[00:42:02] Speaker 00:
And factoring would mean somebody's really buying your accounts receivable at a discount.

[00:42:08] Speaker 00:
And so the idea that whether the vehicle that's buying this has equity, which means it's a real

[00:42:17] Speaker 00:
entity goes into that versus whether it's finance with debt, which makes it seem more like maybe you're not an independent entity buying this factoring thing.

[00:42:26] Speaker 00:
But it just seems to me that the economic substance question, the bottom line of it isn't so dependent on that financing question so much as

[00:42:36] Speaker 00:
It just seems to me the most important evidence would be that they kept the accounts receivable and were using the accounts receivable as if they had never been factored.

[00:42:46] Speaker 05:
Yes, the theories, we won't say that there's zero overlap in the theories, obviously.

[00:42:51] Speaker 05:
All of these theories are dealing with the same record and the same evidence and the same types of transactions and coming at it from different angles in the code.

[00:42:59] Speaker 05:
And the best evidence of treating entities as

[00:43:06] Speaker 05:
functioning corporations in which someone can obtain an equity stake is going to be different best evidence, as you notice, from whether they had economic substance in the first place.

[00:43:16] Speaker 05:
So you will see overlap in the evidence here.

[00:43:19] Speaker 05:
It is much more salient and meaningful in the making of determinations that we didn't rely on than in the determination that we did.

[00:43:27] Speaker 05:
The whistleblower office recognized that this was meaningful.

[00:43:32] Speaker 02:
Why can't that be a substantial contribution?

[00:43:35] Speaker 02:
Put us on the right track.

[00:43:37] Speaker 02:
Kept us from spending more resources and time pursuing something that was going to be a dead end.

[00:43:43] Speaker 02:
It did not do that.

[00:43:44] Speaker 02:
I'm asking if this is something.

[00:43:46] Speaker 02:
I mean, you said it's all right.

[00:43:48] Speaker 02:
We shouldn't go that way anymore.

[00:43:49] Speaker 02:
We're going to go back over here and shut down the taxpayers' efforts to describe this as something other than a loan.

[00:43:58] Speaker 05:
Well, it was actually the chief counsel advice that said,

[00:44:02] Speaker 05:
go with economic substance and not debt versus equity.

[00:44:06] Speaker 05:
Debt versus equity should be your secondary alternate position.

[00:44:10] Speaker 05:
And the parties were already proceeding, I don't want to say in tandem because they do overlap.

[00:44:19] Speaker 02:
I'm asking a legal question of whether it can't, I'm just saying in this case.

[00:44:25] Speaker 02:
whether a substantial contribution can occur if information allows the IRS to stop going down a path it's been going and spending resources on and tells them, no, concentrate here.

[00:44:42] Speaker 02:
I think that would be a substantial contribution.

[00:44:43] Speaker 02:
And you just said, shut it down.

[00:44:45] Speaker 02:
Shut down that equity argument.

[00:44:48] Speaker 05:
But that wasn't what happened here.

[00:44:51] Speaker 05:
The whistleblower information was not the basis of the chief counsel concluding that debt versus equity was not going to be first over across the finish line.

[00:45:01] Speaker 05:
The strength of the various litigating positions was a separate question from the sufficiency of the evidence for each.

[00:45:10] Speaker 02:
And there was all the strength of a position to be separated from the sufficiency of the evidence support.

[00:45:15] Speaker 05:
Because we're looking to make a tax assessment here.

[00:45:17] Speaker 05:
We're looking to make an adjustment.

[00:45:18] Speaker 02:
I understand that, but how can it be separated from the sufficiency?

[00:45:22] Speaker 02:
I've never heard someone think that an argument or legal argument position can be separated from the evidence substantiating it.

[00:45:29] Speaker 05:
Let me be clear.

[00:45:31] Speaker 05:
You're making two different adjustments.

[00:45:37] Speaker 05:
You have compelling evidence in support of each.

[00:45:41] Speaker 05:
Some evidence is more compelling in support of theory A. Some evidence is more compelling in terms of theory B. Some evidence overlaps.

[00:45:48] Speaker 05:
Theory A allows you to make a larger tax adjustment.

[00:45:51] Speaker 05:
The strength of your evidence on theory B is immaterial to the fact that you want to go with theory A, which is equally well-founded, because you can collect more tax that way.

[00:45:59] Speaker 05:
That was what I meant to convey.

[00:46:01] Speaker 02:
And then, didn't the chief counsel say it was at least for, I could have them backwards, for X Corporation 50-50 on your stronger theory?

[00:46:10] Speaker 05:
Chief counsel did not say that.

[00:46:11] Speaker 05:
Appeals said that.

[00:46:12] Speaker 05:
Appeals said that.

[00:46:13] Speaker 05:
50-50 on your strongest theory.

[00:46:15] Speaker 05:
Right.

[00:46:15] Speaker 05:
And conceded debt versus equity completely.

[00:46:19] Speaker 05:
Conceded.

[00:46:20] Speaker 05:
The alternate theory.

[00:46:21] Speaker 05:
Rejected debt versus equity.

[00:46:22] Speaker 05:
Gave it away.

[00:46:23] Speaker ?:
Right.

[00:46:24] Speaker 02:
That was shut down.

[00:46:24] Speaker 02:
You were able to shut that down and concentrate where you had.

[00:46:27] Speaker 02:
Let us focus.

[00:46:29] Speaker 02:
Maybe you're going to tell me how I'm mixing apples and oranges.

[00:46:31] Speaker 02:
The fact that appeals counsel said up front, look, this is a 50-50 proposition suggests to me that ultimately did prevail that the role of information, the new information that comes in from a whistleblower that contributes to get you to at least the 50-50 mark

[00:46:53] Speaker 02:
would be substantial.

[00:46:55] Speaker 02:
This isn't a case where, you know, this isn't a case where we had it locked down.

[00:47:00] Speaker 02:
We're going to get 90% from the appeals office to tell me how this isn't what they do.

[00:47:04] Speaker 02:
But we weren't, we had this locked down without them, which seems to be the argument.

[00:47:09] Speaker 02:
But then appeals office seemed to think this is anything but locked down.

[00:47:12] Speaker 02:
This is a 50-50 proposition on your better argument.

[00:47:17] Speaker 05:
And were the whistleblower information

[00:47:20] Speaker 05:
salient in that determination by the appeals office as to the strength of the primary argument, then we would be in a different situation.

[00:47:28] Speaker 05:
And then that would be a harder question.

[00:47:30] Speaker 05:
Because yeah, then we would be saying, yeah, you probably are playing some substantial role in the determination of the outcome here, which is coming out of the appeals office.

[00:47:39] Speaker 05:
And that's where we get the dollar amount of proceeds.

[00:47:42] Speaker 05:
We would normally be going off of an adjustment when we're measuring kind of the substantiality.

[00:47:48] Speaker 05:
But that didn't happen here because the whistleblower information was not the basis on which appeals decided that there were 50-50 litigation hazards in settling the case based on an economic substance adjustment.

[00:48:06] Speaker 05:
The whistleblower information was not what the appeals office was concerned with.

[00:48:11] Speaker 05:
Remember, the whistleblower information had to do with how did the Dutch bank treat debt?

[00:48:16] Speaker 05:
Did it call it debt or did it call it a...

[00:48:20] Speaker 02:
It seems to me it was also how the taxpayer in reality viewed what they were doing because the application was from the taxpayer, correct?

[00:48:29] Speaker 02:
The credit application was from the taxpayer.

[00:48:31] Speaker 02:
Okay, so it's outing the taxpayer as to what it was doing.

[00:48:37] Speaker 02:
It's not just, we're curious how some Dutch bank thought about this.

[00:48:43] Speaker 02:
It shows us how the taxpayer thought about this.

[00:48:46] Speaker 02:
Isn't that really important?

[00:48:50] Speaker 05:
as the whistleblower office determined a minor element far outweighed by the economic reality of the transactions themselves.

[00:48:58] Speaker 05:
To the extent that it was of any significance, that is the extent of its significance as found by the whistleblower office who this court reviews for abuse of discretion.

[00:49:09] Speaker 02:
Do we review for abuse of discretion if it applied the wrong legal test?

[00:49:15] Speaker 05:
The wrong legal test would be a per se abusive discretion, but it did not apply the wrong legal test here.

[00:49:21] Speaker 02:
For V Incorporated, it uses those words exactly.

[00:49:25] Speaker 02:
And it does so in a context where they say, yikes, the people that did this investigation are no longer here, so we're having trouble figuring out what the role of this was.

[00:49:35] Speaker 02:
But it didn't cause A, B, or C. End of story.

[00:49:40] Speaker 05:
Those were not the bases on which the award was rejected.

[00:49:44] Speaker 05:
that was the basis on which the award was rejected, and this is a page 103 of the appendix was that.

[00:49:48] Speaker 05:
The information provided by the whistleblower did not result in the collection of any proceeds from any of the taxpayers covered by the letter.

[00:49:58] Speaker 05:
It had nothing to do with.

[00:49:59] Speaker 05:
Did we start an audit based on your information?

[00:50:01] Speaker 05:
Did we fulfill any of these other regulatory criteria?

[00:50:07] Speaker 05:
Initiate

[00:50:14] Speaker 05:
a heuristic applied within the whistleblower office and still is, it's still in the regulation.

[00:50:19] Speaker 05:
It is simply an example rather than an only if test.

[00:50:23] Speaker 02:
Right.

[00:50:24] Speaker 02:
It wasn't then.

[00:50:25] Speaker 02:
Correct.

[00:50:26] Speaker 02:
Okay.

[00:50:27] Speaker 02:
And so if their conclusion is, we don't know, it's hard to figure out what role this information played for V corporation.

[00:50:37] Speaker 02:
Cause the key players, it sounds like we're gone.

[00:50:40] Speaker 02:
We're no longer at IRS.

[00:50:41] Speaker 02:
You couldn't ask them, but

[00:50:44] Speaker 02:
It didn't do A, B, or C. And the fact that we'd already started the audit, that doesn't seem to analyze substantial contribution to end result at all.

[00:50:58] Speaker 05:
We knew that both of these taxpayers were coordinating and proceeding in parallel.

[00:51:04] Speaker 05:
We did, the whistleblower office was able to speak directly to the audit team members for X,

[00:51:11] Speaker 05:
They were not able to speak directly to the audit team members for V because those individuals had retired.

[00:51:16] Speaker 05:
But they had information already from X that said this was not meaningful to us.

[00:51:23] Speaker 05:
This was helpful.

[00:51:24] Speaker 05:
It corroborated our views.

[00:51:26] Speaker 05:
But we had figured this out already.

[00:51:28] Speaker 05:
Like you said, it was locked in.

[00:51:29] Speaker 05:
They knew what their economic reasoning was going to be.

[00:51:33] Speaker 05:
In March of 2007, they had already drafted proposed adjustment language

[00:51:37] Speaker 05:
And the actual proposed adjustments came out months before the chief council notice on both debt versus equity and economic substance that involved only the whistleblower information was key only in the debt versus equity adjustment.

[00:52:00] Speaker 02:
Thank you very much.

[00:52:01] Speaker 02:
Thank you.

[00:52:04] Speaker 02:
Mr. Mohammed, we'll give you two minutes.

[00:52:08] Speaker 03:
Thank you, Your Honors.

[00:52:10] Speaker 03:
Your Honors, just a few points that I wanted to address.

[00:52:15] Speaker 03:
Council for the government said that what was ultimately proved was that this was just subterfuge.

[00:52:22] Speaker 03:
That was her words.

[00:52:24] Speaker 03:
When you look at what the IRS was looking at and what Chief Counsel Advice was looking at and using to prove that this whole transaction was subterfuge, it was the Dutch bank credit applications.

[00:52:35] Speaker 03:
The Chief Counsel Advice memo

[00:52:36] Speaker 03:
When it says that this was a, quote, disguised loan, it cites to the Dutch bank credit applications, because that was the most direct evidence that this was just a subterfuge and a sham transaction.

[00:52:48] Speaker 03:
And that's the ultimate point of economic substance.

[00:52:51] Speaker 03:
Was this a legitimate transaction, or was it just a sham?

[00:52:55] Speaker 03:
Second point.

[00:52:57] Speaker 03:
Council for the government talks about debt versus equity and how there was one factor in the debt versus equity analysis that was changed.

[00:53:06] Speaker 03:
You won't see that in the economic substance note buzz because those were entirely separate note buzz from the debt versus equity note buzz.

[00:53:13] Speaker 03:
So when the economic substance note buzz are talking about the Dutch Bank credit applications, they're only talking about them in the context of economic substance.

[00:53:22] Speaker 03:
Third point.

[00:53:23] Speaker 03:
everybody knows you put your best evidence forward in your argument first.

[00:53:28] Speaker 03:
And that's exactly what the IRS did in its economic substance note post when it said first in its argument that the Dutch bank credit applications disprove the taxpayers intent and they prove that this was really just a little.

[00:53:44] Speaker 03:
Thank you, Your Honors.

[00:53:44] Speaker 02:
Thank you.

[00:53:45] Speaker 02:
Thank you to both counsel.

[00:53:46] Speaker 02:
The case is submitted.