[00:00:00] Speaker 01:
Good morning, ladies and gentlemen.

[00:00:01] Speaker 01:
Please be seated.

[00:00:10] Speaker 01:
We have five cases on the calendar this morning, a tax case from the Court of Federal Claims, two patent cases, one from the Patent Office, a trade case from the Court of International Trade, and a Veterans Appeal.

[00:00:27] Speaker 01:
The Veterans Appeal and the Patent Office case are being submitted on the briefs and will not be argued.

[00:00:34] Speaker 01:
Our first case is the tax case, Emergen Energy Company versus the United States, 2014, 5067.

[00:00:42] Speaker 01:
Mr. Smith.

[00:00:45] Speaker 02:
Good morning, Your Honor.

[00:00:50] Speaker 02:
May it please the court, Paul Smith, for the appellate.

[00:00:53] Speaker 02:
For many years following the Supreme Court's crane decision, it was well settled that the purchase price basis of an acquired business asset included from the date of acquisition, not just the money paid for that asset, but obligations transferred from the seller should be up to the buyer as consideration for the transfer of the asset.

[00:01:11] Speaker 02:
The government claims, and the court below held, that Congress changed that rule in 1984 when it modified something called the All Events Test.

[00:01:20] Speaker 02:
but providing that it would not be treated as satisfied until something new called economic performance had occurred.

[00:01:27] Speaker 02:
But that argument simply doesn't work because it's undisputed in this case that the term all events test was never used prior to 1984 to refer to the issue at hand, which is the calculation of purchase price basis.

[00:01:43] Speaker 02:
It was always exclusively a test modifying the accrual method of counting

[00:01:47] Speaker 02:
and say whether and when accrual method taxpayers could accelerate deductions including capital expenditures based on the fact that they had simply become obligated to make those expenditures.

[00:01:59] Speaker 01:
Mr. Smith, isn't there a special statute for nuclear decommissioning costs providing for a deduction?

[00:02:09] Speaker 01:
When economic performance decommissioning

[00:02:14] Speaker 01:
occurs during the taxable year?

[00:02:17] Speaker 01:
And wouldn't you be getting a double benefit if we changed the basis and let you take a deduction as well?

[00:02:26] Speaker 02:
No, Your Honor.

[00:02:26] Speaker 02:
There is a statute that says, a separate provision that says the owners of nuclear plants may put money away to pay for decommissioning in the future.

[00:02:36] Speaker 02:
And it has certain tax advantages.

[00:02:37] Speaker 02:
You can deduct, get a deduction when you put the money in.

[00:02:40] Speaker 02:
It's got special tax rates while the money sits in that fund, and then when you take it out... You're talking about 468AA.

[00:02:46] Speaker 01:
Yes, Your Honor.

[00:02:49] Speaker 01:
But the deduction I'm talking about is in addition to A. Your Honor, I'm not sure what... In addition to any deduction under subsection A, it's allowable as a deduction of the amount of the decommissioning costs with respect to which

[00:03:11] Speaker 01:
Economic performance occurs.

[00:03:14] Speaker 01:
It's dependent upon economic performance.

[00:03:16] Speaker 02:
Yes.

[00:03:17] Speaker 02:
That's a business deduction that you take when you're doing the decommissioning down the road.

[00:03:22] Speaker 02:
But 468A has absolutely nothing to do with calculating the basis in the ownership of the plant while the money is sitting there before decommissioning occurs.

[00:03:32] Speaker 02:
If we, Amergen, had built these three plants, the basis would be

[00:03:36] Speaker 02:
the amount of money expended to build the plants, and they would be fully depreciable using that basis.

[00:03:42] Speaker 02:
Instead, we bought the plants, and virtually all of the consideration that we provided was the assumption of the obligation to do decommissioning in the future.

[00:03:51] Speaker 01:
But the assumption of the obligation hasn't been materialized yet until economic performance has occurred.

[00:03:58] Speaker 02:
Your Honor, the crane rule that has been the rule since the 1940s is that when you get the asset now, you need to have

[00:04:06] Speaker 02:
full recognition of the cost.

[00:04:08] Speaker 02:
And to go back to the point you were making, I think it's important to understand, if we get these depreciation deductions, there will not be a second deduction when we then do the decommissioning.

[00:04:18] Speaker 02:
It's all about timing, whether or not we can get depreciation now or amortization now.

[00:04:23] Speaker 02:
But you want a higher basis.

[00:04:25] Speaker 02:
Yes, in order to get the deductions while the building is still experiencing wear and tear.

[00:04:32] Speaker 02:
while we have the asset when we should be getting depreciation deductions.

[00:04:37] Speaker 02:
But if we get those deductions, that means that the decommissioning costs when we then spend the money in 2040 will not be a deductible business expense.

[00:04:48] Speaker 00:
2040 or 2106 or sometime there off in the future.

[00:04:51] Speaker 00:
Yes, Your Honor.

[00:04:52] Speaker 00:
So you'd like to take deductions now, perfectly reasonable given the time value of money, for costs that you're likely to incur

[00:05:01] Speaker 00:
potentially 100 years from now?

[00:05:03] Speaker 00:
No, we'd like to have depreciation and deductions for the basis of the value of- Based on where the entire basis analysis is hinged upon a cost that you intend to occur when you decommission.

[00:05:18] Speaker 00:
But if you can't- So it's an expense you intend to spend.

[00:05:21] Speaker 00:
I don't see how this is any different from wear and tear on my house or anything else.

[00:05:25] Speaker 00:
The only difference is in this case, you're required when you purchase these plants to accept

[00:05:31] Speaker 00:
in a contract term, potential future decommission costs.

[00:05:35] Speaker 00:
Not definitive future decommission costs in terms of a specific date upon which it must be decommissioned, because here this case very much shows the liquidity of the date.

[00:05:45] Speaker 00:
Nor does it specify an amount of decommission costs.

[00:05:48] Speaker 00:
We're just supposed to rely on your assertion of $1.6 billion.

[00:05:52] Speaker 02:
Well, Your Honor, that whole issue was not addressed below the question of the exact amount.

[00:05:57] Speaker 02:
There are formulas for determining that.

[00:05:59] Speaker 02:
that can be addressed on remand.

[00:06:01] Speaker 02:
The only question before the court now is whether it makes sense under the code and whether Congress in 1984 changed the law to provide that when we acquired this asset, we're treated as having paid $93 million for $900 million worth of securities.

[00:06:18] Speaker 00:
Don't you agree that section 461 on its face contains no limitation that your argument hinges on us

[00:06:25] Speaker 00:
accepting the fact that we should read a limitation in based on a legislative intent to codify the judicial version of this all-events test.

[00:06:36] Speaker 02:
Yes, but it uses a term of art that is essentially meaningless unless you look at what the all-events test was at the time Congress passed that statutory amendment.

[00:06:45] Speaker 02:
There was a regulation that was built on the judicial interpretations.

[00:06:50] Speaker 02:
And it said the all-events test is about accrual of deductions

[00:06:54] Speaker 02:
by accrual method taxpayers.

[00:06:55] Speaker 02:
That's in the addendum.

[00:06:57] Speaker 02:
Congress then grabs that term and puts it into the statute.

[00:07:01] Speaker 02:
All of the legislative history is fully consistent with the proposition that the only problem they were addressing was the abuse of the accrual method

[00:07:09] Speaker 02:
tax paying to accelerate obligations merely because they were obligations.

[00:07:13] Speaker 00:
Quite clear, you would like me to use the legislative history to modify the otherwise clear language of the statute.

[00:07:18] Speaker 00:
That's exactly what you're asking me to do.

[00:07:20] Speaker 02:
No, Your Honor, that's the precise opposite of what I'm asking you to do.

[00:07:23] Speaker 02:
I think the statute unambiguously supports us because Congress chose a term of art that has nothing to do with the way that the IRS is now trying to... Certain liabilities not incurred before economic performance.

[00:07:35] Speaker 00:
And then you go through and read it.

[00:07:36] Speaker 00:
I don't see why this doesn't include future decommissioning costs that you may or may not incur.

[00:07:43] Speaker 02:
Because the term all events test was about use of the accrual method to accelerate future expenditures.

[00:07:50] Speaker 02:
We are not asking to deduct the future expenditures.

[00:07:53] Speaker 02:
We're asking to get the full cost of the plants and the securities that we receive recognized as basis so that we can have

[00:08:02] Speaker 02:
don't have this irrational weird world where we have a 93 million dollar basis on 900 million dollars worth of securities and three nuclear plants.

[00:08:09] Speaker 03:
Is it your view that because Congress used the phrase all events test in the statutes that Congress was therefore bound and confined to use the all events test in the same way that Supreme Court had contemplated it?

[00:08:28] Speaker 02:
It was using the term that came from the tax cases and the tax regulations.

[00:08:33] Speaker 03:
But I guess theoretically, I guess my question is theoretically, if Congress wanted to, it had the power and discretion to expand the context of how the All Events Test had previously been used and understood in the court.

[00:08:46] Speaker 02:
Of course, Your Honor, it had that power.

[00:08:47] Speaker 02:
If it had written a statute that said, the All Events Test shall henceforth also apply to the calculation of purchase price basis, then we wouldn't have an argument.

[00:08:55] Speaker 02:
But they didn't say that.

[00:08:56] Speaker 02:
They said the All Events Test

[00:08:58] Speaker 02:
shall not be met until economic performance has occurred.

[00:09:01] Speaker 02:
That's the operative language of the provision.

[00:09:04] Speaker 02:
So it's a narrowing of a test, an addition of a requirement, not a broadening of a test to some other context.

[00:09:10] Speaker 03:
Well, I guess the concern I have with your position is that it didn't appear to me that Congress necessarily just plucked this name of a doctrine and inserted it into a statue.

[00:09:23] Speaker 03:
It also went a little further and actually

[00:09:27] Speaker 03:
gave some meaning to what it understands the all-events test to be in this subsection in 461H4, where it says, for purposes of this subsection, the all-events test is met with respect to any item, if all events have occurred which determine the fact of liability and the amount of such liability can be determined with reasonable accuracy.

[00:09:51] Speaker 03:
So when it says the all-events test is met with respect to any item,

[00:09:57] Speaker 03:
I guess any item except decommissioning liabilities?

[00:10:01] Speaker 02:
Well, Your Honor, that phraseology, like the phraseology in 461H1, doesn't justify, I don't believe, the conclusion that they were suggesting that the all-events test would have any greater scope.

[00:10:15] Speaker 02:
The all-events test, wherever it applies, has these two prongs, which are the ones in 4, which was it already existed, and a third one is added in H1.

[00:10:25] Speaker 02:
But they don't, in either of those sentences, suggest that they're applying the Olivet's test to some greater scope.

[00:10:32] Speaker 02:
And the legislative history and the regulations all are completely consistent with our interpretation, which I think is the plain meaning of the statute.

[00:10:39] Speaker 02:
The odd thing about this case is the IRS, the government, they've got a statute that doesn't support them.

[00:10:44] Speaker 02:
They've got a regulation that they put out in 1992 that doesn't apply to anybody but accrual method taxpayers, because that was the problem that this statute was addressing.

[00:10:51] Speaker 02:
So should I read 461H4 to be

[00:10:55] Speaker 03:
The all events test is met with respect to any item with respect to the deduction of an expense?

[00:11:02] Speaker 02:
The deduction of future expenses where the accrual method is what's at issue.

[00:11:08] Speaker 02:
That's what the all events test was.

[00:11:10] Speaker 02:
It was part of the rules governing the accrual method of tax pay, of accounting.

[00:11:16] Speaker 02:
And either they could accelerate a business expense and get a deduction, or they could accelerate a future capital investment and get

[00:11:23] Speaker 02:
a basis and start depreciating an asset they didn't yet have.

[00:11:26] Speaker 03:
I guess I'm just wondering how would you want us to translate the phrase with respect to any item in 461H4?

[00:11:34] Speaker 02:
The all events test, wherever it applies in any context, has those two prongs plus the third one that's added over in one.

[00:11:42] Speaker 02:
But I don't think that with respect to any item can fairly be read as saying the all events test applies to completely different things that it never applied to before.

[00:11:53] Speaker 02:
How would you know which of the many thousand things in the code it now applies to?

[00:11:57] Speaker 02:
They don't tell you any of that.

[00:11:58] Speaker 02:
It is a term of art.

[00:11:59] Speaker 02:
And when Congress chooses a term of art, there's a strong presumption that they're doing that for a purpose, which is to tell you this is the thing we're dealing with.

[00:12:07] Speaker 02:
They can obviously change the meaning of the term of art, but just putting with respect to any item in there isn't an indication.

[00:12:14] Speaker 01:
Is deference owed here, deference to the agency?

[00:12:18] Speaker 02:
Your Honor, I think the argument for deference here is extraordinarily weak.

[00:12:21] Speaker 02:
First of all, I think the statute has a clear meaning.

[00:12:25] Speaker 02:
Second of all, if it's ambiguous, you look at the legislative history, all of which supports us.

[00:12:30] Speaker 02:
It's all about premature accruals.

[00:12:32] Speaker 02:
There is no reference to purchase price basis or changing the crane rule in the legislative history.

[00:12:37] Speaker 02:
And then you look at what the IRS itself did.

[00:12:40] Speaker 02:
Its regulations all deal with accrual method abuse.

[00:12:44] Speaker 02:
They don't have anything to do with cash method taxpayers, because that's not the issue that the IRS itself

[00:12:50] Speaker 02:
understood Congress to have been addressing.

[00:12:53] Speaker 02:
And so what happens then in the late 90s is these nuclear plants start being bought and sold, and most of the consideration is assumed obligations.

[00:13:02] Speaker 02:
And the IRS decides, well, maybe we can take this rule and put it over in this entirely different context.

[00:13:06] Speaker 02:
But they've never put that interpretation in a regulation.

[00:13:11] Speaker 02:
They basically just started doing private letter rulings and saying that this is what we now read the statute is doing.

[00:13:17] Speaker 02:
But the argument for deference under those circumstances

[00:13:20] Speaker 02:
Given that it contradicts the regulations, contradicts the legislative history, and I submit contradicts the statute, is extremely weak.

[00:13:28] Speaker 01:
Would you like to say the time for a vote?

[00:13:30] Speaker 02:
I appreciate the suggestion, Your Honor.

[00:13:44] Speaker 01:
Mr. Katterow.

[00:13:57] Speaker 04:
may it please the court, Arthur Catterall of the Justice Department on behalf of the government.

[00:14:02] Speaker 04:
The court below correctly held that Amergen may not include estimated future decommissioning costs in its basis for the three nuclear power plants it acquired in 1999 and 2000.

[00:14:13] Speaker 04:
First, the court correctly held on multiple grounds that Amergen may not treat those costs as having been incurred prior to the time economic performance occurs with respect to those costs as provided

[00:14:25] Speaker 04:
in section 461H.

[00:14:26] Speaker 04:
The court began by correctly holding that the plain language of section 461H subjects those costs to the economic performance rule.

[00:14:36] Speaker 01:
Mr. Smith says it doesn't apply to this situation.

[00:14:40] Speaker 04:
Well, let's go ahead and look at the language.

[00:14:43] Speaker 04:
For purposes of this title, i.e.

[00:14:49] Speaker 04:
the internal revenue, the entire internal revenue code,

[00:14:51] Speaker 04:
in determining whether an amount has been incurred with respect to any item during any taxable year, the all events test shall not be treated as met any earlier than when economic performance with respect to such item occurs.

[00:15:04] Speaker 04:
And then subsection H4 says, for purposes of this subsection, i.e.

[00:15:11] Speaker 04:
section 461H, the all events test is met with respect to any item if all events have occurred which determine the fact of liability and the amount of such liability

[00:15:20] Speaker 04:
can be determined with reasonable accuracy.

[00:15:22] Speaker 04:
So what we have here, Amazon claims that for a purpose of the Internal Revenue Code, i.e.

[00:15:30] Speaker 04:
determining its tax bases, an amount, almost 1.7 billion here, was incurred, i.e.

[00:15:38] Speaker 04:
through an assumption of liabilities with respect to an item decommissioning costs during two taxable years, 1999 and 2000.

[00:15:49] Speaker 04:
So under the plain terms of Section 461H1, in determining whether for tax purposes, Amergen incurred the claimed amount of costs in 1999 and 2000, the all events test of Section 461H4, a provision that like Section 461H1 is phrased in terms of any item, is not met until economic performance occurs with respect to these costs.

[00:16:18] Speaker 04:
And in their briefs and in the primary argument here, Amaritan repeatedly claims that Section 461H expressly precludes the economic performance rule from applying to obligations assumed in connection with the purchase of an asset.

[00:16:41] Speaker 04:
And instead of pointing to any language in the statute to that effect,

[00:16:45] Speaker 04:
They rely heavily on a footnote in a Supreme Court case, a case that did not even involve Section 461H, in which the court simply stated, the obvious, Section 461H imposed limits on the application of the judicially created all events test, i.e., by providing that the test is not met any earlier than when economic performance occurs.

[00:17:10] Speaker 01:
How do you deal with Crane?

[00:17:15] Speaker 04:
I just don't see where crane is a problem because to begin with... Well, if this case was before 1984, then you would apply crane to the facts of this case, right?

[00:17:35] Speaker 04:
Sure, yeah.

[00:17:38] Speaker 04:
Absolutely, yes.

[00:17:39] Speaker 03:
And so the idea here is that all events test is a technical term of art for purposes of tax reform.

[00:17:46] Speaker 04:
But I think it's important to note that if there was a separate test under crane as opposed to the all events test, maybe it was separate in name, but in substance it's the exact same test.

[00:18:00] Speaker 04:
The question is whether the future obligation

[00:18:05] Speaker 04:
is that the fact of liability is fixed, and the amount thereof is determinable with reasonable accuracy.

[00:18:11] Speaker 04:
That's the test under Crane.

[00:18:12] Speaker 04:
It's the test under the old all-events test.

[00:18:16] Speaker 00:
But did Crane have a provision that requires the economic performance?

[00:18:20] Speaker 00:
No, no, no.

[00:18:21] Speaker 00:
See, but that's the issue, right?

[00:18:23] Speaker 00:
The 1984 Amendment to 461 added economic performance, and that's the reason they're not able to adjust.

[00:18:31] Speaker 00:
And so I think Judge Chen's point is

[00:18:34] Speaker 00:
If Crane were the law of the land and economic performance were not required, they'd be able to do exactly what they wanted.

[00:18:41] Speaker 04:
Right.

[00:18:41] Speaker 04:
And in this narrow sense, Congress effectively added for accrual basis taxpayers, added this economic performance requirement.

[00:18:54] Speaker 00:
So Congress changed Crane to add additional requirements.

[00:18:57] Speaker 04:
With respect to accrual basis taxpayers.

[00:19:00] Speaker 04:
Yes.

[00:19:03] Speaker 03:
I guess the other side was saying in their brief something about when it comes to purchase price basis, can these issues come up whether you're a cash method or a cruel method, and yet now we're trying to somehow force it 461H, which is for only a cruel method, into an understanding of what to do here.

[00:19:31] Speaker 04:
And I don't understand why, I mean, Amergen's argument is that because the crane doctrine applied equally to cash basis and accrual method taxpayers, Congress can't make, can't change the crane rule with respect to accrual method taxpayers without also, and I think the implication is Congress can't do that unless it

[00:20:00] Speaker 04:
also makes the same change with respect to cash basis taxpayers.

[00:20:06] Speaker 04:
In our brief, we invited Amergen to cite a principle of statutory construction that would require that result.

[00:20:14] Speaker 04:
And in their reply brief, they didn't do so.

[00:20:17] Speaker 04:
They just proclaim, based on what their view of logic and common sense is, that the IRS's position is unsustainable.

[00:20:26] Speaker 04:
And just saying that is so doesn't make it so.

[00:20:30] Speaker 04:
So I just don't think that, I think the whole crane argument is really a red herring.

[00:20:40] Speaker 04:
And it just doesn't, it doesn't overcome the plain language of the statute.

[00:20:48] Speaker 04:
And again, as counsel has stated- Does cranes still get applied or is

[00:20:57] Speaker 03:
Is Crane gone now?

[00:20:59] Speaker 04:
No, Crane is certainly, Crane is certainly still there for cash method taxpayers.

[00:21:06] Speaker 04:
And the thing is, you know, you can say, well, theoretically, Congress has sort of tweaked the Crane rule.

[00:21:17] Speaker 04:
But in practicality, the Crane rule was the same as the all events test.

[00:21:27] Speaker 04:
So I just don't think that there's too much being made of the Crane Rule.

[00:21:36] Speaker 04:
And also, Crane arose in the context of purchase price mortgages.

[00:21:44] Speaker 04:
And that rule, the Crane Rule, the result in Crane is exactly the same under the economic performance requirement because

[00:21:56] Speaker 04:
when you receive property and you incur an obligation with respect to that purchase, economic performance is deemed to occur when you receive the property.

[00:22:09] Speaker 01:
You haven't mentioned 468A, but isn't that key to your position?

[00:22:16] Speaker 04:
Well, it certainly is.

[00:22:19] Speaker 01:
The specific controlling the general?

[00:22:23] Speaker 04:
Well, it certainly

[00:22:25] Speaker 04:
indicates that Congress thought that nuclear decommissioning costs should be subject to the economic performance requirement.

[00:22:35] Speaker 01:
And provided for a deduction.

[00:22:38] Speaker 04:
Right.

[00:22:38] Speaker 04:
Right.

[00:22:39] Speaker 04:
And it gives you an upfront deduction for a contribution to a qualified fund.

[00:22:46] Speaker 04:
Then down the road, when you use those funds for the decommissioning, when you withdraw the money,

[00:22:55] Speaker 04:
you recognize income, and then when you make the expenditure, you get a deduction because you are economically performing.

[00:23:04] Speaker 04:
So it's certainly consistent with everything that we're saying.

[00:23:09] Speaker 04:
And I think it's important to note that Amergen's position is, well, just by using the words all events test, Congress must have imported wholesale every aspect

[00:23:24] Speaker 04:
scope, et cetera, of that test into the statute.

[00:23:27] Speaker 04:
And as we pointed out, if Congress had wanted to do that, it very easily could have done that.

[00:23:34] Speaker 04:
And a perfect example is when it codified the economic substance doctrine just four or five years ago in section 77010, where the statute defines the economic substance doctrine in terms of

[00:23:54] Speaker 04:
the common law doctrine under which, et cetera, et cetera, et cetera.

[00:23:59] Speaker 03:
But you don't expect Congress to have to say that every single time it adopts some common law doctrine for it to actually use the magic words.

[00:24:09] Speaker 03:
We use this term as it's understood in the common law prior to the enactment of this.

[00:24:15] Speaker 03:
That's never been the law to understand whether or not Congress is codified.

[00:24:22] Speaker 04:
Well, I would just say this.

[00:24:24] Speaker 04:
Well, I would just say that the council has said, well, you know, Congress could easily have, you know, limited or could have easily said this is limited to deductions and doesn't apply to purchase price basis.

[00:24:41] Speaker 04:
Well, the same goes the other way.

[00:24:43] Speaker 04:
They very easily could have said that, you know, the all events test is, you know,

[00:24:54] Speaker 04:
based on, we are importing the all events test from existing case law, but they didn't do that.

[00:25:02] Speaker 00:
Not only did they not do that, isn't it clear that they meant to explain the precise contours of the all events test even in a way that would be inconsistent with existing case law because they added an additional element?

[00:25:17] Speaker 04:
Sure, yeah, right, exactly.

[00:25:19] Speaker 04:
They added, just like Congress tweaked the common law economic substance doctrine, they did the same with the all events test.

[00:25:27] Speaker 04:
And in addition to adding this economic performance requirement, the language of the statute is broad and not limited.

[00:25:37] Speaker 04:
And it's for purposes of this title, for purposes of the Internal Revenue Code, any item is subjected to this rule.

[00:25:47] Speaker 04:
So the analysis can end there, just on the language of the statute.

[00:25:55] Speaker 04:
The court also looked at the legislative history and concluded that it confirmed its view.

[00:26:05] Speaker 04:
And the legislative history, it does confirm any item view, because it expressly says that

[00:26:14] Speaker 04:
that this new rule applies to both non-capital items, i.e.

[00:26:19] Speaker 04:
deductible expenses, and capital items.

[00:26:22] Speaker 04:
Expressly says that.

[00:26:25] Speaker 03:
What am I supposed to take away from that?

[00:26:27] Speaker 03:
Because the vast bulk of the legislative history statements I read

[00:26:33] Speaker 03:
seemed to be consistently sprinkled with the notion of deducting an expense.

[00:26:39] Speaker 03:
If you really look for the word deduction of an expense, you would see that many, many, many more times than this capital.

[00:26:47] Speaker 04:
And that's certainly, you can certainly draw the inference that that was their main concern.

[00:26:55] Speaker 03:
Because that's what the all events test was used for.

[00:27:00] Speaker 04:
The fact that they are also now applying this to capital items indicates that they are not, that Congress did not mean to limit the All Events Test to where it previously applied.

[00:27:12] Speaker 04:
You know, again, maybe deductible expense.

[00:27:15] Speaker 03:
Because the All Events Test was never applied to capital items?

[00:27:18] Speaker 03:
I'm sorry?

[00:27:18] Speaker 03:
Because the All Events Test had never previously been applied to capital items?

[00:27:22] Speaker 04:
Well, the All Events Test did apply.

[00:27:25] Speaker 04:
I mean, if you look at the old regulation,

[00:27:28] Speaker 04:
that embodies the all events test.

[00:27:31] Speaker 04:
And I think we cited this in our brief.

[00:27:34] Speaker 04:
The first sentence cites the all events test and then it says, of course, you're still subject to capitalization rules.

[00:27:45] Speaker 04:
So even if your expenditure meets the test, if it's a capital expense, you don't get to deduct it right now.

[00:27:53] Speaker 04:
So why should there be a difference between

[00:27:57] Speaker 04:
a capital expenditure, you know, in the nature of betterment or improvement, as opposed to a capital expenditure in the form of purchasing a wholly new plant.

[00:28:10] Speaker 04:
Amarjan never explains why there should be a distinction between those two.

[00:28:15] Speaker 04:
Congress clearly did not see a distinction between those two.

[00:28:19] Speaker 00:
The related cases says there are no other related cases.

[00:28:22] Speaker 00:
I mean, this seems like an unusual

[00:28:25] Speaker 00:
I mean in this case the taxpayers repeatedly asked for advice from the IRS and repeatedly told no, this would not be allowed prior to their purchase, right?

[00:28:35] Speaker 00:
That's my recollection.

[00:28:36] Speaker 00:
And in 2009, 5468 was amended such that now even these taxpayers are taking advantage of

[00:28:44] Speaker 00:
the new tax benefits accorded to 468 because it doesn't have to have a cap on it anymore.

[00:28:50] Speaker 04:
Right.

[00:28:50] Speaker 04:
And they got a $450 million deduction.

[00:28:52] Speaker 00:
Right.

[00:28:52] Speaker 00:
That was the double-dipping that Judge Rory alluded to in the very beginning when he was talking to your closing counsel.

[00:29:00] Speaker 00:
So I guess my question is, is there any reason to think there are going to be any more of these cases?

[00:29:05] Speaker 00:
Is this a one-time, you know, they're going for the Hail Mary pass because they've got $1.6 billion they'd like to advance now.

[00:29:12] Speaker 00:
for deductibility purposes.

[00:29:16] Speaker 00:
Is this a Hail Mary or are there other cases?

[00:29:19] Speaker 00:
Is this something that matters?

[00:29:20] Speaker 04:
Well, you saw that there was an amicus brief filed by Entergy Corporation.

[00:29:25] Speaker 04:
So they have the same issue.

[00:29:28] Speaker 04:
So I don't know how many.

[00:29:31] Speaker 00:
When you say they have the same issue, did they actually already file to amend?

[00:29:36] Speaker 04:
Well, I know they had the issue.

[00:29:37] Speaker 00:
Or are they just looking to get this result and then they'll file to amend?

[00:29:40] Speaker 04:
Well, they had this issue.

[00:29:42] Speaker 04:
earlier and went to the tax court and it settled.

[00:29:48] Speaker 04:
Obviously, you have this issue every year.

[00:29:52] Speaker 04:
So yes, there are other taxpayers and there are certainly other years that are going to be affected.

[00:30:02] Speaker 01:
Do you have a final thought, Mr. Cattarola?

[00:30:06] Speaker 04:
The final thought, I guess, would be that

[00:30:11] Speaker 04:
The plain language of the statute should end the inquiry.

[00:30:16] Speaker 04:
And so all of these hacks on the regulations are irrelevant if the court just follows the plain language of the statute.

[00:30:24] Speaker 01:
Thank you.

[00:30:28] Speaker 01:
Mr. Smith, I trust that what you're wearing on your arm didn't result from dueling with the IRS.

[00:30:33] Speaker 02:
No, Your Honor.

[00:30:35] Speaker 02:
Your clumsiness, I'm afraid.

[00:30:37] Speaker 01:
We'll give you a full three minutes.

[00:30:39] Speaker 01:
Thank you so much.

[00:30:40] Speaker 02:
I think, to start, Mr. Carroll acknowledged that we would have won this case if it had occurred in 1983 before this statutory change occurred.

[00:30:50] Speaker 02:
And it's also, I think, acknowledged that the all-events test would not have applied to this transaction in 1983 because it didn't have anything to do with this transaction.

[00:31:00] Speaker 02:
There was a test called the non-contingent test, which was similar in those days.

[00:31:04] Speaker 02:
And the real question is whether both got changed or simply the all events test got changed in 1984.

[00:31:10] Speaker 02:
And I would submit that it's perverse to suggest that Congress, given that reality, given the fact that this term had a well understood meaning, intentionally set out to broaden the all events test to cover this issue of calculating basis by using the language that is in 461.

[00:31:28] Speaker 02:
It's not as if they said, you know, for purposes of this title and determining whether an amount has been incurred

[00:31:34] Speaker 02:
with respect to any item, the all events test should be used for everything.

[00:31:38] Speaker 02:
They simply said it shall not be used until some additional requirement has been added.

[00:31:43] Speaker 02:
It is rather strange, I think, to read a restrictive sentence as adding breadth rather than narrowing the test and making it more restrictive.

[00:31:52] Speaker 02:
Let me address, if I could, the issue of the references to capital items in the legislative history.

[00:31:58] Speaker 02:
The all events test always has had a relevance to

[00:32:04] Speaker 02:
future obligations which accrual method taxpayers tried to accelerate.

[00:32:09] Speaker 02:
Most of those would be ordinary business deductions which they would obligate themselves to pay in 2020 and try to deduct now.

[00:32:18] Speaker 02:
But they could also be future capital expenditures which they would obligate themselves to pay and try to capitalize now based merely on the fact that they were obligated to pay in the future and they're using an accrual method of accounting.

[00:32:33] Speaker 02:
This case is the opposite.

[00:32:35] Speaker 02:
This is a case where it's not some future transaction we're trying to move to the present using accounting methods.

[00:32:41] Speaker 02:
This is a transaction that's already occurred.

[00:32:42] Speaker 02:
We have the asset, and it's a question of calculating what the cost of that asset was.

[00:32:49] Speaker 02:
And the crane rule, which had nothing to do with the all events test, says you do take into account, once you have the asset and the transaction has closed, you take into account not just cash you paid,

[00:33:01] Speaker 02:
but obligations you assumed.

[00:33:03] Speaker 01:
Otherwise, you get this.

[00:33:04] Speaker 01:
You're talking about the cost that you incurred, but it's a liability, right?

[00:33:09] Speaker 01:
Yes, it's assumed liability.

[00:33:12] Speaker 01:
461H2B talks about the liability occurring as taxpayers provide property of the services.

[00:33:23] Speaker 02:
Well, yes, that's one of the ways in which the economic performance rule is laid out in the statute, but it doesn't apply

[00:33:31] Speaker 02:
to the calculation of basis.

[00:33:33] Speaker 02:
It applies to deductions and the acceleration of future expenses.

[00:33:37] Speaker 02:
That is, I think, the only fair reading.

[00:33:38] Speaker 02:
It is the reading the IRS gave the statute in its own regulations.

[00:33:43] Speaker 02:
Thank you.

[00:33:43] Speaker 01:
Thank you, Mr. Smith.

[00:33:44] Speaker 01:
This is a taxing case.

[00:33:47] Speaker 01:
We will take it under advisement.