[00:00:00] Speaker 00:
Good morning.

[00:00:05] Speaker 00:
We have four cases on the calendar this morning.

[00:00:11] Speaker 00:
Tax case from the Court of Federal Claims, two patent cases, a government employee case.

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One of the patent cases has been submitted on the briefs and will not be argued.

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Our first case is

[00:00:26] Speaker 00:
Mr. Wilson is speaking first.

[00:00:31] Speaker 00:
Yes, Your Honor.

[00:00:34] Speaker 01:
May I approach?

[00:00:39] Speaker 00:
Please.

[00:00:40] Speaker 01:
Good morning, Your Honors, and may it please the Court.

[00:00:53] Speaker 01:
At issue is whether FLPJ

[00:00:55] Speaker 01:
a Japanese entity owned by plaintiffs, possessed sufficient corporate characteristics, here three out of four, to be taxed as a corporation rather than as a partnership.

[00:01:04] Speaker 01:
Plaintiffs concede that FLPJ possessed one of these characteristics, continuity of life.

[00:01:09] Speaker 01:
However, on cross motions for summary judgment, the trial court was wrong to rule that all three of the other corporate characteristics are present.

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I will address them in the order presented in the brief, in the order in which they appear in the regulations.

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However, one overarching consideration must be kept in mind.

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The Kintner regulations are biased in favor of partnerships.

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They were promulgated as a response to a flurry of judicial decisions upholding the taxation of entities as corporations for the favorable tax benefits that attended to that.

[00:01:39] Speaker 00:
Well, we don't deal with bias, do we?

[00:01:41] Speaker 00:
We just look at the four qualifications.

[00:01:45] Speaker 01:
The bias goes to the intent underlying the Kintner regulations and the manner in which they must be interpreted when applied to the facts of this case.

[00:01:53] Speaker 01:
The government at the time was casting a wide partnership net to ensnare as many entities as possible.

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In this case, FLPJ gets caught in that net, which in this instance does not suit defendants.

[00:02:04] Speaker 01:
With that in mind, I'd like to turn first to the centralization of management.

[00:02:08] Speaker 04:
Except that they didn't get caught in that net, right?

[00:02:10] Speaker 04:
I mean, for years you claimed that you were a corporation, and then when you got a different tax ruling in Japan, you tried to change that.

[00:02:17] Speaker 04:
So they never did aggressively use those regulations to declare you a partnership,

[00:02:22] Speaker 04:
over your objections until much later on.

[00:02:26] Speaker 01:
They were initially formed, FLPJ was initially formed as a Kabushiki Kaisha in Japan, a KK, which is akin to a corporation.

[00:02:37] Speaker 01:
But it wasn't just formed as a Kabushiki Kaisha, it also qualified as a Dozoku Kaisha, which is akin to a small, close corporation, which is akin to a family-owned corporation with just two owners.

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The reason it was formed at the Kabushiki Kaisha is that in Japan, that elevates the company to a lot higher status.

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And in 1996 and forwards, they started checking the box after the Kindle regulations were abolished by the Check the Box regulations as a partnership.

[00:03:05] Speaker 01:
The point is, SLPJ always operated as a partnership, regardless of how it was classified in Japan.

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And under the Kindle regulations, we did not look to how it was classified at the time.

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A limited partnership could be treated as a corporation or a corporation nominally called a corporation could be treated as a partnership.

[00:03:23] Speaker 01:
As to the centralization of management, I'd like to focus on the parenthetical language at issue, which says that an organization has centralized management if any person or any group of persons, and this is important, which does not include all the members, has continuing exclusive authority to make management decisions.

[00:03:41] Speaker 01:
that parenthetical language states that when all of the members are in the group with management authority, there is no centralization of management.

[00:03:47] Speaker 01:
It's clear and it's unambiguous, and the trial court correctly agreed that for the years in which all of the entities' members are present in the group with management authority, there is no centralized management.

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However, the trial court erred by holding that after plaintiffs placed their shares in S corporation holding companies for no other reason than to just hold the shares, centralized management was no longer present because

[00:04:11] Speaker 01:
and I quote, Mon and Yamagata did not own shares in FLPJ as individuals and were therefore not members of the organization within the meaning of the Kintner regulation.

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The court's opinion is thus premised on the requirement that the shares be held by the members as individuals.

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However, the Kintner regulations draw no distinction between forms of ownership.

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The fact that Mon and Yamagata placed their shares in 1992 in holding companies has no effect on who actually owned FLPJ.

[00:04:41] Speaker 05:
But those holding companies are different legal entities, are they not?

[00:04:45] Speaker 01:
They are separate legal entities, but in effect, as is recognized in Morton versus United States, which was decided by the judge initially presiding in this case, that an S corporation passed through holding company is nothing but the alter ego of the individual holding the shares in that holding company.

[00:05:06] Speaker 01:
Both this case and Morton involved the question of whether the owner of an S corporation and the S corporation itself are one and the same for tax purposes.

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As I just explained, Morton said that they are.

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This is different from the case of Zuckman, which the trial court pinned its ruling on.

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Zuckman dealt with constructive ownership issues and involved entities very different from the ones that issue in this case.

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Zuckman did not mention S corporations.

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The court in Zuckman was asked to determine whether a 51% interest in a limited partnership traveled up a chain of two additional entities to the individual owner.

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The entities in that chain of ownership were not entities formed for the sole purpose of holding shares in the corporation.

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They had boards of directors to manage their affairs.

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In this case, we have just one entity between each plaintiff and FLPJ, the underlying taxpayer.

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Entities with no other members, no boards,

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and no purpose other than to hold the shares in the company.

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The holding companies here fit the Morton decision rather than Zuckman, and ultimately, SLPJ's owners at all times were plaintiffs, not the underlying companies.

[00:06:13] Speaker 00:
What about free transferability?

[00:06:16] Speaker 01:
As for free transferability, Your Honor, the last of the kidney regulation factors.

[00:06:20] Speaker 01:
I'd like to focus on the right of first refusal and the restrictions that were placed on those shares.

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upon Jean Yamagata's death, one of the owners of FLPJ.

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Looking first to the right of first refusal, for free transferability to exist, each member must be able, without the consent of the other member, to confer upon his substitute all of the attributes of his interest in the organization.

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A right of first refusal, where the seller must first offer his interest to the other member, allows the other member to prevent the transfer to his substitute, thus precluding free transferability.

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However, the Kintler regulations recognize that.

[00:07:00] Speaker 00:
Well, just because there is that right of the person to choose, it doesn't prevent us from being transferred, even if they are markup value, isn't that correct?

[00:07:09] Speaker 00:
It's just a question of to whom it's transferred.

[00:07:14] Speaker 01:
In that situation, it would be transferred to the other member, not to somebody that the transferring member was free to choose.

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at whatever price he was able to get on the open market.

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He was basically forced to transfer to the other member.

[00:07:28] Speaker 01:
That is not free transferability.

[00:07:29] Speaker 01:
That's a forced transfer to the other member.

[00:07:32] Speaker 04:
But at fair market value?

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There's no requirements in the Kintna regulations that the transfer... Sorry.

[00:07:40] Speaker 01:
There is no requirement in the settlement agreements governing the parties that the transfer happen at fair market value.

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the kidney regulations.

[00:07:49] Speaker 04:
Is there any requirement that it be at the receiving partners or the receiving person's set price?

[00:07:58] Speaker 01:
No, the settlement agreement speaks not to price in respect to the transfer between the owners.

[00:08:03] Speaker 01:
It just speaks to a right of first refusal.

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It must first be offered to the non-selling shareholder.

[00:08:08] Speaker 04:
Well, if the non-selling shareholder doesn't give a fair price, then isn't the other party allowed to go out and sell it to somebody else at fair market value?

[00:08:17] Speaker 01:
Well, the selling party must specify a price, but the settlement agreement doesn't define what that price should be or set up a mechanism.

[00:08:24] Speaker 01:
It says that the selling shareholder cannot then turn around and sell it to somebody on the open market for a better price than he offered it to the receiving shareholder.

[00:08:34] Speaker 04:
I'm still not following how this would force them to sell at less than fair market value.

[00:08:39] Speaker 01:
You could try and sell it for more than fair market value to the non-selling shareholder.

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For example, if you had a competitor trying to effect a hostile takeover, he knows he can get a premium for it out on the open market.

[00:08:51] Speaker 01:
He could sell it to the non-selling shareholder offer to sell to the non-selling market at an inflated price.

[00:08:57] Speaker 01:
Obviously, the non-selling shareholder says that's too much and refuse.

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And then the selling shareholder can turn around on the open market and attempt to sell it.

[00:09:05] Speaker 04:
That sounds like free transferability to me.

[00:09:08] Speaker 04:
Well, in order for free transferability, it seems like your definition of free transferability is there can be no restriction in any way whatsoever on the right of the party to transfer.

[00:09:20] Speaker 04:
And that doesn't seem to me to be what the Kintner regulations require.

[00:09:25] Speaker 01:
Reading the language from the Kintner regulations themselves, the language states, if each member can transfer his interest to a non-member,

[00:09:34] Speaker 01:
only after having offered such interest to the other member at fair market value, it will be recognized that a modified form of free transferability exists.

[00:09:43] Speaker 01:
So the Kintner regulations require that in this situation where you have a right of first refusal, that right of first refusal be at fair market value.

[00:09:51] Speaker 01:
That is only after having offered his interest at fair market value.

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There is no requirement in the settlement agreement for that transfer to happen at a fair market value.

[00:10:02] Speaker 01:
It may result

[00:10:04] Speaker 04:
But there's no requirement that it doesn't.

[00:10:06] Speaker 01:
Yeah, there's no requirement at all whatsoever.

[00:10:08] Speaker 01:
And that is exactly the point.

[00:10:08] Speaker 01:
There needs to be a requirement in there under the Kintner regulations in order for a modified form of free transferability to exist.

[00:10:18] Speaker 01:
I'd like to turn back, if I may, Your Honors, to limited liability, one of the other factors at issue here.

[00:10:26] Speaker 01:
This is purely a legal inquiry.

[00:10:28] Speaker 01:
The Kintner regulations direct us to consider under local law

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whether a creditor of the organization could seek personal satisfaction from a member of the organization.

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Hence, there's no need for factual inquiry as to whether actual liability exists or not, or whether a transaction actually had been denied or not, or whether the decision of the national tax authority referred to the denial of transaction liability.

[00:10:51] Speaker 01:
The only question is whether the Japanese legal structure allowed for personal liability of members of certain entities, and whether plaintiffs are members of such an entity.

[00:11:02] Speaker 01:
The case here is very clear, but the trial court failed to draw a distinction between FLPJ as a Kabushiki kaisha and a Dozoku kaisha.

[00:11:10] Speaker 01:
But FLPJ's status as a Dozoku kaisha is fundamental to understanding plaintiff's exposure to personal liability.

[00:11:17] Speaker 01:
For limited liability to be lacking under the Kintner regulation, all that is needed is its legal framework under which the members of an entity could be personally liable to a creditor when the assets of the organization are insufficient to satisfy the creditor's claim.

[00:11:31] Speaker 01:
Here we have a creditor, the NTA, and the creditor's claim, the amount of tax that was said to be owing by SLPJ.

[00:11:41] Speaker 01:
Under Article 132 of the Corporation Tax Law, a transaction or accounting treatment by a Dezoku Kaisha will be denied with a resulting increase in tax if the transaction or accounting treatment is found to unduly reduce the tax.

[00:11:55] Speaker 01:
Under the Income Tax Law of Japan, Articles 157 and 168,

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the members themselves of the company can be made liable for this additional tax obligation as members of the company.

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Furthermore, under Article 36 of the National Tax Collection Act, the members can be made liable if they merely benefited from the transaction, not if they participated in the transaction.

[00:12:18] Speaker 01:
This is important because one of the underpinnings of the trial court's opinion here is that the members needed to participate in the underlying denied transaction

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in order to be liable for the resulting tax liabilities or profits that they received from it.

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And this is not true under Japanese tax law.

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Anybody who merely benefits, whether they caused the transaction that ultimately got denied or not, can be held liable for that ultimate liability.

[00:12:44] Speaker 01:
This is different than piercing the corporate veil, which is what the travel courts base its ruling on under the participation in the transaction theory.

[00:12:53] Speaker 01:
This is a completely different type of liability.

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and therefore not precluded or does not result in the limited liability contemplated by the Canada regulations.

[00:13:03] Speaker 01:
I see I'm almost out of time.

[00:13:04] Speaker 01:
Your Honours, you are beyond my time.

[00:13:06] Speaker 00:
You are in fact out of time.

[00:13:08] Speaker 00:
Thank you, Mr. Wilson.

[00:13:09] Speaker 00:
Thank you.

[00:13:10] Speaker 00:
Mr. Cattarall representing the government.

[00:13:30] Speaker 03:
May it please the court.

[00:13:31] Speaker 03:
I'm Arthur Cavarol, the Justice Department on behalf of the United States.

[00:13:36] Speaker 03:
I will start with the characteristic of centralized management.

[00:13:40] Speaker 04:
Let me make sure I understand.

[00:13:42] Speaker 04:
If we agree with you on limited liability and pre-transferability, we don't have to reach centralized management.

[00:13:48] Speaker 04:
Is that right?

[00:13:49] Speaker 04:
Because there will be three of the four.

[00:13:50] Speaker 04:
Correct.

[00:13:51] Speaker 03:
Okay.

[00:13:53] Speaker 03:
Starting with centralized management, the court correctly found that

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As is the case with the board of directors of a domestic statutory corporation, exclusive managerial authority resided in FLPJ's board of directors, and the taxpayers' arguments to the contrary are unavailing.

[00:14:11] Speaker 03:
First, the taxpayers argue that because Mon and Yamagata controlled the board by virtue of their respective 50% stock holdings, the board's managerial authority could not have been exclusive of the shareholders.

[00:14:24] Speaker 03:
But under that argument, as the court recognized, no closely held entity could ever have centralized management.

[00:14:32] Speaker 03:
As the regulations recognize, the essence of centralized management is that no owner can bind the entity simply by virtue of his status as an owner.

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And decisions of the management group do not require ratification of the owners in their capacity as such.

[00:14:48] Speaker 03:
Both of those conditions were indisputably present.

[00:14:52] Speaker 04:
Sorry, I don't mean Senator Rob Butcher.

[00:14:54] Speaker 04:
These regulations aren't in effect anymore.

[00:14:56] Speaker 04:
That is correct.

[00:14:56] Speaker 04:
And so this question of what constitutes centralized management, is this going to be come up in any other cases?

[00:15:04] Speaker 03:
Probably and frequently, because the new regime took effect, I believe, January of 97.

[00:15:10] Speaker 03:
So we're talking 18 years.

[00:15:12] Speaker 04:
I mean, it just seems to me that the regulation on this issue is not particularly well worded, and it's hard to understand.

[00:15:20] Speaker 04:
If it were going to have some kind of ongoing effect, it might make sense for us to sort it out.

[00:15:25] Speaker 04:
But if it doesn't, and we can affirm based on the other two, then I'm not sure why we would need to address what honestly seems to be pretty badly written regulation.

[00:15:39] Speaker 03:
I would agree that the regulation is not the best drafted piece of administrative work.

[00:15:48] Speaker 03:
But again, as you indicate, there will be very few cases going forward that implicate these regulations.

[00:15:59] Speaker 03:
I would like to point out another argument that the taxpayers make regarding centralized management, and that is that the managerial authority was not exclusively vested in the board because, according to them, representative directors of a Japanese joint stock company

[00:16:18] Speaker 03:
can act independently of the board.

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In our brief, we explained that representative directors are analogous to board members who also serve as officers of the company.

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They can act on behalf of the company in their capacity as officers, but only within the parameters established by the full board.

[00:16:36] Speaker 03:
And in their reply brief, the taxpayers selectively cite to a portion of an excerpt from a Japanese corporate law treatise, which is page 542 of the Joint Appendix,

[00:16:48] Speaker 03:
that discusses the all-inclusive authority of representative directors, suggesting that this authority is independent of the board.

[00:16:57] Speaker 03:
But the surrounding pages of the treatise refute this notion.

[00:17:03] Speaker 03:
At first, it's significant that this treatise refers to representative directors as, quote, President Perrin, representative of board of directors, close Perrin, which certainly sounds officer-like.

[00:17:17] Speaker 03:
And this is from page 540 of the physical compilation of the Joint Appendix.

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And it's addressing the relationship between the Board of Directors and the President Perrin, representative of the Board of Directors, close Perrin.

[00:17:31] Speaker 03:
And specifically, the level of delegated authority to the President Perrin, representative of Board of Directors, in terms of business management decision making.

[00:17:43] Speaker 03:
The Board of Directors is the decision making body that deals with business management.

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The business management body that implements the decisions is the president, per end, representative board of directors and members of the board that are in charge of the operations.

[00:17:59] Speaker 03:
So the treatise continues that although decision making authority on business management activities is placed in the board of directors, it is too troublesome for the board to determine everything in terms of daily business management activities.

[00:18:14] Speaker 03:
And that authority to run the day to day operations

[00:18:17] Speaker 03:
is delegated to the representative directors, and that's precisely analogous to a domestic statutory corporation.

[00:18:25] Speaker 05:
Can I get you to shift gears and talk a little bit about limited liability, and in particular, how would you respond to Mr. Wilson's argument about liability exposure of members of a dozuku kaisha?

[00:18:40] Speaker 03:
Right, I would, just to sort of recap,

[00:18:46] Speaker 03:
under Article 132 of Japan's corporation tax law, the tax authorities can re-characterize transactions of a closely held company in order to more clearly reflect the company's true income, and this is the denial of transactions rule.

[00:19:00] Speaker 03:
And then Article 36 of the National Tax Collection Act provides that if the company fails to pay any increased tax resulting from such a re-characterization of the transaction, the tax may be collected from, quote, any individual who is deemed to have benefited from the transaction.

[00:19:17] Speaker 03:
to the extent of such benefit.

[00:19:22] Speaker 03:
Now, the taxpayers claim that this potential liability destroys limited liability in the case of closely held corporations in Japan.

[00:19:30] Speaker 03:
The Court of Federal Claims correctly rejected this argument, citing cases holding that the liability contemplated in the Kintner regulations is liability that attaches solely by reason of an owner's status as an owner.

[00:19:44] Speaker 03:
And liability that results from the owner's actions, as would be the case under Article 36, is not what the Kentner regulations are focused on.

[00:19:54] Speaker 03:
And on appeal, the taxpayers argued that because participation in the company's suspect treatment of a recharacterized transaction is not required for liability to attach under Article 36, it follows that such liability arises solely by reason of a shareholder's status as a shareholder.

[00:20:13] Speaker 03:
But that can't be true since, as the taxpayers acknowledge, shareholder status is likewise not required for liability to attach under Article 36.

[00:20:24] Speaker 03:
All that is required is that the individual have benefited from the re-characterized transaction.

[00:20:30] Speaker 03:
Now the taxpayers will argue that, well, the individuals who benefit will almost always be shareholders.

[00:20:36] Speaker 03:
But as we argued in our brief, those same shareholders will almost always be the ones behind the scheme

[00:20:43] Speaker 03:
as they were in this case, so that as a practical matter, liability under Article 36 of the National Tax Collection Act derives from the shareholder's actions, not from his status as a shareholder.

[00:20:57] Speaker 03:
In their opening brief, the taxpayers cite their own expert's rationale for this denial of transactions rule, and that is in small family corporations, the members

[00:21:07] Speaker 03:
can easily adopt accounting treatments that unduly reduce the company's tax liabilities.

[00:21:14] Speaker 03:
So that is my response to the limited liability issue.

[00:21:21] Speaker 03:
And again, the court correctly noted that if the theoretical ability of an entity's creditor to reach

[00:21:31] Speaker 03:
an entity's owner in a single limited circumstance were sufficient to destroy limited liability under these regulations, it is unlikely that any closely held entity could ever be said to exhibit the corporate characteristic of limited liability.

[00:21:47] Speaker 03:
And I'd also point out that in that regard, this Article 36 of the National Tax Collection Act is somewhat analogous to the transferee liability provisions of the Internal Revenue Code.

[00:22:00] Speaker 03:
pursuant to which the IRS can collect unpaid taxes of a corporation from people who benefited from such non-payment, i.e.

[00:22:09] Speaker 03:
as transferees of the corporation's assets.

[00:22:12] Speaker 03:
So if such potential liability in that narrow context could destroy limited liability, then no corporation could be said to afford its shareholders limited liability.

[00:22:24] Speaker 05:
Let me move you to the next modified free transferability.

[00:22:29] Speaker 05:
And what is your response to Mr. Wilson's argument about the requirement that any transfer be at fair market value?

[00:22:37] Speaker 03:
Well, apparently, the argument is that under the settlement agreement,

[00:22:57] Speaker 03:
the right of first refusal set forth in that agreement doesn't satisfy the standard in the regulations because it could result in the transferring shareholder obtaining more than fair market value for his shares.

[00:23:15] Speaker 03:
In other words, the taxpayers contend that a right of first refusal that provides freer

[00:23:21] Speaker 03:
transferability than the procedure described in the regulations nonetheless does not result in modified free transferability.

[00:23:28] Speaker 00:
Mr. Wilson's also arguing that the transfer might be to a person not of the seller's choice.

[00:23:36] Speaker 03:
But that's exactly what happens under, well, in this circumstance, under a right of first refusal.

[00:23:44] Speaker 03:
I mean, the regulations clearly contemplate

[00:23:47] Speaker 03:
that a right of first refusal is acceptable as long as it's at fair market value.

[00:23:55] Speaker 03:
Obviously, if somebody exercises the right of first refusal, then the transferring shareholder is not going to be transferring his shares to the person of his choice.

[00:24:06] Speaker 03:
And the regulations specifically expressly say that that's okay.

[00:24:11] Speaker 03:
And the only rationale for this argument

[00:24:17] Speaker 03:
that freer transferability doesn't satisfy the regulation is that the regulation must be applied as written, but nothing in the language of the regulation suggests that a right of first refusal that is more favorable to the transferring shareholder does not satisfy the regulation, and we would submit that such a rule would be nonsensical.

[00:24:41] Speaker 03:
And turning to Article 6,

[00:24:44] Speaker 03:
of the settlement agreement, which mandated that Yamagata's estate or successor surrender the Yamagata shares upon Yamagata's death to the company in exchange for $10 million.

[00:24:57] Speaker 03:
And the taxpayers claimed that that destroyed free transferability with respect to Yamagata's shares.

[00:25:04] Speaker 03:
As the court correctly found, Article 6 did not restrict the transferability of Yamagata's shares at his death.

[00:25:13] Speaker 03:
as might have been the case if the provision had said that the shares would remain outstanding, but could only be sold to the company for $10 million.

[00:25:23] Speaker 03:
That's a different case, and that would presumably constitute a restriction on transferability.

[00:25:31] Speaker 03:
Instead, Article 6 had the effect of terminating Yamagata's interest at his death in exchange for a $10 million termination payment.

[00:25:40] Speaker 03:
there can't be a restriction on the transferability of an interest that no longer exists.

[00:25:47] Speaker 03:
And nor did Article VI impose any restrictions on the transfer of the Yamagata shares during Yamagata's life.

[00:25:55] Speaker 03:
The diminution in value that he could have received upon such a transfer would not have been attributable to an existing or future transfer restriction.

[00:26:06] Speaker 03:
But instead, it would have been attributable to the impending termination

[00:26:10] Speaker 03:
of the ownership interest.

[00:26:13] Speaker 03:
And as a final observation on this point, as we noted in our brief, even if the right of first refusal procedure in the settlement agreement were somehow deficient, it could not have impaired free transferability prior to October 1992.

[00:26:30] Speaker 03:
And that is because the restriction was never reflected in the public registry of FLPJ.

[00:26:39] Speaker 03:
And prior to October, 1992, the necessary restrictive legend was not stamped onto the shares.

[00:26:52] Speaker 03:
So it would have been unenforceable against a purchaser without notice of the restriction.

[00:26:59] Speaker 03:
And the same thing is true with Article 6.

[00:27:02] Speaker 03:
Even if it were deemed to effect a restriction on the transfer of the amygdala shares,

[00:27:09] Speaker 03:
rather than effecting a termination of his interest at his death, it too would have been invalid prior to October 1992.

[00:27:15] Speaker 03:
At that point, a different entity was substituted for FLPJ as the ostensible purchaser of the shares.

[00:27:25] Speaker 03:
Before that time, it was FLPJ, and I don't think there's any dispute that the lawyers figured out that that was invalid under Japanese law.

[00:27:37] Speaker 03:
And I'll circle back to centralized management for the last point.

[00:27:41] Speaker 03:
And in particular, whether the parenthetical in the regulations precluded centralized management prior to October 1992, when the taxpayers transferred their shares to their respective holding companies.

[00:27:54] Speaker 03:
The parenthetical in question refers to collective management authority by any group of persons, which does not include all the members.

[00:28:02] Speaker 03:
And the court held that because prior to October 1992,

[00:28:05] Speaker 03:
all the shareholders and board members of the parenthetical preclude the finding of centralized management prior to October of 1992.

[00:28:12] Speaker 03:
I don't have time to repeat all our arguments in this regard, but I would focus the Court's attention on pages 38 to 39 of our brief where we demonstrated that parenthetical were merely a counting rule as the lower court concluded that every general partnership that delegates managerial authority to less than all the partners would exhibit

[00:28:32] Speaker 03:
the corporate characteristic of centralized management, contrary to the per se rule in dash 2C4 of the regulations.

[00:28:41] Speaker 00:
Thank you, Mr. Cattaro.

[00:28:43] Speaker 00:
Mr. Vaughan will provide the reply.

[00:29:00] Speaker 02:
Good morning, Your Honor.

[00:29:04] Speaker 02:
I'd like to just address a couple of the issues that you seem to be most interested in, and that's the liability and the transferability.

[00:29:15] Speaker 02:
A point that's not discussed by the government is with respect to Mr. Yamagata's shares and whatever those restrictions were, the fact is that any recipient of those shares also had to agree to be bound by

[00:29:34] Speaker 02:
various other terms of the settlement agreement, including non-competition covenants, the sale price that Mr. Young got his debt, and that is far different than a mere transfer of shares at fair market value and you get all of the shares and that's your transfer.

[00:29:53] Speaker 02:
You as a transferee would have to accept the restrictions that come along with those shares.

[00:30:01] Speaker 02:
The modified free transferability, which the regulations themselves define as having less weight than actual free transferability, define the modified form as only when there's a requirement for a first offer to your co-member at fair market value.

[00:30:23] Speaker 02:
That element of offering at fair market value to Mr. Mon is just absent in this case.

[00:30:29] Speaker 02:
Under the regulations as written then, the modified form of free transferability wouldn't exist.

[00:30:37] Speaker 02:
With respect to the limited liability aspect, the regulations speak in terms of the potential for liability.

[00:30:50] Speaker 02:
If there's a legal structure that would allow a member

[00:30:55] Speaker 02:
because he's a member to be held personally liable for an entity's obligations, then that aspect of limited liability is absent.

[00:31:07] Speaker 02:
And we have looked at this status as a decay.

[00:31:10] Speaker 02:
The government points out that any person who benefited could also be liable, even if they're not a member.

[00:31:17] Speaker 02:
But that doesn't negate the fact that under the regulations, if a member could be

[00:31:24] Speaker 02:
liable to a creditor, then limited liability doesn't exist under the regulations.

[00:31:31] Speaker 05:
And it seems like... But that liability doesn't stem from that member's status as a stockholder necessarily.

[00:31:39] Speaker 02:
Not under Article 36, but it would under... Stems from the fact that that party allegedly benefits.

[00:31:50] Speaker 02:
That's true under Article 36, but under Articles 157 and 168, as members, as shareholders, they would have liability because of that status.

[00:32:01] Speaker 02:
And my time has expired.

[00:32:03] Speaker 02:
Thank you.

[00:32:05] Speaker 00:
Thank you, Mr. Vaughan.

[00:32:06] Speaker 00:
We'll take the case on revisions.