[00:00:00] Speaker 05:
In our cases this morning, I turn it over to Judge Newman to recognize me for a motion.

[00:00:16] Speaker 05:
So if you will recognize me for my motion, Judge Newman.

[00:00:20] Speaker 02:
Indeed, yes.

[00:00:21] Speaker 05:
Thank you.

[00:00:23] Speaker 05:
Kristen, would you please stand?

[00:00:27] Speaker 05:
I move the admission of Kristen Elizabeth Lovin, who's a member of the Bar and Good Standing in the Highest Court of California.

[00:00:34] Speaker 05:
I have knowledge of her credentials and am satisfied that she possesses the necessary qualifications.

[00:00:41] Speaker 05:
And I'd just like to say to my colleagues and to Kristen on a personal note that it's been a delight having her in chambers for this past year.

[00:00:50] Speaker 05:
getting to meet her mom and her sister, who she's very close to, getting the delight of interacting with her on a daily basis, her wisdom and her great advice on cases, and just having her there in general.

[00:01:03] Speaker 05:
She's decided that after a year with me, she loves clerking so much that that's what she's going to do next year too.

[00:01:09] Speaker 05:
And then we're the district of California.

[00:01:11] Speaker 05:
But we look forward to her finally having a real job after that.

[00:01:15] Speaker 05:
And we know she will be enormously successful as a lawyer and as a person.

[00:01:19] Speaker 05:
It's been a delight, Kristin.

[00:01:21] Speaker 02:
OK, I think the panel may vote on the motion.

[00:01:24] Speaker 02:
The panel unanimously grants the motion with pleasure.

[00:01:28] Speaker 02:
Welcome to the bar.

[00:01:30] Speaker 03:
Please swear.

[00:01:33] Speaker 03:
Do you solemnly swear or affirm that you will report yourself as an attorney and counselor of this court, up writing, according to law, and that you will support the Constitution of the United States of America?

[00:01:48] Speaker 05:
I do.

[00:01:48] Speaker 05:
Congratulations.

[00:01:52] Speaker 05:
The first case for argument this morning is 16-1-0-1-4, diversified group versus United States.

[00:02:00] Speaker 05:
Mr. Taylor, whenever you're ready.

[00:02:17] Speaker 01:
I've got a visual which I now realize perhaps might have type 2 small, so I brought hard copies of the visual with me.

[00:02:27] Speaker 05:
Well, you might want to focus more on your argument of the visual.

[00:02:30] Speaker 05:
Typically, they're not terribly helpful to us in the realm of questions, I'm sure.

[00:02:35] Speaker 05:
So why don't you proceed with your argument and worry about the visuals if necessary.

[00:02:39] Speaker 01:
That's what I will do, Your Honor.

[00:02:40] Speaker 01:
Thank you.

[00:02:42] Speaker 01:
May it please the Court?

[00:02:44] Speaker 01:
Jasper G. Taylor on behalf of Appellants Diversified Group Incorporated and James Haber.

[00:02:50] Speaker 01:
The foundation of the government's case as laid out on pages 10, 11, and 38 of its brief is as follows.

[00:02:59] Speaker 01:
Haber conceived and marketed through DGI a tax avoidance strategy called OPS.

[00:03:05] Speaker 05:
Can I just interrupt?

[00:03:07] Speaker 05:
I think we've read the briefs and understand the case.

[00:03:10] Speaker 05:
Is it your position that the OPF and FDIS are not tax shelters?

[00:03:22] Speaker 01:
OPF and FDIS are characterized by the government as strategies, global schemes.

[00:03:33] Speaker 01:
Those are not tax shelters.

[00:03:34] Speaker 01:
In fact, if you look at the statutory language of Section 6111,

[00:03:41] Speaker 01:
The statutory language is contrary to what the government is arguing.

[00:03:45] Speaker 01:
The government argues that OPS is a strategy, FDIS is a strategy.

[00:03:50] Speaker 01:
They should have been registered.

[00:03:52] Speaker 01:
Section 6111 does not require registration of a strategy, a global scheme, an idea, or a concept.

[00:04:00] Speaker 05:
So what in your view was the tax shelter here?

[00:04:03] Speaker 05:
Was it the individual transactions between you and each individual customer?

[00:04:09] Speaker 05:
Is that what we call them?

[00:04:11] Speaker 01:
That's exactly right.

[00:04:12] Speaker 01:
And did you register each of those?

[00:04:14] Speaker 01:
Not one was registered.

[00:04:16] Speaker 01:
And that's the important part of this case.

[00:04:19] Speaker 01:
In order to impose a penalty, you must have failed to file form 8264.

[00:04:28] Speaker 01:
If you look at form 8264, and that's at pages 171 through 184 of the joint appendix in this case,

[00:04:40] Speaker 01:
That form requires for each tax shelter to be reported a number of things, including the maximum aggregate amount to be contributed to the investment, the tax shelter ratio for the investment, which is how much money and property is contributed by the investor to the investment, the principal asset,

[00:05:10] Speaker 01:
of the investment and the date the principal asset was acquired.

[00:05:17] Speaker 04:
So it seemed to me that the word investment has two quite common different usages.

[00:05:25] Speaker 04:
One is the thing into which you put your money and the other is the money you put into it.

[00:05:31] Speaker 04:
The government's position is it not and it seems to me

[00:05:35] Speaker 04:
As I read the statute, it's pretty clear what the statute is saying, that the statute uses the term investment as the thing into which you are putting the money.

[00:05:44] Speaker 04:
And so when it says there has to be at least $250,000 and five contributors, the investment is either the OPS or whatever it is, and the other one.

[00:05:57] Speaker 04:
There are two investments.

[00:05:58] Speaker 04:
Various people with money put their money into those.

[00:06:02] Speaker 04:
But it's the things into which the money is being put that have to be registered if indeed they are tax shelters as the government alleges.

[00:06:10] Speaker 01:
That is absolutely correct, Your Honor, and that supports Appellant's case.

[00:06:14] Speaker 04:
How does that support your case?

[00:06:16] Speaker 01:
Because if you look at the 192 investment vehicles, generally partnerships, sometimes LLCs, you have them being

[00:06:29] Speaker 01:
invested in with, as the statute requires, money and other property.

[00:06:35] Speaker 05:
You mentioned investment vehicles.

[00:06:37] Speaker 05:
What are you referring to?

[00:06:38] Speaker 05:
The individual transactions between the customers?

[00:06:42] Speaker 05:
Is that what you call an investment vehicle?

[00:06:44] Speaker 01:
Yes.

[00:06:45] Speaker 01:
There are 192 of them.

[00:06:47] Speaker 01:
And sometimes they're partnerships.

[00:06:49] Speaker 01:
Sometimes they are LLCs or other entities.

[00:06:53] Speaker 01:
But they took place from 1999

[00:06:56] Speaker 01:
Through 2002.

[00:06:58] Speaker 04:
I have a question I hadn't really thought of before.

[00:07:02] Speaker 04:
Maybe there are three possible things here.

[00:07:04] Speaker 04:
I guess I want to know what this 192 is.

[00:07:07] Speaker 04:
Is that the number of persons, let's call them persons,

[00:07:13] Speaker 04:
natural or otherwise, that put money into something or are there 192 or 193 different limited liability partnerships or corporations or whatever into each of which there may be therefore more than 192 individual persons putting money in?

[00:07:34] Speaker 01:
Generally speaking, your honor, each of the 192 transactions involved one

[00:07:41] Speaker 01:
Partnership, LLC, and generally it was one individual who was involved.

[00:07:46] Speaker 04:
So there's pretty much a one-to-one correspondence between those things?

[00:07:50] Speaker 01:
Pretty much.

[00:07:51] Speaker 01:
And so, Your Honor, getting back to your original question on what is an investment, when the form 8264 requires to be reported, the maximum aggregate amount to be contributed to the investment

[00:08:11] Speaker 01:
and you have one LLC or partnership in 1999, and you have a totally different one in 2002, it is impossible, absolutely impossible to file a form 8264 in 1999 to report aggregate amount to be invested, principal asset of the investor.

[00:08:36] Speaker 04:
Doesn't the statute use a term like expected to be invested,

[00:08:41] Speaker 04:
invested in calculating in referring to the amount.

[00:08:45] Speaker 01:
It does and that is because the actual investment, the writing of the check, the contribution may not occur until after the offering of interest in the investment.

[00:09:00] Speaker 01:
So the statute says you must file this form before offering interest and the answer

[00:09:07] Speaker 01:
to when it is filed comes in the actual form.

[00:09:12] Speaker 01:
I beg this court for reaching a decision.

[00:09:15] Speaker 01:
Please look at form 8264.

[00:09:19] Speaker 01:
You will see that it is absolutely impossible to take a concept or a strategy like OPS and determine

[00:09:32] Speaker 01:
what the principal asset is going to be and the date the asset was acquired.

[00:09:36] Speaker 01:
We're talking about three to four years later.

[00:09:40] Speaker 01:
The dollar amount of financing, the dollar amount of costs, the tax shelter ratio, none of those can be determined when an 8264 is filed if this is just a strategy or a concept or an idea.

[00:09:58] Speaker 01:
None of those are investments.

[00:10:01] Speaker 02:
So on that theory,

[00:10:02] Speaker 02:
You would then have to bring a separate action as to each of these separate investments?

[00:10:08] Speaker 01:
No, Your Honor.

[00:10:09] Speaker 01:
In this case, because the $42 million penalty was calculated transaction by transaction, and those are also in the joint appendix.

[00:10:21] Speaker 02:
But you're questioning only one transaction.

[00:10:23] Speaker 01:
No, Your Honor.

[00:10:24] Speaker 01:
We are actually taking advantage of the divisibility doctrine

[00:10:31] Speaker 01:
which was, I think, discussed quite ably in the SYNCAS Services case.

[00:10:37] Speaker 01:
I believe that two of the members of the panel were involved in that case.

[00:10:42] Speaker 01:
The idea is for a payment to be made with respect to a divisible transaction.

[00:10:50] Speaker 01:
So each of OPS and FDIS types, there was a payment made which matched

[00:10:59] Speaker 01:
the amount of penalty calculated for those two transactions.

[00:11:04] Speaker 01:
And under SYNCAST, obviously a case out of this court, a test case, those are the terms, that's the term, a test case takes place where a determination is made with respect to all of the other similar transactions, in this case the 190 transactions.

[00:11:25] Speaker 01:
And this is a

[00:11:26] Speaker 04:
How does that work as a matter of legal doctrine?

[00:11:30] Speaker 04:
You have two of the transactions in your terms.

[00:11:36] Speaker 04:
Suppose you go through and you win, and then what happens to the other 190?

[00:11:44] Speaker 04:
The government would not, would it, be subject to non-mutual issue preclusion?

[00:11:51] Speaker 04:
Because the government isn't generally subject to non-mutual

[00:11:55] Speaker 04:
issue preclusion.

[00:11:56] Speaker 04:
So how does that, unless the government just says, we recognize this to be a test case and even though we could go to another circuit, we're going to accept this.

[00:12:07] Speaker 01:
Your Honor, first of all, there can be no better description of this test case practice than in the Sincast Services case out of this court, which is referred to in our brief.

[00:12:21] Speaker 01:
But what typically happens

[00:12:23] Speaker 01:
is that when the divisible payments are made, a decision is reached by the court.

[00:12:31] Speaker 01:
At some point, generally, the government counterclaims for the rest of the amount, in this case the 190 transactions portions, and everything is made a part of the case.

[00:12:42] Speaker 01:
And the court's decision

[00:12:44] Speaker 01:
It applies to, in this case, all 192 transactions.

[00:12:47] Speaker 05:
I don't understand.

[00:12:48] Speaker 05:
I mean, is that something they're compelled to do, or is that something you said, generally, the government does this?

[00:12:54] Speaker 05:
Well, what if the government decide not to do it?

[00:12:57] Speaker 05:
And if it can decide not to do it, then what happens to those?

[00:13:00] Speaker 05:
In those other 190 cases, the taxpayer has not paid.

[00:13:06] Speaker 05:
the amount owed, right?

[00:13:08] Speaker 01:
That's correct, Your Honor.

[00:13:09] Speaker 05:
So if they're not part of this case, are there penalties and interest accruing to the amounts owed and not paid?

[00:13:19] Speaker 05:
And is there any way short of the government conceding to do something it doesn't need have to do?

[00:13:25] Speaker 05:
Where are we left with those other 190 transactions?

[00:13:28] Speaker 01:
Your Honor, in the years that I've been involved in these cases, I've never seen the government not

[00:13:34] Speaker 01:
counterclaim for the additional amount.

[00:13:37] Speaker 01:
But to answer the court's question directly, if the issues are decided by the court with respect to two out of the 192 transactions, the legal issues are the same for all of the transactions.

[00:13:54] Speaker 04:
And I think collateral estoppel would apply if... And that's because maybe I was wrong when I referred to non-mutual

[00:14:03] Speaker 04:
issue of conclusion.

[00:14:04] Speaker 04:
In fact, since it's just the diversified group and Haber that is the penalized party in all of them, there would in fact be mutual issue of conclusion, right?

[00:14:16] Speaker 01:
I think that it would probably be West Judicata.

[00:14:20] Speaker 04:
You may not want to say that.

[00:14:22] Speaker 04:
You don't want to say that it's the same claim.

[00:14:25] Speaker 01:
Well, in this case, Your Honor.

[00:14:27] Speaker 04:
But it may be the same issue.

[00:14:29] Speaker 04:
It is the same.

[00:14:31] Speaker 01:
It is the same issue.

[00:14:34] Speaker 01:
The central issue that applies to all of these transactions is when you have offsetting options, buy and sell options, and only a small net is actually invested by the investor, can the government take just one and apply the 1% to that?

[00:14:53] Speaker 01:
And that's how you get $42 million instead of less than $2 million.

[00:14:57] Speaker 01:
That issue applies.

[00:14:58] Speaker 01:
to every last one of the 192 transactions.

[00:15:03] Speaker 05:
This is just really basic.

[00:15:05] Speaker 05:
We don't get many of these tax cases.

[00:15:10] Speaker 05:
Are you acknowledging that none of the taxpayers of the 192 ever filed a form 8264, never registered?

[00:15:19] Speaker 01:
That is correct, Your Honor.

[00:15:21] Speaker 05:
So how would they not

[00:15:23] Speaker 05:
be liable for not registering their tax shelters, notwithstanding, what is it you're going to argue, that they didn't have to?

[00:15:31] Speaker 01:
The very first argument that applies to all 192 transactions is that the tax shelter ratio, which must be greater than 2 to 1, was not met.

[00:15:46] Speaker 01:
And that's on the merits.

[00:15:47] Speaker 01:
But the tax shelter ratio must be greater than 2 to 1.

[00:15:51] Speaker 01:
That tax shelter ratio was incorrectly calculated by the government.

[00:15:56] Speaker 01:
If we went on that issue, all of the 192 transactions were not tax shelters under Section 61.

[00:16:03] Speaker 05:
But on that issue, is there the difference if you aggregate all the transactions, then you meet the test ratio, but if you deal with them divisibly, you do not?

[00:16:12] Speaker 01:
No, Your Honor.

[00:16:13] Speaker 01:
That issue would be the issue of whether these were tax shelters

[00:16:20] Speaker 01:
Before you get to substantial investment, you first have to decide is the tax shelter ratio test met.

[00:16:28] Speaker 01:
And that tax shelter ratio is determined transaction by transaction.

[00:16:34] Speaker 01:
You take each, in this case litigation vehicle, excuse me, you take each vehicle, each investment vehicle, you calculate the amount of deductions or credits that are being offered

[00:16:46] Speaker 01:
You compare that to the amount of money and property that was contributed and you determine was the tax shelter ratio test met for that transaction.

[00:16:57] Speaker 01:
Again, each of the 192 transactions over four years had its own separate tax shelter ratio.

[00:17:05] Speaker 01:
That is why, that's one of the reasons why a form 8264 could not have been filed in 1999 with respect to a 2002 transaction.

[00:17:16] Speaker 01:
You didn't know what the tax shelter ratio was going to be for that transaction four years later.

[00:17:23] Speaker 05:
I think we have your argument.

[00:17:24] Speaker 05:
We'll restore a few minutes for rebuttal.

[00:17:27] Speaker 05:
Thank you.

[00:17:34] Speaker 00:
Good morning, may it please the court?

[00:17:37] Speaker 00:
I'm Francesca Ugolini, counsel for the United States.

[00:17:40] Speaker 00:
I'd like to respond to the appellant's principle argument in this case that each instance of filing a form 8264 was a standalone registration such that the penalty applied, the 6707 penalty applies distinctly to each failure to file a form.

[00:17:56] Speaker 00:
This argument has no basis in the statutory language.

[00:17:59] Speaker 04:
Does that point you're just making agree that there should have been 192 forms filed?

[00:18:07] Speaker 00:
No.

[00:18:07] Speaker 00:
In fact, that is the appellants have contended that each instance of selling one of these tax shelters required a separate form.

[00:18:15] Speaker 00:
Under the regulations, well, under the statute, you file the tax shelter before any sales are even made.

[00:18:22] Speaker 00:
Then if you make further sales of the same arrangement,

[00:18:26] Speaker 00:
And those sales differ with respect to one of five categories.

[00:18:29] Speaker 00:
This is a list that's in the regulations.

[00:18:32] Speaker 00:
Those categories include principal asset, financing methods, tax shelter ratio.

[00:18:37] Speaker 00:
Then the tax shelter organizer is required to file another form notifying the IRS that we made a sale, this piece is different.

[00:18:46] Speaker 00:
The regulations explicitly say that notwithstanding the multiple filing of these forms, that these

[00:18:54] Speaker 00:
I'd like to pull up the exact language, because I think it's important here.

[00:18:57] Speaker 05:
Can I ask you?

[00:18:57] Speaker 05:
Sure.

[00:18:58] Speaker 05:
You're a little ahead of me in terms of the logistics.

[00:19:00] Speaker 05:
You're required to file the 8264 when, when you create this tax shelter in this circumstance, before they had any customers for it?

[00:19:08] Speaker 00:
The statute says that the registration, any tax shelter organizer, is required to register not later than the day on which the first offering for sale of interests in such tax shelter occurs.

[00:19:20] Speaker 02:
Are you ever asking us to presume

[00:19:22] Speaker 02:
the merits of the case, don't we have to cross the bridge first of the propriety of a test case?

[00:19:30] Speaker 02:
The court declined to treat it that way.

[00:19:33] Speaker 02:
And therefore, the merits weren't decided.

[00:19:37] Speaker 02:
So how do we get to the stage?

[00:19:40] Speaker 02:
And particularly, what's wrong with the test case theory?

[00:19:44] Speaker 02:
You expect the taxpayer to score $150 million in order to get into court?

[00:19:52] Speaker 02:
to be told that you didn't have to pay it?

[00:19:55] Speaker 00:
The basis for the government's argument here is the full payment rule, which this court and the Supreme Court have acknowledged are a condition on the government's waiver of sovereign immunity in a tax refund suit.

[00:20:07] Speaker 02:
Well, we aren't told yet whether it isn't before us to decide whether this applies to all of the other, whatever it is, 81 investors.

[00:20:17] Speaker 02:
We have a test case that is presented

[00:20:22] Speaker 02:
as severable, and the tax was paid, refund is requested, or the penalty was paid and refund is requested.

[00:20:32] Speaker 02:
And isn't that enough to cross the jurisdictional barrier for review of the merits of the specific case that's before us?

[00:20:44] Speaker 00:
Well, I think your honor just said that the case was presented to you as severable.

[00:20:48] Speaker 00:
That is the exact question.

[00:20:50] Speaker 00:
That's the question.

[00:20:52] Speaker 00:
Is it severable?

[00:20:53] Speaker 00:
Because if it's not severable, if Congress did not make this a severable or divisible tax, then the taxpayer has to fully pay the assessed penalty before he gets to test the merits.

[00:21:05] Speaker 00:
That is the full payment rule from the Supreme Court's Flora case.

[00:21:08] Speaker 00:
So that is the question to be decided.

[00:21:10] Speaker 00:
Is it truly severable here?

[00:21:12] Speaker 02:
I agree.

[00:21:13] Speaker 02:
And as a test case is for a piece through severed of the total.

[00:21:20] Speaker 02:
And the merits haven't yet been decided.

[00:21:23] Speaker 02:
So doesn't that again cross the jurisdictional barrier?

[00:21:28] Speaker 00:
Well, I think to determine whether the case is actually severable, we have to look at the statutory language.

[00:21:34] Speaker 00:
Because the case law about the divisible tax exception

[00:21:38] Speaker 00:
is rooted in how the tax or the penalty is imposed.

[00:21:43] Speaker 00:
The Supreme Court in Flora and the other courts that have recognized the exception have observed that a tax is divisible when the assessment is composed of multiple individual assessments.

[00:21:55] Speaker 00:
So the tax is actually, for example, an excise tax is imposed $100 per sale.

[00:22:00] Speaker 00:
So the Internal Revenue Code imposes the tax on a per transaction basis.

[00:22:05] Speaker 02:
OK, no, that makes sense.

[00:22:07] Speaker 02:
And if it's decided that this is a valid assessment, then it applies to everyone.

[00:22:12] Speaker 02:
But I still keep coming back to thinking about the concept of, again, the test case on the facts for which the penalty was paid.

[00:22:24] Speaker 02:
Are the issues sufficiently severable to permit the court of federal claims to review it?

[00:22:34] Speaker 00:
The underlying facts here are similar among all 193 shelters, which is the reason why the government

[00:22:44] Speaker 00:
treats them and why they're treated under the statute and regulations here as a single tax shelter.

[00:22:49] Speaker 04:
So what is, what are your best points under the statute, I guess, in particular for why what I think this dispute is coming down to was were there two shelters here or were there 192 shelters here?

[00:23:06] Speaker 04:
And in order to decide jurisdiction, we need to answer that question.

[00:23:10] Speaker 04:
Correct.

[00:23:11] Speaker 04:
So why are there two, not 192?

[00:23:14] Speaker 00:
Well, the regulations under 6111 say that similar plans or arrangements are treated as part of a single tax shelter.

[00:23:24] Speaker 00:
If you look at the language of 6111 and 6707, it contemplates... You're looking now at the regulations 301.6111?

[00:23:32] Speaker 00:
Right, 301.6111-1T, and the language specifically, it is the Q&A 22.

[00:23:43] Speaker 00:
which says that similar investments offered by the same person or related persons are aggregated together.

[00:23:48] Speaker 00:
Investments are considered similar if they involve- I'm having a hard time.

[00:23:52] Speaker 05:
Oh, sure.

[00:23:54] Speaker 05:
I've got a Westlaw print out here.

[00:23:56] Speaker 00:
This is the Q&A 22.

[00:23:58] Speaker 00:
Got it.

[00:24:04] Speaker 00:
Thank you.

[00:24:05] Speaker 00:
Okay.

[00:24:05] Speaker 00:
So in that first paragraph under A-22, it says similar investments offered by the same person are aggregated together, and it explains that investments are considered similar if they involve similar principal business assets and similar plans or arrangements.

[00:24:20] Speaker 00:
I don't think there's any dispute in this case that OPS and FDIS, that all of the transactions would be considered similar to one another.

[00:24:28] Speaker 00:
Whether you looked at them more broadly as a single son of boss shelter,

[00:24:33] Speaker 00:
or if you broke them out separately into OPS and FDIS.

[00:24:37] Speaker 00:
If you then look at under the same regulations, this is the Q&A 48.

[00:24:47] Speaker 00:
And here's where we get specifically into this issue of the multiple forms.

[00:24:51] Speaker 02:
This is exactly the problem that I'm trying to penetrate.

[00:24:55] Speaker 02:
You're telling us that it's essential to decide the merits of their case.

[00:25:01] Speaker 02:
in order to decide whether the court has the authority to decide the merits?

[00:25:05] Speaker 00:
Well, no.

[00:25:07] Speaker 00:
Respectfully no, Your Honor.

[00:25:08] Speaker 00:
Their argument on the merits of the case is that the transactions don't meet the definition of a tax filter.

[00:25:14] Speaker 02:
I'm talking about your argument as well, that you must decide the merits in order to decide whether you can decide the merits.

[00:25:23] Speaker 00:
I think our argument here is the only piece that needs to be decided is whether these

[00:25:28] Speaker 00:
is whether the statute imposes the penalty on a singular failure to file or whether the statute imposes the penalty on each instance of a failure to file one of these forms for multiple sales of these transactions.

[00:25:45] Speaker 05:
Can I take you back to where your friend spent a great deal of his time looking at form 8264 and telling us how this

[00:25:53] Speaker 05:
I think his argument was this can't possibly have been for the ODS or the FDS, whatever those names are for the tax dollars.

[00:26:00] Speaker 05:
Right.

[00:26:00] Speaker 05:
Now, what you just showed us, in fact, your question in 48 deals with filing a separate 8264.

[00:26:07] Speaker 05:
But tell us when.

[00:26:09] Speaker 05:
You're saying they were required to fill out this form at the get-go.

[00:26:14] Speaker 05:
Right.

[00:26:14] Speaker 05:
Before they sold any of the, before they had any investments?

[00:26:18] Speaker 05:
Correct.

[00:26:18] Speaker 05:
And so how could you possibly fill out all of these questions with regard to the value of the property, the cash and all of this stuff?

[00:26:27] Speaker 05:
How could you know that when you haven't gotten any investments yet?

[00:26:31] Speaker 00:
Normally, when a tax shelter promoter organizes an investment, they do have an idea.

[00:26:37] Speaker 00:
I mean, they create marketing materials to market these to potential investors.

[00:26:41] Speaker 00:
So they have marketing materials that say, these are the types of assets we're going to invest in.

[00:26:47] Speaker 00:
Here, it was foreign currency options.

[00:26:51] Speaker 00:
In other tax shelters, they know maybe it's going to be a piece of depreciable property.

[00:26:56] Speaker 00:
So they know, and they have these estimates.

[00:26:59] Speaker 00:
They have these ranges.

[00:27:00] Speaker 00:
that they market to investors.

[00:27:02] Speaker 00:
That if you are willing, for example, in this case, the way these shelters were marketed is that a tax loss is available dollar for dollar for the amount that you are willing to spend on a long option.

[00:27:15] Speaker 00:
Now, economically, that would then be offset by the short option.

[00:27:18] Speaker 00:
But what was done here is they would first purchase this long option, contribute it to the partnership, increase their basis, not offset their basis by the offsetting liability,

[00:27:30] Speaker 00:
and then use that artificial basis to create a tax loss.

[00:27:34] Speaker 00:
So that number was knowable in advance in terms of... Was it advertised?

[00:27:41] Speaker 04:
Knowable or actually touted?

[00:27:46] Speaker 00:
Touted that the... I mean, I have not seen the marketing materials for every one of these transactions.

[00:27:53] Speaker 00:
A number of the transactions that they were penalized for in this case

[00:27:57] Speaker 00:
have been the subject of other decisions on the merits by courts of appeals that have looked at these materials.

[00:28:04] Speaker 00:
These were all marketed tax shelters where the investors were told, for each dollar you contribute towards this long option, you will get a dollar of inflated basis that will then become a dollar of tax loss.

[00:28:17] Speaker 00:
And so the amount of the tax loss was sort of up to the investor.

[00:28:21] Speaker 00:
How much did they put in?

[00:28:21] Speaker 00:
Right.

[00:28:22] Speaker 00:
How much are you willing to put in?

[00:28:23] Speaker 00:
And if you look at the spreadsheet that the IRS, it is in the record, and I can provide you with the site.

[00:28:29] Speaker 00:
The IRS, when it was computing the penalty here, the penalty was 1% of the aggregate amount invested.

[00:28:35] Speaker 00:
So the IRS totaled up the amount that all of these different investors spent on the long option.

[00:28:41] Speaker 00:
And you'll see that it ranges.

[00:28:42] Speaker 00:
Almost all of them were over a million dollars.

[00:28:44] Speaker 00:
Most of them were in the tens of millions of dollar range.

[00:28:47] Speaker 00:
And then some investors contributed over $100 million.

[00:28:50] Speaker 00:
So it was really a question of how much can the investor come up with.

[00:28:53] Speaker 05:
But your friend talked about how you could possibly fill this out in 1999, and this other stuff was going on through 2000 something or other.

[00:28:59] Speaker 05:
Does that mean that you have to keep on amending this form, filing an amended form?

[00:29:05] Speaker 00:
The regulations specifically say that if the tax shelter changes, you can amend it.

[00:29:11] Speaker 00:
But you use the same registration number, because the tax shelter has already been registered.

[00:29:14] Speaker 00:
You're not required to amend it.

[00:29:16] Speaker 00:
The regulations also say that if you sell another instance of this investment to another purchaser, and it varies with respect to a particular category, then file a new form.

[00:29:28] Speaker 00:
But then the regulation specifically says that these similar investments are still treated as a single tax shelter.

[00:29:34] Speaker 00:
So it unequivocally clarifies that even though multiple forms might be required to keep apprising the IRS of these investments that have been sold,

[00:29:43] Speaker 00:
They remain part of a single tax shelter.

[00:29:55] Speaker 00:
I'd just also like to respond, Judge Newman, to the point that you made about asking a taxpayer to come up with this money.

[00:30:01] Speaker 00:
I think you had used the example of $150 million to be able to come to court to test the case out.

[00:30:08] Speaker 00:
In this case, the amount is actually 24 million, which I recognize is still a substantial amount.

[00:30:14] Speaker 05:
But I'd like to point out that the appellants here- I thought it was 17 million and 24 million.

[00:30:20] Speaker 00:
The original assessment, the assessment was $42 million, but it was assessed to multiple promoters of this transaction.

[00:30:28] Speaker 00:
They are jointly and separately liable for the amount.

[00:30:31] Speaker 00:
Other promoters who are not in this case have paid that balance down, so all that's left is about $24 million.

[00:30:37] Speaker 02:
Now, really what I'm trying to approach is some of the fundamentals of the due process that are involved with the position of the Court of Federal Claims in these relationships, in these tax relationships.

[00:30:51] Speaker 02:
If this taxpayer loses in the Court of Federal Claims on the merits, on the threshold merits, one can assume, although I don't know, that the other taxpayers similarly situated would also

[00:31:07] Speaker 02:
be affected.

[00:31:08] Speaker 02:
But if this taxpayer prevails, you're saying, nonetheless, it can't prevail unless the entire penalty for everyone else, in addition to this particular investor, is paid in advance.

[00:31:23] Speaker 02:
And that's where I get stuck.

[00:31:25] Speaker 00:
I would be happy.

[00:31:26] Speaker 00:
I know there is a Supreme Court case.

[00:31:28] Speaker 00:
I cannot recall the name.

[00:31:29] Speaker 00:
I think it might be Burns.

[00:31:30] Speaker 00:
I'd be happy to send it as a 28-J letter.

[00:31:33] Speaker 00:
The Supreme Court has addressed the issue of whether this pay-first, litigate-later doctrine in federal tax law satisfies due process.

[00:31:41] Speaker 02:
They don't want to litigate this particular claim, which they've paid.

[00:31:44] Speaker 02:
They've paid the amount that they're seeking to litigate.

[00:31:51] Speaker 02:
But what happens to everyone else is complicated.

[00:31:55] Speaker 02:
I don't want to guess how that would come out.

[00:31:57] Speaker 02:
But here, we're not permitting them even to do this.

[00:32:01] Speaker 00:
Right, and the reason we're not doing that, the reason the Court of Federal Claims would not permit them to do that is because of the full payment rule, which is part of the waiver of sovereign immunity to bring the case in the first place.

[00:32:14] Speaker 02:
They say it's divisible, and more important that this will be a critical test with all of the elements involved.

[00:32:22] Speaker 02:
And we're saying you can't do that.

[00:32:23] Speaker 02:
And that's where I'm stuck.

[00:32:26] Speaker 00:
Right.

[00:32:29] Speaker 00:
I think there are many taxpayers that have felt the same way you have in terms of the potential unfairness of the pay first, litigate later rule, but it doesn't... They have paid.

[00:32:38] Speaker 02:
They have paid that which they're litigating.

[00:32:42] Speaker 02:
So the rule doesn't apply to this particular investor whose structure is being presented as a test case.

[00:32:52] Speaker 02:
They have paid.

[00:32:53] Speaker 00:
They've paid for...

[00:32:55] Speaker 00:
one of the participants of the 193.

[00:32:57] Speaker 02:
And what they're asking for is a decision as to this one.

[00:33:02] Speaker 02:
And I'm asking for a decision as to the other 192.

[00:33:06] Speaker 02:
They say it's a test case.

[00:33:08] Speaker 02:
It may very well turn out to be.

[00:33:10] Speaker 02:
But we're saying you can't do that either.

[00:33:14] Speaker 00:
Right, because you can only bring a test case if the penalty is divisible in the first instance, which is the question to be decided.

[00:33:20] Speaker 04:
Can I just double check something with you?

[00:33:22] Speaker 04:
Sure.

[00:33:23] Speaker 04:
They had no ability or debate to go to the tax court.

[00:33:27] Speaker 00:
That is what I wanted to address.

[00:33:28] Speaker 00:
They could not go to the tax court, but they did.

[00:33:30] Speaker 04:
Because the tax court doesn't do penalties?

[00:33:32] Speaker 00:
Right.

[00:33:33] Speaker 00:
The statute that creates tax court jurisdiction does not cover a prepayment challenge to penalties.

[00:33:42] Speaker 00:
However, they did have the chance to appeal the IRS's penalty assessment to the IRS Office of Appeals, which is

[00:33:49] Speaker 00:
independent from the exam function of the IRS.

[00:33:52] Speaker 00:
The IRS Office of Appeals has brought authority to review and settle cases.

[00:33:57] Speaker 00:
And they opted not to go to appeal.

[00:33:59] Speaker 00:
So they did have some prepayment forum to challenge the method in which the penalty was computed.

[00:34:05] Speaker 04:
OK, can I ask one more question?

[00:34:07] Speaker 04:
Sure.

[00:34:08] Speaker 04:
Suppose one got beyond jurisdiction and went to the merits here.

[00:34:14] Speaker 04:
Is your understanding or your position, I guess, you might have a different position from the plaintiffs here, that the various merits of

[00:34:30] Speaker 04:
Disputes or challenges to the whether this was a back shelter whether ratios were met would look different or would look the same depending on whether one thought there were 192 shelters or two shelters I think it would probably be the same across the board because I think the the argument the arguments on the merits here have to do with what the IRS included or didn't include in the

[00:35:00] Speaker 00:
Calculate quote investment base and the quote aggregated amount invested.

[00:35:05] Speaker 00:
These are terms from the statute used to compute the penalty.

[00:35:08] Speaker 00:
So I guess my understanding is that the dispute here really has to do with what's the appropriate formula for determining whether something is a tax shelter and then what's also the appropriate formula for determining whether or the amount of the penalty if it is a tax shelter.

[00:35:24] Speaker 00:
And I believe that the appellants also have raised a reasonable cause defense because there is a defense to the penalties based on reasonable cause.

[00:35:33] Speaker 00:
Thank you.

[00:35:34] Speaker ?:
Thank you.

[00:35:48] Speaker 04:
So can I ask you to return to your focus on the form 171?

[00:35:53] Speaker 04:
What is it about that form that you say cannot be filled out for each of two strategies that could always be filled out pre-acquisition of a client's money for each of 192?

[00:36:16] Speaker 04:
that maybe there's a difference in kind but even in your view once they put out the LLC number 141 before they've actually got somebody putting money in that's the moment when they have to fill this out right to answer the question respectfully I have to two requests first request is that my time started three minutes and I believe I have five minutes and

[00:36:41] Speaker 01:
It's now working its way down.

[00:36:43] Speaker 01:
So I think I've got two more minutes, 10 and five.

[00:36:47] Speaker 01:
So I think I've got 4.43.

[00:36:50] Speaker 01:
I took 10 minutes.

[00:36:53] Speaker 05:
Stop the clock.

[00:36:55] Speaker 05:
You initially indicated that you wanted to retain five minutes for rebuttal, but you ended up using virtually all of that time in your original statement.

[00:37:03] Speaker 05:
So that's why I'm giving you extra time, because you've exhausted all of your other time.

[00:37:08] Speaker 01:
Thank you very much.

[00:37:08] Speaker 05:
But if you need a couple more minutes, it's one of them.

[00:37:11] Speaker 01:
Thank you.

[00:37:13] Speaker 01:
Your Honor, please look at, in the joint appendix,

[00:37:17] Speaker 01:
A 0110.

[00:37:21] Speaker 01:
That's the first page of the IRS calculations.

[00:37:27] Speaker 01:
Transaction by transaction.

[00:37:29] Speaker 01:
And then look at A 171.

[00:37:32] Speaker 01:
So if you put a finger on 110 and a finger on 171, you'll see that if you look at 110, it's not just this one short leg number that they're looking at.

[00:37:47] Speaker 01:
There's the broker fee.

[00:37:49] Speaker 01:
There's an accounting firm fee.

[00:37:51] Speaker 01:
There's a law firm fee.

[00:37:53] Speaker 01:
There are other fees.

[00:37:55] Speaker 01:
There are other second cash contributions.

[00:37:58] Speaker 01:
There are a number of things which fall into the category of amount invested by the investor and the costs.

[00:38:06] Speaker 04:
I guess I have to get a little clearer in my head about this.

[00:38:13] Speaker 04:
Your view is that if there were 192 shelters, let's take number 143, and they set up an LLC, and the moment they put that out, that's a tax shelter before anybody puts any money into it, and whether or not they have somebody lined up, I don't think matters.

[00:38:34] Speaker 04:
That's when they have to fill this form.

[00:38:36] Speaker 04:
That's different from the retrospective calculation of

[00:38:41] Speaker 04:
the amounts, which they can use all these retrospective numbers.

[00:38:45] Speaker 04:
So what I'm trying to understand is your position, which I think is absolutely at the heart of your case, at least as I'm hearing it, is that if you look at 8264, it makes sense for 192 shelters.

[00:39:00] Speaker 04:
It makes no sense for two shelters.

[00:39:02] Speaker 04:
And I need to understand very concretely why.

[00:39:05] Speaker 01:
Please look at 171, Your Honor.

[00:39:08] Speaker 01:
That's page one.

[00:39:10] Speaker 01:
and then page 172 of the same form 8264.

[00:39:15] Speaker 01:
In order to calculate, for example, tax shelter ratio, you have to go to, and that's item number nine, your honor, on page one, tax shelter ratio.

[00:39:26] Speaker 01:
If you turn to page two, you need to fill out a worksheet with respect to everything that's required to calculate tax shelter ratio.

[00:39:37] Speaker 01:
Look at part Roman numeral two.

[00:39:39] Speaker 01:
Investment base, cash contributed, adjusted basis of property contributed.

[00:39:45] Speaker 01:
All of these things you cannot possibly know, Your Honor, in 1999 with respect to a 2002 transaction.

[00:39:56] Speaker 01:
If you go back to A110.

[00:39:57] Speaker 04:
But how do you know with respect to transaction number 143 when you create the, are these LLCs, is that what you call them?

[00:40:05] Speaker 01:
Some of them LLCs, some of them partnerships.

[00:40:07] Speaker 04:
Partnerships.

[00:40:07] Speaker 04:
Before you actually, do those specify this is the amount that's going to come in?

[00:40:12] Speaker 04:
I don't know whether Toronto's putting in a million dollars or Prost is or somebody, but it's a million dollars.

[00:40:19] Speaker 04:
Yes.

[00:40:20] Speaker 04:
And I can fill all that out even before.

[00:40:22] Speaker 01:
No, you can fill it out in 2002 right before Judge Toronto puts in his money.

[00:40:29] Speaker 01:
Before there is an adjusted basis of property contributed.

[00:40:32] Speaker 01:
That's when you know what to put down on the page two worksheet.

[00:40:37] Speaker 01:
Part two, which must go on to page one, which is ultimately how you file your 8264.

[00:40:44] Speaker 05:
I'm sorry, can you go back to, I don't know, maybe it's not related to it, but your friend took us to question 48.

[00:40:51] Speaker 05:
Yes, your honor.

[00:40:52] Speaker 05:
And that says, unless a person registering a cap shelter that is substantial investment only by reason of an aggregation of optimal investments in the section

[00:41:00] Speaker 05:
complete a separate 8264 for each investment constituting a substantial investment.

[00:41:05] Speaker 05:
And it says a separate 8264 must complete for each investment that differs from the other investments in a substantial investment with respect to any of the following.

[00:41:13] Speaker 05:
And then it lists all of these.

[00:41:15] Speaker 05:
So clearly the regulations do contemplate if there's an outlier in here, there's a separate 8264 required.

[00:41:23] Speaker 05:
Why isn't that sufficient?

[00:41:25] Speaker 01:
I wouldn't use the word outlier because one of the things that requires a separate form 8264 is if the principal asset is different and it's different throughout.

[00:41:37] Speaker 01:
It's sometimes foreign currency, sometimes domestic currency.

[00:41:41] Speaker 01:
It is and if the tax shelter ratio is different, you must file a separate form 8264.

[00:41:50] Speaker 01:
The tax shelter ratio was different throughout these.

[00:41:53] Speaker 01:
And that is clear from the record.

[00:41:54] Speaker 05:
Well, if that's true, I don't know where that gets you.

[00:41:57] Speaker 05:
That means that your client should not just have filed one 8264 form, but should have filed maybe 100 of them, as required by the regulations.

[00:42:06] Speaker 05:
What relevance does that have to whether or not these two things created by you all were tax shelters that should have been registered?

[00:42:14] Speaker 01:
If, first of all, Your Honor, it's my client's position on the merits.

[00:42:20] Speaker 01:
that these were not tax shelters under the statute because of the tax shelter ratio test not being met, because of substantial investment.

[00:42:27] Speaker 01:
There are arguments on the merits as to why these were not tax shelters, but that's on the merits.

[00:42:35] Speaker 01:
Here we're talking about can you pay on a divisible basis for one transaction or two transactions and satisfy the jurisdictional requirement.

[00:42:46] Speaker 01:
That is what this

[00:42:49] Speaker 01:
this case is about.

[00:42:51] Speaker 05:
Can I ask you just a basic question?

[00:42:53] Speaker 05:
Sure.

[00:42:53] Speaker 05:
If we were to conclude that you had to file a separate tax shelter form for each of these two entities, and those are the tax shelters we were talking about, then the only issue, the issue is whether or not you appropriately, as required under law, registered your tax shelter.

[00:43:10] Speaker 05:
Isn't that

[00:43:11] Speaker 05:
sort of begin and almost end the case with respect to your client.

[00:43:15] Speaker 05:
And that issue deals with what your client did, not with respect to each of the divisible transactions at issue here, right?

[00:43:22] Speaker 01:
No, Your Honor.

[00:43:23] Speaker 01:
And that's because the government is arguing, because we paid a divisible portion for two transactions, the government is arguing that this is not divisible, that you only had one or two failures, that you should have filed

[00:43:40] Speaker 01:
one or two 8264s.

[00:43:42] Speaker 01:
That's the jurisdictional argument.

[00:43:46] Speaker 01:
Our argument is that if the government is right, and these were tax shelters, you had to file an 8264 for each one of the transactions.

[00:43:56] Speaker 01:
That makes this divisible.

[00:43:59] Speaker 01:
That establishes jurisdiction for the court.

[00:44:02] Speaker 01:
And according to this court, in

[00:44:06] Speaker 01:
When a taxpayer sues for a refund based on a divisible refund claim, it is meant to test the validity of the entire assessment.

[00:44:24] Speaker 01:
That is what this case is about.

[00:44:26] Speaker 01:
Merely establishing jurisdiction because this penalty, if it was imposed correctly, and that is the issue on the merits,

[00:44:36] Speaker 01:
That had to occur when a form 8264 was required to be filed for each and every one.

[00:44:45] Speaker 01:
There is, I said it before, I will say it again, it was impossible, if you look at this form, it was impossible to fill it out once and report everything that was required throughout the four-year period.

[00:44:59] Speaker 05:
Thank you, Your Honor.