Legal Case Summary

Good morning and may it please the court due to the tag lead from the Department of Justice representing the United States. I'd like to reserve three minutes for a battle. Please keep track of your time. Yes, Your Honor. Central issue in this case is whether a taxpayer can have cost basis and property is not required to pay for. The property issue are membership interest in mutual insurance companies and the issue arises in the context of determining gain on the sale of demutualization stock. Now three courts have addressed the taxation of demutualization stock, Fisher, Dorinton, Rubin, and each of those courts took a different approach. Rubin, we submit, took the correct approach because it remained focused on the relevant issue, which is whether the policy holders were required to pay for the membership rights. That's the issue of basis. We want to determine that the policy holders were not required to pay, determine that the basis and the membership rights is zero and the carryover basis in the stock was also zero. Absolutely. Help me with something. I understand the government's position and I understand the regulation about the presumption and so on and who's breaking them proof. But here you have a company, it's a mutual benefit company to agree anybody owns it. It's the policy holders. Now they make a decision to demutualize. Clearly, there's a legal obligation under the laws of Canada or United States wherever we happen to be dealing with to retain a certain amount of money and an account or accounts to meet the expectations to pay the benefits under the policies, etc. But there's something left over. Now, some of the cases refer to that as a divisible surplus, but however you count it, it's a lot of money. There are probably buildings and cars and all kinds of other things. And someone owns those. When the demutualization occurs, my understanding is that the owners become the shareholders. Now, before demutualization, everyone seems to agree you really can't value it

. It's kind of inextricably intertwined. The service seems to agree with that. The policy holders agree as well. Once the demutualization takes place, you've got shareholders. And those shareholders own whatever's left. The voting rights may be a little different than they might normally be in a straight out common stock equity situation, but whoever owns something, it's those shareholders. Those things they own have a value. The question is how do you calculate it? Now, in the first case here we're dealing with the district court apply to formula based upon expected future income stream discounted. I think by like 60 percent, the other case that we're going to deal with next has a slightly different situation, but the reality is there is a value there. It's not always easy to determine, but it's not like this is some will of the whist that no one can determine. It's difficult in the sense that the market has a certain value to it. Other people have different values, but it's not like after the demutualization, it's incalculable. I mean, it's clearly calculable, is it not? It is calculable after demutualization and prior demutualization, the test there's testimony in the record that you can determine the value of the membership rights. The membership rights prior demutualization provide no economic value to the membership. Is that what we're looking at though? With respect, I know you're on a weird looking at what they were required to pay. And this is the distinction between basis and value that the courts emphasize in tax cases, including this court's decision of Coleman and the Fifth Circuit and Better Beverage. Basis is what you're required to pay, not what the value of the property is, not what you would be willing to pay. Well, let me ask you this. Each of the shareholders got whatever they got because they had a policy that made payments on it. Without having been a policy on, they would have gotten nothing, right? That is correct. Okay, so in this case, if they are entitled, if they continue to make the premium payments on the policy that when whoever the covered person is dies, then there's a payment. But there's more in the company

. So even though it's almost impossible to calculate it when it's tied together with the policy, once that is no longer the case, there's clearly a value. I mean, you can say, well, all I paid for was the premium and the premium is the same before and after, but the fact is, as you agreed, if they hadn't paid anything, they wouldn't be entitled to be shareholders. And the shareholders own something. The market says they own something. So admittedly, a little tricky, but we can't just say, they pay the same amount, whether or not it's demutualized, therefore they have no basis. But that is how you calculate basis. For example, to this court's gladdened decision to determine the cost basis and property that was inseparable when originally acquired, to look at the cost of the property with the additional right versus the cost of the property without it. And if the cost is the same, then nothing can be allocated to that additional right. And here there's a lot of... Doesn't that really arise from a very different factual situation, though? Well, there was a additional fact of initially the court was looking at whether an invested right, like the what a right's net case could be allocated basis. And the court said that in certain situations, in the situation from that case, an invested right could be allocated basis in the same way that a invested right could be allocated basis. And so in that sense, the cases are similar because the membership rights had vested at the time that the members had brought the policy. But what's key is that the premiums did not change, and it's undisputed that the members had been paying for the members' rights. There seem to be two different things we're talking about. One is what was the value of this... The thing's policy hold has got aside from the insurance. What was the value of that? The second thing is what did they pay for that? For the purpose of establishing the basis, isn't the issue what did they pay? That's exactly right, Your Honor. That's exactly right

. And that's why the Ruben Court got it right because it focused solely on that issue without regard to value. And the undisputed testimony in this case from each of the executions from the companies, from the government's expert Ralph Fair is that mutuals do not charge their members for the voting and liquidation rights. Whatever their value, they are not charged for it. And if you are not charged for something, you have no basis. But isn't the problem though that the reason they have no value is because they're inextricably intertwined with the policy while there's a mutualization. This is where the problem that open transactions comes in. If we were dealing here with valuing the asset and determining basis and they were still intertwined, then that doctrine may very well apply. But here, it no longer applies. And what was impossible to determine at one point suddenly has a value. The question is what is it? Now, obviously, as you indicated earlier, if they hadn't paid the premium, they wouldn't be entitled to anything. So they got something in addition to the policy for the payment of the premium. So the question is what is that? How do you calculate that? I guess that's in the Ruben case. You fix a certain value than you took it away. But the market immediately has a value for these shares when they came out. What role, if any, should that play in just the value part, not the basis part, but the value part for the moment? But your honor, the value is irrelevant in this instance to the basis question. And that is the question before it is what is the basis? Well, I understand your position. But what I'm saying is, if they don't get the stock at all, if they haven't paid, then some portion of what they've paid yields the value that they get. Now, how you get to that is the issue that I think we're talking about here, but it's not like all of the money that they paid in just went for the payment of the policy and nothing else, right? But no, the test one is that exactly right. All the money that they paid in was calculated to cover their contract rights. The fact that they had to have a policy as a predicate to get the stock doesn't mean they paid for the membership rights. They exchange the stock. In the case, I would tell you to look at as analogous is the Better Beverage's case

. There, the buyer purchased a company and bought the business asset and also acquired as part of that deal a covenant not to compete. The buyer would not have received the covenant not to compete, but for the fact that it purchased the company. But the seller didn't charge the covenant not to compete and therefore the fifth circuit house. The buyer had no basis in the covenant not to compete just as the premium, the policy holders here, they had to buy a policy in order to get the membership rights, but they would the seller, the- But that was based upon the way they structured the deal, because normally a covenant not to compete can even be written off over a period of time if you structure a problem, isn't that correct? If there had been a charge, there was no charge in that case. Well, is it the charger is the way you structure it? It was the fact that the analysis of the court was there had been no charge for it. It was all part of one contract, but that's the whole thing. It's certainly possible in many circumstances that how you structure it determines. I mean, they could have structured the insurance by saying, all right, you pay a thousand dollars a month, 900 goes for the cost of the insurance, 100 goes for the cost of your other benefit, and we wouldn't have a problem. They didn't say that, so they structured it that way, it would have been easy, but they didn't, and so we now have to figure out is was there a charge in effect for those other side benefits? And we know that there wasn't, because the company said that there wasn't, there was no evidence that there was a charge, the premiums did not decrease after the neutralization, and this view to testimony is that there had any charge for the voting and liquidation rights, the regulators would have required the premiums to decrease, and they simply did not, and then step back and look at the internal revenue. Wait a minute. Wait a minute. I thought what the regulators required was that they get certain monies and that they get the stock because there was value, because they accumulated surplus, am I missing something? Because they were required to get the stock because they were giving up the voting and liquidation rights. Right, that's value. That's has value. Let me have value. Not because they had paid for that. Again, this gets back to the distinction between basis and value, and as the companies told the policyholders, prior to its mutualization, those membership rights provided you no economic value. I think they're somewhere where we referred to the value of that. But we're facing our tail here because I thought you agreed, if they hadn't paid the premiums, they would not get any stock. And yet you say if they get stock, it doesn't matter what the stock is worth, it'll basis zero. I don't get that. Because the stock was received as exchange for the membership rights and there had been no charge for the membership rights

. But when the membership rights are integral to the nature of the mutual policy that they purchased in the first place, why isn't it tied up? And then when you decouple it, you have a different situation. Look at the concept of what the mutual company is. And mutual is a bunch of members you agree we're going to provide insurance at cost. And when you calculate the premiums, you look at the only solely at the concept rights of how much support I have, the death penalty, the cash surrender value, providing voting and liquidation rights has no cost to the company. Why would the members charge each other for that? That's consistent. In fact, the executive said we do not charge that. It is right that you get by operation of law. We only charge for things that cost the company. These rights don't cost there is no cost, no portion of that premium that is allocated. But with respect to council, you're talking about the situation before the demutualization takes place. And that's what you do. But let's just say hypothetically that the company didn't demutualize, but it liquidated. Who gets the excess cash and the company buildings and the cars and all that stuff. The policy hold it, right? If there were solvent liquidation that you're on, that is a theoretical right. As the Supreme Court said in society, savings, mutuals do not liquidate. Solvently, there's never been a solvent liquidation. And it was illegal for there to be a solvent liquidation. So I'd refer to as a theoretical right. It never happened. But you're saying that it's impossible for an insurance company to liquidate. You're saying just a mutual insurance company to liquidate. I'm saying anything can happen, but it's almost impractical, which is why this Supreme Court in Paulson when it said was valuing the equity interest of a mutual member said the value was practical zero

. Can I ask you a different question which goes to the tax code? And you made an argument that Section 72E by its boardage suggests to you that if we were to take the position that the taxpayer wants us to take, that that would be actually in contravention of the tax code. So I'd like to hear your argument on that and then I have some further questions. Sure. Sure. We've made the point that viewing the policy premiums of being paid solely for the contract right to not for the membership rights is consistent with the way Congress taxes, insurance companies and the policy holders. Congress treats all of the premiums as being paid solely for the contract rights and the point of view of the company. It's all income. No portion is treated as non-taxable contributions to capital or payment for an equity interest. And from the point of view of the policy holder, Congress treats all of the premiums as being paid for the contract rights such that when the policy member receives a payment under the contract, Congress allows under 72 all the premiums to be applied to that contract right. And the Doran's experience this first hand in 2010 when they cashed out their Phoenix policy. So let me let me ask you about that when they when they cash out that policy under section 72, they're permitted but not required to take advantage of that section of the tax code. Correct. I mean, I know. You're not going to take the advantage of it. But that just that is the design they're entitled to. They're entitled. All aggregate premiums apply it to, which is how Phoenix reported the distribution to the IRS. They received 1.9 under the contract. They had paid 1.5 premiums and so 400,000 was what this reported. No portion was held back for membership rights

. So I understand that underlying this, you'd be saying you can't you can't take advantage of that portion of the tax code and then come over here and basically, I don't know if you want to call it double counting, but basically inflate a basis like when you've already done this double use of that. So then my question would be couldn't they go back if the taxpayer is correct that it's possible to give some basis value to this transaction? Couldn't they go back and simply file an amendment? Wouldn't that be the solution? They could do that, but this puts I mean this creates a normally in the code and it puts the IRS litigation risk of taxpayers not doing that. Under the code we're entitled to apply all our premiums to our contract rights. Right. And then we are entitled and we did, but now we're in this other situation, which we didn't know about in 2010 exactly or when we did this. So we're going to be square with you and file an amended return and come up roses basically. They could do that. And if they do that, then the tax code wouldn't be running into itself like you're suggesting. They could do that, but the services that risk that taxpayers are not in fact going to do that. Well, but you're at risk every day, at least as of next week, that people won't even pay their taxes. So I'm not quite sure what that means. But our only point is that our interpretation of our position in this case is consistent with Congress's understanding that premiums are paid for the contract rights and not for any sort of equity. But with respect, Council, I think most of us that have followed this over the years, realizing insurance companies have had some wonderful lobbyists that have found a way to shelter all these premiums and build up all of the equity almost like it's a giant 401k. But we're talking about not what happens with the money and how it's treated from a tax position with respect to the policies as policies. We're talking about what happens when the company changes its structure. And I view this as being very different than that the umbrella of how the premiums are treated for policy purposes. So I'm troubled with the idea that there's just no value here. I know you say value and they are distinct. They are just understanding. I understand they are distinct points, but the reality is there would be no value or right to value if they hadn't had no basis in it. They hadn't paid for it. They hadn't paid the premiums

. They wouldn't get anything. The question is, is there a portion of the premium that is a basis in what they get? That's of course you dispute the fact that there is any basis. Because the company said we are not charging you for this right. And therefore they have no basis in the right. Which is why the courts like the six servicemen in Bank of New York and other authorities refer to Dementialization benefits as a windfall. They're receiving stock in exchange for membership rights and unexpected reorganization when they hadn't been required to pay for those membership rights. Nothing wrong with getting a windfall. It's just taxable. It's taxable. I mean the authorities are consistent on what they're saying it's taxable. They just saying it's less taxable. You say there's no basis. They say there's some basis. Well, I guess one of the one of the things. Yeah, then there's open transactors. I can argue them by zero. You don't talk about this with your significant other over dinner. All the time. Sure. May I please the court. Todd Welty for the Dorances. And I would like to reserve three minutes for your plot to the cross appeal the court alliance

. Starting with where your questions began and that is where the Dorances required to pay for the mutual rights. Yes, the Dorances in aggregate paid more than $15 million in premiums. Had they not done so or anywhere along the way, had they stopped paying premiums, the mutual rights would have lapsed. It is inconceivable that they did not pay something out of that $15 million in premiums for the mutual rights. The question is not whether they paid something but how much? Let's stop with whether they paid because I don't think you can quite so lightly skip over the services argument that the way these were structured and what they were told is that you're not paying anything for any additional rights paying your premiums for the policy. That's it. So what is your response to that? They were paying for they paid in end of story. That in fact is not the evidence and not what the court found. The court found that the mutual insurance companies generally sold policies with the benefit of oh by the way you are a owner a mutual policy. This is a mutual policy and you are in part an owner and we operate this insurance company for your benefit. That was part of the sales page. But that doesn't answer the question of disaggregating what they're paying for what they're getting. This aggregating yes and the government points to better beverage among others is the basis for saying they didn't charge the insurance companies didn't charge anything. Judge Allegra at the Court of Fittles claims dealt with this very thoroughly in his opinion but turning to the better beverage case that really turns on a unilateral statement by one side of a transaction as to the value of a covenant not to compete. There were no discussions in that case among the sides is to what value if any should be assigned to that covenant not to compete. In part because it would have revealed that the virgin text treatment on each side there was sort of a competition. So you remain silent during the negotiation of better beverage. Each side takes its position and the government is simply a stakeholder saying wait a second and we're being whipped by both sides. But to the point that I made to your colleague on the other side that's a matter of structure right if the parties had structured the better beverage transaction differently. There would have been no question that there was basis in the covenant not to compete and no question that under certain circumstances the payor could deduct those costs. Correct correct in a contract. I'm saying this through here if you had structured your deal saying you're paying us a thousand dollars a month 900 is for the insurance 100 is for this the benefits you're going to get because of the form of the insurance company if you'd structure it that way we'd have no problem

. So of course it's structure that's the easiest solution but there is no structure there's a single payment and the question is how much of any of that is for the infantile benefit rather than for the insurance. Correct and unlike better beverage where there was no discussion here we have an entire statutory regulatory framework protecting that right you have actuary studying what is that right words you have investment bankers rendering fairness approved you have regulatory approval and finally a vote by the policyholder so that not only are both sides agreeing on is this fair and equitable treatment for those you've got. That's that's post after I bought this and paid my money so as I brought up with the IRS and you know your clients took advantage of section 72 and in doing that there was no attempt to say well only a percentage of this is really eligible for this offsetter deduction right. Candidly Your Honor I don't know that was in 2010 not a year before the court and that was raised for the first time on brief on appeal. Well let me take a hypothetical step we won't take your client we'll take a hypothetical mutual policyholder who takes advantage of section 72 and in doing that the way it's structured with the IRS there's there's basically this complete offset right. No Your Honor at a conceptual level there is and should not be as double-deft if you will to the extent that there is an allocation of the premium payments to the basis of the mutual rights it would be a dollar for dollar reduction in the basis in the insurance policies. I acknowledge that there's a 1099 in the record that doesn't report to you. Let's we're not going to talk about your clients right now but if a tax pair holds policy and you surrender the policy and under 72 you can reduce the taxable gain correct. You can reduce the taxable gain with the basis in the insurance policy which if that portion of that basis is allocated to the mutual rights it would not be double counted. Oh no no okay that that confuses me because I don't see that in section 72 that's where I'm I don't understand that. One of the ways that I mean do you have any authority that says that the way they do it is that they they basically split up the premium right from some kind of other allocable right. I acknowledge Your Honor that 72 does not address this on its face. Okay so then let's just go back to 72 and where Congress says look if you have a situation where either you pay tax on your dividend or you surrender your policy then you can reduce your taxable gain correct by your premium. Yes and one of the. And then the premium is this total amount we're talking about now a portion of what you would like to allocate to basis down the road correct. Yes yes Your Honor and one of the ways that basis is calculated under second 72 is the premiums paid less dividends received. Right. The dividends received is a return of a portion of the surplus inside the insurance company which is exactly what the mutual policy holders are being compensated for in the demutualization. So it doesn't produce an anomaly it is a variation on the reduction of the basis in 72 for dividends because it is a return of surplus and in fact the court here at the trial focused very much on the return of that surplus and how is it calculated. Retrial on the competing cross-relations for summary judgment we argued open transaction doctrine the government argued no cost basis. At the record at page 71 the court ruled been looking at the insurance company side that a dividend if you will is treated as a deduction against the insurance company's income in other words it's a return of what would otherwise be retained earnings or a portion of the surplus. And the court was troubled by the way the refund claim was structured and that is the refund claim said we should have neither gain nor loss on the sale of the shares we received as a part of the demutualization and the court recognized. Wait a second through the demutualization you are being compensated through the data demutualization with the shares. There is some post demutualization gain or loss built into this of approximately $450,000 and that calculation is actually at the record at 77 option number 3 approximately $450,000 in the aggregate and the court was somewhat troubled by that and therefore denied our open transaction claim. One of the ways to solve that which we acknowledge free trial is option number 3 at record on page 77 was you treat the basis recovery through the date of demutualization. In fact that is the primary distinction between what happened in the fissure case and what happened here in fissure the taxpayers sold the shares they received as part of the demutualization in the IPO. Like a cash right? They got cash. So there was no post IPO gain or loss and everything they received could be attributed essentially to the surplus that they as mutual policyholders were the owners of. Here the dorns is held on to the shares post on the IPO. I don't understand what difference that makes as far as how much they actually paid for these benefits as opposed to for the life insurance. What differences make whether you take the cash or whether you take the stock and sell it? That doesn't change the question of how much did you pay for it which was your basis. Yes, Your Honor. One of the aspects of this is how was this share allocation determined? How was it determined? In all but the Sun Life case here which used a slightly different method is testified by the government's expert. The actuaries in the investment bankers looked at two different things. There was a fixed component that was the vote, the right to vote that they were compensated for. Mr. Sair testified that's roughly 20% though the detailed evidence in the record shows more specific numbers. And then there was this variable component and what were they looking at? And the record as testified by Mr. Sair and found by the court is that the actuaries, the investment bankers were looking at what did this particular policy holder actually contribute to the surplus through their premium payments. You step back a little bit. What are you talking about? What did this year holder contribute to the equity value of this company by making the premium payments? So when they get it back, they are essentially getting back the equity, the amount that they threw their premium payments. Could I just stop standing? I thought that we were looking at how much of the amount they paid for this insurance plus the benefits was attributable to the side benefits. Now I understand you should be saying how much of what they paid is attributable, how much of what they paid produced the benefits to the company. Is there a difference between those two? The difficulty is with the lump sum payment upfront

. Wait a second through the demutualization you are being compensated through the data demutualization with the shares. There is some post demutualization gain or loss built into this of approximately $450,000 and that calculation is actually at the record at 77 option number 3 approximately $450,000 in the aggregate and the court was somewhat troubled by that and therefore denied our open transaction claim. One of the ways to solve that which we acknowledge free trial is option number 3 at record on page 77 was you treat the basis recovery through the date of demutualization. In fact that is the primary distinction between what happened in the fissure case and what happened here in fissure the taxpayers sold the shares they received as part of the demutualization in the IPO. Like a cash right? They got cash. So there was no post IPO gain or loss and everything they received could be attributed essentially to the surplus that they as mutual policyholders were the owners of. Here the dorns is held on to the shares post on the IPO. I don't understand what difference that makes as far as how much they actually paid for these benefits as opposed to for the life insurance. What differences make whether you take the cash or whether you take the stock and sell it? That doesn't change the question of how much did you pay for it which was your basis. Yes, Your Honor. One of the aspects of this is how was this share allocation determined? How was it determined? In all but the Sun Life case here which used a slightly different method is testified by the government's expert. The actuaries in the investment bankers looked at two different things. There was a fixed component that was the vote, the right to vote that they were compensated for. Mr. Sair testified that's roughly 20% though the detailed evidence in the record shows more specific numbers. And then there was this variable component and what were they looking at? And the record as testified by Mr. Sair and found by the court is that the actuaries, the investment bankers were looking at what did this particular policy holder actually contribute to the surplus through their premium payments. You step back a little bit. What are you talking about? What did this year holder contribute to the equity value of this company by making the premium payments? So when they get it back, they are essentially getting back the equity, the amount that they threw their premium payments. Could I just stop standing? I thought that we were looking at how much of the amount they paid for this insurance plus the benefits was attributable to the side benefits. Now I understand you should be saying how much of what they paid is attributable, how much of what they paid produced the benefits to the company. Is there a difference between those two? The difficulty is with the lump sum payment upfront. It is virtually impossible or impractical to use the court and Gladden's terminology on the remand. Is that impossible or impractical to disaggregate because they're inextricably intertwined? And if so, you go to a basis recovery method which is the open transaction doctrine in the spring court case Logan or in a non-JLAN company which is what the Gladden Court pointed to. In fact, the Gladden Court would have described this case as one of the easy scenarios. We had vested rights in the mutual insurance company at the time we paid the policy. You just couldn't disaggregate those rights to tell how much you paid for the insurance versus how much you paid for the mutual rights. And therefore the only question is can you use equitable apportionment under the regulations under section 61 or do you use the open transaction doctrine? We contend that you should use the open transaction doctrine and why? The record here demonstrates that how difficult it is to come up with a value or a or the breakdown of what you paid for in mutual rights versus the insurance policy. It's impractical or impossible which is a terminology or you can't determine it with anything like fair certainty is other terminology. And in fact, I think that's what happened here. And quite candidly one of the reasons the court at the end of the day, ruled that we had waived a portion of our argument because it caught itself coming and going. But wouldn't you also, I mean, doesn't that sort of tie into the IRS's argument that really there, your argument is you just can't figure it out and that's why you need the open transaction doctrine and they're saying, well, you can't figure it out because there isn't anything to figure out. Nothing was paid for this. So it kind of loops back on itself, doesn't it? And moreover, isn't the service correct that if you can't figure it out under Columnment and the right cited there, if you can't show what your basis is, is zero. That's their argument I gather. I think that's your argument and I think that in Fisher, at page 797, the court of federal claims dealt with that well. If that were the case, if it's just too speculative, you can't tell what it is. There's a court pointed out in Fisher, well, then there would be no reason for any open transaction doctrine case because that's the fundamental presupposition in open transactions. The open transaction doctrine is by its term, it's supposed to be exceedingly rare. It's a real windfall, depending on how it's applied. In this case, the judge seemed to have tried very, very hard to balance this, take everything in and as I understand it, we review what the district judge did for abusive discretion, do we not? Your Honor, whether you refer to... In terms of the calculation, that's what I'm talking about

. It is virtually impossible or impractical to use the court and Gladden's terminology on the remand. Is that impossible or impractical to disaggregate because they're inextricably intertwined? And if so, you go to a basis recovery method which is the open transaction doctrine in the spring court case Logan or in a non-JLAN company which is what the Gladden Court pointed to. In fact, the Gladden Court would have described this case as one of the easy scenarios. We had vested rights in the mutual insurance company at the time we paid the policy. You just couldn't disaggregate those rights to tell how much you paid for the insurance versus how much you paid for the mutual rights. And therefore the only question is can you use equitable apportionment under the regulations under section 61 or do you use the open transaction doctrine? We contend that you should use the open transaction doctrine and why? The record here demonstrates that how difficult it is to come up with a value or a or the breakdown of what you paid for in mutual rights versus the insurance policy. It's impractical or impossible which is a terminology or you can't determine it with anything like fair certainty is other terminology. And in fact, I think that's what happened here. And quite candidly one of the reasons the court at the end of the day, ruled that we had waived a portion of our argument because it caught itself coming and going. But wouldn't you also, I mean, doesn't that sort of tie into the IRS's argument that really there, your argument is you just can't figure it out and that's why you need the open transaction doctrine and they're saying, well, you can't figure it out because there isn't anything to figure out. Nothing was paid for this. So it kind of loops back on itself, doesn't it? And moreover, isn't the service correct that if you can't figure it out under Columnment and the right cited there, if you can't show what your basis is, is zero. That's their argument I gather. I think that's your argument and I think that in Fisher, at page 797, the court of federal claims dealt with that well. If that were the case, if it's just too speculative, you can't tell what it is. There's a court pointed out in Fisher, well, then there would be no reason for any open transaction doctrine case because that's the fundamental presupposition in open transactions. The open transaction doctrine is by its term, it's supposed to be exceedingly rare. It's a real windfall, depending on how it's applied. In this case, the judge seemed to have tried very, very hard to balance this, take everything in and as I understand it, we review what the district judge did for abusive discretion, do we not? Your Honor, whether you refer to... In terms of the calculation, that's what I'm talking about. The calculation would be clear error. And what we would say here is under whatever standard you review it under, as the largest policy here was prudential. And as noted at page 79 of the record, prudential itself said, when calculating what the policyholders are entitled to, you should not only look at past contributions to surplus as of the calculation date, but future contributions between the calculation date and the IPO date. That's the 60 percent figure, right? That's the 40 or 50 percent. 60 percent with the past contributions 40 percent. I've got them twisted around. It's between the calculation date and the IPO. Prudential itself in the actuaries said, ignoring estimated future contributions after the calculation date would clearly produce an unrepresented result. These are the insurance companies themselves. And what happened and how did we get to this 60-40 split? Just a little bit of background into the trial. What happened at the trial was after the examination of Mr. Sair, the court took over questioning. And as the court questioned, Mr. Sair talked about the variable component dealing with contributions to surplus. And the court said, well, how did they break that down? Sair responded, what do you mean, break down? You know, and the court said, between past and future contributions. And Sair gave a rough estimate as he turned it a 60-40 past contributions 40 percent future contributions. And then he went on to testify about it. He hesitantly, I stood up and objected to the judge's questions. He said, you're honored. This is not disclosed anywhere in the materials by the insurance company. Or, Mr. Sair's report, it came out of the blue

. The calculation would be clear error. And what we would say here is under whatever standard you review it under, as the largest policy here was prudential. And as noted at page 79 of the record, prudential itself said, when calculating what the policyholders are entitled to, you should not only look at past contributions to surplus as of the calculation date, but future contributions between the calculation date and the IPO date. That's the 60 percent figure, right? That's the 40 or 50 percent. 60 percent with the past contributions 40 percent. I've got them twisted around. It's between the calculation date and the IPO. Prudential itself in the actuaries said, ignoring estimated future contributions after the calculation date would clearly produce an unrepresented result. These are the insurance companies themselves. And what happened and how did we get to this 60-40 split? Just a little bit of background into the trial. What happened at the trial was after the examination of Mr. Sair, the court took over questioning. And as the court questioned, Mr. Sair talked about the variable component dealing with contributions to surplus. And the court said, well, how did they break that down? Sair responded, what do you mean, break down? You know, and the court said, between past and future contributions. And Sair gave a rough estimate as he turned it a 60-40 past contributions 40 percent future contributions. And then he went on to testify about it. He hesitantly, I stood up and objected to the judge's questions. He said, you're honored. This is not disclosed anywhere in the materials by the insurance company. Or, Mr. Sair's report, it came out of the blue. The court initially sustained the objections to its own questions, struck the 60-40 because there was no advance notice. Later on, the court came back and said, are you sure you want to object to that? The objection was that the record 15, 16 to 17. The court comes back and says, are you sure you want to object it? To that, we would draw your objection. At 1582, in the record, we would, through the objection, but the court then said at the end of the evidence, obviously, the computations had been not been done on the 60-40 split. What is that? Number does that produce? A court clearly said that, now, I'll get to it. That contributions post-calculation day and pre-opio day may add to the basis, clearly in the record. Your position that there was clear error by the district judge in his calculation? I would say at that point, either clear error, it's a mixed question of fact and law at that point. But under either standard, the court acknowledges in the record that payments between calculation day and opio day would increase the basis. But at that point, would you sense you waived or at least withdrew the objection, the 60-40 is evidence in the record, is that right? Just to the 60-40, yes. Yes, in the court then went on to say that we could provide computations and argument that he would accept post-trial, essentially, do the math for me and send it back to me. I had it reviewed the record and I'm not inclined to do so. Point me to the existing record and do the math, which we did. And it can't be said that the trial court didn't have the opportunity to review it or that we somehow waive that. As this court noted, in Cornhusker, Casualty Insurance, Company at 553 F3, 1187, 1192, an issue is not considered waived if it has been raised sufficiently for the trial court to rule. What would that change? I suppose you would correct on this. What would the effect be? The effect is, as we pointed out, to the court. And I think this is why the court didiscentive is that when you do the math, it actually produced a net long-term capital loss, which is something we didn't even ask for. And so when you do the math under the 6040, as recommended by the court, it actually produces the basis larger than we requested. And we pointed the court back to either the open transaction doctrine or a basis recovery, which is essentially open transaction doctrine option number three at record 77, which produces a basis equal to the IPO value. And then there would be a net gain of approximately $450,000 for the post IPO fluctuation in the stock price. With that, I have about a minute left. I'm sorry

. The court initially sustained the objections to its own questions, struck the 60-40 because there was no advance notice. Later on, the court came back and said, are you sure you want to object to that? The objection was that the record 15, 16 to 17. The court comes back and says, are you sure you want to object it? To that, we would draw your objection. At 1582, in the record, we would, through the objection, but the court then said at the end of the evidence, obviously, the computations had been not been done on the 60-40 split. What is that? Number does that produce? A court clearly said that, now, I'll get to it. That contributions post-calculation day and pre-opio day may add to the basis, clearly in the record. Your position that there was clear error by the district judge in his calculation? I would say at that point, either clear error, it's a mixed question of fact and law at that point. But under either standard, the court acknowledges in the record that payments between calculation day and opio day would increase the basis. But at that point, would you sense you waived or at least withdrew the objection, the 60-40 is evidence in the record, is that right? Just to the 60-40, yes. Yes, in the court then went on to say that we could provide computations and argument that he would accept post-trial, essentially, do the math for me and send it back to me. I had it reviewed the record and I'm not inclined to do so. Point me to the existing record and do the math, which we did. And it can't be said that the trial court didn't have the opportunity to review it or that we somehow waive that. As this court noted, in Cornhusker, Casualty Insurance, Company at 553 F3, 1187, 1192, an issue is not considered waived if it has been raised sufficiently for the trial court to rule. What would that change? I suppose you would correct on this. What would the effect be? The effect is, as we pointed out, to the court. And I think this is why the court didiscentive is that when you do the math, it actually produced a net long-term capital loss, which is something we didn't even ask for. And so when you do the math under the 6040, as recommended by the court, it actually produces the basis larger than we requested. And we pointed the court back to either the open transaction doctrine or a basis recovery, which is essentially open transaction doctrine option number three at record 77, which produces a basis equal to the IPO value. And then there would be a net gain of approximately $450,000 for the post IPO fluctuation in the stock price. With that, I have about a minute left. I'm sorry. Actually, you're over time. Okay. All right. Thank you. You will give you as much as you want. Three minutes. I don't think I saved it. Actually, I could just make three. I think I'll give you a couple. With regard to the equitable allocation that the district court did to respond to Judson's question, we believe that the court should be viewed as a denobo because the court erudism matter of law, you're going to use value to estimate costs. You need to look at the value of the property was acquired. Now it was relinquished. We said a number of stories, including Gatton makes a point. And this is back to the conversation we had earlier. Value is not basis. Exactly. And under the circumstances, if we accept in the context that we're using it, that you are right, then of course the judge would have heard of the matter of law, right? Right. Right. Right. And just looking at the allocation itself to main flaws, to demonstrate why it wasn't equitable. Number one, it ignores the dramatic transformation. And the disputed dramatic transformation of the membership rights and the time they required to the time they were relinquished

. Actually, you're over time. Okay. All right. Thank you. You will give you as much as you want. Three minutes. I don't think I saved it. Actually, I could just make three. I think I'll give you a couple. With regard to the equitable allocation that the district court did to respond to Judson's question, we believe that the court should be viewed as a denobo because the court erudism matter of law, you're going to use value to estimate costs. You need to look at the value of the property was acquired. Now it was relinquished. We said a number of stories, including Gatton makes a point. And this is back to the conversation we had earlier. Value is not basis. Exactly. And under the circumstances, if we accept in the context that we're using it, that you are right, then of course the judge would have heard of the matter of law, right? Right. Right. Right. And just looking at the allocation itself to main flaws, to demonstrate why it wasn't equitable. Number one, it ignores the dramatic transformation. And the disputed dramatic transformation of the membership rights and the time they required to the time they were relinquished. Both experts agreed to that ill-liquid temporary assets were transformed into permanent liquid ones. Also, it ignores the undisputed fact that at least 90% of the surplus that the stock represented had been contributed by former policy holders. These companies had been in existence for a hundred years. And much of that surplus was created by former policy holders. But arguably that could be true. I mean, the value basis are different from your perspective. That would be true of almost any company, all right? It would be an insurance company or whatever. I mean, you could have one that's been around for years and years and years. Other people may have made contributions and invested whatever. But they still have that now again that gets back to your basis and value. If they, if some portion of the premium is a basis, then that reduces the amount of taxable gain. What we have to wrestle with is whether, from my perspective, is whether the service is corrected. Just across the board, we have to totally discount the value when we consider the basis. When I, when you have stated, and I agree with you that if they had not paid any premiums, they would have got no stock. They would have had no rights at all. So that, it's worth something. They have paid something to get something. But how that works is the issue here. The Supreme Court has said it's worth practically nothing. The court said that in Paulson. You see, for them to say because they make more than we do. And, you know, for generations, policy holders had paid premiums for policy and received nothing

. Both experts agreed to that ill-liquid temporary assets were transformed into permanent liquid ones. Also, it ignores the undisputed fact that at least 90% of the surplus that the stock represented had been contributed by former policy holders. These companies had been in existence for a hundred years. And much of that surplus was created by former policy holders. But arguably that could be true. I mean, the value basis are different from your perspective. That would be true of almost any company, all right? It would be an insurance company or whatever. I mean, you could have one that's been around for years and years and years. Other people may have made contributions and invested whatever. But they still have that now again that gets back to your basis and value. If they, if some portion of the premium is a basis, then that reduces the amount of taxable gain. What we have to wrestle with is whether, from my perspective, is whether the service is corrected. Just across the board, we have to totally discount the value when we consider the basis. When I, when you have stated, and I agree with you that if they had not paid any premiums, they would have got no stock. They would have had no rights at all. So that, it's worth something. They have paid something to get something. But how that works is the issue here. The Supreme Court has said it's worth practically nothing. The court said that in Paulson. You see, for them to say because they make more than we do. And, you know, for generations, policy holders had paid premiums for policy and received nothing. And so on that point, other than their contract life, which in case they need to collect on it. But on that point, one of the things that the Dorns is relying on here, of course, is that the insurance companies themselves, when they were going in and making actual allocations, they claim, in fact, that there is, at that point, an acknowledgement of some component for voting or other, you know, intangible rights. And therefore, the way that they were even valuing the transaction was giving not only a value, but it would mean they would have paid some portion of their premium for that value. So what does the service say to that, Art? Well, there's nothing in the demutualization plans in the record where they're saying that they're getting the stock because they paid for the membership rights. There's no discussion of that. The stock is not designed to be an estimate of any sense of what they paid. They're just the regulators have required the companies to provide the entire value of the company to its current policy holders and actual contribution memos. The work that they did was to try and tell how are we going to divide up this windfall against amongst the current? You say that there is material in the record that chose that they were not paying for anything other than the policy. Correct. It's the testimony from both the government's expert and each of the executives said that when we calculate premiums, there is no charge for the membership rights. Premiums are calculated solely on the basis. How much is it going to cost the company to provide these contract rights? Is there something that is told to the purchases that says you are not paying anything for those additional rights? No, unless the purchaser asks. What the purchaser knows is that they get these rights as a matter of law. They know that these rights are not even discussed in the policies and they know that they are not getting the economic value from these rights. So why would they think that they're being charged for? Is there anything publicly disclosed by the companies that says that? Not at the time, but it was public information during the trial that they were not charging for these membership rights and the policy. When the people bought policies and paid, there was nothing that told them whether they were or were not paying part of the amount. They would know that the internal revenue code treats all the payments as being treated as points of contract rights and not to any membership rights. I'm sure that all the policy holders were very familiar with that. What else do you mean by that? All right. But also let me ask another question. Is there anything from a regulatory insurance regulatory standpoint that required them to only accept as a mutual company premiums for the policy right? What they are, the government's mutual expert said is that in computing your premiums, you have to be very specific about your cost. You have to identify your costs

. And so on that point, other than their contract life, which in case they need to collect on it. But on that point, one of the things that the Dorns is relying on here, of course, is that the insurance companies themselves, when they were going in and making actual allocations, they claim, in fact, that there is, at that point, an acknowledgement of some component for voting or other, you know, intangible rights. And therefore, the way that they were even valuing the transaction was giving not only a value, but it would mean they would have paid some portion of their premium for that value. So what does the service say to that, Art? Well, there's nothing in the demutualization plans in the record where they're saying that they're getting the stock because they paid for the membership rights. There's no discussion of that. The stock is not designed to be an estimate of any sense of what they paid. They're just the regulators have required the companies to provide the entire value of the company to its current policy holders and actual contribution memos. The work that they did was to try and tell how are we going to divide up this windfall against amongst the current? You say that there is material in the record that chose that they were not paying for anything other than the policy. Correct. It's the testimony from both the government's expert and each of the executives said that when we calculate premiums, there is no charge for the membership rights. Premiums are calculated solely on the basis. How much is it going to cost the company to provide these contract rights? Is there something that is told to the purchases that says you are not paying anything for those additional rights? No, unless the purchaser asks. What the purchaser knows is that they get these rights as a matter of law. They know that these rights are not even discussed in the policies and they know that they are not getting the economic value from these rights. So why would they think that they're being charged for? Is there anything publicly disclosed by the companies that says that? Not at the time, but it was public information during the trial that they were not charging for these membership rights and the policy. When the people bought policies and paid, there was nothing that told them whether they were or were not paying part of the amount. They would know that the internal revenue code treats all the payments as being treated as points of contract rights and not to any membership rights. I'm sure that all the policy holders were very familiar with that. What else do you mean by that? All right. But also let me ask another question. Is there anything from a regulatory insurance regulatory standpoint that required them to only accept as a mutual company premiums for the policy right? What they are, the government's mutual expert said is that in computing your premiums, you have to be very specific about your cost. You have to identify your costs. If it's not an identified cost, then your premium can't provide for whatever that is. There's no evidence that an identified cost was some additional issue. That component. That's undisputed. Thank you. Yes. I'm sorry. I thought you had one in three minutes, but we'll give you two. If I've got my three minutes, I would be glad to take it. Just in response to the last statements, policy holders don't know they're buying this. Finding effect number four, a typical purchaser of a life insurance policy from a mutual company understands that by virtue of buying a policy, here she becomes an owner of the company. The possession of mutual rights was a typical selling point to potential policy holders finding a fact by the court. Along the same lines was anything paid for these rights. The government's own expert, whose testimony the court rejected, is not credible when he said there was no value. He did at least testify as the IPO approached the mutual rights gained value, the closer you got. Between the cap that take potential, the largest insurance policy at issue for the dormances, $12 million total premiums paid from the data acquiring the policy through the IPO. Four million of those were through the calculation date. Eight million dollar premiums of pay between the calculation date and the IPO date. It is that additional $8 million premiums that the trial court ignored when calculating the basis. That gets back to what your colleague on the other side talked about, which is value versus basis. I assume she would say, well sure, you get closer to the IPO, the market looks for certain things. That's the value, that's great, but that doesn't explain why that should translate into basis

. If it's not an identified cost, then your premium can't provide for whatever that is. There's no evidence that an identified cost was some additional issue. That component. That's undisputed. Thank you. Yes. I'm sorry. I thought you had one in three minutes, but we'll give you two. If I've got my three minutes, I would be glad to take it. Just in response to the last statements, policy holders don't know they're buying this. Finding effect number four, a typical purchaser of a life insurance policy from a mutual company understands that by virtue of buying a policy, here she becomes an owner of the company. The possession of mutual rights was a typical selling point to potential policy holders finding a fact by the court. Along the same lines was anything paid for these rights. The government's own expert, whose testimony the court rejected, is not credible when he said there was no value. He did at least testify as the IPO approached the mutual rights gained value, the closer you got. Between the cap that take potential, the largest insurance policy at issue for the dormances, $12 million total premiums paid from the data acquiring the policy through the IPO. Four million of those were through the calculation date. Eight million dollar premiums of pay between the calculation date and the IPO date. It is that additional $8 million premiums that the trial court ignored when calculating the basis. That gets back to what your colleague on the other side talked about, which is value versus basis. I assume she would say, well sure, you get closer to the IPO, the market looks for certain things. That's the value, that's great, but that doesn't explain why that should translate into basis. What you said about the finding of fact may have been a different issue, though, because there seems to be some sentiment in the literature and the cases that if there is absolutely no expectation that it's ever going to be mutualized, and we know value that that somehow plays into whether there's basis. In other words, it's almost an expectation aspect. What's your comment about that? Well, as of 1996, cited in the record as ADD126, as an article, noting that demutualization is possible in all 50 states as of the date the policies were acquired. There had been a series of demutualization. By the time the Dorns' first bought their policy, and certainly by time of the demutualizations or the IPO's here, and during the period during which the Dorns' were paying millions and millions of dollars to premiums, a wave of demutualization swept the country. Was there any? Flip that really seems like a very odd argument. So, what that would do if that argument holds true is you'd have a series of policyholders who bought their policies in the 50s or whenever they bought them. There were no demutualizations. There was no sweeping of the country. And then, all of a sudden, presumably, they had no expectation, and you're saying, but your clients had a potential expectation. I'm having trouble with that argument. You're exactly right, Your Honor. We have argued consistently that under Gladden, our rights vested when we first paid- Day one. Day one. But so do the people who bought their policies way back in your view, okay? This goes to the Gladden- So, what does this argument have to do with anything then? This responding to the court's question about- Well, you're responding, but you're acting as if there's some sort of a consumer reliance situation, and I think that's been injected into the case up to now. No, you're wrong. Okay, you know you're wrong. This is simply a response to the government's argument based on the in-between case in Gladden or the hard case in Gladden. We've always contended where the easy case in Gladden the government has postured that we had no expectation of demutualization. And the response is, well, clearly it was legal in all 50 states, and there have been a series of them before 1996, and between 1996 and the actual demutualizations, during this time period, my clients paid $15 million of premiums in the aggregate to acquire, yes, insurance, but also acquire and maintain ownership of those mutual rights. It's your clients when they got dividends offset any premiums they'd paid against that to reduce any tax. Your Honor, just quite candidly, I don't know that- Oh, that is not the directive- That is not calculated, normally- That's how the 2010 issue came up somewhere

. Yeah, yes, Your Honor. When Phoenix sent out the 1099, it did not take into account the argument that we've made in the claims of a refund that were entitled to portion of that basis, not upon termination of the policy, but as a part of the basis of the- Obviously, if you- If that were done, and I don't know what it was or not, because I couldn't see it in the record either, but if that were done, that couldn't double count that. If there is a basis, it would have to have been reduced by the amount that was applied toward any dividend payments. We have never argued in- Oh, we've not maintained that there should be a double debt on basis. Okay. Thank you, Your Honor. Thank you, Councilor Kishchis, you will be submitted