1.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2% de pizzeria. 2% de pizzeria. 2% de pizzeria. 2% de pizzeria. 4% de pizzeria. 4% de pizzeria. 4% de pizzeria. 4% de pizzeria. All our new standards. All such errors involve new legal standards and impose on the taxpayer an impossible burden of proof. In summary, those errors were, first of all, relating to the whether the transactions had the sole effect of reducing taxes, whether the purchase option was virtually certain, under circumstances where the decision was based upon post-hoc evaluation methods, and information not available at the time of posing
. 3% of the transactions were too profitable in that they would recoup profits, the investment and the profit through rents alone without regard to residual value. None of those standards exist in prior case law, and therefore, the decision should be reversed. Addressing the first of those. These transactions, as Professor Lee's who is the government's own economic expert stated, need both the pre-tax cash flows and the tax benefits to make economic sense. It's impossible for this court to hold that the tax benefits were the sole reason for the investment under circumstances where you need both pre-tax cash flow and tax benefits for the transaction to be viable. I contrast that to the situation, the court ruled in Shelby Creek and J. Trading recently. In those situations, the tax benefits were approximately 10 to 20 times the investment made in the transaction. It was not difficult for this court to hold that the tax benefits were the sole reason for investing in those transactions. But even in those cases, this court engaged in a very deliberate and careful analysis of whether transactions would still show a profit. Presumably, had they done so, even with tax benefits 10 to 20 times the excess of the investment. If they had been profitable as well, they would have been upheld. This case is at the far other end of the extreme. When Professor Lee made his statement that they need both pre-tax cash flow and tax benefits make economic sense of these transactions. That was in the context of being asked what were his values as he computed it or the value of the tax benefits in this transaction as compared to the investment and one of the transactions was the subject of his belt's comp. In that situation, in belt's comp, the taxpayer, Wells Fargo invested $9 million. And by Professor Lee's government's expert, owned calculation, the tax benefits were only worth $3 million. One third of the amount invested. Not 10 times, not 20 times. One third
. It's impossible for this court to conclude that the sole reason for investing in these transactions was tax benefits under those circumstances. Compare that to a whole string of tax court cases doing with lease transactions. The state of Thomas only tax benefits worth only 50% of the amount invested. You can also see Levy, Mukherjee, Torres, Geffen, all upholding the transactions, lease transactions, all having tax benefits valued by the court at less than the amount invested. In fact, in the state of Thomas and Geffen, the court specifically noted that relationship in determining that you cannot hold the transactions were invested in sole-free tax purposes. Now, contrast all of that then with the government's theories about whether these transactions were entered into sole-free tax purposes as adopted by Judge Wheeler below. They use financial re-engineering manipulation such as using present values, subtracting cost of funds, subtracting apples for more oranges. In order to come up with some notion that these transactions are not profitable. In fact, the tax payer conservatively estimated that these transactions would generate $61 million of pre-tax book earnings. Pre-tax book earnings. Conservatively the estimated that figure could go up as high as 80 and might be higher depending on what happens with residual values. Mr. Abbott, even if you are correct that there's some economic substance shown, don't you still have a problem with substance-over-form side of this case? Absolutely, Your Honor. The taxpayer here has to show both of these transactions have economic substance that they were entered into and had effects beyond the tax benefits, but they also have to show that they were in substance-least transactions, not in form only in least transaction, but in substance-something else. It seems to me that's a more difficult argument for you to make. Well, Your Honor, I think that again we have red layers that have been committed in the court below in that determination. First of all, the most important element, the courts have routinely accepted as determining whether somebody has the benefits and burns of ownership or put another way in substance, which is treated as the owner of the property, is whether or not in the context of a long term, how are high water net lease? Do you get back at the end and asset that has a meaningful residual? If so, you are considered to have the benefits and burns of ownership. I'm not suggesting the test is as simple as that, but I think it's very clear from the authorities that that is the single most important factor. It is not important that the LSE controls the property in the meantime. That is the nature of them at least
. Of course they do. They have possession. Is your position that the Court of Federal claims clearly aired in the underlying factual determinations with regard to the substance-overformed determination? I do believe that there are queer errors there, but what I think we need to focus on in fact is that there are legal errors in the analysis made by the Court in reaching that conclusion. What is your argument? That is a Court of Federal claims clearly aired or that there is a legal error. There is a legal error here. You are not focusing on any erroneous finding of facts. That is correct, Your Honor. We are focused on the fact that, as I said, the residual value is the key to the case. The residual value of the property can be negated if the LSE is granted a purchase option. The purchase options are extremely common in the spring court case. There are four purchase options. There is only one. They are common, but they can if structured improperly negate the LSE or expectation of residual value. When do they do so? They do so when it is virtually certain that they are going to be exercised. There was a finding in this case by the trial judge that it was virtually certain that the purchase options would be exercised. There was. That does not mean that legal argument ends up turning on that factual finding. It turns on the standard that the Court used to determine the virtual certainty of that exercise, not the finding itself, but the finding was based upon an improper analysis, which was an illegal analysis. Now it is not supported by the case now. That was that the Court did not use and accepted the testimony of an expert who admitted he did not use the fair market value standard in determining whether or not the option was virtually certainly exercised
. The Court's and the IRS itself and its own ruins have determined the virtual certainty of an exercise of a purchase option in a lease context by reference to whether or not the option was set below fair market value. The Court will be exercised in a certain way. The IRS's own ruins, an option must be nominal in relation to fair market value, not just below nominal in relation to fair market value, before it will be considered virtually certain to be exercised here. The Court, below relied upon Professor Lee's who testified he was not using a fair market value standard. In fact, was using a standard that he had made up on his own. Some 10 years after the transaction was closed, not based on any published authorities that Wells Fargo or its appraisers could have had access to and consulted at the time of the closing. Had they done, had they been able to do so, they could have come to the same conclusion. But instead, many years after the fact the government brings an expert in to testify as to his personal opinion, that it was virtually certain because he computed a value well in access of fair market value that these particular alessies might be willing to pay. To make sure that I understand the point that we're discussing now and its significance in the case, would you agree that if the trial judge was correct, I know you dispute this vigorously. But if the trial judge was correct with respect to his conclusion that the purchase option was in each case, virtually certain to be exercised that the outcome of the case was correct. I would concede that that would be the case if the conclusion that that was based upon was based upon noble information at the time of the closing and not based upon the personal information, a personal opinion of somebody many years after the fact, which was unknowable. This court in still be creep observed the transactions have to be analyzed based upon the bets and information available at the time of the closing. Perhaps most succinctly the tax court in Levy said businesses cannot operate on the basis of hindsight. I would submit that tax bearer cannot file their tax returns on the basis of hindsight. This information was not available to anybody. They defended and its expert have cited no public sources that would give rise to anybody thinking that the valuation methodology is by Professor Lee's. Should have been anticipated to be used by these particular essays and their analysis. These particular essays are being imputed by the government's expert to pay well over or be willing to pay well over bear market value in order to obtain these assets back. Therefore, make the purchase option by that distorted analysis seem compelled. In fact, although Olessi might be willing to pay more by his analysis, there is no reason to believe and Wells Fargo had no reason to anticipate that Olessi would have taken that analysis, would have done so and should have taken into account that Olessi, although they might be willing to pay more, would actually do so
. If the purchase options had not been exercised presumably the surface contract option would have been exercised. It very well could have been. I assume that the one thing that wouldn't have happened as far as Wells Fargo was concerned was that a bunch of buses, old buses, would have been driven from New Jersey and parked in front of the bank in Chicago. You weren't going to take possession of those buses. I don't think you can presume that. Tell me if that's a realistic prospect. Let me address that. These transactions were not done by Wells Fargo's tax department. They were not done as one of the transactions. They were done in the context of Olessi business. Olessi businesses are at least aircraft. Firstly, every aircraft flying overhead has been leased. Olessi businesses rent rail cars. They rent automobiles. They are not. I think we can presume that Wells Fargo is not hoping to when it gets back an aircraft fly it around. They're going to sell it. They're not hoping to get back thousands of automobiles and have to drive them around. They'll sell them. In this particular transaction, if Wells Fargo is presented with a return of the property, they have employees whose very purpose it is to take those assets back and remarket them
. Whether they exercise a service contract or remarket it to somebody else is a decision they will make at the time. In fact, Wells Fargo had an appraisal done at the closing, which indicated that taking the asset back and selling it was probably the more attractive option. You addressed the question to the service contract. Yes, Wells Fargo does have the ability to require the LSEs to find a service contract. Not to be the service recipient. The LSEs can walk away. When they're after these transactions, the leases are over. The LSEs can meet certain return requirements, find a service recipient, which again, an opinion was obtained at the closing date, saying that service contracts were perfectly reasonable commercial contracts normal in that industry. They can find that person and they just walk away. In fact, Wells Fargo, here in Washington, DC, is already planning on repising the equipment that's in this lease. This is years before the transaction comes around. But they're already engaging in about advanced planning. They could walk away from this asset when the lease is over. They can replace it with another asset. They're engaging in a process right now. This is in the record of what you get the pros and cons, the cost and so on. There's nothing at all burdensome about the walking away from the asset. In fact, it may well fit into their exact corporate plans. Is there a history of this form of leasing transaction and its tax consequences? I mean, we know that by statute now, it's no longer permitted. I didn't see any representation as to how long or how many years or decades such tax procedures may have been accepted by the service
. I think that there's two answers. First of all, leases to tax and subtenities, which each of these transactions involve. Wells Fargo did many other leases, not involving tax. These were the only ones that were disputed. But leases to tax subtenities have been around for decades. In fact, in 1984, Congress specified new rules at that point in time to deal exactly with the situation of when a U.S. taxable party leases to a tax example, such as a municipality or a foreign party. 1984, decades ago, and they specified that there was nothing wrong with that. But they would reduce the tax benefits that the investor Wells Fargo would get in that situation. And we have complied, Wells Fargo has complied 100% with those rules. The tax benefits and these transactions is, in fact, much less than it would be if they had just engaged in another one of their, which they already have, class one railroad type leases to a brilliant to northern or so on. In those situations, the tax benefits are substantially more valuable. They chose these transactions for diversification needs. They already had a lot of S1 railroads. They wanted different asset types. And that's why they did these. But to answer your question, yes, decades ago, even before then, because Congress was reacting to what they perceived to be a practice. The people were leasing to municipalities. And there was nothing wrong with that, but they reduced the tax benefits
. The second part of your answer is, did, is there a practice of these particular transactions of the type that we're looking at here, if these are somehow different? Well, the genesis of these transactions comes from Wells Fargo's own leasing business. They had engaged in leasing transactions with many people. Some of their employees had engaged in municipal leases over the years, golf courses, things like that. And they had, they had a long experience with these things. The IRS itself knew about these transactions in 1993, years before they need to dispute a rose here. Their attention was brought to these transactions by the FTA itself. The FTA is the governing or regulatory body regulating municipal transit agencies. And they do so because they give out grants of money. The FTA, when they give out a grant of money, out of particular property, has certain oversight obligations with respect to that property. These transactions, to the extent that FTA money was invested in them, it cannot be closed without the FTA's approval. But the FTA explicitly said they're not saying anything about the tax consequences. It's absolutely true that the FTA does not give tax rulings. But just as in Frank Lyon, where the business and regulatory realities of that particular transaction, in that case bank regulations, been formed on and dictated the sum of the structure of the transaction, here you have the same regulatory realities. The less ease were actually being encouraged by the United States government to enter into these transactions, pursuant to a presidential directive, and pursuant to the FTA's own policies, where they went out to conferences, meetings, and they actually told less ease, do this. And that's what they did. But obtain private funding to buy new cars. That is, I understand these transactions was exactly what didn't happen. In this case, those cars were already owned. There wasn't any influx fusion of capital. Well, the FTA would disagree, or rather the FTA was in this
. Rather than relying on what the FTA might or might not say, how is it that there's an infusion of capital here, when, as I understand the transaction, setting aside the equity investment portion of the transaction. But just looking at the lease and payment relationships between the parties, it seems to me to be, at least, and it certainly was found by the trial judge to be a circular flow of cash that didn't have a net increase in assets flowing to the transit. Well, the first of all, the transit agencies did obtain capital from these transactions. Well, they obtained a payment from you for their participation in this transaction, but setting that aside, is there any net flow of capital? I thought that the lease payments were balanced equally so that there was an effect of wash between Wells Fargo and the transit agent. It's common in all leverage leases for the lease payments to be structured so as to meet the debt service payments. And courts have routinely held that to be a neutral factor in determining whether it's true or not. What happened here is that these transit agencies, or Bellscom, received substantial amount of money. They've seen fair market value of the property. They also, in three of the cases, pursuant to the FDA's their own directives, in one case, pursuant to state of California's directives, were mandated to put that money aside to some extent to deal with their future obligations. It is the nature of any financing, whether it's a lease financing, debt financing, and so on, that you receive money up front and you pay it back later. If that didn't happen, we wouldn't have a profit motive. So that is just the nature of the transaction. Now, that money that they set aside was set aside at the risk of and for the benefit of the last years. It's their money. And you do not have a statement from the lower court saying otherwise. It is their money. Now, to look only at the cash flows, frankly, exalts the form over the substance. This court's predecessor in Osirio, 1937, found that it is the payment of the obligation that goes rise to an income. Discharge for an obligation that goes rise to an income. Not whether the person actually makes the payment themselves
. The cash flow and how the cash flows is form. The government is arguing form. The substance is, is that cash flow being used to satisfy the less these rental obligations, and it clearly is. And in the less these at risk for that, for instance, in whose energy, recent case in the seven circuit, this side by Judge Easterbrook, that's exactly what's happening. The money set aside, or the security arrangements are raised. Our end default, in fact, in that particular case, was the Amback file from bankruptcy last month. They're in default. Who has to still pay? Well, I see, still has to pay. This is their money. Now, you might, the government may not like how they've invested their money. They've invested it in some bonds or securities and payment obligations and so on, but it's their money. And that money is paying their obligation. From Wells Fargo's point of view, that's all we have. We have rent payments coming in. We have a hope for residual. And that is where our profit comes from. That is the nature of our investment. We can't, we don't have no interest in other than its collateral. Whatever the less he has put the money to satisfy the less he's own obligations in the future. Okay. I believe I've gotten it well into my rebuttal time. We'll save you rebuttal time Mr. Eich. Thank you. Mr. Johnson. Good morning. May it please the court. The court, 26 tax shelter silo transactions were an issue in this case. The parties presented only five at trial, however, because all 26 as are all lilos and silos for that matter, fundamentally similar in their structure. And then the features relevant to their tax treatment. And it's those common features that also distinguish silos and lilos for that matter from traditional leverage leases and answer your question, judge Newman about the history of these transactions. The history of silos is very short. They came onto the market in the late 1990s after the IRS discovered the lilos and shut them down by issuing a revenue ruling. The lilos similarly had a very short life in the mid 1990s to late 90s. They were shut down. The testimony and the record from the trial is that silos with these features, with the loop debt, with the equity outlay invested in the equity defeasance account. With the reciprocal options, all the features that the court described in its opinion were all new in that package. And they came onto the market in the late 1990s when the lilos couldn't be done anymore people were unwilling to do them. So they tweaked the transaction just a little bit to claim that it was different
. I believe I've gotten it well into my rebuttal time. We'll save you rebuttal time Mr. Eich. Thank you. Mr. Johnson. Good morning. May it please the court. The court, 26 tax shelter silo transactions were an issue in this case. The parties presented only five at trial, however, because all 26 as are all lilos and silos for that matter, fundamentally similar in their structure. And then the features relevant to their tax treatment. And it's those common features that also distinguish silos and lilos for that matter from traditional leverage leases and answer your question, judge Newman about the history of these transactions. The history of silos is very short. They came onto the market in the late 1990s after the IRS discovered the lilos and shut them down by issuing a revenue ruling. The lilos similarly had a very short life in the mid 1990s to late 90s. They were shut down. The testimony and the record from the trial is that silos with these features, with the loop debt, with the equity outlay invested in the equity defeasance account. With the reciprocal options, all the features that the court described in its opinion were all new in that package. And they came onto the market in the late 1990s when the lilos couldn't be done anymore people were unwilling to do them. So they tweaked the transaction just a little bit to claim that it was different. But as any comparison of the description of transactions here with those in VB and T and AWG, in the other cases shows they're fundamentally the same. But the question is still there. The silos eventually shut down by Congress. The legislation was not made retroactive. What was being done, whether one views it as an ingenious tax shelter or whatever else had been accepted, was not on its face illegal, at least viewed at the time. And yet now we're asked retroactively to reach back for these years for which the statute hasn't run and essentially extend the legislation result backward for another six years. I would disagree based on two points, Your Honor. First, we didn't rely on the statute in the trial court nor did judge Wheeler rely on the statute. Well, never mind the length of the statute. It's still we have a legislative change. And there are no transactions before us that after that legislative change. But here we have the situation which was the subject of the legislative change. And also it's the rules about exposed factor laws and I don't know what else come to mind. And is it that what we're being asked to do? No, Your Honor, the courts being asked to apply longstanding common law doctrines under Frank Lyon and the substance over form doctrine, as well as the economic substance doctrine, which long predate the jobs act of 2004 and under which these silos fail. And that's what Judge Wheeler found. He applied the Frank Lyon case as well as the similar appellate court cases and lower court cases which apply the principles of Frank Lyon and Frank Lyon was decided in the 1970s. And that laid down a clear rule as further explicated in BB&T and AWG and the Coleman and Swift Dodge case in the state of Thomas case, when the tax court in numerous other cases that in order to chain claim a depreciation deduction in a certain way. Transaction that purports to be a sale lease back. The taxpayer who wants to claim a tax depreciation deduction needs to have an actual equity outweigh invested in committed to the property and subject to consumption because of depreciation and that problem. I had no trouble with the equities or the arithmetic, but here we have a situation with full knowledge of the FDA
. But as any comparison of the description of transactions here with those in VB and T and AWG, in the other cases shows they're fundamentally the same. But the question is still there. The silos eventually shut down by Congress. The legislation was not made retroactive. What was being done, whether one views it as an ingenious tax shelter or whatever else had been accepted, was not on its face illegal, at least viewed at the time. And yet now we're asked retroactively to reach back for these years for which the statute hasn't run and essentially extend the legislation result backward for another six years. I would disagree based on two points, Your Honor. First, we didn't rely on the statute in the trial court nor did judge Wheeler rely on the statute. Well, never mind the length of the statute. It's still we have a legislative change. And there are no transactions before us that after that legislative change. But here we have the situation which was the subject of the legislative change. And also it's the rules about exposed factor laws and I don't know what else come to mind. And is it that what we're being asked to do? No, Your Honor, the courts being asked to apply longstanding common law doctrines under Frank Lyon and the substance over form doctrine, as well as the economic substance doctrine, which long predate the jobs act of 2004 and under which these silos fail. And that's what Judge Wheeler found. He applied the Frank Lyon case as well as the similar appellate court cases and lower court cases which apply the principles of Frank Lyon and Frank Lyon was decided in the 1970s. And that laid down a clear rule as further explicated in BB&T and AWG and the Coleman and Swift Dodge case in the state of Thomas case, when the tax court in numerous other cases that in order to chain claim a depreciation deduction in a certain way. Transaction that purports to be a sale lease back. The taxpayer who wants to claim a tax depreciation deduction needs to have an actual equity outweigh invested in committed to the property and subject to consumption because of depreciation and that problem. I had no trouble with the equities or the arithmetic, but here we have a situation with full knowledge of the FDA. The FDA asks, the IRS, or what do you think of all this? They say, well, we're not going to tell you. And the FDA tells the taxpayer that you're on your own, I suppose that's that's all right. But in fact, with all of the open knowledge and tacit understanding, followed eventually by legislative change, when really does have to wonder about the equities, the fairness of this retrospective change. A few points, Your Honor, regarding the claim that the IRS knew about these transactions, I don't think the record supports that in the record. The record said, and I don't recall a contribution that the FDA asked the IRS for advice. And their answer was, we don't give advice to the government agencies only to tax payers. Yes, the evidence in the record is a letter from the IRS to the FDA. We don't have any evidence of what type of transaction the FDA told the IRS about. And as I mentioned earlier, silos didn't come into the market. That's undisputed until the late 90s. But I don't recall the government raising that issue or disputing, well, they weren't asked the right question. I think what the evidence in the record shows, Your Honor, is that the IRS told the FDA, if you have taxpayers who want to enter into these transactions with entities that are FDA grant recipients, they can come to the IRS and ask for a private letter ruling. There's a procedure for doing that. Taxpayers can submit the documentation, we'll look at the entire transaction and give them a private letter ruling or perhaps we'll tell them we can't do one. Wells Fargo was aware of that procedure. They could have gone to the IRS and said, please give us a ruling. Do silos pass muster? Can we claim tax depreciation deductions? Wells Fargo elected not to do that. And in fact, Wells Fargo was fully aware it's a sophisticated entity, a bank, who hired tax lawyers. We should hold it against the taxpayer, that the taxpayer didn't seek a private ruling. I think Wells Fargo, the evidence shows that Wells Fargo knew that the, from their own internal documents and the credit approval presentations for each transaction, they say, the IRS may disallow this
. The FDA asks, the IRS, or what do you think of all this? They say, well, we're not going to tell you. And the FDA tells the taxpayer that you're on your own, I suppose that's that's all right. But in fact, with all of the open knowledge and tacit understanding, followed eventually by legislative change, when really does have to wonder about the equities, the fairness of this retrospective change. A few points, Your Honor, regarding the claim that the IRS knew about these transactions, I don't think the record supports that in the record. The record said, and I don't recall a contribution that the FDA asked the IRS for advice. And their answer was, we don't give advice to the government agencies only to tax payers. Yes, the evidence in the record is a letter from the IRS to the FDA. We don't have any evidence of what type of transaction the FDA told the IRS about. And as I mentioned earlier, silos didn't come into the market. That's undisputed until the late 90s. But I don't recall the government raising that issue or disputing, well, they weren't asked the right question. I think what the evidence in the record shows, Your Honor, is that the IRS told the FDA, if you have taxpayers who want to enter into these transactions with entities that are FDA grant recipients, they can come to the IRS and ask for a private letter ruling. There's a procedure for doing that. Taxpayers can submit the documentation, we'll look at the entire transaction and give them a private letter ruling or perhaps we'll tell them we can't do one. Wells Fargo was aware of that procedure. They could have gone to the IRS and said, please give us a ruling. Do silos pass muster? Can we claim tax depreciation deductions? Wells Fargo elected not to do that. And in fact, Wells Fargo was fully aware it's a sophisticated entity, a bank, who hired tax lawyers. We should hold it against the taxpayer, that the taxpayer didn't seek a private ruling. I think Wells Fargo, the evidence shows that Wells Fargo knew that the, from their own internal documents and the credit approval presentations for each transaction, they say, the IRS may disallow this. They were fully aware that they were taking a risk as to whether or not these past muster under the tax laws. And Wells Fargo has never made an estoppel argument that somehow they relied on the FDA or they relied on the IRS not finding these sooner than they did. That's never been a claim and they don't claim. I'm looking at the retrospective effect of the legislative change. One point of clarification that you honor if I could make on that. The legislative change in 2004 is section 470. And that prescribes a particular new type of treatment for these transactions. In the legislative going forward, prospectively, for those transactions entered into 2004. As we cited in our brief, the legislative history is very clear that this prospective chain was not intended to affect at all the treatment of prior transactions under the longstanding test that in order to claim depreciation deductions, you need to have the benefits and burdens of ownership. And that's the law that both parties agree has to be applied here. And that is whether Wells Fargo and each of these transactions acquired the benefits and burdens of ownership acquired a depreciable interest when it entered into the transactions. Do you address the question of the finding made by the trial court is to the virtual certainty of the exercise of the purchase option and Mr Abbott's argument that there was legal failure on the part of the trial judge. And on the part of Mr Liss, Dr Liss, I guess it is with respect to his analysis of the underlying economic so that transaction. Certainly, honor. First, I would just note as a preliminary point that as the trial court found and as we argued, whether or not the first purchase option is going to be exercised or whether it's virtually certain is not necessary to determine that under the substance overformed doctrine. And they didn't acquire a depreciable interest. And as the court explained and as the VBNT court explained, that's because they have the sole option to impose the service contract, which does is the functional equivalent. Well, that's the second part of the question is the extent to which the service contract is a really just another form of imposing the person purchase option. I'd like you to discuss that briefly as well. But but if you could talk about the the question of the virtual certainty, I'd appreciate it
. They were fully aware that they were taking a risk as to whether or not these past muster under the tax laws. And Wells Fargo has never made an estoppel argument that somehow they relied on the FDA or they relied on the IRS not finding these sooner than they did. That's never been a claim and they don't claim. I'm looking at the retrospective effect of the legislative change. One point of clarification that you honor if I could make on that. The legislative change in 2004 is section 470. And that prescribes a particular new type of treatment for these transactions. In the legislative going forward, prospectively, for those transactions entered into 2004. As we cited in our brief, the legislative history is very clear that this prospective chain was not intended to affect at all the treatment of prior transactions under the longstanding test that in order to claim depreciation deductions, you need to have the benefits and burdens of ownership. And that's the law that both parties agree has to be applied here. And that is whether Wells Fargo and each of these transactions acquired the benefits and burdens of ownership acquired a depreciable interest when it entered into the transactions. Do you address the question of the finding made by the trial court is to the virtual certainty of the exercise of the purchase option and Mr Abbott's argument that there was legal failure on the part of the trial judge. And on the part of Mr Liss, Dr Liss, I guess it is with respect to his analysis of the underlying economic so that transaction. Certainly, honor. First, I would just note as a preliminary point that as the trial court found and as we argued, whether or not the first purchase option is going to be exercised or whether it's virtually certain is not necessary to determine that under the substance overformed doctrine. And they didn't acquire a depreciable interest. And as the court explained and as the VBNT court explained, that's because they have the sole option to impose the service contract, which does is the functional equivalent. Well, that's the second part of the question is the extent to which the service contract is a really just another form of imposing the person purchase option. I'd like you to discuss that briefly as well. But but if you could talk about the the question of the virtual certainty, I'd appreciate it. Certainly, or what Professor Liss did was look at the appraisals that Wells Fargo had obtained at the time they had entered into the transaction and then these appraisals, the appraisers set forth a value for the property at the time of entering into the transaction. And they forecasted values at the time of the FPO decision and also values at the time of the end of the service contract or in Belgium, the end of the continued lease after the EBO. He adopted and used the values that those appraisers gave the property. So the the attack on Professor Liss for not using the correct value is a bit puzzling to say the least. What Wells Fargo is really arguing is a factual question and a question that was the subject of expert testimony with the court heard. And that is what is the proper discount rate to use to model and try to determine what is the transit agency or what is Belgium come going to decide when it's based with the FPO decision. And like the appraisers, Professor Liss looked at that decision and said, well, they have two choices. They can exercise the FPO in which the money in the defesence accounts goes to Wells Fargo or they can not exercise the FPO and then they're staring at this service contract. Wells Fargo can impose that service contract with all its costs and those are the preset basic fees that were determined at the contract's inception to give Wells Fargo the same return in the service contract that it would get the FPO. And the other cost of the service contract is at the end of it, they may lose the equipment. So he added up these costs and some of those even at the FPO point are future costs. They are the basic fees going out to 10, 11 years during the service contract term. And Professor Liss recognized that the time value of money has is relevant. A dollar paid 10 years in the future is not the same as the dollar paid today. So he used a discount rate to hurdle rate, he called it that the transit agencies would face to discount that future payment stream or the costs or benefits in the various alternatives to the FPO point. So you could have an apples the apples comparison. What's the cost and benefits of the FPO at that point in time? What are the cost and benefits of the service contract at that point in time? And he used the discount rates to put on the common denominator those various streams of cost and benefits over time from the various scenarios. And that is the crux of Wells Fargo's argument, not that he didn't use the correct values or the use the same values as their appraisers used for the value of that equipment at various points of time. It's an attack on the discount rate and that is something that the court heard testimony about and found that Professor Liss was the only one who provided a convincing argument as to what discount rates should be used. And in fact Wells Fargo didn't present any witnesses as that gave an opinion as to what discount rate would be used
. Certainly, or what Professor Liss did was look at the appraisals that Wells Fargo had obtained at the time they had entered into the transaction and then these appraisals, the appraisers set forth a value for the property at the time of entering into the transaction. And they forecasted values at the time of the FPO decision and also values at the time of the end of the service contract or in Belgium, the end of the continued lease after the EBO. He adopted and used the values that those appraisers gave the property. So the the attack on Professor Liss for not using the correct value is a bit puzzling to say the least. What Wells Fargo is really arguing is a factual question and a question that was the subject of expert testimony with the court heard. And that is what is the proper discount rate to use to model and try to determine what is the transit agency or what is Belgium come going to decide when it's based with the FPO decision. And like the appraisers, Professor Liss looked at that decision and said, well, they have two choices. They can exercise the FPO in which the money in the defesence accounts goes to Wells Fargo or they can not exercise the FPO and then they're staring at this service contract. Wells Fargo can impose that service contract with all its costs and those are the preset basic fees that were determined at the contract's inception to give Wells Fargo the same return in the service contract that it would get the FPO. And the other cost of the service contract is at the end of it, they may lose the equipment. So he added up these costs and some of those even at the FPO point are future costs. They are the basic fees going out to 10, 11 years during the service contract term. And Professor Liss recognized that the time value of money has is relevant. A dollar paid 10 years in the future is not the same as the dollar paid today. So he used a discount rate to hurdle rate, he called it that the transit agencies would face to discount that future payment stream or the costs or benefits in the various alternatives to the FPO point. So you could have an apples the apples comparison. What's the cost and benefits of the FPO at that point in time? What are the cost and benefits of the service contract at that point in time? And he used the discount rates to put on the common denominator those various streams of cost and benefits over time from the various scenarios. And that is the crux of Wells Fargo's argument, not that he didn't use the correct values or the use the same values as their appraisers used for the value of that equipment at various points of time. It's an attack on the discount rate and that is something that the court heard testimony about and found that Professor Liss was the only one who provided a convincing argument as to what discount rates should be used. And in fact Wells Fargo didn't present any witnesses as that gave an opinion as to what discount rate would be used. The appraisers used discount rates different discount rates in their appraisals. Wells Fargo however did not designate them as experts did not have them testify as to what discount rates should be used and why. Instead they hired or they retained and presented rebuttal expert witnesses who criticized Professor Liss's discount rate. But when asked by the government and indeed by Judge Wheeler what do you think the appropriate discount rate should be neither had an opinion they specifically testified that we have no opinion. So Professor Liss was the only one who provided an opinion and with supporting evidence we believe for what discount rate should be used. Remind me on a different point now. I understand that the equity defecence account would be used to fund the purchase option if that option were exercised. What happens in the event of non-exercise? What happens to the equity defecence account? Under the terms of the agreement if a service contract is imposed by Wells Fargo Wells Fargo can demand full equity defecence and debt defecence similar to that was in place from they won under the initial sublies. So Wells Fargo has the sole power to say okay we're going to impose the service contract and we also want full equity and debt defecence and what that practically means is that the funds and the equity defecence account and the debt defecence account will not be given to the transit agency. They'll be just rolled over. Now whether you say that they take it for a minute and then put it back and money is fundable so that end result is there's no net cash flow to the transit agencies when the service contract is imposed because Wells Fargo has the option and indeed said in its internal analyses of the transactions that we will require full debt equity defecence. And that is because in the service contract that provides them the same protection as they had in the initial sublies turn and that is even if the unexpected happens and there are some failure and payment or default they simply grab the defecence account and they get their money recouped anyway. You have a little more time if there are more things you want to tell us. I would like to make one point about the substance overformed doctrine which judge Lynn raised and that is that is distinct from the economic substance doctrine. These are two independent doctrines under both of which the trial court found these transactions failed and under the substance overformed doctrine the arguments about business purpose or profit motives or whether these were profitable simply are not relevant. The substance overformed doctrine looks at the actual economic realities of the transaction and whether under the code sections. The substance here acquired a depreciable interest rather than just in form or that they wanted to be the owner or that they were labeled the owner we have to look at the actual substance and for that other business purposes that are relevant under the economic substance doctrine do not control. One more question. Thank you Mr. Johnson
. The appraisers used discount rates different discount rates in their appraisals. Wells Fargo however did not designate them as experts did not have them testify as to what discount rates should be used and why. Instead they hired or they retained and presented rebuttal expert witnesses who criticized Professor Liss's discount rate. But when asked by the government and indeed by Judge Wheeler what do you think the appropriate discount rate should be neither had an opinion they specifically testified that we have no opinion. So Professor Liss was the only one who provided an opinion and with supporting evidence we believe for what discount rate should be used. Remind me on a different point now. I understand that the equity defecence account would be used to fund the purchase option if that option were exercised. What happens in the event of non-exercise? What happens to the equity defecence account? Under the terms of the agreement if a service contract is imposed by Wells Fargo Wells Fargo can demand full equity defecence and debt defecence similar to that was in place from they won under the initial sublies. So Wells Fargo has the sole power to say okay we're going to impose the service contract and we also want full equity and debt defecence and what that practically means is that the funds and the equity defecence account and the debt defecence account will not be given to the transit agency. They'll be just rolled over. Now whether you say that they take it for a minute and then put it back and money is fundable so that end result is there's no net cash flow to the transit agencies when the service contract is imposed because Wells Fargo has the option and indeed said in its internal analyses of the transactions that we will require full debt equity defecence. And that is because in the service contract that provides them the same protection as they had in the initial sublies turn and that is even if the unexpected happens and there are some failure and payment or default they simply grab the defecence account and they get their money recouped anyway. You have a little more time if there are more things you want to tell us. I would like to make one point about the substance overformed doctrine which judge Lynn raised and that is that is distinct from the economic substance doctrine. These are two independent doctrines under both of which the trial court found these transactions failed and under the substance overformed doctrine the arguments about business purpose or profit motives or whether these were profitable simply are not relevant. The substance overformed doctrine looks at the actual economic realities of the transaction and whether under the code sections. The substance here acquired a depreciable interest rather than just in form or that they wanted to be the owner or that they were labeled the owner we have to look at the actual substance and for that other business purposes that are relevant under the economic substance doctrine do not control. One more question. Thank you Mr. Johnson. Thank you. First I would like to address so as a question just towards the end there. If the purchase options not exercised does the the last he's got their money back and the answer is yes it's their money and they can get their money back. They always get their money back. Whether it's used to satisfy their continuing obligations which they have undertaken or they can put it in their own pocket. I thought that was the case I just wanted to be sure that that was true in the service contract sitting as well as in the service of the first of all. Sorry Ryan. First of all the will modifer instance here and it doesn't have to be the service or so they could easily take the turns here and there is evidence in the record that says they could be used for instance in my other places. They could be taken there and they could arrange a service contract there in which case will mod keep 100% of the money in the defense accounts. The modif decides that it's in their economic interest to be the service recipient which is a viable option. The modif is authorized to be a service that's entering service contracts by their own charter. If they decide that's economically viable then money is still there they can either use it to pay their future obligations which they've decided on economic terms is sensible or they could even substitute they could keep the money and put a letter of credit in there as opposed to an unfunded letter of credit which is a common form of credit support. The government's own expert, at least an expert Mr. Shemdenman testified that the fesins is an appropriate way to address the mechanism of municipal credits whose budgets have to be satisfied every year and whether they pay an obligation or not is stems from them actually apportioning money to pay the budget in their budget to pay the money. The fesins is a way to mitigate that risk. It's an appropriate means which the government's own expert testified was appropriate. The discount rate Mr. Johnson discussed with respect to the present value of the residuals in the purchase option calculation. The appraisers which Wells Fargo commissioned at closing had that calculation justice most professor at least did. The difference is it has Mr
. Thank you. First I would like to address so as a question just towards the end there. If the purchase options not exercised does the the last he's got their money back and the answer is yes it's their money and they can get their money back. They always get their money back. Whether it's used to satisfy their continuing obligations which they have undertaken or they can put it in their own pocket. I thought that was the case I just wanted to be sure that that was true in the service contract sitting as well as in the service of the first of all. Sorry Ryan. First of all the will modifer instance here and it doesn't have to be the service or so they could easily take the turns here and there is evidence in the record that says they could be used for instance in my other places. They could be taken there and they could arrange a service contract there in which case will mod keep 100% of the money in the defense accounts. The modif decides that it's in their economic interest to be the service recipient which is a viable option. The modif is authorized to be a service that's entering service contracts by their own charter. If they decide that's economically viable then money is still there they can either use it to pay their future obligations which they've decided on economic terms is sensible or they could even substitute they could keep the money and put a letter of credit in there as opposed to an unfunded letter of credit which is a common form of credit support. The government's own expert, at least an expert Mr. Shemdenman testified that the fesins is an appropriate way to address the mechanism of municipal credits whose budgets have to be satisfied every year and whether they pay an obligation or not is stems from them actually apportioning money to pay the budget in their budget to pay the money. The fesins is a way to mitigate that risk. It's an appropriate means which the government's own expert testified was appropriate. The discount rate Mr. Johnson discussed with respect to the present value of the residuals in the purchase option calculation. The appraisers which Wells Fargo commissioned at closing had that calculation justice most professor at least did. The difference is it has Mr. Johnson pointed out in the discount rate. The appraisers used a discount rate that based on public sources available to them at the time indicated should be risk adjusted for the risk of that particular cash flow. The particular cash flow in question is residual value. It's uncertain. It's an equity like cash flow. No one knows without residual value will be 10 years later. They used a discount rate appropriate to the risk inherent in that cash flow. Professor Lee's on the other hand used a debt like discount rate. Oh, in fact, a low debt like this guy rate low to reflect that these transit agencies can borrow cheaply. A debt like that discount rate does not reflect the uncertain cash flow that's been discounted. It's the subject of the discounting exercise by doing so. He vastly overvalued the value of that residual vastly overvalued the option of buying back the property. And that is legal error. You cannot use a discount rate that does not reflect the risk of the underlying cash flows. You certainly cannot use do so in the face choose that discount rate in the face of having no public. The most authorities telling you that's the right thing to do that we could have relied upon at time and close transaction. We give you a very short parable war and buffer at Berkshire halfway. We I presume borrow is very cheaply GM does not. I don't believe war and buffer when they're competing against them for the purchase of a parcel of real estate will overpay for that asset more than fair market value just because war and buffer borrow is more cheaply. That isn't going to happen
. Johnson pointed out in the discount rate. The appraisers used a discount rate that based on public sources available to them at the time indicated should be risk adjusted for the risk of that particular cash flow. The particular cash flow in question is residual value. It's uncertain. It's an equity like cash flow. No one knows without residual value will be 10 years later. They used a discount rate appropriate to the risk inherent in that cash flow. Professor Lee's on the other hand used a debt like discount rate. Oh, in fact, a low debt like this guy rate low to reflect that these transit agencies can borrow cheaply. A debt like that discount rate does not reflect the uncertain cash flow that's been discounted. It's the subject of the discounting exercise by doing so. He vastly overvalued the value of that residual vastly overvalued the option of buying back the property. And that is legal error. You cannot use a discount rate that does not reflect the risk of the underlying cash flows. You certainly cannot use do so in the face choose that discount rate in the face of having no public. The most authorities telling you that's the right thing to do that we could have relied upon at time and close transaction. We give you a very short parable war and buffer at Berkshire halfway. We I presume borrow is very cheaply GM does not. I don't believe war and buffer when they're competing against them for the purchase of a parcel of real estate will overpay for that asset more than fair market value just because war and buffer borrow is more cheaply. That isn't going to happen. There was no reason for it. Wells Fargo tends to participate these less is we're going to act in such an irrational manner. I'd also address the question of whether the service contract is just another form of imposing purchase option. The purchase option was set here to be above fair market value. No compulsion to exercise that up at all and put yourself in the shoes of the less. I see the last ask themselves do I want to exercise the purchase option and pay more for the value of the property for its entire remaining use of life or do I want to undertake a service contract option which maybe is more maybe not. But it looks to assume even if it is more set at a price that's above fair market value. Would I rather pay more for the entire remaining use of life property or only pay more for a portion. That analysis was done at the closing by the Wells Fargo's appraisals and they concluded a less economic and motivated rationally motivated would choose to pay under the service contract obligation as being cheaper and buying at an inflated price for the entire value of the property. I could also address Mr. Johnson's use of the word silo and lilo. He seems to think that these transactions silo as he refers to them term that is not used by anybody at the time. Where the outgrowth is lilo transactions there's just nothing in the record that supports that in their briefs they refer to a CRS report which was prepared many years later was not presented in the record. The author of that report was not presented as an expert but I had no chance to process them. I don't know what sources they relied upon. It's simply not in the record. It's just argument by name calling. In fact, these transactions were closed by business units by business people and the service contract feature itself the record shows was introduced here because the first of these transactions, CalTrans, CalTrans itself a Transad agency in California had service contract. It was a contract with the contract at the time. It was familiar with the concept
. It was familiar with the obligations, the risk and the operational requirements under a service contract. The service contract was introduced here for that purpose. That's what the record shows. One closing remark if the government has stated that they don't believe the purchase option whether it's compelled or not is relevant because they have their recruitment argument. The recruitment argument is entirely novel and has never been addressed by court. But we put this court, frankly inconsistent with the commercial law treatment under the UCC of how transactions should be treated under commercial law for substantive purposes. I think that's it. Thank you very much