[00:00:01] Speaker 02:
The next case up for argument is Continuing Life Communities Thousand Oaks LLC versus the Commissioner of Internal Revenue.

[00:00:38] Speaker 03:
Good morning, Your Honors.

[00:00:40] Speaker 03:
My name is Cheryl Wong, and I'm here for the Commissioner of Internal Revenue.

[00:00:44] Speaker 03:
I'd like to reserve two minutes for rebuttal with the Court's permission.

[00:00:47] Speaker 03:
Thank you.

[00:00:48] Speaker 03:
I may please the Court.

[00:00:51] Speaker 03:
The tax court committed reversible error when it held that the commissioner abused his discretion in disallowing Continuing Life's accounting method that does not clearly reflect income and is required to use a different method, even though the commissioner's method clearly reflects income.

[00:01:09] Speaker 03:
An accounting method does not clearly reflect income when it mismatches income and expenses, when it violates the governing law, and generates uncertainty.

[00:01:20] Speaker 03:
The tax court made the mistake, contrary to the record, that the deferred fee at issue here had anything to do with life expectancy.

[00:01:29] Speaker 03:
It's undisputed that the deferred fee had nothing to do with the age or life expectancy of the resident.

[00:01:37] Speaker 03:
It's not set in accordance with the costs of providing care over any lifetime.

[00:01:42] Speaker 03:
It's not used to pay for care.

[00:01:44] Speaker 03:
Continuing Life's method is, quote, purely artificial and bears no relation to the services which petitioner may in fact be called upon to render.

[00:01:54] Speaker 03:
That's from Automobile Club of Michigan.

[00:01:56] Speaker 01:
So under the agreement, yes.

[00:01:58] Speaker 01:
The residential agreement.

[00:02:01] Speaker 01:
When did the continuing care community facility, when was it entitled?

[00:02:09] Speaker 01:
When did it's right to the non-refundable entrance fee accrue?

[00:02:18] Speaker 03:
In accordance with the schedule in section 12.5.

[00:02:22] Speaker 03:
And it vests.

[00:02:23] Speaker 01:
I thought it was when either the resident

[00:02:28] Speaker 03:
died or voluntarily moved out voluntarily moved out or was kicked out well the word used in section 12.5 as well as 8.2 which refers to 12.5 the word used is shall pay those are payment terms and in accrual accounting that's not the important event our position is that because the deferred fee is not used to pay for care rather access that

[00:02:59] Speaker 01:
I thought it was to, under California law, I thought it was to ensure that the facility would provide lifetime care.

[00:03:08] Speaker 03:
Yes, but that fee does not correspond to the actual provision of lifetime care.

[00:03:16] Speaker 01:
But the method that the facility used is consistent with

[00:03:20] Speaker 01:
standard accounting principles.

[00:03:22] Speaker 03:
Right, which is not the positive.

[00:03:24] Speaker 03:
That is a starting point.

[00:03:25] Speaker 01:
Yes, I understand that.

[00:03:27] Speaker 01:
But it is.

[00:03:28] Speaker 01:
And it's not contrary to any regulation, correct?

[00:03:31] Speaker 03:
Well, it's contrary to the All Events Test, Section 451 and the regulations there under, which focuses as applied to this dispute as to when performance occurs.

[00:03:42] Speaker 03:
And in our view, it does not occur over the lifetime because it bears no relation to the provision of services.

[00:03:51] Speaker 03:
It occurs when the promise of lifetime access is made and accrues over that four-year schedule.

[00:04:01] Speaker 01:
So in, in the commissioner's view, when they made that, we'll look here, the $500,000 entrance fee and under the agreement at the end of what is it?

[00:04:16] Speaker 01:
The end of one year, 5% is non-refundable.

[00:04:21] Speaker 03:
Right.

[00:04:22] Speaker 03:
90 91st day.

[00:04:23] Speaker 01:
Yes.

[00:04:24] Speaker 01:
91st day.

[00:04:25] Speaker 01:
And then it goes up, um, in the commissioner's view,

[00:04:31] Speaker 01:
That means that they had the right to that money at that time at the expiration of each one of those periods.

[00:04:36] Speaker 01:
Yes.

[00:04:39] Speaker 02:
Right.

[00:04:39] Speaker 02:
It's it's called an entrance fee.

[00:04:41] Speaker 02:
Right.

[00:04:41] Speaker 02:
But they don't have access to the money immediately.

[00:04:43] Speaker 02:
Right.

[00:04:43] Speaker 02:
Because that's triggered when the resident dies or leaves.

[00:04:47] Speaker 03:
Right, but then in accrual accounting, that does not matter as it's been a bedrock.

[00:04:52] Speaker 03:
It's the right.

[00:04:53] Speaker 03:
Right, it's the right that accruals.

[00:04:55] Speaker 03:
And you could see that in cases like Hanson, in Keith, in an installment sale agreement where the seller cannot compel payment immediately.

[00:05:05] Speaker 03:
So the actual physical access to the money, it doesn't really matter.

[00:05:14] Speaker 01:
Well, let me ask you this.

[00:05:15] Speaker 01:
Yes.

[00:05:19] Speaker 01:
I mean, you don't contend that.

[00:05:21] Speaker 01:
I understand the commissioner doesn't argue that the method that they use doesn't account for income.

[00:05:31] Speaker 03:
The method that they use does not comport with the Ollivans test because they do not earn it over a lifetime.

[00:05:37] Speaker 03:
That is our argument.

[00:05:39] Speaker 01:
Okay, that's the core of your argument.

[00:05:41] Speaker 01:
Yes.

[00:05:43] Speaker 04:
Okay.

[00:05:43] Speaker 04:
But do we get there because under 44-6b, the commissioner only gets to decide what the proper method of accounting is if the method used by the taxpayer does not clearly reflect income.

[00:05:59] Speaker 03:
Right.

[00:05:59] Speaker 04:
So if the court, and I think the tax court below and the courts below, determine that the method does clearly reflect income, so therefore we don't even get to whether or not the commissioner gets to choose what method is proper.

[00:06:14] Speaker 03:
If that conclusion is correct.

[00:06:16] Speaker 03:
right it was a city ok but i thought you weren't challenging that it does clearly reflected all we are we absolutely are challenging the taxpayers method we are saying that it does not clear it's like income on the least of which because it uh... does not comport with the all events but the all events has is one method of accounting right or is it is it the only method of accounting well it's what

[00:06:42] Speaker 03:
It's what is core to the application of the accrual accounting method.

[00:06:48] Speaker 04:
But if it's a gap compliant, doesn't that suggest that it's clearly reflects income?

[00:06:54] Speaker 03:
Well, it's a starting point.

[00:06:55] Speaker 03:
It's a starting point, but the gap cannot bind the commissioner.

[00:06:59] Speaker 03:
Correct.

[00:06:59] Speaker 03:
Yes.

[00:07:00] Speaker 04:
And do we, as the courts, is it objective test whether or not the method clearly reflects income, right?

[00:07:08] Speaker 04:
We don't defer to the commissioner on that determination.

[00:07:12] Speaker 03:
Well, the standard of review for the appellate court is a de novo review of the commissioner's discretion.

[00:07:19] Speaker 03:
So there is a level of deference there.

[00:07:22] Speaker 03:
But for the purposes of this case, well, the commissioner cannot trump the law.

[00:07:27] Speaker 03:
We do not.

[00:07:28] Speaker 03:
Right.

[00:07:28] Speaker 03:
So, and the law here is the all events test.

[00:07:31] Speaker 03:
So that for the purpose of, yes.

[00:07:33] Speaker 03:
Is that true?

[00:07:33] Speaker 04:
I thought we only get to the all events test if we determine that the method used by the taxpayer does not clearly reflect income.

[00:07:40] Speaker 04:
If we determine that the, that the, or if the courts affirms the factual finding or the legal finding that the method does clearly reflect income, then isn't that the end of the question?

[00:07:51] Speaker 03:
Well, our position, what for the taxpayer's method to clearly reflect income

[00:07:55] Speaker 03:
it needs to first of all meet the all events test, because a method that does not comply with the law cannot clearly reflect income.

[00:08:05] Speaker 04:
So, okay, so you're saying the all events test is the only test to determine whether or not something clearly reflects income?

[00:08:12] Speaker 03:
Well, I would say that it's the threshold test.

[00:08:14] Speaker 03:
There might be other cases in the future where

[00:08:19] Speaker 03:
where there are other factors at play, where, for example, if the commissioner or court has determined that the taxpayer's method does not clearly reflect income and the commissioner has a choice of methods, for example, that, you know, all of which comply with the law and the commissioner picks one, well, then that and that the court should defer to that.

[00:08:44] Speaker 03:
But our situation here is,

[00:08:46] Speaker 03:
Our argument is that the taxpayer's method does not clearly reflect income, but because it does not meet, first of all.

[00:08:53] Speaker 03:
Yes, and I see that I am... I'm sorry, can I just clarify one thing?

[00:08:57] Speaker 04:
Yes, of course.

[00:08:57] Speaker 04:
In my head, I thought the all events test is one of many different methods to compute as a counting method.

[00:09:04] Speaker 04:
Am I wrong on that?

[00:09:05] Speaker 04:
Is that the only method?

[00:09:07] Speaker 03:
It is the core.

[00:09:09] Speaker 03:
It is what's the most important thing for an accrual method taxpayer.

[00:09:13] Speaker 03:
In other situations, there might be different tests.

[00:09:17] Speaker 01:
I'm having a hard time grasping your argument.

[00:09:25] Speaker 01:
So it seems to me, when I was looking at this, is that the commissioner wants the facility to acknowledge income at a faster rate.

[00:09:37] Speaker 03:
Correct.

[00:09:38] Speaker 01:
Right?

[00:09:39] Speaker 03:
Yes.

[00:09:40] Speaker 01:
And the other way also,

[00:09:43] Speaker 01:
reflects income, but just not at the rate that the commissioner would prefer.

[00:09:51] Speaker 03:
The taxpayer's method does not clearly reflect income because, if you will, the threshold for what clearly reflects income is that it meets, as applied here, all events as relevant here.

[00:10:05] Speaker 03:
And our argument is that- Let me ask you this.

[00:10:07] Speaker 01:
Yes.

[00:10:07] Speaker 01:
What makes up, in your mind,

[00:10:10] Speaker 01:
The elements of the all-events test that suggests that their method of accrual or of counting income is not reflective of all income.

[00:10:23] Speaker 03:
The time of performance, because income is recognized under the all-events test either when due, received, or earned by performance, the earliest of those three.

[00:10:36] Speaker 03:
And that's in King Solomon from this court.

[00:10:39] Speaker 02:
I know we're going to take you over time, but I want to make sure that I understand your argument, because I think I was going into argument kind of where Judge Bumate was.

[00:10:47] Speaker 02:
So given your clarification today, I just want to make sure that we understand what your argument is.

[00:10:53] Speaker 02:
You're saying that you're acknowledging that sometimes there are alternative methods of what constitutes clearly reflecting income, but not under these particular factual circumstances, because it's a cruel

[00:11:07] Speaker 03:
Because it's accrual, that is what accrual accounting, how we recognize income under the accrual accounting method.

[00:11:16] Speaker 02:
So here, because generally compliance with GAP, generally

[00:11:21] Speaker 02:
means that you did clearly reflect income, but you're saying not under the accrual method.

[00:11:27] Speaker 02:
There's only one way to do it, and that's the way the commissioner did it.

[00:11:30] Speaker 03:
Because the gap cannot trump the Sullivan's test.

[00:11:32] Speaker 02:
Right.

[00:11:33] Speaker 02:
No, I understand that.

[00:11:34] Speaker 02:
I just want to make sure that you are essentially saying that the commissioner's methodology under the accrual

[00:11:42] Speaker 02:
test is the only way to do it in this case.

[00:11:44] Speaker 03:
Did I get that right?

[00:11:46] Speaker 03:
It's the correct way.

[00:11:47] Speaker 03:
There could be potentially out there other correct ways, but from what the parties argue, that is the correct way.

[00:11:54] Speaker 03:
Okay.

[00:11:55] Speaker 04:
Is that the commissioner's subjective decision or is that like the well-established everyone is metaphysical truth?

[00:12:03] Speaker 03:
Well, it is correct under

[00:12:05] Speaker 03:
the governing law, interpreting what the Ollivans test is.

[00:12:10] Speaker 01:
Let me, I have one other question.

[00:12:14] Speaker 01:
Did the tax court make a determination that the commissioner's method actually reflects income?

[00:12:26] Speaker 03:
No, because I think what it did at the

[00:12:31] Speaker 03:
heart or core substance of its opinion, starting from I think page 27 or so through 33.

[00:12:38] Speaker 03:
When it went through the all events test, it determined, it said that the taxpayers

[00:12:44] Speaker 03:
method was correct.

[00:12:46] Speaker 03:
So if that is determination, which is not a position, we're saying that it does not.

[00:12:52] Speaker 03:
If that is position under the analysis, it does not have to go to the second step, which is to evaluate the commissioner's method.

[00:13:00] Speaker 03:
But obviously, we disagree with his conclusion of the first step of his analysis.

[00:13:05] Speaker 01:
OK.

[00:13:06] Speaker 03:
Thank you.

[00:13:06] Speaker 03:
All right.

[00:13:06] Speaker 03:
Should I come back up?

[00:13:07] Speaker 03:
Yes.

[00:13:08] Speaker 03:
I'll add a minute.

[00:13:09] Speaker 02:
Thank you so much.

[00:13:09] Speaker 02:
I'll give you rebuttal.

[00:13:25] Speaker 00:
Good morning, Your Honors.

[00:13:27] Speaker 00:
Gary Watt, appearing for Appellee, Continuing Life Communities.

[00:13:32] Speaker 00:
Your Honors, the crux of the mistake that the Commissioner is making here is that it's really twofold.

[00:13:41] Speaker 00:
And the first and biggest mistake is that the Commissioner is misconstruing the contract.

[00:13:47] Speaker 00:
And, Circuit Judge Paez, your question went really to the heart of it, which is, what is it exactly

[00:13:54] Speaker 00:
that Continuing Life has to do to earn the deferred entrance fee.

[00:14:00] Speaker 00:
And that's the operative part of Section 12.5, not the table, but right above it.

[00:14:07] Speaker 00:
And it basically says if Continuing Life performs for the lifetime of the resident, then the right to obtain the deferred entrance fee, which it doesn't have, will attach at that time.

[00:14:24] Speaker 00:
if it performs for life.

[00:14:26] Speaker 00:
And it's important to note what that performance is.

[00:14:30] Speaker 00:
The performance is a where and it's a what.

[00:14:35] Speaker 00:
The where is the promise to provide the University Village Thousand Oaks campus in all of its glory with all of its amenities for the life of the resident.

[00:14:46] Speaker 00:
The what is the monthly services that include such things as the cleaning and the meals and the activities

[00:14:54] Speaker 00:
and so on, the deferred entrance fees arise from provision of the what?

[00:15:00] Speaker 00:
The University Village Thousand Oaks campus.

[00:15:03] Speaker 00:
Now, by ignoring the operative language of 12.5, which tells us when continuing life will have the right to the deferred entrance fees, the commissioner makes another mistake, and that is the commissioner does violence to his own treasury regulation.

[00:15:24] Speaker 00:
And the statute is 1.451-1, and it advises as to when the taxable year for items of gross income should be accounted for.

[00:15:35] Speaker 00:
And it has two elements.

[00:15:39] Speaker 00:
It has what I call a fixing the right element, and it has a reasonable amount determined element.

[00:15:46] Speaker 00:
And this table that the commissioner makes so much of does only one thing.

[00:15:54] Speaker 00:
It just tells us when the reasonable amount can be determined.

[00:15:59] Speaker 00:
But it doesn't tell us, that table says nothing, about when the right for continuing life to have, and the concurrent obligation to... Kels, before you get there, so does that mean that you're conceding that the All Events Test is the binding method of accounting?

[00:16:18] Speaker 00:
Your Honour, continuing life is in accrual taxpayer.

[00:16:23] Speaker 00:
There's no dispute here as to that.

[00:16:26] Speaker 04:
So we should look at the All Events Test.

[00:16:28] Speaker 00:
Absolutely.

[00:16:29] Speaker 00:
It is the test here.

[00:16:31] Speaker 00:
It's the test that was tried in the tax court.

[00:16:34] Speaker 00:
It's the test that applies here.

[00:16:36] Speaker 00:
And God help us if the taxpayers of this country, American businesses, who comply with operative parts of the contract, who comply with the Treasury regulations, have the Commissioner come in and say, well, I want something else to apply.

[00:16:51] Speaker 00:
And especially do it at oral arguments.

[00:16:54] Speaker 00:
is abandon hope, right, because it's regulatory chaos.

[00:16:57] Speaker 00:
And the hallmark of a civilized society is that those who are regulated follow the regulation as well as the regulators.

[00:17:06] Speaker 04:
Now... So the dispute here then between the commissioner and you is that your method of accounting does comply with all events tests.

[00:17:15] Speaker 00:
Absolutely.

[00:17:16] Speaker 04:
And that's it.

[00:17:17] Speaker 04:
That's the crux of the dispute.

[00:17:19] Speaker 00:
That's the crux of the dispute.

[00:17:20] Speaker 00:
That's where the focus should be.

[00:17:22] Speaker 00:
The focus here should be on the operative terms of 12.5.

[00:17:25] Speaker 00:
How do we know that?

[00:17:27] Speaker 04:
Under that test, the way I see it, then the question is, is it condition precedent or condition subsequent?

[00:17:32] Speaker 00:
Absolutely.

[00:17:33] Speaker 04:
Is that the right way to frame it?

[00:17:34] Speaker 00:
That is, because as the United States Supreme Court said, there's really two steps here.

[00:17:39] Speaker 00:
First is to look to the contracts to identify the right or the interest, and then look to the federal regulations and the federal statutes

[00:17:48] Speaker 00:
to decide of the tax issue.

[00:17:50] Speaker 00:
And when you look at the California Civil Code, and it's section 1436 for condition precedent, that's what controls here.

[00:17:59] Speaker 00:
And it says the following, and again, this brings us back to, I'll come right back to 12.5.

[00:18:05] Speaker 00:
But what it says here is, a condition precedent is one which is to be performed before some right dependent thereon, I'm gonna stop, the right to have the fees,

[00:18:17] Speaker 00:
accrues, or some act dependent thereon, the obligation to pay the deferred entrance fees is performed.

[00:18:27] Speaker 00:
That's condition precedent.

[00:18:29] Speaker 00:
Now, let me, before I talk about condition subsequent, come back to 12.5.

[00:18:32] Speaker 04:
If continuing... Well, so just, so under, to be fair to the tax, the Commissioner, they're saying after four years, basically no matter what, they're entitled to that money.

[00:18:44] Speaker 00:
No.

[00:18:45] Speaker 00:
No, because that amount after five years, longer than four years, the amount will be 25.

[00:18:53] Speaker 00:
So if, as Judge Paez put it, if it's $500,000, the amount will be 25%.

[00:18:59] Speaker 00:
That's when we know the amount.

[00:19:02] Speaker 00:
Well, what happens, Your Honor, if the life expectancy is 10 years, the contract requires continuing life to perform for the life of the resident

[00:19:12] Speaker 00:
or forfeit the deferred entrance fee, what happens in year five or year six if continuing life ceases to provide the where, the campus, and the what, the monthly services?

[00:19:24] Speaker 00:
They're not going to get that money.

[00:19:27] Speaker 04:
Why not?

[00:19:28] Speaker 04:
Because they provided it for the four years.

[00:19:31] Speaker 04:
Under the contract, you're saying they would not be entitled to it.

[00:19:35] Speaker 00:
No.

[00:19:35] Speaker 00:
No.

[00:19:35] Speaker 00:
And there's no ambiguity here.

[00:19:37] Speaker 01:
And that comports with California law, doesn't it?

[00:19:39] Speaker 01:
I guess that's true.

[00:19:40] Speaker 00:
Now, if you look at section 12.4.2, which is referred to in the deferred entrance fee section, that's the death of the resident.

[00:19:51] Speaker 00:
So it's telling continuing life, if you terminate by death of the resident, you get the deferred entrance fee.

[00:19:58] Speaker 00:
That's one way.

[00:20:00] Speaker 00:
The only other way to get the deferred entrance fee is voluntary termination, 12.2.

[00:20:07] Speaker 00:
The passage of time here in the schedule does nothing to fix the right to that money.

[00:20:14] Speaker 00:
Okay?

[00:20:15] Speaker 00:
Now, I have to get into something else quickly here, which is the commissioner's lawyer came up here and said that it doesn't matter if you have the money or not.

[00:20:25] Speaker 00:
It doesn't matter if you have the money or not.

[00:20:27] Speaker 00:
But the commissioner has argued Highland Farms and other cases where they had the money.

[00:20:37] Speaker 00:
They had the money, and yet the tax court said, no, we don't go by you having the money.

[00:20:43] Speaker 00:
We don't go by the assurance that you'll keep the money.

[00:20:46] Speaker 00:
We go by the operative term of the contract.

[00:20:48] Speaker 00:
Now, Highland Farms is a case that the commissioner wishes this case was.

[00:20:54] Speaker 00:
The commissioner wishes that this case was just this table, because in Highland Farms,

[00:21:00] Speaker 00:
That's what the argument is.

[00:21:02] Speaker 00:
In Highland Farms, the money became non-refundable merely by the passage of this time.

[00:21:09] Speaker 00:
But that's not this case.

[00:21:11] Speaker 00:
And so what happened there was the commissioner argued the opposite of here.

[00:21:14] Speaker 00:
Oh, they have the money.

[00:21:15] Speaker 00:
It's taxable now.

[00:21:16] Speaker 00:
Commissioner lost.

[00:21:18] Speaker 00:
Why?

[00:21:18] Speaker 00:
Because the contract controlled and the time periods had to pass.

[00:21:22] Speaker 00:
And that's what Highland Farms did and became non-refundable.

[00:21:26] Speaker 00:
But that's not what's happening here.

[00:21:29] Speaker 00:
Now, in Shea Homes,

[00:21:31] Speaker 00:
What this court said was, it doesn't matter that the money's in escrow and you'll probably get it, Shea Holmes.

[00:21:38] Speaker 00:
It doesn't matter.

[00:21:40] Speaker 00:
Commissioner, it doesn't matter.

[00:21:41] Speaker 00:
You don't get to call it income.

[00:21:43] Speaker 00:
Why?

[00:21:44] Speaker 00:
Because the contract made

[00:21:46] Speaker 00:
the benefit of the bargain, the entire planned development.

[00:21:50] Speaker 00:
And so Shea Holmes was allowed to clearly reflect income by waiting until 95% of the development was complete, even though it had the money already.

[00:22:01] Speaker 00:
It was in escrow.

[00:22:02] Speaker 00:
It was going to get it.

[00:22:03] Speaker 00:
So even when the taxpayer has the money, it's not enough to make it taxable.

[00:22:09] Speaker 00:
Here, it's undisputed.

[00:22:11] Speaker 00:
Continuing life doesn't have the money.

[00:22:13] Speaker 00:
And it won't have the right to have the money.

[00:22:16] Speaker 00:
until it provides the where and the what for the entire life of the resident.

[00:22:23] Speaker 00:
And if it stops one day short, it forfeits the entire amount of the deferred entrance fees.

[00:22:33] Speaker 00:
And if the court doesn't have any more questions, I'll submit.

[00:22:35] Speaker 01:
Let me ask you this.

[00:22:38] Speaker 01:
These continuing care facilities have been around now for some time.

[00:22:42] Speaker 01:
Is that correct?

[00:22:43] Speaker 00:
That's right, Your Honor.

[00:22:44] Speaker 01:
And there aren't many cases that have taken a look at this.

[00:22:50] Speaker 01:
Is there a reason for that?

[00:22:53] Speaker 00:
Well, maybe this will become one.

[00:22:55] Speaker 00:
But there is one case.

[00:22:56] Speaker 00:
There's one case that's very interesting.

[00:22:58] Speaker 00:
And it's very ironic that the commissioner doesn't want to mention it.

[00:23:02] Speaker 00:
And that's Norbury Sanatorium.

[00:23:04] Speaker 00:
Now, take a look at Norbury Sanatorium.

[00:23:07] Speaker 00:
And it's a little different, though, isn't it?

[00:23:09] Speaker 00:
No, the contract was the same.

[00:23:11] Speaker 00:
Norbury had the obligation under the contract

[00:23:14] Speaker 00:
to perform until the death of the disabled son.

[00:23:18] Speaker 00:
And there, the commissioner actually argued what Continuing Life is arguing here, that it would have the right to wait until the death of the son before it obtained the bonds.

[00:23:30] Speaker 00:
Norbury properly took income when the son died, and it then had the right to the bonds.

[00:23:38] Speaker 00:
If Norbury Sanatorium had stopped providing before the son died, it never would have got those.

[00:23:44] Speaker 00:
And ironically, that's what the commissioner argued.

[00:23:46] Speaker 00:
Norbury lost because it was trying to say, oh, this was income years ago.

[00:23:50] Speaker 00:
And the commissioner came up and said, no, you do the life care contract until the son dies.

[00:23:56] Speaker 00:
And only if you do that, then you get the bonds.

[00:24:00] Speaker 00:
And now the commissioner forgets that argument and comes up here and says, just go by the table.

[00:24:05] Speaker 00:
And the Treasury regulations can't stand that kind of manipulation.

[00:24:10] Speaker 00:
American business can't stand

[00:24:13] Speaker 00:
that kind of caprice, and this court should affirm the tax court's decision.

[00:24:27] Speaker 03:
Just a few quick points in response to Mr. Watt.

[00:24:30] Speaker 03:
First of all, Mr. Watt conflates, again, payment versus a fixation of the right to accrual.

[00:24:37] Speaker 03:
I noticed that Mr. Watt, when referring to section 12.5 paraphrase, rather than read, the words shall pay.

[00:24:44] Speaker 03:
Those are payment terms.

[00:24:45] Speaker 03:
It's kind of like when you go to the mechanic, when you go to the doctor, they perform the form, yes.

[00:24:50] Speaker 04:
But Council, you have to agree, though, if the continuing life of the Thousand Oaks facility closed after five years.

[00:24:57] Speaker 04:
they ran on money, they for whatever reason closed, they're not entitled to any of that money, right?

[00:25:02] Speaker 03:
If they stop providing lifetime care.

[00:25:04] Speaker 04:
Yeah, so doesn't that, doesn't that answer the question?

[00:25:07] Speaker 03:
No, that to us is a deterrent, that's a condition subsequent because that's the default.

[00:25:12] Speaker 03:
What?

[00:25:12] Speaker 03:
And default in performing their obligation.

[00:25:14] Speaker 04:
And I want to refer to court to... How is it a default if the obligation is to provide lifetime care and then they don't and then

[00:25:23] Speaker 03:
because the obligation to the, because what they have to do for the accrual of income is making that promise, is making it open.

[00:25:30] Speaker 03:
And you can think of it as, you can think of it as buying a light, an insurance policy, for example, because what the appeal of the facility was is that the residence costs are capped, it's certainty and security.

[00:25:47] Speaker 03:
And that is huge when you're looking for the care for the rest of your life.

[00:25:52] Speaker 03:
And that performance occurs as soon as that contract is signed, except that they have a schedule that spreads that consideration over four years.

[00:26:03] Speaker 01:
It's not performed at that time.

[00:26:04] Speaker 01:
It's performed over time.

[00:26:06] Speaker 03:
Yes, it's performed over four years.

[00:26:09] Speaker 02:
All right.

[00:26:09] Speaker 02:
Thank you, counsel.

[00:26:10] Speaker 02:
Thank you.

[00:26:12] Speaker 02:
The matter is submitted.