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

[00:00:14] Speaker 00:
The next argued case is number 18-1781, Sonoma Apartment Associates against the United States.

[00:00:23] Speaker 00:
Mr. Roche, are you all ready?

[00:00:28] Speaker 01:
Thank you.

[00:00:28] Speaker 01:
Good morning, Your Honor, and may it please the court.

[00:00:34] Speaker 01:
This court should reverse the trial court's award of tax gross up damages because Sonoma offered no evidence of future tax rates.

[00:00:43] Speaker 01:
or future non-rental income, instead using only the first page of the Sonoma Partners 2015 tax returns, and for one of them, the 2014 tax return.

[00:00:54] Speaker 04:
Can I just cut to the chase here?

[00:00:55] Speaker 04:
I think it seems to me you argued there are two different things in respect to the LIF.

[00:01:00] Speaker 04:
One, the rates that Congress is going to statutorily have going forward for the next 20 years, and two, the

[00:01:07] Speaker 04:
The partners actual income going forward for the 20 next 20 years and you object to the notion of using current rates and current income for both sets right.

[00:01:20] Speaker 01:
In part.

[00:01:20] Speaker 01:
Yes, your honor.

[00:01:22] Speaker 04:
So.

[00:01:22] Speaker 04:
I get it with regards to the income.

[00:01:26] Speaker 04:
Starting with one year's income seems like a very narrow slice that is not indicative of future income potential.

[00:01:33] Speaker 04:
But what other measure would you have the court use for actual statutory rates other than the rates in existence?

[00:01:42] Speaker 01:
Well, Your Honor, if you can use the rates in existence, they put no evidence of what the applicable rates would be based on the income that they had.

[00:01:50] Speaker 00:
That's terrible, isn't it?

[00:01:52] Speaker 00:
But there was no contrary evidence.

[00:01:57] Speaker 04:
Well, that's their burden, right?

[00:01:58] Speaker 04:
Your argument is it's their burden of proof.

[00:02:00] Speaker 04:
You don't have to provide contrary evidence.

[00:02:02] Speaker 04:
But maybe I misunderstand your argument, and you're not objecting to the fact that they provided no evidence that Congress would keep the same rates.

[00:02:10] Speaker 01:
We're objecting to the fact that they provided no evidence of what future rates would be applicable

[00:02:15] Speaker 01:
To them based upon their income?

[00:02:18] Speaker 01:
Correct.

[00:02:19] Speaker 03:
So it's all income driven is really what your argument rests on?

[00:02:23] Speaker 01:
In part, it's mostly income driven.

[00:02:24] Speaker 01:
But it's also pretty, you can take the, in other cases, in the Winstar cases that this court has affirmed a tax gross up award.

[00:02:32] Speaker 01:
It was based on expert testimony of tax accountants or corporate controllers.

[00:02:39] Speaker 01:
And they did an analysis of the previous tax, several years worth of tax returns.

[00:02:45] Speaker 01:
And they aggregated, they came up and presented evidence of what they thought the rate would be that they would have to pay on that damages award.

[00:02:52] Speaker 01:
Here, it's entirely possible.

[00:02:55] Speaker 01:
Companies do this all the time.

[00:02:56] Speaker 01:
They have to make their planning, five-year plans.

[00:02:59] Speaker 01:
They do tax planning.

[00:03:00] Speaker 01:
And predicting what tax rates are going to be applying in future years is part of that analysis.

[00:03:05] Speaker 01:
Based on the income that they expect to be earning?

[00:03:07] Speaker 01:
Based on their expected income, yes, Your Honor.

[00:03:10] Speaker 04:
And you can do that based upon, what, retrospective reviews, future plans for employment, and things like that?

[00:03:17] Speaker 01:
Correct.

[00:03:17] Speaker 04:
And none of that was done here?

[00:03:19] Speaker 01:
None of that was done here.

[00:03:20] Speaker 04:
They looked at one tax year?

[00:03:21] Speaker 01:
They looked at one tax year.

[00:03:22] Speaker 01:
They looked at only the first page of the partner's individual tax returns.

[00:03:27] Speaker 00:
But they assumed it would be unchanged.

[00:03:30] Speaker 00:
You don't think that meets any sort of prima facie burden as opposed to the speculation that you're saying they need to figure out a tax is going to go up, down, you're going to be richer or poorer as opposed to their assumption that we have all of this historical information?

[00:03:55] Speaker 01:
That is correct your honor.

[00:03:57] Speaker 01:
They did have access to historical information They could have talked the the expert dr. Benzion could have spoken to Sonoma's tax Prepare and planner was actually the general partner he could have spoken to the other partners But what their expectations of future income would be he could have done an analysis with the tax planner to predict it at least with reasonable

[00:04:16] Speaker 01:
the likelihood of what would our tax rate be in the next few years moving forward?

[00:04:20] Speaker 03:
In the end, it's always going to be a very rough guess in terms of what the expected income is going to be in year 2, year 10, year 15, et cetera.

[00:04:32] Speaker 03:
And so I guess what concrete, tangible things do you really think they should have done that they did not do here?

[00:04:41] Speaker 01:
Well, I think it's going to be a much rougher guess when you're going out from years 10 to 20.

[00:04:45] Speaker 03:
Of course.

[00:04:45] Speaker 03:
But give me something concrete and tangible that if you were Dr. Benzian, you would have done that he actually did not do.

[00:04:54] Speaker 01:
He could have looked at the schedules of tax to the individual partner's tax returns that show the sources of other income and other tax planning strategies that they were currently employing to use to offset then existing taxes and to lower their tax burden.

[00:05:08] Speaker 01:
He could have spoken to the tax preparer.

[00:05:11] Speaker 01:
He could have consulted with the individual partners about what their expectations were.

[00:05:16] Speaker 01:
One of the partners, I don't want to give his name, was married, father, had children, was a tax attorney himself, had his own practice, and had $300,000 in gross income for the year that was used.

[00:05:30] Speaker 01:
But they only used the AGI, which showed roughly $12,500.

[00:05:33] Speaker 01:
And he took that $12,500.

[00:05:36] Speaker 04:
And that's the number he used for the next 20 or 30 years?

[00:05:39] Speaker 01:
Yes, and that was the number that Dr. Benzion used going forward.

[00:05:44] Speaker 01:
All under the assumption that it's unknown.

[00:05:46] Speaker 04:
Isn't that per se unreasonable since, I mean, if you look back a year, he probably had a lot higher income or less.

[00:05:54] Speaker 04:
I mean, that isn't the real problem here that you plucked out one arbitrary point in time without looking at a pattern.

[00:06:02] Speaker 01:
Yes.

[00:06:03] Speaker 01:
Yes, exactly.

[00:06:03] Speaker 01:
I think that's exactly the problem.

[00:06:05] Speaker 01:
That was the argument that was raised before the trial court and that was rejected by the trial court.

[00:06:08] Speaker 04:
Hypothetically, if they had looked at, say, the past five years and said, our most recent return shows $100,000 in income, we've had $100,000 in income for the last five years and we have the same job, we anticipate keeping the same job, then that would be a reliable assumption to say this last year is going to be the same for the next 20 years.

[00:06:29] Speaker 01:
If that's what that evidence indicated, yes.

[00:06:32] Speaker 01:
But in this case, it's even more complicated because you had with a general partner, he had multiple other properties that he owned.

[00:06:39] Speaker 01:
He had other sources of rental income plus other sources of investment income.

[00:06:43] Speaker 01:
None of that was considered.

[00:06:44] Speaker 01:
It was only the first page of the tax return.

[00:06:46] Speaker 01:
And I do think that, yes, we believe that was per se unreasonable to rely exclusively on that.

[00:06:52] Speaker 04:
That's why the trial court committed a clear error.

[00:06:54] Speaker 04:
Do we know why for that one person the gross was $300,000 and the adjusted was $12,000?

[00:07:01] Speaker 01:
Because most of those were startup.

[00:07:04] Speaker 01:
He had incurred a lot of startup expenses.

[00:07:06] Speaker 01:
He testified in his deposition.

[00:07:08] Speaker 01:
And so a lot of that income was offset through those expenses.

[00:07:15] Speaker 01:
But then when asked directly, do you expect?

[00:07:18] Speaker 04:
I guess you're going to answer my question.

[00:07:19] Speaker 04:
But let me ask anyway.

[00:07:20] Speaker 04:
Are those one-time expenses or are those same expenses expected going forward?

[00:07:25] Speaker 01:
Those expenses were not.

[00:07:26] Speaker 01:
They were expected to decrease going forward.

[00:07:28] Speaker 01:
In fact, Dr. Benzion at Page's... Which suggests that his income is going to go up quite a bit.

[00:07:36] Speaker 01:
Correct.

[00:07:37] Speaker 01:
Dr. Benzion conceded that that income would go up, was likely to increase as well as another partner.

[00:07:42] Speaker 03:
When you say he conceded, he was assuming that.

[00:07:46] Speaker 03:
He didn't have some tangible reason to think that

[00:07:51] Speaker 03:
Well, oh, I've now got new clients coming in the pipeline, and they have brothers and sisters, and I'm going to have even more clients after that.

[00:08:03] Speaker 03:
I mean, I guess you're asking them to do something that in its own way is a little speculative.

[00:08:12] Speaker 03:
And so I guess what I'm wondering is if someone had just gone through the exercise of taking these steps and then tried to assign certain values that on a certain level are going to be a little bit arbitrary but are nevertheless a good faith attempt to assign certain values.

[00:08:33] Speaker 03:
Would that have been satisfactory?

[00:08:35] Speaker 03:
Because then, at least from your vantage point, you would have seen Dr. Benzion going through what you would think is a more rigorous attempt at examining the question of what kinds of future incomes are going to be earned.

[00:08:47] Speaker 01:
Yes, I think that would have gone far closer to satisfying the reasonable certainty requirement that was plaintiff's burden than they did merely by assuming that all of the incomes and rates from 2015 forward were going to remain flat.

[00:09:01] Speaker 01:
that was based purely on an assumption that everything in the future

[00:09:05] Speaker 01:
was unknowable.

[00:09:05] Speaker 03:
Now one thing I thought the judge below relied on, the big hook for sort of protecting the government against an overinflated gross up award was the fact that one of the taxpayers of this partnership you could foresee that that person's salary was not going to be sustainable at the very relative high level it was currently at the one year that was

[00:09:32] Speaker 03:
looked at and at a certain point it was definitely going to tail off and So for that reason that sort of protected the government from what ultimately would be an overinflated gross up award even if some of the other People's incomes for that one Reviewed year were likely to go up in future years

[00:09:56] Speaker 03:
Well, yes.

[00:09:57] Speaker 03:
So there's some kind of a buffer to counteract any concerns about increased income for the other people.

[00:10:04] Speaker 01:
Well, the court did make two adjustments, that being one of them.

[00:10:09] Speaker 01:
However, it resulted in an increase in the gross of award.

[00:10:13] Speaker 01:
Because the general partners, in that one year that was relied on for the calculation, I think his income was something like $400,000 or thereabouts.

[00:10:25] Speaker 01:
And that was the projection going forward 20 years.

[00:10:28] Speaker 01:
The court said, no, go back, use the life actuary tables, and see when he's likely to retire.

[00:10:35] Speaker 01:
They did that.

[00:10:36] Speaker 01:
So that loss of the current income resulted in an increase in the tax gross up amount.

[00:10:43] Speaker 00:
So the concern is with the methodology, because it does seem to be sufficiently open-ended that with all of the additional information that

[00:10:56] Speaker 00:
you said is necessary for the projection that the government's liability might increase rather than decrease.

[00:11:05] Speaker 01:
Yes, that's correct, Your Honor.

[00:11:06] Speaker 00:
The concern is... That the methodology that needs to be imposed on the taxpayer, on the prevailing party, the conceded prevailing party under ALIFA, they need to go through this very elaborate speculation as to

[00:11:26] Speaker 00:
their personal future income, not the income from the property.

[00:11:30] Speaker 01:
No, we're not challenging the methodology as Dr. Benzion used it in the Olympic cases or in other cases where you're just looking at one person's income.

[00:11:42] Speaker 01:
And he was actually instructed just to assume that that person was expected likely to be employed for five more years.

[00:11:50] Speaker 01:
And so he was doing his projections in those cases.

[00:11:53] Speaker 01:
the majority of his cases he testified to on that basis.

[00:11:57] Speaker 01:
That methodology could well work in those instances.

[00:12:01] Speaker 01:
Here, when you get to cases where this court has affirmed a tax gross up, like the Winstar cases, as well as this one, when you're dealing with complex partnership income with multiple sources of revenue and income, more is required.

[00:12:18] Speaker 01:
certainly more than an assumption that any future tax rate, any future income is unknowable.

[00:12:22] Speaker 01:
Therefore, we're not even going to try.

[00:12:24] Speaker 01:
That's simply guessing.

[00:12:27] Speaker 01:
You might as well have picked a number out of the hat.

[00:12:29] Speaker 01:
And that does not satisfy the reasonable certainty standard, not under the restatement nor under this court's decision in precision pine, which you specifically said that guesswork is not sufficient.

[00:12:40] Speaker 01:
And so that's the reason that the trial court committed reversible error in this instance.

[00:12:48] Speaker 01:
And it would result, there's a concern that if this court was to affirm the trial court based on such a lack of supporting evidence for the damages award, it could result in potentially increased liability in other cases moving forward.

[00:13:03] Speaker 01:
If we're going to reduce the tax gross up to merely a math exercise and not have the sort of requirements that require the type of evidence and testimony and competent testimony that was presented in the Winstar decisions,

[00:13:15] Speaker 01:
then it's going to lower the burden that future plaintiffs may have to meet to receive a tax gross up in other cases.

[00:13:25] Speaker 00:
Okay.

[00:13:26] Speaker 00:
Let's hear from the other side.

[00:13:27] Speaker 01:
Thank you, Your Honor.

[00:13:34] Speaker 00:
Ms.

[00:13:34] Speaker 00:
Bull.

[00:13:35] Speaker 02:
Good morning, Your Honors.

[00:13:36] Speaker 02:
May it please the Court?

[00:13:40] Speaker 02:
So this is a case involving clear error.

[00:13:43] Speaker 04:
To reverse, the court has to find- Why isn't it per se unreasonable to take one year's adjusted gross income without looking at any previous years or any kind of evidence about what that person might do in the future and say, this person is going to have the same income for the next 30 years?

[00:14:02] Speaker 04:
That's not economic reality for a lot of people.

[00:14:06] Speaker 02:
Yes, Your Honor.

[00:14:07] Speaker 02:
The reason that that process,

[00:14:10] Speaker 02:
would not have been unreasonable is that in combination of looking at the four partners, it was the most conservative estimate because the amount by which the highest grossing, highest percentage partner

[00:14:27] Speaker 02:
he got overcharged more than his children could possibly have been undercharged.

[00:14:33] Speaker 02:
But the more fundamental aspect is that that's not what happened.

[00:14:36] Speaker 04:
But we know that, though, because we don't have any evidence.

[00:14:38] Speaker 04:
They're just picking one number snapshot for one year and saying, this is going to be the same forever.

[00:14:44] Speaker 04:
And you're saying, well, that's a rough, by the numbers estimate, that's good enough.

[00:14:51] Speaker 04:
And the trial court seemed to accept that because she said, well, all these numbers are going to be speculative.

[00:14:57] Speaker 04:
Don't you agree that there's a line where something is speculative but still supported by evidence and something that's just entirely speculative and unsupported?

[00:15:08] Speaker 04:
And if you fall below that line, then it's not good enough.

[00:15:11] Speaker 02:
Your Honor, the trial judge addressed.

[00:15:14] Speaker 04:
Let's talk about that specific example of the attorney who had a $300,000 gross income but a $12,000 adjusted gross income.

[00:15:24] Speaker 04:
And that $12,000 would be used as

[00:15:26] Speaker 04:
the income for all 30 years, right?

[00:15:30] Speaker 02:
No, Your Honor.

[00:15:33] Speaker 04:
That's my understanding.

[00:15:35] Speaker 02:
Right.

[00:15:35] Speaker 02:
So there's two parts to this.

[00:15:37] Speaker 04:
For that person's income, that was the income was used, right?

[00:15:40] Speaker 02:
No.

[00:15:41] Speaker 04:
What was used then?

[00:15:42] Speaker 02:
What was used because the trial court addressed this at the trial level and adopted the government's argument and said, no, there should be an apples to apples comparison.

[00:15:53] Speaker 02:
So we should not be looking at the wage income for one side but not the other.

[00:15:58] Speaker 02:
We should be looking at the real estate income for both sides to have an apples to apples comparison.

[00:16:04] Speaker 04:
But that personal income, the wage income plays into the calculation, doesn't it?

[00:16:09] Speaker 02:
It does not.

[00:16:10] Speaker 02:
It fell out, and the revised calculations were accepted by the government.

[00:16:15] Speaker 04:
For the gross up award.

[00:16:18] Speaker 04:
I'm not talking about the damages.

[00:16:19] Speaker 04:
They conceded the damages, the expectancy damages.

[00:16:23] Speaker 04:
I'm talking about the gross up.

[00:16:25] Speaker 04:
Are you saying that $12,000 was not the assumption that your expert relied on for this individual's wage income going forward?

[00:16:35] Speaker 02:
In the final damages calculation incorporated into the judgment, no, it was not.

[00:16:43] Speaker 04:
Can you show me where that was done?

[00:16:45] Speaker 04:
Because that's not what the government says.

[00:16:48] Speaker 02:
I understand that the government appeared to have a misconception.

[00:16:52] Speaker 04:
That's not what your expert said.

[00:16:53] Speaker 04:
Your expert said he's going to rely on one year

[00:16:57] Speaker 04:
of these person's income and assume it's going to be the same going forward.

[00:17:00] Speaker 04:
Isn't that what he said?

[00:17:01] Speaker 02:
At trial, that's what he said and the judge disagreed with him.

[00:17:05] Speaker 02:
She said, no, that's not a correct way to do it.

[00:17:07] Speaker 02:
I want you to go back and recalculate, expert.

[00:17:11] Speaker 02:
Dr. Barry Benzion, go back, redo it.

[00:17:14] Speaker 03:
So where can you show us in the lower court's opinion, very likely opinion, that where she says, I reject using the $12,000 adjusted gross income number for that particular individual for years 2016 to 2035.

[00:17:40] Speaker 03:
Because I'm also, I guess, under the impression that that's what was relied on.

[00:17:46] Speaker 03:
We're going to take one data point, a particular year, and then just draw a straight line, a flat line, across the next 20 calendar years and assume that that particular individual will, with his tax and law practice, continue to make $12,000 a year for the next 20 years.

[00:18:11] Speaker 02:
Yes, your honor, it is this is discussed in the briefing.

[00:18:17] Speaker 02:
And it is from Appendix, page 96.

[00:18:21] Speaker 02:
And I can read what the court said.

[00:18:23] Speaker 02:
It was also in the Respondents' Brief at page 44.

[00:18:26] Speaker 02:
The judge said, accordingly, when recalculating the tax utilization payment.

[00:18:31] Speaker 03:
Can you help me where?

[00:18:32] Speaker 03:
In A96?

[00:18:33] Speaker 02:
Sure.

[00:18:34] Speaker 03:
Oh, OK.

[00:18:34] Speaker 03:
It's towards the lower half, in the middle of the penultimate paragraph before the conclusion, right?

[00:18:46] Speaker 02:
I can go find it.

[00:18:48] Speaker 02:
I quoted it at page 44 in the respondent's appellee's brief as well.

[00:18:56] Speaker 03:
Oh, I'm sorry.

[00:18:57] Speaker 03:
Let me try again.

[00:18:58] Speaker 03:
It's near the topic in 96.

[00:19:01] Speaker 03:
You're accordingly.

[00:19:04] Speaker 02:
All right.

[00:19:04] Speaker 02:
So the court directed Dr. Benzion to go back and recalculate taking out the wage income and only having the rental income.

[00:19:12] Speaker 02:
The future rental income was established by expert testimony, which was really not contested by Mr. Burwell looking at future rates anticipated based on his market studies and comparatives in the area.

[00:19:24] Speaker 02:
And both calculations in order to have an apples to apples comparison were recalculated for that.

[00:19:31] Speaker 02:
What's going to be the tax rate on that particular income?

[00:19:34] Speaker 02:
the government received those calculations did not object to the calculation and those were the numbers that are incorporated into the final judgment.

[00:19:43] Speaker 02:
So the answer is no, that wage income is not the basis of

[00:19:49] Speaker 02:
this calculation.

[00:19:50] Speaker 03:
So you're saying the sentence near the top of A96, accordingly, when recalculating the tax neutralization payment it is owed, plaintiff shall omit wage and other non-real estate income from Dr. Benzion's computation of the tax consequences of the lump sum damages award?

[00:20:09] Speaker 03:
Yes.

[00:20:10] Speaker 02:
And that's what was done.

[00:20:12] Speaker 04:
But doesn't that affect the actual taxes paid?

[00:20:19] Speaker 04:
I mean, these are partners, right?

[00:20:21] Speaker 04:
Do they pay income taxes as individual partners?

[00:20:24] Speaker 02:
They do.

[00:20:25] Speaker 02:
It flows right through to the individual partners.

[00:20:27] Speaker 04:
Well, then how would that even be legally reasonable if you're admitting because the wage income is directly relevant to that partner's taxation bracket?

[00:20:39] Speaker 04:
And so clearly, if somebody is making $1 million a year, their tax rate is going to be higher than they're making $12,000 a year.

[00:20:49] Speaker 04:
And so that individual wage income or non-rental income, whatever you want to call it, is directly relevant.

[00:20:57] Speaker 04:
So if she threw that out altogether, then it seems even more legally erroneous.

[00:21:02] Speaker 02:
The government requested that comparison, and the judge adopted it.

[00:21:08] Speaker 04:
And whether or not it makes it- I have a feeling your friend sitting there is not going to agree with that assessment.

[00:21:13] Speaker 02:
They did, though.

[00:21:14] Speaker 04:
The whether or not it makes it- Can you point out to us where they did?

[00:21:18] Speaker 02:
It was in their argument.

[00:21:19] Speaker 02:
And I could certainly, I don't have that page citation.

[00:21:23] Speaker 02:
I could send a letter.

[00:21:24] Speaker 04:
I didn't see any of that in their blue brief.

[00:21:27] Speaker 04:
Did you point that out in your red brief?

[00:21:30] Speaker 02:
That the government was the one who had requested it?

[00:21:32] Speaker 04:
Yeah.

[00:21:32] Speaker 02:
I believe so.

[00:21:36] Speaker 04:
I mean, we're hearing an argument right now from you that I didn't read in these briefs.

[00:21:40] Speaker 04:
So I'm a little confused about what's going on.

[00:21:44] Speaker 02:
This was starting at page 43.

[00:21:47] Speaker 02:
in my brief?

[00:21:52] Speaker 00:
I'm looking.

[00:21:58] Speaker 04:
OK, this is this argument, right?

[00:22:01] Speaker 04:
I see what it's the same argument.

[00:22:03] Speaker 04:
But how is wage income irrelevant to the partner's actual tax bracket?

[00:22:15] Speaker 02:
It is not irrelevant to the partner's actual tax bracket overall.

[00:22:20] Speaker 02:
If you look though at the damages as the first dollars that are received, it affects, you have an equal calculation there.

[00:22:28] Speaker 02:
If you look at it as a whole and you say, okay,

[00:22:32] Speaker 02:
including in the wage income, what do we look at?

[00:22:36] Speaker 02:
Then I would still contend that in fact, Dr. Benzion had prior years to look at.

[00:22:43] Speaker 02:
The 12,500 income, for example, was not a wildly weird one-year amount.

[00:22:51] Speaker 02:
It had been in place, that kind of very low income had been in place for the last several years.

[00:22:56] Speaker 02:
He looked at the last four years of income because you had prior damages.

[00:23:02] Speaker 04:
the economic circumstances and job experience of that person for those previous years?

[00:23:10] Speaker 02:
That person had approximately three years ago begun a law practice and had testified that he had high startup costs.

[00:23:19] Speaker 02:
So it was not expected to last forever.

[00:23:22] Speaker 02:
He optimistically hoped to be making more income as an attorney than

[00:23:26] Speaker 02:
the net profit that he was showing there.

[00:23:29] Speaker 03:
It's more about he just had very, very high reported expenses every year.

[00:23:35] Speaker 03:
His income was not small.

[00:23:37] Speaker 02:
His income was reasonable.

[00:23:38] Speaker 03:
It wasn't insignificant.

[00:23:40] Speaker 03:
It's just that for whatever reason, he kept reporting $275,000 of expenses every year.

[00:23:48] Speaker 02:
Yes, Your Honor.

[00:23:48] Speaker 02:
The expenses were high as well as the income.

[00:23:52] Speaker 02:
Um, so there was not ultimately Dr. Benzion.

[00:23:58] Speaker 02:
opined that it was reasonable and conservative to take the final year and to take the gross income from all sources, and that was his opinion at trial.

[00:24:09] Speaker 03:
He had the backup information, and he decided it was... For this particular partner, did he say, for this particular partner, I'm going to look at his past three or four years, and then I'm going to average those three or four years?

[00:24:20] Speaker 03:
No, he did not say that.

[00:24:21] Speaker 03:
My understanding is he only used a single data point.

[00:24:24] Speaker 02:
He had all of the data for the past few years.

[00:24:27] Speaker 02:
He used the most recent year and carried it forward.

[00:24:31] Speaker 02:
at trial for all of the partners, including the one who would probably retire and earn less.

[00:24:38] Speaker 02:
And that was not entirely corrected by the trial court below.

[00:24:42] Speaker 02:
That was a very conservative assumption.

[00:24:45] Speaker 04:
But you say it's a conservative assumption.

[00:24:47] Speaker 04:
A mistake in the government's favor doesn't mean that the overall methodology is correct.

[00:24:55] Speaker 04:
There's some mistakes here.

[00:24:56] Speaker 04:
There's some mistakes here.

[00:24:58] Speaker 04:
If it's a mistaken methodology, then you need to do a correct methodology.

[00:25:03] Speaker 02:
I do not believe it was a mistaken methodology, Your Honor.

[00:25:06] Speaker 04:
I believe that- How is it ever reasonable, again, let me ask you this, to take one single data point of salary for each of these individual relevant people, and without any other evidence of whether they're going to have consistent salary or not, say, we're just going to assume that.

[00:25:22] Speaker 04:
How is that ever reasonable without any notion that this person is going to have the same job,

[00:25:27] Speaker 04:
is going to live in the same area and have the same kind of pay scale or things like that.

[00:25:30] Speaker 04:
I get it if this person is a GS-12 worker at a government agency.

[00:25:35] Speaker 04:
They've been working at this job for 20 years.

[00:25:38] Speaker 04:
They plan to work at it for another 20 years.

[00:25:41] Speaker 04:
They're going to have the same salary with minimal cost of living increases.

[00:25:45] Speaker 04:
That makes sense.

[00:25:46] Speaker 04:
But he didn't testify to any of that evidence.

[00:25:49] Speaker 04:
He plucked out single data points and said, well, we're just going to assume this without any reason to assume that assumption is rational.

[00:25:57] Speaker 03:
It's kind of hard to draw a line with a single data point.

[00:26:01] Speaker 02:
It's also hard to draw an accurate methodology when you are looking at a term that stretches decades, and that problem lies directly at the government's feet.

[00:26:14] Speaker 04:
No, it does not.

[00:26:15] Speaker 04:
It is your burden of proof on this issue.

[00:26:18] Speaker 04:
And so if you submit deficient proof, then that's not the government's fault.

[00:26:23] Speaker 04:
Sure, I agree entirely with you that

[00:26:27] Speaker 04:
Predicting somebody's income going forward 20 or 30 years is going to be speculative no matter what.

[00:26:33] Speaker 04:
But there's a certain line of speculative that's OK, and there's a certain line that's not.

[00:26:38] Speaker 04:
Relying on one single data point without any explanation of why that's correct seems to be not.

[00:26:43] Speaker 04:
If you looked at the past 10 years,

[00:26:45] Speaker 04:
and you'd said, here's the trajectory, it's flat, we're going to assume it's going to stay flat, then that might be good enough.

[00:26:52] Speaker 04:
Or if you looked at the trajectory and said it's going up by 5% each year and said he's going to keep that trajectory.

[00:26:58] Speaker 04:
Or for the older partner, if you said, look, he's had this income level, he's probably going to maintain the same one, but he's going to retire and he's going to drop down.

[00:27:07] Speaker 04:
None of that was done.

[00:27:08] Speaker 04:
It was one single data point.

[00:27:10] Speaker 04:
How is that sufficient evidence for a reasonable approximation of what's going to happen for 20 or 30 years?

[00:27:18] Speaker 02:
I believe that it was reasonable in the aggregate that Dr. Benzion looked at the... I'm not buying your aggregate argument among the different partners.

[00:27:26] Speaker 04:
I think that to have some kind of reasonable degree of certainty here, you have to look at each of these people individually because they're going to have differing incomes and their tax consequences are going to be different.

[00:27:41] Speaker 02:
Yes, Your Honor.

[00:27:42] Speaker 02:
The people were looked at individually and... Based upon one single data point.

[00:27:48] Speaker 02:
The data was available for the pioneers.

[00:27:50] Speaker 04:
He kept saying it was available, but he didn't use it.

[00:27:52] Speaker 04:
If it was available and he'd used it and we had the same conclusion, we probably wouldn't be here because the government probably wouldn't have appealed.

[00:28:02] Speaker 04:
But he used one arbitrary data point and didn't explain why that was indicative of somebody's expected income for the next 20 years.

[00:28:11] Speaker 04:
I'm not going to be the dead horse.

[00:28:12] Speaker 04:
You see where I am.

[00:28:13] Speaker 04:
I think that's pretty simple.

[00:28:15] Speaker 04:
I do, Your Honor.

[00:28:16] Speaker 02:
I don't believe that there are prior authorities.

[00:28:20] Speaker 02:
There's a line of cases.

[00:28:21] Speaker 02:
And Dr. Benzion testified to his experience in using the most recent year.

[00:28:26] Speaker 02:
There was not any authority that was pointed out at trial that using one year under these circumstances was, or under other circumstances, was unreasonable.

[00:28:36] Speaker 04:
Weren't those much smaller time periods?

[00:28:38] Speaker 02:
Some were and some weren't, Your Honor.

[00:28:40] Speaker 02:
In Hook versus Sheraton, for example, that went out 40 years based on a presumed income from a fellow who was in, I think he was around 20 years old.

[00:28:53] Speaker 02:
And it assumed that he would get a job that he at that point only wished to have and would have a career.

[00:28:59] Speaker 02:
And it took his income from that.

[00:29:01] Speaker 02:
There are other cases, for instance, Felder.

[00:29:04] Speaker 04:
But that's the problem is it relied on

[00:29:07] Speaker 04:
other evidence rather than one arbitrary data point.

[00:29:10] Speaker 04:
It relied on evidence that he might get this job.

[00:29:13] Speaker 04:
He would have a career for the next 40 years.

[00:29:15] Speaker 04:
And his income from that job would be x amount.

[00:29:19] Speaker 04:
That's not what he did here.

[00:29:22] Speaker 04:
In fact, if he did that and said, this guy's a tax whatever, whatever kind of attorney he is, and said, this guy's had a lot of startup cost and things like this, so it's flat here, it's probably going to go up a little bit.

[00:29:35] Speaker 04:
I'm going to account for that.

[00:29:35] Speaker 04:
You'd be OK.

[00:29:37] Speaker 04:
But man, I hope this guy's not going to earn $12,000 a year for the next 30 years as an attorney.

[00:29:43] Speaker 04:
Otherwise, he's not going to be able to pay back his law school loans.

[00:29:47] Speaker 04:
I mean, it's just an unreasonable assumption to use that $12,000 number.

[00:29:53] Speaker 02:
I believe that Dr. Benzion looked at the data.

[00:29:58] Speaker 02:
And I understand your honor.

[00:29:59] Speaker 04:
Sorry, I'm beating a dead horse.

[00:30:00] Speaker 04:
You're out of here.

[00:30:01] Speaker 04:
Thank you.

[00:30:04] Speaker 00:
Anything else from Ms.

[00:30:07] Speaker 00:
Will?

[00:30:07] Speaker 00:
Thank you, Ms.

[00:30:07] Speaker 00:
Will.

[00:30:08] Speaker 01:
If I could just address one quick point, I think.

[00:30:11] Speaker 01:
Thank you.

[00:30:12] Speaker 04:
I'm confused as to what she was arguing about on that opinion.

[00:30:14] Speaker 04:
Can you at least give us your view about that?

[00:30:18] Speaker 01:
Yes.

[00:30:19] Speaker 01:
We did point out that discrepancy in the tax neutralization calculations at trial.

[00:30:25] Speaker 01:
The trial court, and we did that.

[00:30:28] Speaker 01:
I don't think that we have the transcript phrases in the appendix here.

[00:30:32] Speaker 01:
As I recall, we were doing that to show that the entire methodology was flawed and not reasonable.

[00:30:38] Speaker 01:
The trial court did remove the non-rental income from that neutralization calculation.

[00:30:47] Speaker 01:
However, as Your Honor pointed out, we addressed this.

[00:30:50] Speaker 04:
Is that because the gross up was actually counting other income when all you look at for the gross up is the damages from the rental income?

[00:31:01] Speaker 04:
But for determining the individual partner's tax brackets, you of course have to include their wage.

[00:31:12] Speaker 01:
Correct.

[00:31:12] Speaker 01:
Exactly.

[00:31:13] Speaker 01:
And the problem with that is all of that other income, that's not how taxes are calculated.

[00:31:19] Speaker 01:
And the expert that we had testify, his unrebutted testimony was that this calculation was not in compliance with the Internal Revenue Code.

[00:31:27] Speaker 01:
And when they go to pay these taxes all of that income is going to go into it determine what rates apply and we pointed that out at page 29 of our reply brief and this was addressed in Sonoma's Maybe the right solution here is to vacate and get the more rigorous

[00:31:51] Speaker 03:
set of evidence into the record to make a proper judgment?

[00:31:56] Speaker 01:
Sonoma already has been paid $4.1 or $4.2 million in their expectancy damages that went through last year, I believe.

[00:32:06] Speaker 01:
They had their chance at court to present that we were raising these objections, these concerns about their expert's testimony and the lack of testimony of any kind of tax preparer or tax expert or accountant to make these projections.

[00:32:22] Speaker 01:
They had their chance.

[00:32:23] Speaker 01:
And I think a remand here would be unfair to the United States in this instance.

[00:32:30] Speaker 00:
Anything else for Mr. Rush?

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

[00:32:33] Speaker 00:
Thank you.

[00:32:33] Speaker 00:
Thank you both.

[00:32:34] Speaker 00:
The case is taken under submission.