WEBVTT
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SJC-13564.
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Tenants' Development Corporation et al,
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the AMTAX Holdings 227, LLC et al.
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Okay.
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Attorney Davenport, whenever you're ready.
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Morning, Your Honors.
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Maybe afternoon, I don't know.
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(judges laugh)
Not yet.
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It's an honor and a privilege to be here.
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I have the distinct privilege
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of representing Tenants' Development Corporation,
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which is a historic nonprofit here in Boston.
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It's all laid out in the pleadings,
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but it's important to note just for context
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as we begin to dive into the nature of the dispute,
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that they are a nonprofit
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who participated
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in the low income housing tax credit program,
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of which this court is familiar
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because of the decision from 2018
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in the case of Homeowner's Rehab,
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normally I would spend a lot of time in cases like this
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talking about the low income housing tax credit program
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because it helps to inform
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the context and the objectives of the contracting parties,
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which are important when we're looking at intent
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and what were they trying to accomplish
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with this Section 42 ROFR.
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But rather than spending a whole lot of time in context,
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unless the court had questions there,
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I'd like to turn to the issue
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that you solicited amicus briefs on
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relative to the purchase price
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that's established by the Section 42 i7 ROFR
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that is contractually agreed to
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in the contracts that TDC entered into
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with the express purpose
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of being able to reacquire its property
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that was deeded to it in 1973
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by the historic...
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It escapes me.
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It'll come to me-
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Redevelopment.
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The Redevelopment Authority.
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Thank you, Your Honor.
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It was deeded to the nonprofits in 1973.
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And then fast forward about 20 years later,
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and they put the property into the program
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in express agreement for the right to reacquire it
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for the principal amount of debt secured by the property
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and the taxes attributable to such sale.
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And as this court knows,
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the crux of the dispute that we are appealing
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relates to that limited phrase,
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"taxes attributable to the sale."
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I think it's important to note
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that we have bedrock contract interpretation principles
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that help us inform the decision that we hope you will make,
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which is to reverse the Superior Court
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for the decision that it made,
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that this nonprofit should have to pay
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potential assumed exit taxes
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for an institutional investor
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who has received more benefits from their investment
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than they contributed and ever anticipated.
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That is what-
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Can I ask you to address the Section 2.5
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of the limited partner agreement,
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which, and I'll just read it to you,
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it says, "the partnership shall be dissolved
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upon the happening of the sale
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of all or substantially all of the property."
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Why is that dissolution and the taxes attributable to it
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not part of the taxes attributable to the sale
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of all or substantially all the property?
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Thank you, Your Honor,
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because that dissolution will not occur
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concurrent with or coincident to the sale of the property.
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We know that from-
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But the language that you just pointed us to
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was "taxes attributable to the sale."
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It doesn't say taxes incurred coincident to the sale,
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it says attributable to the sale.
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And one of the things that follow from the sale,
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according to the limited partner agreement,
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is that the partnership is dissolved.
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It says shall be dissolved.
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The partnership shall be dissolved
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through an orderly liquidation process
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that follows the terms and conditions
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of the liquidation and dissolution provisions
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and the partnership agreement
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that follow the distribution of sale proceeds
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from a sale under 6.2b-
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But it's weird because it doesn't say followed,
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it says prior.
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Which section, Your Honor?
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I'm looking at the same section as Justice Wendlandt.
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It says "shall be dissolved prior to such date
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upon the happening of any of the following events..."
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So it's either before or upon.
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Those are the two,
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but nothing says following.
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So what happens Your Honor,
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is the partnership has more assets than just the property.
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And when the property is sold,
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Section 6.2b instructs what's supposed to happen
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with the sale of the proceeds.
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And then upon the occurrence of that sale
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and the distribution of those proceeds,
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the partnership has had an event of liquidation,
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an event of dissolution,
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something that triggers the need
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to subsequently wind down the partnership
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and its remaining assets.
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And we know that from case law
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that has been uniformly determined in different states,
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not the Commonwealth,
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but in Florida and New York and in elsewhere,
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where they have said that the sale is an event
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that will trigger the subsequent liquidation.
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We know that from Hopkins Court,
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we know that from St. Mary's,
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we know that from the CED cases down in Florida,
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and we know that from a decision
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that was rendered by the northern district of Illinois
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just recently
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that we provided through supplemental authority.
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So there's this, call it a two step process, if you will.
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Most certainly what is going to happen upon the sale
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is a distribution of the proceeds from the sale.
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And then the partnership is going to sit back
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and say, what does my partnership agreement
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tell me I need to do?
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I now need to dissolve and liquidate.
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Okay, what are my remaining assets?
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But as the partnership is doing that,
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it's then liquidating those remaining assets,
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potentially distributing that cash,
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but the partnership does not dissolve
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the day of the sale and the distribution.
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It just can't.
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The partnership's gonna have trailing obligations,
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it's gonna have trailing liabilities.
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It's going to have to allocate the gain from the sale
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or the loss from the sale to the partners, right?
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So you distribute the proceeds.
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And there was a question
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I think asked in an earlier argument here today about-
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[Justice Wolohojian] The dissolution
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is a necessary consequence of the sale.
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That is correct.
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[Justice Wolohojian] Then why isn't that enough to mean
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that it's associated with it?
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I'll give you an example.
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So right now,
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on the books and records of the partnership,
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there's a negative capital account
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reflected for the limited partners.
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That allegedly is going to lead to them having exit taxes
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when the partnership is dissolved.
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That negative capital account
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has nothing to do with the sale of the property.
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So whatever taxes they may have today,
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if they were to exit today and before the sale-
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It's caused by the dissolution, right?
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That's when they have to pay.
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But what causes their exit tax liability
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if this pass through entity that has no tax liability
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has to ever pay taxes
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is when it's due.
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Like when you look at the capital gain,
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you look at the different assets,
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and this court has said, I think-
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When will it become due?
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[Attorney Davenport] It will become due
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when they exit the partnership.
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[Justice Wolohojian] Which is upon dissolution?
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It's going to happen upon dissolution
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following the sale-
And then dissolution
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is a necessary consequence of the sale of the property.
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Ultimately, yes.
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So that's the issue that we struggle with,
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is where does the causation end and begin?
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Because attributable to,
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when we look at the dictionary definition of it,
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is caused by an event.
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What is the event that causes this to happen?
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Their current exit tax balance...
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Excuse me, capital account balance
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has nothing to do with the sale of the property,
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it exists because they've received more benefits,
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it exists because of the operations of the property.
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It has produced losses.
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Those losses were allocated to them.
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Maybe they took them, we don't know.
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We don't know if they carried them forward.
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Is the fact that they got more a timing issue?
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I take it one of your arguments
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is you could sell without their permission
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at any time, right?
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We can't sell without their permission.
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In order to enter into a binding agreement to sell,
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we have to have consent of the limited partner.
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We can propose
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for purposes of triggering the ROFR to sell, right?
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We will get into the consent issue later,
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or I can do it now if you want,
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but to your question, we can't-
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I'm trying to understand
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'cause in order to get this low income housing built,
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we've created these tax benefits
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for basically your opponents here.
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And you're saying,
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well, they already got what they were entitled to
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and now they're looking for more.
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But I'm just trying to understand the timing,
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'cause I take it sometimes they wouldn't have.
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And the fact that they did good by doing good,
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we want to encourage, right?
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We we want them-
To impact, sorry-
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That's the whole purpose of the statute,
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is people with the money are investing in low income housing
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and they wouldn't otherwise do it.
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And the benefit for them is the tax benefit.
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And you're sort of saying, well, it's limited though,
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but I'm trying to understand the principles behind that.
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[Attorney Davenport] Sure.
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And I don't get that
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as well as my colleagues do at this point at all.
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I'm happy to unpack that as best I can, Your Honor,
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and please interrupt me along the way
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if you have a question about what I'm about to say.
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Their predecessors contributed the capital.
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The people that are controlling those limited partners
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contributed nothing.
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So the predecessors,
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the limited partners that are in the deal have-
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They've stepped in the shoes
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of those people, right?
That is correct.
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So that's a distinction
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that doesn't matter.
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Fair enough.
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Okay, so now relative to what the limited partners
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who contributed the capital,
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they were investing in housing credits,
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which are a dollar for dollar reduction
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on the income tax obligations that they will have
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on an annual basis.
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And they were investing in the allocation of losses,
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which results from depreciation
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and other things that stem from operations.
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Those loss allocations are made on an annual basis
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through the tax returns and the K-1s.
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Those loss allocations
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exceeded the anticipated value of their investment
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when coupled with the anticipated housing credit benefits.
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So they received more tax benefit
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than they paid into the partnership to receive.
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No one begrudges them for that,
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and that's not what we're trying to suggest at all.
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But we are trying to suggest is
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absent a contractual basis
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that obligates TDC to pay their exit tax liabilities
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at some point in the future
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when they leave and the partnership is unwound,
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that's on them.
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We don't believe congressional intent,
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which will help form the decision
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that this court is going to make
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evaluating the contractual provisions of the ROFR.
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We don't believe congressional intent
273
00:11:00.270 --> 00:11:03.060
was ever to shoulder non-profits
274
00:11:03.060 --> 00:11:06.270
with potential or actual tax liability
275
00:11:06.270 --> 00:11:07.860
from an institutional investor
276
00:11:07.860 --> 00:11:11.160
who received more than they should have received.
277
00:11:11.160 --> 00:11:12.390
Happy they got it.
278
00:11:12.390 --> 00:11:13.961
Happy my client has done a great job
279
00:11:13.961 --> 00:11:16.320
and delivered them additional losses,
280
00:11:16.320 --> 00:11:18.148
but they should shoulder their own tax liability
281
00:11:18.148 --> 00:11:20.904
unless they can prove that there is an agreement
282
00:11:20.904 --> 00:11:23.370
that expressly requires us to do it.
283
00:11:23.370 --> 00:11:25.650
The ROFR does not.
284
00:11:25.650 --> 00:11:27.810
The ROFR focuses in context
285
00:11:27.810 --> 00:11:30.540
on what are the partnership's obligations.
286
00:11:30.540 --> 00:11:32.460
There's two components of the price.
287
00:11:32.460 --> 00:11:34.290
What does the partnership need to do
288
00:11:34.290 --> 00:11:37.200
to deliver clean title to the buyer?
289
00:11:37.200 --> 00:11:39.690
In this instance, the buyer is TDC.
290
00:11:39.690 --> 00:11:42.540
In any other instance, it would be a third party.
291
00:11:42.540 --> 00:11:45.810
TDC needs to get clean title to the property.
292
00:11:45.810 --> 00:11:47.760
So the first thing that the ROFR looks at
293
00:11:47.760 --> 00:11:49.380
is the principal amount of debt.
294
00:11:49.380 --> 00:11:51.810
We have to give the partnership enough money
295
00:11:51.810 --> 00:11:53.640
to pay the bank.
296
00:11:53.640 --> 00:11:55.080
But in this instance,
297
00:11:55.080 --> 00:11:56.820
the contract allows,
298
00:11:56.820 --> 00:11:59.130
consistent with Section 42's purposes,
299
00:11:59.130 --> 00:12:01.350
for TDC to assume the debt
300
00:12:01.350 --> 00:12:04.020
if mass housing will allow them to assume the debt.
301
00:12:04.020 --> 00:12:06.810
Mass housing will allow them to assume the debt.
302
00:12:06.810 --> 00:12:08.640
So we don't actually have to have the cash
303
00:12:08.640 --> 00:12:10.770
on the day of the sale for that.
304
00:12:10.770 --> 00:12:13.080
But that's the partnership obligation.
305
00:12:13.080 --> 00:12:15.810
What else might the partnership have an obligation to do
306
00:12:15.810 --> 00:12:17.010
on the day of sale?
307
00:12:17.010 --> 00:12:19.140
It might have to pay a capital gain
308
00:12:19.140 --> 00:12:24.120
associated with, attributable to, on the date of sale.
309
00:12:24.120 --> 00:12:25.890
That's what we're talking about.
310
00:12:25.890 --> 00:12:29.700
The partnership's taxes attributable to the sale.
311
00:12:29.700 --> 00:12:32.040
It doesn't say the limited partner's taxes,
312
00:12:32.040 --> 00:12:34.470
it doesn't say the general partner's taxes.
313
00:12:34.470 --> 00:12:38.010
It says all state, federal and local taxes
314
00:12:38.010 --> 00:12:40.110
attributable to the sale.
315
00:12:40.110 --> 00:12:42.630
We believe that in context,
316
00:12:42.630 --> 00:12:45.180
framed within the context of the program,
317
00:12:45.180 --> 00:12:47.190
TDC's mission, TDC's purpose,
318
00:12:47.190 --> 00:12:49.530
TDC's putting this property into the program
319
00:12:49.530 --> 00:12:51.960
in express exchange for this right
320
00:12:51.960 --> 00:12:55.500
was never to pay anybody else's taxes.
321
00:12:55.500 --> 00:12:57.000
Just take care of the taxes
322
00:12:57.000 --> 00:12:59.040
that the partnership might have to pay
323
00:12:59.040 --> 00:13:01.020
when you're taking care of the liability,
324
00:13:01.020 --> 00:13:03.390
and that will inform your purchase price.
325
00:13:03.390 --> 00:13:05.760
That's why when CohnReznick's accountant
326
00:13:05.760 --> 00:13:07.050
Nick Ratti here in Boston
327
00:13:07.050 --> 00:13:09.120
sat down and did the calculation
328
00:13:09.120 --> 00:13:11.220
when the ROFR became available,
329
00:13:11.220 --> 00:13:13.980
he looked at it and said, it's gonna sell at a loss.
330
00:13:13.980 --> 00:13:15.480
It's like if you're selling a home
331
00:13:15.480 --> 00:13:17.160
that has a hundred thousand dollars mortgage
332
00:13:17.160 --> 00:13:18.480
and the market's gone terrible
333
00:13:18.480 --> 00:13:21.060
and you can only get a buyer for $80,000,
334
00:13:21.060 --> 00:13:23.580
you short sell it and you have a loss.
335
00:13:23.580 --> 00:13:26.670
Somebody is going to get the allocation of that loss,
336
00:13:26.670 --> 00:13:28.080
it's going to go somewhere.
337
00:13:28.080 --> 00:13:31.230
They get the losses, that may benefit them.
338
00:13:31.230 --> 00:13:33.150
If they take those losses,
339
00:13:33.150 --> 00:13:36.060
they will then have responsibilities associated with it.
340
00:13:36.060 --> 00:13:37.260
But critical here,
341
00:13:37.260 --> 00:13:40.290
they might not have ever taken the losses.
342
00:13:40.290 --> 00:13:41.923
Just because they were allocated to them
343
00:13:41.923 --> 00:13:44.970
doesn't mean that they claimed them and got a benefit.
344
00:13:44.970 --> 00:13:46.710
They could have suspended them.
345
00:13:46.710 --> 00:13:48.079
And if they have a tax liability
346
00:13:48.079 --> 00:13:50.700
that arises upon exit of the partnership,
347
00:13:50.700 --> 00:13:51.630
nine months from now
348
00:13:51.630 --> 00:13:53.520
when the thing is unwound and dissolved,
349
00:13:53.520 --> 00:13:54.482
they may have a tax liability
350
00:13:54.482 --> 00:13:56.150
and they can go into their loss bucket
351
00:13:56.150 --> 00:13:57.720
and say, Hey, guess what?
352
00:13:57.720 --> 00:13:59.250
I suspended all those losses,
353
00:13:59.250 --> 00:14:00.930
now I don't have to pay any taxes.
354
00:14:00.930 --> 00:14:03.390
But we have to pay them cash anyway?
355
00:14:03.390 --> 00:14:05.010
That's their theory, right?
356
00:14:05.010 --> 00:14:06.600
And we say that's an absurd result.
357
00:14:06.600 --> 00:14:09.609
It's totally inconsistent with what the...
358
00:14:09.609 --> 00:14:11.700
With what Congress would've intended
359
00:14:11.700 --> 00:14:14.490
when it tried to incentivize nonprofits to be here.
360
00:14:14.490 --> 00:14:18.030
Very tellingly, they admitted at argument
361
00:14:18.030 --> 00:14:19.680
before the Superior Court
362
00:14:19.680 --> 00:14:21.780
when we went in on a motion for reconsideration
363
00:14:21.780 --> 00:14:23.340
because there was this finding of,
364
00:14:23.340 --> 00:14:24.870
well, you're both reasonable.
365
00:14:24.870 --> 00:14:26.670
This is a colorable claim.
366
00:14:26.670 --> 00:14:28.110
You have a reasonable position,
367
00:14:28.110 --> 00:14:29.670
you have a reasonable position,
368
00:14:29.670 --> 00:14:31.200
but I think they have the better argument
369
00:14:31.200 --> 00:14:32.820
so he went in their favor.
370
00:14:32.820 --> 00:14:35.130
I respectfully disagree with that honorable judge
371
00:14:35.130 --> 00:14:36.661
because I don't think their position is reasonable
372
00:14:36.661 --> 00:14:40.350
because it is just conflicting with all sorts of things.
373
00:14:40.350 --> 00:14:42.240
But that was ambiguity,
374
00:14:42.240 --> 00:14:43.650
but that's not what he found.
375
00:14:43.650 --> 00:14:45.120
And so where we ended up with
376
00:14:45.120 --> 00:14:49.170
was they are saying we have a hypothetical exit tax
377
00:14:49.170 --> 00:14:51.960
from an entity that's passed through for tax purposes
378
00:14:51.960 --> 00:14:53.490
and pays no taxes.
379
00:14:53.490 --> 00:14:56.490
They're simply trying to create a cash windfall.
380
00:14:56.490 --> 00:14:58.500
They want us to write them a check
381
00:14:58.500 --> 00:14:59.863
for eight and a half or $9 million
382
00:14:59.863 --> 00:15:02.370
that may never go towards paying anybody's taxes
383
00:15:02.370 --> 00:15:05.250
because they may never not even exist.
384
00:15:05.250 --> 00:15:07.620
So when we look at attributable to,
385
00:15:07.620 --> 00:15:09.120
we look at it within the lens
386
00:15:09.120 --> 00:15:10.619
of how is it framed up in the program?
387
00:15:10.619 --> 00:15:13.200
How is it framed up with the intention of the parties?
388
00:15:13.200 --> 00:15:16.005
Because what we know from bedrock Massachusetts law,
389
00:15:16.005 --> 00:15:18.813
and as it's stated in the Homeowner's Rehab case,
390
00:15:21.450 --> 00:15:22.980
we are intending to look at
391
00:15:22.980 --> 00:15:24.287
the context in which it was written
392
00:15:24.287 --> 00:15:27.750
with reference to the objectives sought to be accomplished.
393
00:15:27.750 --> 00:15:29.039
So when we look at the context
394
00:15:29.039 --> 00:15:31.410
within which the Section 42 ROFR
395
00:15:31.410 --> 00:15:33.180
was embedded in this contract,
396
00:15:33.180 --> 00:15:35.880
what was the objective it was intending to accomplish?
397
00:15:35.880 --> 00:15:38.760
Can I interrupt you, sorry, for a second.
398
00:15:38.760 --> 00:15:41.850
So the limited partner agreement
399
00:15:41.850 --> 00:15:46.850
has something called an exit tax distribution.
400
00:15:48.000 --> 00:15:53.000
How, if at all, does that affect this case?
401
00:15:53.520 --> 00:15:54.510
It's not applicable.
402
00:15:54.510 --> 00:15:56.685
It's the fourth item in the Section 6.2b waterfall-
403
00:15:56.685 --> 00:15:57.518
Right.
404
00:15:57.518 --> 00:16:02.518
And how you allocate certain funds from sales.
405
00:16:02.820 --> 00:16:03.653
Yes, Your Honor.
406
00:16:03.653 --> 00:16:05.462
So in item four of that waterfall,
407
00:16:05.462 --> 00:16:07.262
it starts within the event of a sale
408
00:16:07.262 --> 00:16:09.660
to a qualified nonprofit entity
409
00:16:09.660 --> 00:16:13.110
pursuant to the LURA or tax credit reservation.
410
00:16:13.110 --> 00:16:16.350
The LURA is short for Land Use Restrictive Agreement.
411
00:16:16.350 --> 00:16:19.200
Neither one of those are applicable here
412
00:16:19.200 --> 00:16:21.900
so there won't be an exit tax distribution.
413
00:16:21.900 --> 00:16:23.250
But it shows you,
414
00:16:23.250 --> 00:16:26.040
if somebody wanted to memorialize an agreement
415
00:16:26.040 --> 00:16:28.800
to have the partnership pay an exit tax distribution,
416
00:16:28.800 --> 00:16:30.002
you could have done it.
417
00:16:30.002 --> 00:16:30.835
Not in the ROFR-
Right.
418
00:16:30.835 --> 00:16:31.668
That's why I'm wondering
419
00:16:31.668 --> 00:16:34.188
why that argument was not marshaled.
420
00:16:34.188 --> 00:16:37.770
Because it does, in my view,
421
00:16:37.770 --> 00:16:41.970
show that there was consideration of such a thing
422
00:16:41.970 --> 00:16:44.230
as an exit tax distribution
423
00:16:45.258 --> 00:16:48.813
and expressly named in the LPA.
424
00:16:50.760 --> 00:16:52.500
But then we have the other phrase
425
00:16:52.500 --> 00:16:55.960
used in the right of first refusal document
426
00:16:57.240 --> 00:17:00.030
suggesting that they're different things.
427
00:17:00.030 --> 00:17:00.863
Right.
428
00:17:00.863 --> 00:17:03.576
And so relative to what's in the section
429
00:17:03.576 --> 00:17:05.310
in the right of first refusal,
430
00:17:05.310 --> 00:17:07.741
it tracks the language in Section 42i7.
431
00:17:07.741 --> 00:17:08.574
Right.
432
00:17:08.574 --> 00:17:10.710
But it doesn't use the language of the LPA
433
00:17:10.710 --> 00:17:12.630
called "exit tax distributions,"
434
00:17:12.630 --> 00:17:15.060
which suggests maybe it's something else.
435
00:17:15.060 --> 00:17:16.920
I think that's right, Your Honor.
436
00:17:16.920 --> 00:17:18.127
I also think that, you know,
437
00:17:18.127 --> 00:17:19.290
one of the things
438
00:17:19.290 --> 00:17:22.260
that we attempted to provide the court with
439
00:17:22.260 --> 00:17:24.870
was examples of other rights of first refusal
440
00:17:24.870 --> 00:17:26.550
that are out there from other litigation.
441
00:17:26.550 --> 00:17:27.656
Because trust me when I tell you,
442
00:17:27.656 --> 00:17:29.790
this is happening all over the country,
443
00:17:29.790 --> 00:17:30.750
where these folks are coming in
444
00:17:30.750 --> 00:17:32.880
and trying to strip the equity outta these communities
445
00:17:32.880 --> 00:17:35.250
after the end of the 15 year compliance period.
446
00:17:35.250 --> 00:17:36.600
And we're trying to put a stop to it.
447
00:17:36.600 --> 00:17:39.000
So we gave you examples of other contracts
448
00:17:39.000 --> 00:17:41.970
where people have expressly expanded the ROFR
449
00:17:41.970 --> 00:17:44.070
to include exit taxes,
450
00:17:44.070 --> 00:17:46.530
to include the investor exit taxes
451
00:17:46.530 --> 00:17:48.540
that will actually potentially be paid
452
00:17:48.540 --> 00:17:51.180
through the owners of the pass through entity.
453
00:17:51.180 --> 00:17:53.220
So this ROFR is clean,
454
00:17:53.220 --> 00:17:55.440
it tracks exactly what's in the code.
455
00:17:55.440 --> 00:17:57.540
Which is intended to be efficient and orderly,
456
00:17:57.540 --> 00:17:58.740
and in my estimation,
457
00:17:58.740 --> 00:18:00.480
limited only to
458
00:18:00.480 --> 00:18:03.420
what are going to be the partnership's capital gains
459
00:18:03.420 --> 00:18:04.980
associated with the sale.
460
00:18:04.980 --> 00:18:05.820
That's it.
461
00:18:05.820 --> 00:18:07.930
What would be the consequences
462
00:18:09.030 --> 00:18:10.680
were we to conclude
463
00:18:10.680 --> 00:18:14.625
that the investor's consent was required?
464
00:18:14.625 --> 00:18:17.823
That the judge got that part of the decision wrong.
465
00:18:18.960 --> 00:18:20.913
How would that then play out?
466
00:18:20.913 --> 00:18:22.653
What would happen?
467
00:18:24.510 --> 00:18:25.740
If I understand your question,
468
00:18:25.740 --> 00:18:27.120
is if the judge...
469
00:18:27.120 --> 00:18:29.460
If you conclude that the judge got the consent issue wrong,
470
00:18:29.460 --> 00:18:30.293
what would happen?
471
00:18:30.293 --> 00:18:31.126
[Justice Wolohojian] Yeah.
472
00:18:31.126 --> 00:18:32.100
It would eviscerate the ROFR.
473
00:18:32.100 --> 00:18:34.110
Just like if we end up with a purchase price
474
00:18:34.110 --> 00:18:35.790
that includes the potential exit taxes-
475
00:18:35.790 --> 00:18:37.288
Well, I was thinking more mechanically.
476
00:18:37.288 --> 00:18:40.566
The whole case comes out the other way automatically?
477
00:18:40.566 --> 00:18:42.450
What happens?
478
00:18:42.450 --> 00:18:44.790
If they have a consent right
479
00:18:44.790 --> 00:18:47.881
over TDC proposing to sell the property
480
00:18:47.881 --> 00:18:50.400
and issuing the disposition notice,
481
00:18:50.400 --> 00:18:51.780
they have a veto power.
482
00:18:51.780 --> 00:18:53.970
And it's just like what we saw in Homeowner's Rehab,
483
00:18:53.970 --> 00:18:55.410
it will create a set of circumstances
484
00:18:55.410 --> 00:18:58.170
where this ROFR and potentially others,
485
00:18:58.170 --> 00:18:59.520
they can never be exercised
486
00:18:59.520 --> 00:19:02.820
because they will not consent to a sale
487
00:19:02.820 --> 00:19:04.980
at a below market purchase price.
488
00:19:04.980 --> 00:19:07.050
I may think they're unreasonable in a lot of ways,
489
00:19:07.050 --> 00:19:09.330
but most reasonable people wouldn't, right?
490
00:19:09.330 --> 00:19:10.650
If you can force a sale
491
00:19:10.650 --> 00:19:13.134
at market value of 50 or $60 million
492
00:19:13.134 --> 00:19:14.739
and then you can get all of that profit,
493
00:19:14.739 --> 00:19:18.510
you're not going to consent to a purchase
494
00:19:18.510 --> 00:19:20.580
even if it included their exit taxes, right?
495
00:19:20.580 --> 00:19:22.800
Because they don't, right?
496
00:19:22.800 --> 00:19:24.190
They wanna force the sale of the property
497
00:19:24.190 --> 00:19:27.210
so that they can take all the equity out of the community
498
00:19:27.210 --> 00:19:30.390
that has built up in it over the last 20 plus years
499
00:19:30.390 --> 00:19:31.800
while it's been in the program.
500
00:19:31.800 --> 00:19:33.660
That's the aim, that's the goal.
501
00:19:33.660 --> 00:19:35.580
So we know from Homeowner's Rehab,
502
00:19:35.580 --> 00:19:38.130
there's one distinction that's without a difference
503
00:19:38.130 --> 00:19:40.140
in our case and Homeowner's Rehab,
504
00:19:40.140 --> 00:19:41.100
there was a carve out
505
00:19:41.100 --> 00:19:44.070
that mentioned in the applicable provisions,
506
00:19:44.070 --> 00:19:45.060
you know, the consent right.
507
00:19:45.060 --> 00:19:46.740
It referenced the option agreement.
508
00:19:46.740 --> 00:19:49.530
Here our agreement doesn't reference the option agreement,
509
00:19:49.530 --> 00:19:51.210
but that's a distinction without a difference
510
00:19:51.210 --> 00:19:54.870
because all of the other analysis in Homeowner's Rehab
511
00:19:54.870 --> 00:19:56.160
applies here.
512
00:19:56.160 --> 00:19:57.120
And to your question,
513
00:19:57.120 --> 00:19:59.610
what would happen is they would have a veto right.
514
00:19:59.610 --> 00:20:01.410
There would be never a circumstance
515
00:20:01.410 --> 00:20:02.640
under which they would consent
516
00:20:02.640 --> 00:20:05.010
because it's a below market purchase price.
517
00:20:05.010 --> 00:20:09.450
And it is the antithetical notion to congressional intent
518
00:20:09.450 --> 00:20:12.120
to establish perpetuity
519
00:20:12.120 --> 00:20:14.490
of affordable housing and income restricted rents
520
00:20:14.490 --> 00:20:16.830
for income qualifying residents
521
00:20:16.830 --> 00:20:19.560
if we make it cost prohibitive
522
00:20:19.560 --> 00:20:22.410
for the nonprofit to reacquire the property
523
00:20:22.410 --> 00:20:24.570
at the end of the 15 year compliance period
524
00:20:24.570 --> 00:20:26.400
when the credits are beyond risk of recapture.
525
00:20:26.400 --> 00:20:28.350
So we would reverse the summary judgment
526
00:20:28.350 --> 00:20:29.820
and the litigation would continue?
527
00:20:29.820 --> 00:20:31.020
I apologize, I couldn't hear you.
528
00:20:31.020 --> 00:20:32.910
So we would reverse the summary judgment
529
00:20:32.910 --> 00:20:34.623
and the litigation would continue?
530
00:20:35.850 --> 00:20:38.370
If you granted them a consent right-
531
00:20:38.370 --> 00:20:40.770
No, if we said they did have a consent right.
532
00:20:40.770 --> 00:20:42.094
We're not, you know...
533
00:20:42.094 --> 00:20:46.240
If they had the right to consent to the terms
534
00:20:47.760 --> 00:20:49.143
before the sale occurred.
535
00:20:50.700 --> 00:20:52.400
We probably would not have...
536
00:20:53.400 --> 00:20:55.890
Yeah, we would not have ROFR that we can exercise,
537
00:20:55.890 --> 00:20:56.809
so we wouldn't have a claim anymore-
538
00:20:56.809 --> 00:20:57.660
On this one?
539
00:20:57.660 --> 00:20:58.748
Yep.
Yep.
540
00:20:58.748 --> 00:21:00.360
[Justice Wolohojian] Maybe some future sale
541
00:21:00.360 --> 00:21:01.620
or something but-
542
00:21:01.620 --> 00:21:02.640
Oh, in all likelihood...
543
00:21:02.640 --> 00:21:04.800
Oh, if you're asking what's going to happen in that event,
544
00:21:04.800 --> 00:21:05.730
if we lose our ROFR-
545
00:21:05.730 --> 00:21:06.870
No, I'm asking actually
546
00:21:06.870 --> 00:21:08.847
what the mechanical litigation consequences would be.
547
00:21:08.847 --> 00:21:09.680
Oh, I see.
548
00:21:09.680 --> 00:21:11.850
I think in the mechanical litigation consequences,
549
00:21:11.850 --> 00:21:14.100
what would happen is there would be a determination
550
00:21:14.100 --> 00:21:16.320
that they have a consent right.
551
00:21:16.320 --> 00:21:18.360
We were not allowed to exercise the ROFR
552
00:21:18.360 --> 00:21:20.310
because we were not allowed to propose a sale,
553
00:21:20.310 --> 00:21:22.530
we were not allowed to issue a disposition notice.
554
00:21:22.530 --> 00:21:24.990
And then the properties would ultimately be sold,
555
00:21:24.990 --> 00:21:26.160
marketed to a third party
556
00:21:26.160 --> 00:21:26.993
on the market-
On who knows, yeah.
557
00:21:26.993 --> 00:21:29.460
Because that's what got us here.
558
00:21:29.460 --> 00:21:30.990
Because they told us,
559
00:21:30.990 --> 00:21:33.780
go sell the property, market it for sale,
560
00:21:33.780 --> 00:21:35.850
we have a right to force you to do it.
561
00:21:35.850 --> 00:21:36.690
And we did.
562
00:21:36.690 --> 00:21:39.000
We complied with our obligations under the agreement.
563
00:21:39.000 --> 00:21:40.560
And we got eight offers.
564
00:21:40.560 --> 00:21:42.870
And then the general partner proposed
565
00:21:42.870 --> 00:21:44.040
on behalf of the partnership
566
00:21:44.040 --> 00:21:45.840
pursuant to its exclusive authority
567
00:21:45.840 --> 00:21:47.430
to sell to one of them,
568
00:21:47.430 --> 00:21:49.200
that triggered the disposition notice,
569
00:21:49.200 --> 00:21:51.960
that triggered the exercise of the ROFR.
570
00:21:51.960 --> 00:21:55.890
So they claimed, when the case started,
571
00:21:55.890 --> 00:21:57.090
we lied to them.
572
00:21:57.090 --> 00:21:59.010
20 years ago, there was a fraud committed,
573
00:21:59.010 --> 00:22:00.810
the tenants didn't tell them about the ROFR,
574
00:22:00.810 --> 00:22:03.120
but we found out that the ROFR's been on title.
575
00:22:03.120 --> 00:22:04.927
We found out that their closing attorneys
576
00:22:04.927 --> 00:22:07.920
and the people that were representing them at the time
577
00:22:07.920 --> 00:22:09.000
knew about the ROFR,
578
00:22:09.000 --> 00:22:10.428
instructed it to be recorded against title,
579
00:22:10.428 --> 00:22:12.390
said where it should be filed.
580
00:22:12.390 --> 00:22:13.770
So that went away,
581
00:22:13.770 --> 00:22:15.900
but then it came back apparently in the arguments
582
00:22:15.900 --> 00:22:17.790
that we're seeing here on an appeal.
583
00:22:17.790 --> 00:22:20.340
I guess the piece related to all of this
584
00:22:20.340 --> 00:22:23.070
is this case was originally at some point
585
00:22:23.070 --> 00:22:25.860
went up to the First Circuit Court of Appeals, right?
586
00:22:25.860 --> 00:22:29.730
And the First Circuit looked at the ROFR.
587
00:22:29.730 --> 00:22:31.050
And they determined
588
00:22:31.050 --> 00:22:32.734
there was no federal question jurisdiction
589
00:22:32.734 --> 00:22:34.560
relative to the ROFR.
590
00:22:34.560 --> 00:22:36.390
And they confirmed that the ROFR
591
00:22:36.390 --> 00:22:39.360
is intended to be an efficient and orderly process
592
00:22:39.360 --> 00:22:40.470
for the non-profit
593
00:22:40.470 --> 00:22:43.080
to acquire the property at the end of the compliance period.
594
00:22:43.080 --> 00:22:47.040
And it's subject to three requirements, and that's it.
595
00:22:47.040 --> 00:22:48.090
It can only be available
596
00:22:48.090 --> 00:22:50.130
at the end of the compliance period.
597
00:22:50.130 --> 00:22:53.250
It has to be to a qualifying non-profit organization,
598
00:22:53.250 --> 00:22:55.620
both of which my client satisfy.
599
00:22:55.620 --> 00:22:57.960
And then it has to be the minimum purchase price.
600
00:22:57.960 --> 00:23:00.630
It can be more, but it can't be less.
601
00:23:00.630 --> 00:23:03.900
And so my respectful submission to this court
602
00:23:03.900 --> 00:23:07.830
is if the court were to affirm the Superior Court
603
00:23:07.830 --> 00:23:09.457
on the interpretation
604
00:23:09.457 --> 00:23:12.810
"taxes attributable to a sale should include exit taxes,"
605
00:23:12.810 --> 00:23:15.450
you are expanding the contractual language
606
00:23:15.450 --> 00:23:17.460
of the minimum purchase price.
607
00:23:17.460 --> 00:23:20.490
And that would result in TDC
608
00:23:20.490 --> 00:23:22.800
having to shoulder the burden of taxes
609
00:23:22.800 --> 00:23:25.140
that we say in no certain circumstances
610
00:23:25.140 --> 00:23:28.620
are due to property operations, excess benefits,
611
00:23:28.620 --> 00:23:31.410
their potential use whether they claimed them or not
612
00:23:31.410 --> 00:23:33.960
from their exit from the partnership.
613
00:23:33.960 --> 00:23:36.600
And last thing on the gains and the losses.
614
00:23:36.600 --> 00:23:37.500
As the partnership
615
00:23:37.500 --> 00:23:39.496
is going through the liquidation and dissolution process,
616
00:23:39.496 --> 00:23:41.259
there's going to be other distributions
617
00:23:41.259 --> 00:23:43.860
when you're liquidating remaining assets.
618
00:23:43.860 --> 00:23:45.960
They're gonna get more loss allocations.
619
00:23:45.960 --> 00:23:47.610
They might get gain allocations.
620
00:23:47.610 --> 00:23:50.790
That's why we don't know at the time of the sale
621
00:23:50.790 --> 00:23:53.250
what their actual exit tax might be
622
00:23:53.250 --> 00:23:55.110
because it's not calculatable
623
00:23:55.110 --> 00:23:57.330
on the day of the sale under the ROFR.
624
00:23:57.330 --> 00:24:01.500
Which is why the District Court put us in this conundrum,
625
00:24:01.500 --> 00:24:03.570
because if they have a consent right,
626
00:24:03.570 --> 00:24:04.590
and we can't determine
627
00:24:04.590 --> 00:24:06.480
the purchase price on the day of the sale,
628
00:24:06.480 --> 00:24:08.100
we'll never get there.
629
00:24:08.100 --> 00:24:09.480
So we would respectfully request
630
00:24:09.480 --> 00:24:13.470
that the court reverse on the issue of the exit taxes
631
00:24:13.470 --> 00:24:15.720
and what taxes attributable to a sale are,
632
00:24:15.720 --> 00:24:17.820
and affirm on the consent issues,
633
00:24:17.820 --> 00:24:18.810
and let us move on
634
00:24:18.810 --> 00:24:21.120
so that we can potentially get back into the District Court,
635
00:24:21.120 --> 00:24:22.110
get the case resolved
636
00:24:22.110 --> 00:24:26.580
because this is having real economic impact on the ground
637
00:24:26.580 --> 00:24:28.620
and has delayed for four and a half years
638
00:24:28.620 --> 00:24:30.990
my client's ability to get a community center built
639
00:24:30.990 --> 00:24:33.870
through the equity that it has established in this property
640
00:24:33.870 --> 00:24:35.820
and should stay with this community.
641
00:24:35.820 --> 00:24:36.653
Thank you.
642
00:24:36.653 --> 00:24:37.486
Okay, thank you.
643
00:24:39.900 --> 00:24:40.803
Attorney Dolan.
644
00:24:48.750 --> 00:24:49.860
May I please the court.
645
00:24:49.860 --> 00:24:51.543
My name is Louis Dolan.
646
00:24:52.560 --> 00:24:53.393
I represent
647
00:24:53.393 --> 00:24:56.913
the appellees and cross appellants in this matter.
648
00:24:57.780 --> 00:24:59.460
The appellees, as you know,
649
00:24:59.460 --> 00:25:03.060
are the limited partners in the limited partnership
650
00:25:03.060 --> 00:25:06.930
that owns this property in the south end of Boston.
651
00:25:06.930 --> 00:25:08.310
They are also investors
652
00:25:08.310 --> 00:25:12.360
in some 1800 affordable housing projects
653
00:25:12.360 --> 00:25:13.920
throughout the Commonwealth
654
00:25:13.920 --> 00:25:14.753
and throughout the United States.
655
00:25:14.753 --> 00:25:16.830
So can I ask you to start with
656
00:25:16.830 --> 00:25:19.522
the definition of exit tax distributions
657
00:25:19.522 --> 00:25:21.828
that were expressly set forth in the LPA
658
00:25:21.828 --> 00:25:26.676
and then the less than clear language of the ROFR
659
00:25:26.676 --> 00:25:30.000
which talks about attributable to the sale?
660
00:25:30.000 --> 00:25:32.160
The point about the taxes
661
00:25:32.160 --> 00:25:37.020
being attributable to the sale,
662
00:25:37.020 --> 00:25:41.760
Section 2.5 of limited partnership agreement.
663
00:25:41.760 --> 00:25:45.030
Please keep in mind that this partnership
664
00:25:45.030 --> 00:25:48.540
is what is known as a single purpose entity.
665
00:25:48.540 --> 00:25:53.540
That means it has one asset, not several assets.
666
00:25:53.940 --> 00:25:55.500
Its single purpose
667
00:25:55.500 --> 00:26:00.500
is to own and operate this property.
668
00:26:00.660 --> 00:26:03.180
It may have some cash on hand,
669
00:26:03.180 --> 00:26:05.520
it may have some reserves
670
00:26:05.520 --> 00:26:08.070
that are typically transferred with the property,
671
00:26:08.070 --> 00:26:11.130
it may have some office furniture, things like that,
672
00:26:11.130 --> 00:26:15.960
but its substantial asset is this property.
673
00:26:15.960 --> 00:26:18.210
And therefore as a result,
674
00:26:18.210 --> 00:26:20.940
and you're asking exactly the right question,
675
00:26:20.940 --> 00:26:25.230
Section 2.5 of the limited partnership agreement
676
00:26:25.230 --> 00:26:30.060
says, this partnership agreement shall dissolve...
677
00:26:30.060 --> 00:26:32.460
This partnership shall dissolve
678
00:26:32.460 --> 00:26:36.450
upon the happening of the sale of the property.
679
00:26:36.450 --> 00:26:39.540
And that makes good business sense
680
00:26:39.540 --> 00:26:41.340
because the sole reason
681
00:26:41.340 --> 00:26:44.370
that the partnership exists in the first place
682
00:26:44.370 --> 00:26:47.880
is for operations of the property.
683
00:26:47.880 --> 00:26:51.990
The reason that these taxes arise
684
00:26:51.990 --> 00:26:56.990
because of and are directly attributable to
685
00:26:57.060 --> 00:26:59.403
the sale of the property,
686
00:27:00.240 --> 00:27:01.620
as the district...
687
00:27:01.620 --> 00:27:04.320
Excuse me, Superior Court found
688
00:27:04.320 --> 00:27:06.460
relying on our expert report
689
00:27:07.920 --> 00:27:12.920
and also relying on numerous points in the record
690
00:27:14.850 --> 00:27:19.850
where the partnership's own accountants at CohnReznick
691
00:27:21.573 --> 00:27:22.860
did precisely the same-
692
00:27:22.860 --> 00:27:26.040
So the LPA actually has a defined term,
693
00:27:26.040 --> 00:27:29.130
it's called "exit tax distribution.
694
00:27:29.130 --> 00:27:30.900
Yes.
695
00:27:30.900 --> 00:27:32.430
What is that?
696
00:27:32.430 --> 00:27:34.080
That is the distribution
697
00:27:34.080 --> 00:27:38.880
that is to be made upon the dissolution of partnership,
698
00:27:38.880 --> 00:27:41.429
the exit taxes-
Right.
699
00:27:41.429 --> 00:27:43.710
And my point is that the ROFR,
700
00:27:43.710 --> 00:27:48.510
instead of saying "exit tax distribution" as a defined term,
701
00:27:48.510 --> 00:27:51.600
talks about all federal and state taxes
702
00:27:51.600 --> 00:27:53.700
attributable to the sale.
703
00:27:53.700 --> 00:27:54.533
Correct.
704
00:27:54.533 --> 00:27:56.411
So given that there is a defined term,
705
00:27:56.411 --> 00:27:58.710
"exit tax distribution,"
706
00:27:58.710 --> 00:28:00.390
in the overarching agreement,
707
00:28:00.390 --> 00:28:01.590
isn't it odd
708
00:28:01.590 --> 00:28:04.893
that the ROFR does not use that same defined term?
709
00:28:05.879 --> 00:28:07.890
Especially when the ROFR says
710
00:28:07.890 --> 00:28:10.230
that it's incorporating the defined terms
711
00:28:10.230 --> 00:28:12.750
from the partnership agreement.
712
00:28:12.750 --> 00:28:14.286
The right of first refusal
713
00:28:14.286 --> 00:28:17.910
has to comply with minimum requirements
714
00:28:17.910 --> 00:28:21.870
under 42i7 B2 of the internal revenue code.
715
00:28:21.870 --> 00:28:25.830
That language, as the Superior Court found,
716
00:28:25.830 --> 00:28:30.180
indicates all taxes attributable to the sale,
717
00:28:30.180 --> 00:28:32.760
which include and incorporate
718
00:28:32.760 --> 00:28:37.500
exit taxes and taxes on gain from the sale.
719
00:28:37.500 --> 00:28:40.920
And what has happened here in this case,
720
00:28:40.920 --> 00:28:43.260
we didn't reap a windfall
721
00:28:43.260 --> 00:28:46.900
in terms of the losses that were allocated to us
722
00:28:46.900 --> 00:28:49.830
over the life of this partnership,
723
00:28:49.830 --> 00:28:54.240
we bargained for the losses that we received-
724
00:28:54.240 --> 00:28:57.150
So you are saying exit tax distributions
725
00:28:57.150 --> 00:29:00.550
is a subset of all the potential taxes
726
00:29:00.550 --> 00:29:02.250
attributable to the sale?
727
00:29:02.250 --> 00:29:03.083
Yes.
Okay.
728
00:29:03.083 --> 00:29:04.710
Exit taxes-
So that would explain
729
00:29:04.710 --> 00:29:07.230
why you wouldn't use the same defined term
730
00:29:07.230 --> 00:29:10.050
because all-
All means all.
731
00:29:10.050 --> 00:29:12.270
There's more than just the exit tax distributions,
732
00:29:12.270 --> 00:29:14.850
there's this potential capital gain you're talking about.
733
00:29:14.850 --> 00:29:16.080
There could be capital gains,
734
00:29:16.080 --> 00:29:18.432
there are gains on the sale,
735
00:29:18.432 --> 00:29:21.240
which is what would happen in this instance.
736
00:29:21.240 --> 00:29:23.730
Once the debt is assumed,
737
00:29:23.730 --> 00:29:27.900
there is gain that is recognized on that sale.
738
00:29:27.900 --> 00:29:30.480
And certainly the Department of Treasury,
739
00:29:30.480 --> 00:29:33.960
which has revisited this section of the code
740
00:29:33.960 --> 00:29:36.480
many, many times over,
741
00:29:36.480 --> 00:29:39.750
over the years since 1986, 1987
742
00:29:39.750 --> 00:29:43.260
when it was adopted and has not changed it,
743
00:29:43.260 --> 00:29:47.730
knows how to change and make an exception
744
00:29:47.730 --> 00:29:50.100
in the portion of the tax code
745
00:29:50.100 --> 00:29:52.650
that says all taxes-
Can I ask you to address
746
00:29:52.650 --> 00:29:56.748
your opposing counsel's argument
747
00:29:56.748 --> 00:30:01.748
regarding, I think it was that you can't tell
748
00:30:01.830 --> 00:30:04.260
what the actual taxes
749
00:30:04.260 --> 00:30:08.490
that the limited partnerships will incur
750
00:30:08.490 --> 00:30:11.760
as a result of the dissolution of the partnership
751
00:30:11.760 --> 00:30:15.050
until a later point in time so that the...
752
00:30:16.050 --> 00:30:16.883
Is it TDC?
753
00:30:16.883 --> 00:30:20.370
The TDCs of the world can't set the purchase price
754
00:30:20.370 --> 00:30:24.270
because if exit taxes is included in that purchase price,
755
00:30:24.270 --> 00:30:27.390
that's something that's in the future will be determined.
756
00:30:27.390 --> 00:30:29.130
That's fundamentally incorrect.
757
00:30:29.130 --> 00:30:32.550
And it happens every day in this business
758
00:30:32.550 --> 00:30:34.890
that taxes are calculated
759
00:30:34.890 --> 00:30:39.890
including exit taxes that would be due on sale.
760
00:30:40.290 --> 00:30:43.170
And what happens as a practical matter,
761
00:30:43.170 --> 00:30:44.550
again, to use the analogy,
762
00:30:44.550 --> 00:30:46.860
it's similar to selling your home.
763
00:30:46.860 --> 00:30:50.640
When you get a settlement sheet in from a title company.
764
00:30:50.640 --> 00:30:52.110
And on that settlement sheet
765
00:30:52.110 --> 00:30:54.510
there are buyers' columns and sellers columns.
766
00:30:54.510 --> 00:30:58.320
And the taxes are calculated on those sheets,
767
00:30:58.320 --> 00:31:02.160
and the taxes are paid by the buyer, right?
768
00:31:02.160 --> 00:31:03.540
Of this property.
769
00:31:03.540 --> 00:31:07.126
Because it's called the minimum purchase price, right?
770
00:31:07.126 --> 00:31:08.580
That is the price
771
00:31:08.580 --> 00:31:12.000
that the buyer must pay to the partnership.
772
00:31:12.000 --> 00:31:16.320
And that is calculable with respect to exit taxes
773
00:31:16.320 --> 00:31:18.087
because what we do,
774
00:31:18.087 --> 00:31:22.380
the exit tax calculation is a very simple formula.
775
00:31:22.380 --> 00:31:25.230
Everybody in this courtroom
776
00:31:25.230 --> 00:31:28.740
knows what it is because their own account-
777
00:31:28.740 --> 00:31:29.604
Some of us might not.
778
00:31:29.604 --> 00:31:31.140
(judges laugh)
779
00:31:31.140 --> 00:31:32.040
I wouldn't go that far.
780
00:31:32.040 --> 00:31:33.566
I apologize.
781
00:31:33.566 --> 00:31:34.830
Everybody on this side-
There's a few people
782
00:31:34.830 --> 00:31:36.750
in the court room who know-
Everybody on this side
783
00:31:36.750 --> 00:31:37.590
knows what it is
784
00:31:37.590 --> 00:31:40.770
because the record is replete with citations
785
00:31:40.770 --> 00:31:44.680
where their accountants calculated the exit tax
786
00:31:44.680 --> 00:31:48.150
using precisely the same methodology
787
00:31:48.150 --> 00:31:51.300
that we did and that our expert did.
788
00:31:51.300 --> 00:31:55.500
And it is taking the negative capital account, right?
789
00:31:55.500 --> 00:31:56.730
Which is reported
790
00:31:56.730 --> 00:32:00.603
in the federal tax return from the prior year.
791
00:32:02.010 --> 00:32:07.010
Calculating the effective tax rate that this partner has
792
00:32:07.830 --> 00:32:10.320
and coming up with those numbers.
793
00:32:10.320 --> 00:32:13.440
So it is not a complex calculation,
794
00:32:13.440 --> 00:32:16.320
it is a calculation that is routinely done,
795
00:32:16.320 --> 00:32:21.320
and routinely done as a part of closings on these projects.
796
00:32:21.351 --> 00:32:24.720
What is the code provision
797
00:32:24.720 --> 00:32:29.720
that applies to when the exit taxes liability
798
00:32:32.490 --> 00:32:37.490
is accrued, created, whatever the right verb is for that?
799
00:32:38.910 --> 00:32:40.110
Your Honor, to my knowledge,
800
00:32:40.110 --> 00:32:44.280
there is no specific internal revenue code provision
801
00:32:44.280 --> 00:32:45.690
that addresses that
802
00:32:45.690 --> 00:32:48.930
other than 42i7 B2,
803
00:32:48.930 --> 00:32:52.860
which speaks to all taxes attributable to the sale.
804
00:32:52.860 --> 00:32:56.783
And that says "all federal, state and local taxes."
805
00:32:56.783 --> 00:33:01.773
That tracks the language in the right of first refusal.
806
00:33:02.760 --> 00:33:05.940
I would phrase that slightly differently, Your Honor,
807
00:33:05.940 --> 00:33:08.670
the right of first refusal tracks that language.
808
00:33:08.670 --> 00:33:09.593
Okay, fair enough-
Yes.
809
00:33:09.593 --> 00:33:12.380
Because the right of first refusal came subsequent to-
810
00:33:12.380 --> 00:33:14.962
So does it refer to "attributable to the sale"
811
00:33:14.962 --> 00:33:17.375
or does it say "attributable to the dissolution"
812
00:33:17.375 --> 00:33:19.380
or does it say something else?
813
00:33:19.380 --> 00:33:20.390
When does it...
814
00:33:21.480 --> 00:33:24.720
Is there anything in the code that would tell us
815
00:33:24.720 --> 00:33:28.953
that from the federal government standpoint,
816
00:33:29.850 --> 00:33:31.660
the exit taxes
817
00:33:33.840 --> 00:33:38.840
are triggered by dissolution, sale or something else?
818
00:33:41.040 --> 00:33:41.873
I don't believe
819
00:33:41.873 --> 00:33:45.090
that there's anything in the code specifically on that,
820
00:33:45.090 --> 00:33:50.090
but what the Superior Court judge found
821
00:33:50.220 --> 00:33:55.220
was it relied on this court's prior presidential opinion
822
00:33:55.740 --> 00:33:59.520
in Homeowner's Rehab from 2019,
823
00:33:59.520 --> 00:34:01.740
where the court went through
824
00:34:01.740 --> 00:34:04.650
and demonstrated a very fine knowledge
825
00:34:04.650 --> 00:34:06.870
of how this program works,
826
00:34:06.870 --> 00:34:10.920
and included within that opinion
827
00:34:10.920 --> 00:34:14.100
the report from the United States'
828
00:34:14.100 --> 00:34:17.340
Department of Housing and Urban Development,
829
00:34:17.340 --> 00:34:20.204
which works hand in hand with the Department-
830
00:34:20.204 --> 00:34:22.950
Okay, but I don't think we were offering a tax opinion
831
00:34:22.950 --> 00:34:25.710
for these investors
832
00:34:25.710 --> 00:34:29.790
as to when they need to calculate or report
833
00:34:29.790 --> 00:34:34.790
or pay, account for, whatever, their exit taxes.
834
00:34:35.130 --> 00:34:36.570
Did we?
835
00:34:36.570 --> 00:34:39.364
In that case, there is certainly...
836
00:34:39.364 --> 00:34:43.650
And it's not the holding of that decision,
837
00:34:43.650 --> 00:34:48.360
but there is certainly reliance on the hard report,
838
00:34:48.360 --> 00:34:52.573
including in footnote five citing 42i7 B2,
839
00:34:54.480 --> 00:34:56.640
which specifically says
840
00:34:56.640 --> 00:35:01.640
exit taxes are part of the minimum purchase price
841
00:35:02.370 --> 00:35:07.370
because they are part of all taxes attributable to the sale.
842
00:35:09.420 --> 00:35:12.540
And Your Honor,
843
00:35:12.540 --> 00:35:14.400
this court cited that report
844
00:35:14.400 --> 00:35:18.960
seven separate times in that opinion.
845
00:35:18.960 --> 00:35:20.400
It relied on it,
846
00:35:20.400 --> 00:35:23.580
it found that report authoritative.
847
00:35:23.580 --> 00:35:28.500
The Superior Court found that thinking and that decision...
848
00:35:28.500 --> 00:35:30.660
Again, it wasn't the direct holding
849
00:35:30.660 --> 00:35:31.890
but authoritative
850
00:35:31.890 --> 00:35:36.000
in the absence of other direct authority on point
851
00:35:36.000 --> 00:35:37.140
throughout the country.
852
00:35:37.140 --> 00:35:37.973
Can I get you-
853
00:35:37.973 --> 00:35:40.080
So we take that, right?
854
00:35:40.080 --> 00:35:44.091
We take industry knowledge in this situation,
855
00:35:44.091 --> 00:35:48.000
which is now coming up on nearly 40 years
856
00:35:48.000 --> 00:35:51.930
for the most important housing tax credit program,
857
00:35:51.930 --> 00:35:54.570
housing program in the United States
858
00:35:54.570 --> 00:35:56.310
and in this Commonwealth-
859
00:35:56.310 --> 00:35:59.400
Could you take a shot at...
860
00:35:59.400 --> 00:36:03.090
So my colleagues have focused on the precise language.
861
00:36:03.090 --> 00:36:05.340
Can you take a step back
862
00:36:05.340 --> 00:36:10.267
and explain to me sort of the policy reason why,
863
00:36:11.130 --> 00:36:13.680
'cause your opposing counsel stands up
864
00:36:13.680 --> 00:36:15.547
and says, look, you're making it much more expensive
865
00:36:15.547 --> 00:36:19.620
for these type of development corporation,
866
00:36:19.620 --> 00:36:21.870
Tenants' Development Corporations
867
00:36:21.870 --> 00:36:25.530
to take over and continue this program.
868
00:36:25.530 --> 00:36:29.400
Tell me why you getting cashed out
869
00:36:29.400 --> 00:36:31.980
is not only consistent with the precise statutory language
870
00:36:31.980 --> 00:36:34.953
but with the statutory intent here,
871
00:36:35.820 --> 00:36:38.520
'cause it's making this more expensive,
872
00:36:38.520 --> 00:36:39.600
I just wanna understand why.
873
00:36:39.600 --> 00:36:41.310
Because they're saying you're getting a windfall,
874
00:36:41.310 --> 00:36:42.240
and I'm trying to understand
875
00:36:42.240 --> 00:36:45.273
whether this is what Congress intended or not.
876
00:36:46.830 --> 00:36:49.860
There is absolutely no windfall in this.
877
00:36:49.860 --> 00:36:54.860
So if you go back to the original intent in the legislature
878
00:36:55.380 --> 00:36:57.210
and Senator Mitchell
879
00:36:57.210 --> 00:37:01.260
who was one of the sponsors of this bill back in the 1980s,
880
00:37:01.260 --> 00:37:05.700
what he specifically said remains true today.
881
00:37:05.700 --> 00:37:08.790
And Your Honor, I think you picked up on this point earlier
882
00:37:08.790 --> 00:37:11.730
in your conversation with opposing counsel.
883
00:37:11.730 --> 00:37:13.080
What Senator Mitchell said
884
00:37:13.080 --> 00:37:16.443
is this is an uneconomic activity in general,
885
00:37:17.370 --> 00:37:19.230
investing in affordable housing,
886
00:37:19.230 --> 00:37:22.680
and we need to make it attractive
887
00:37:22.680 --> 00:37:27.510
for investors to invest and put private capital to work.
888
00:37:27.510 --> 00:37:29.853
And that's what we have done here.
889
00:37:30.690 --> 00:37:31.950
Now, if you want-
890
00:37:31.950 --> 00:37:34.290
So let's take the next step.
891
00:37:34.290 --> 00:37:37.650
They're saying you guys, it was successful,
892
00:37:37.650 --> 00:37:39.000
you've cashed out.
893
00:37:39.000 --> 00:37:41.040
You've been able to depreciate
894
00:37:41.040 --> 00:37:43.830
or write off a lot of taxes in the past.
895
00:37:43.830 --> 00:37:47.850
Now, why at this stage here at the sale
896
00:37:47.850 --> 00:37:50.950
where you've already gotten more than your investment out
897
00:37:51.870 --> 00:37:55.680
did Congress intend for you to continue to benefit from this
898
00:37:55.680 --> 00:37:59.610
even though it's gonna raise the price of the purchase
899
00:37:59.610 --> 00:38:02.160
for people like your opponents here-
900
00:38:02.160 --> 00:38:02.993
Let me-
901
00:38:02.993 --> 00:38:04.590
Who are gonna continue the activity-
902
00:38:04.590 --> 00:38:05.423
Yes.
903
00:38:05.423 --> 00:38:06.256
Let me answer that-
904
00:38:06.256 --> 00:38:07.620
That Congress wanted to maintain.
905
00:38:07.620 --> 00:38:09.390
Let me answer that very directly.
906
00:38:09.390 --> 00:38:11.520
Because the tax liability
907
00:38:11.520 --> 00:38:13.803
that we're talking about currently,
908
00:38:15.150 --> 00:38:18.723
the exit tax liability is approximately $8.5 million.
909
00:38:20.160 --> 00:38:24.600
That wipes out the lion's share of our benefits
910
00:38:24.600 --> 00:38:28.080
received over 15 years.
911
00:38:28.080 --> 00:38:31.320
And so if you simply take away
912
00:38:31.320 --> 00:38:34.680
the vast majority of those benefits
913
00:38:34.680 --> 00:38:38.080
that we have patiently been collecting and gathering
914
00:38:39.120 --> 00:38:40.620
for 15...
915
00:38:40.620 --> 00:38:44.550
It's going on probably closer to 20 years at this point.
916
00:38:44.550 --> 00:38:47.430
And say you actually don't get those benefits?
917
00:38:47.430 --> 00:38:49.440
What private investor
918
00:38:49.440 --> 00:38:52.260
is going to say that makes good sense
919
00:38:52.260 --> 00:38:54.540
for me as an investment,
920
00:38:54.540 --> 00:38:55.920
unless they're simply doing it
921
00:38:55.920 --> 00:38:57.930
out of the goodness of their heart?
922
00:38:57.930 --> 00:38:59.580
There are some that will do that,
923
00:38:59.580 --> 00:39:04.580
but to meet the mission and the statutory purpose and intent
924
00:39:04.710 --> 00:39:06.780
of attracting private capital,
925
00:39:06.780 --> 00:39:08.340
you simply can't do that.
926
00:39:08.340 --> 00:39:09.173
So let me,
927
00:39:09.173 --> 00:39:10.577
if I also could flip the script here a little bit-
928
00:39:10.577 --> 00:39:11.910
How do we know that?
929
00:39:11.910 --> 00:39:14.070
Is that in the record somehow?
930
00:39:14.070 --> 00:39:14.970
I'm sorry, which?
931
00:39:14.970 --> 00:39:16.920
This policy argument that you're making.
932
00:39:16.920 --> 00:39:20.280
That if you don't have the exit tax liability
933
00:39:20.280 --> 00:39:24.000
be part of the minimum purchase price,
934
00:39:24.000 --> 00:39:28.830
that the investors that Congress was trying to woo
935
00:39:28.830 --> 00:39:33.830
would not have the benefit of the tax credits
936
00:39:34.260 --> 00:39:35.640
that they were initially given.
937
00:39:35.640 --> 00:39:37.950
That it would essentially wipe them out,
938
00:39:37.950 --> 00:39:39.603
is what you're arguing.
939
00:39:40.633 --> 00:39:42.240
Let me be very clear,
940
00:39:42.240 --> 00:39:45.000
it would not completely wipe out all of the benefits,
941
00:39:45.000 --> 00:39:47.100
but it would take away the lion's share of those.
942
00:39:47.100 --> 00:39:50.010
But regardless of what percentage of the benefits,
943
00:39:50.010 --> 00:39:53.130
where is that in the record?
944
00:39:53.130 --> 00:39:54.766
In the policy argument?
945
00:39:54.766 --> 00:39:55.599
[Justice Wendlandt] Yeah.
946
00:39:55.599 --> 00:39:56.880
The policy argument, I believe,
947
00:39:56.880 --> 00:40:00.120
is in part in response to the amicus briefs
948
00:40:00.120 --> 00:40:03.450
who try to raise a number of policy arguments,
949
00:40:03.450 --> 00:40:04.980
which are simply incorrect.
950
00:40:04.980 --> 00:40:06.330
Your point is, it's Mitchell.
951
00:40:06.330 --> 00:40:08.640
It's that we wouldn't...
952
00:40:08.640 --> 00:40:10.320
People like your clients
953
00:40:10.320 --> 00:40:12.570
are not in it to, like his clients,
954
00:40:12.570 --> 00:40:14.280
to promote low income housing,
955
00:40:14.280 --> 00:40:15.600
they're in it for the money.
956
00:40:15.600 --> 00:40:16.950
And they're not gonna put their money in
957
00:40:16.950 --> 00:40:19.690
unless they're gonna get their money out of it, right?
958
00:40:19.690 --> 00:40:22.980
It comes down to Mitchell's overall conception
959
00:40:22.980 --> 00:40:24.480
of what the statute was about.
960
00:40:24.480 --> 00:40:27.450
Well, to say that we're in it for the money
961
00:40:27.450 --> 00:40:29.640
is a pretty rough cut.
962
00:40:29.640 --> 00:40:30.660
I would say, Your Honor,
963
00:40:30.660 --> 00:40:32.490
I mean we do have a mission
964
00:40:32.490 --> 00:40:34.680
of supporting affordable housing.
965
00:40:34.680 --> 00:40:37.320
And there are any number of these projects,
966
00:40:37.320 --> 00:40:39.540
these properties throughout the country
967
00:40:39.540 --> 00:40:42.000
that we have actually put in more money
968
00:40:42.000 --> 00:40:43.350
than we are required to
969
00:40:43.350 --> 00:40:46.050
because the project, the properties need it.
970
00:40:46.050 --> 00:40:48.960
And so we're not just in it for the money,
971
00:40:48.960 --> 00:40:51.750
but we are in it and entitled to
972
00:40:51.750 --> 00:40:54.600
and have bargained from day one
973
00:40:54.600 --> 00:40:57.120
to receive an economic benefit.
974
00:40:57.120 --> 00:41:00.240
And so if I could for just a minute,
975
00:41:00.240 --> 00:41:01.800
let me flip the script here
976
00:41:01.800 --> 00:41:05.010
and talk a little bit about this windfall, right?
977
00:41:05.010 --> 00:41:08.610
So what would happen in the circumstance
978
00:41:08.610 --> 00:41:10.443
of this $8.5 million?
979
00:41:11.490 --> 00:41:13.980
At this particular time,
980
00:41:13.980 --> 00:41:18.980
this property is worth on the order of 50 to 60 million,
981
00:41:21.390 --> 00:41:25.410
based on appraised values given by reputable local brokers
982
00:41:25.410 --> 00:41:27.150
as of a couple of years ago.
983
00:41:27.150 --> 00:41:29.970
Whether that number is exactly current, I don't know,
984
00:41:29.970 --> 00:41:32.020
but let's just say it's in that ballpark.
985
00:41:33.180 --> 00:41:35.620
The economics of the transaction
986
00:41:36.570 --> 00:41:39.540
that the TDC parties are proposing
987
00:41:39.540 --> 00:41:43.230
would be that their affiliate nonprofit entity
988
00:41:43.230 --> 00:41:44.650
assumes the debt
989
00:41:45.810 --> 00:41:50.253
of approximately, if my numbers are correct, 17 million,
990
00:41:51.120 --> 00:41:52.803
pay nothing else,
991
00:41:54.240 --> 00:41:55.620
and for that, get a property
992
00:41:55.620 --> 00:41:59.370
that's worth something on the order of 55.
993
00:41:59.370 --> 00:42:03.180
So where is the windfall in that whole equation?
994
00:42:03.180 --> 00:42:06.033
Is it wiping out the tax benefits?
995
00:42:07.268 --> 00:42:09.450
But it just depends upon the situation, right?
996
00:42:09.450 --> 00:42:12.810
I mean the numbers could be different in a different-
997
00:42:12.810 --> 00:42:13.643
Of course.
998
00:42:13.643 --> 00:42:16.020
Of course, they're very different in different projects.
999
00:42:16.020 --> 00:42:18.270
And the concept here
1000
00:42:18.270 --> 00:42:21.810
that we have reaped a windfall, right?
1001
00:42:21.810 --> 00:42:23.400
And they're grateful
1002
00:42:23.400 --> 00:42:26.010
that we've had all of these additional losses.
1003
00:42:26.010 --> 00:42:28.170
The additional losses that we've taken
1004
00:42:28.170 --> 00:42:32.730
have happened because of poor property operations, right?
1005
00:42:32.730 --> 00:42:33.908
This is not something
1006
00:42:33.908 --> 00:42:36.060
that we are sitting back saying,
1007
00:42:36.060 --> 00:42:38.520
oh this is great, we get more losses.
1008
00:42:38.520 --> 00:42:39.990
We would far prefer to see-
1009
00:42:39.990 --> 00:42:42.640
What was the value of the tax credits that you got?
1010
00:42:44.070 --> 00:42:45.990
It's on the order of 10 million.
1011
00:42:45.990 --> 00:42:46.823
Okay.
1012
00:42:48.120 --> 00:42:48.990
And what percentage...
1013
00:42:48.990 --> 00:42:49.823
Did you put...
1014
00:42:49.823 --> 00:42:52.350
Did your predecessors put in the full...
1015
00:42:52.350 --> 00:42:53.340
Pay the full amount?
1016
00:42:53.340 --> 00:42:57.360
I mean there's a 99% thing somewhere.
1017
00:42:57.360 --> 00:42:59.610
Were your predecessors the source of all the money
1018
00:42:59.610 --> 00:43:01.770
for the building of the building?
1019
00:43:01.770 --> 00:43:03.720
They put in
1020
00:43:03.720 --> 00:43:07.410
all but a thousand dollars of the initial capital,
1021
00:43:07.410 --> 00:43:10.320
which was on the order of,
1022
00:43:10.320 --> 00:43:14.010
initially it was $10.7 million.
1023
00:43:14.010 --> 00:43:16.710
That number increased slightly over time
1024
00:43:16.710 --> 00:43:19.020
to about 11 million.
1025
00:43:19.020 --> 00:43:23.100
And that came in through the AMTAX entity
1026
00:43:23.100 --> 00:43:26.530
that is still the partner in the partnership
1027
00:43:27.930 --> 00:43:30.450
for who we acquired their interests.
1028
00:43:30.450 --> 00:43:31.686
So that is correct.
1029
00:43:31.686 --> 00:43:35.400
We created a secondary market for their interests
1030
00:43:35.400 --> 00:43:37.350
out of a bankruptcy proceeding,
1031
00:43:37.350 --> 00:43:38.640
if I recall correctly.
1032
00:43:38.640 --> 00:43:39.780
And then let me,
1033
00:43:39.780 --> 00:43:42.030
if I could just take one moment more,
1034
00:43:42.030 --> 00:43:43.680
I know I'm over time,
1035
00:43:43.680 --> 00:43:46.380
but one moment more to address just in general
1036
00:43:46.380 --> 00:43:51.060
some of the cases that opposing counsel has cited.
1037
00:43:51.060 --> 00:43:53.430
Those cases involve
1038
00:43:53.430 --> 00:43:58.430
the determination of fair market value of a property
1039
00:43:58.890 --> 00:44:03.890
so that interests within the partnership
1040
00:44:04.290 --> 00:44:06.270
can be transferred.
1041
00:44:06.270 --> 00:44:09.240
They do not deal with the situation
1042
00:44:09.240 --> 00:44:12.840
where there is a direct sale of the property,
1043
00:44:12.840 --> 00:44:17.840
which is the sine qua non for this partnership,
1044
00:44:18.120 --> 00:44:21.990
and without which this partnership no longer exists.
1045
00:44:21.990 --> 00:44:24.540
So those cases, they're out there,
1046
00:44:24.540 --> 00:44:25.650
they certainly are,
1047
00:44:25.650 --> 00:44:27.270
but they're very different.
1048
00:44:27.270 --> 00:44:28.170
And with that,
1049
00:44:28.170 --> 00:44:30.473
unless there are other questions, I'll thank you.