Cantu Enterprises, LLC v. Glenn Hegar, Comptroller of Public Accounts of the State of Texas And Ken Paxton, Attorney General of the State of Texas ( 2016 )

ACCEPTED
03-15-00516-CV
11051299
THIRD COURT OF APPEALS
AUSTIN, TEXAS
6/8/2016 6:27:41 PM
JEFFREY D. KYLE
CLERK
No. 03-15-00516-CV
__________________________________________________________________
FILED IN
3rd COURT OF APPEALS
In the Court of Appeals AUSTIN, TEXAS
For the Third Judicial District 6/8/2016 6:27:41 PM
Austin, Texas JEFFREY D. KYLE
Clerk
__________________________________________________________________
CANTU ENTERPRISES, LLC
Appellant,
v.
GLENN HEGAR, COMPTROLLER OF PUBLIC ACCOUNTS OF
THE STATE OF TEXAS, AND KEN PAXTON, ATTORNEY
GENERAL OF THE STATE OF TEXAS
Appellees.
__________________________________________________________________
On Appeal from the 53rd District Court, Travis County, Texas
Trial Court Cause No. D-1-GN-13-004369
__________________________________________________________________
APPELLANT’S REPLY BRIEF
__________________________________________________________________
Mark Eidman RYAN LAW FIRM, LLP
Texas Bar No. 06496500 100 Congress Avenue, Suite 950
Mark.Eidman@RyanLawLLP.com Austin, Texas 78701
512.459.6600 Telephone
Doug Sigel 512.459.6601 Facsimile
Texas Bar No. 18347650
Doug.Sigel@RyanLawLLP.com Attorneys for Appellant
Amy Wills
Texas Bar No. 24093379
Amy.Wills@RyanLawLLP.com June 8, 2016
Table of Contents
Page
Table of Contents ....................................................................................................... i
Index of Authorities ................................................................................................. iii
Index to Appendix ...................................................................................................... v
Reply to Appellees’ Statement Regarding Oral Argument ..................................... vi
The Comptroller’s arguments disregard the plain meaning of § 151.006(a)(1). .......1
The Comptroller’s arguments do not refute the law and the evidence establishing
that Cantu Enterprises is entitled to the sale for resale exemption. ...........................1
Reply to Statement of Facts .......................................................................................2
Reply to Standard of Review .....................................................................................8
Reply to Arguments .................................................................................................10
I. Subsection 151.006(a)(1) applies to transactions involving leases. ...........10
II. Cantu Enterprises’ purchase of the aircraft qualifies for the sale for
resale exemption under § 151.006(a)(1). ....................................................15
A. Cantu Enterprises purchased the aircraft for the purpose of
reselling it. ...........................................................................................15
B. Subsection 151.006(a)(1) does not require the series of
restrictions the Comptroller asserts apply here. ..................................17
III. Cantu Enterprises purchased the aircraft in its normal course
of business. ..................................................................................................20
A. There is no objective standard of “normal course of business.”
“Normal course of business” is tailored to the purchaser’s
business. ..............................................................................................20
B. The Comptroller is not permitted to question the manner of Cantu
Enterprises’ “normal course of business.” ..........................................21
Appellant’s Reply Brief – Page i
C. Cantu Enterprises purchased the aircraft and leased it for
diversification, risk management, and investment purposes —
all of which show economic substance. ..............................................22
Prayer .......................................................................................................................25
Certificate of Compliance ........................................................................................26
Certificate of Service ...............................................................................................26
Appellant’s Reply Brief – Page ii
Index of Authorities
Cases
BMC Software Belgium, N.V. v. Marchand,
83 S.W.3d 789 (Tex. 2002).................................................................................17
Coltec Indus., Inc. v. United States,
454 F.3d 1340 (Fed. Cir. 2006) ..........................................................................24
Combs v. Health Care Servs. Corp.,
401 S.W.3d 623 (Tex. 2013) ...................................................................... passim
Combs v. Newpark Res., Inc.,
422 S.W.3d 46 (Tex. App.—Austin 2013) .........................................................11
Combs v. Roark Amusement & Vending, L.P.,
422 S.W.3d 632 (Tex. 2013) ................................................................................8
Day & Zimmerman v. Calvert,
519 S.W.2d 106 (Tex. 1975) ..............................................................................21
DTWC Corp. v. Combs,
400 S.W.3d 149 (Tex. App.—Austin 2013, no pet.) ................................... 13, 20
Frank Lyon Co. v. United States,
435 U.S. 561 (1978) ............................................................................................22
GATX Terminals Corp. v. Rylander,
78 S.W.3d 630 (Tex. App.—Austin 2002, no pet.) ..............................................8
Greater Houston P’ship v. Paxton,
468 S.W.3d 51 (Tex. 2015).................................................................................11
Hanks v. GAB Bus. Servs., Inc.,
644 S.W.2d 707 (Tex. 1982) ....................................................................... 18, 20
In re City of Georgetown,
53 S.W.3d 328 (Tex. 2001).................................................................................11
Matagorda Cnty. Appraisal Dist. v. Coastal Liquids Partners, L.P.,
165 S.W.3d 329 (Tex. 2005) ..............................................................................11
Appellant’s Reply Brief – Page iii
SSP Partners v. Gladstrong Invs. (USA) Corp.,
275 S.W.3d 444 (Tex. 2009) ..............................................................................24
Strayhorn v. Raytheon E-Systems,
101 S.W.3d 558 (Tex. App.—Austin 2003, pet. denied) ...................................20
Titan Transp., LP v. Combs,
433 S.W.3d 625 (Tex. App.—Austin 2014, pet. denied) .....................................8
Verizon Bus. Network Servs., Inc. v. Combs,
No. 07-11-0025-CV, 2013 WL 1343530
(Tex. App.—Amarillo Apr. 3, 2013) ....................................................................8
Statutes
Tex. Bus. and Comm. Code § 2A.301 (West 2010) ................................................22
Tex. Tax Code § 101.004 (West 2010) ....................................................................22
Tex. Tax Code § 151.005 (West 2010) ............................................................. 13, 17
Tex. Tax Code § 151.006 (West 2010) ....................................................................14
Tex. Tax Code § 151.006(a)(1) (West 2010)................................................... passim
Tex. Tax Code § 151.006(a)(2) (West 2010)................................................... passim
Other Authorities
Black’s Law Dictionary (10th ed. 2014) ..................................................................24
Rules
34 Tex. Admin. Code § 3.294 (West 2010) .............................................................17
34 Tex. Admin. Code § 3.285 (West 2010) .............................................................14
Appellant’s Reply Brief – Page iv
Index of Appendix1
Reporter’s Record – Volume 2 Excerpts
Reporter’s Record – Volume 3 Excerpts
Reporter’s Record – Volume 4 Excerpts
Reporter’s Record – Volume 5 Excerpts
1
The record excerpts cited in Appellant’s Reply Brief are attached for the Court’s convenience.
Appellant’s Reply Brief – Page v
Reply to Appellees’ Statement Regarding Oral Argument
Appellant previously requested oral argument. Appellees state that oral
argument is not necessary. After reviewing Appellees’ Brief, Appellant withdraws
its request for oral argument. Appellant has attempted to address all pertinent
issues in its Reply Brief. If the Court feels that the issues need further discussion
beyond the briefs, Appellant will participate in oral argument.
Appellant’s Reply Brief – Page vi
The Comptroller’s arguments disregard the plain meaning of § 151.006(a)(1)2.
The Comptroller’s arguments disregard the plain meaning of
§ 151.006(a)(1). Subsection 151.006(a)(1) requires that the aircraft be purchased:
• for the purpose of reselling the aircraft
• in the normal course of business
• in the form or condition in which the aircraft was acquired.
Subsection 151.006(a)(1) does not require the series of extra-statutory
requirements that the Comptroller argues for in its Appellees’ Brief.3 It only
requires that the aircraft be purchased for the purpose of resale. The evidence
establishes that Cantu Enterprises purchased the aircraft for the purpose of
reselling it.4
The Comptroller’s arguments do not refute the law and the evidence
establishing that Cantu Enterprises is entitled to the sale for resale exemption.
The real issue here is whether one of Cantu Enterprises’ purposes in
purchasing the plane was to resell it.5 Although the Comptroller cites a series of
sound-bite facts, it has not refuted the evidence establishing that Cantu Enterprises
purchased the aircraft for the purpose of resale.
2
The Reporter’s Record is referred to as “RR.” The Reporter’s Record reference includes the
volume and page number. Unless noted otherwise, “Tax Code” and “subsection” refer to their
respective provisions of the Texas Tax Code in effect during the period at issue. “Rule” refers to
respective provisions of the Texas Administrative Code in effect during the period at issue.
3
Discussed infra.
4
See Appellant’s Br. 5–11.
5
Id. at 5–7.
Appellant’s Reply Brief – Page 1
In fact, the Comptroller’s arguments fail for four reasons: (1)
§ 151.006(a)(1) includes lease transactions; (2) the evidentiary standard is by
preponderance of the evidence, and the evidence showed that Cantu purchased the
aircraft for the purpose of leasing it under § 151.006(a)(1); (3) Cantu Enterprises’
lease of the aircraft was in its normal course of business; and (4) the economic
substance doctrine does not apply, but even if it does, the aircraft purchase and
lease had economic substance. Overall, the Comptroller has presented no solid
legal argument or fact that would compel the Court to affirm the trial court’s
erroneous judgment.
Reply to Statement of Facts
The Comptroller’s description of the facts largely disregards the testimony
and evidence presented. For example, the Comptroller’s factual assertions do not
reflect the true nature of the relationship between Cantu Enterprises and Cantu
Consulting. These assertions also do not reflect the testimony that explains in detail
why Cantu Enterprises operated the way it did.6
Facts asserted by Comptroller What the Record establishes
“Cantu Consulting did not maintain  3 RR 27 – Cantu Consulting paid for
separate Profit and Loss Statements, all operating expenses.
did not pay for Aircraft expenses, nor  2 RR 46–47 – There was no legal
file federal income tax returns, nor need to generate separate profit and
provide an invoice under its own loss Statements.
name.”7  3 RR 12 – Cantu Enterprises and
6
See also id. at 1–2.
7
Appellees’ Br. at 7, 30–31.
Appellant’s Reply Brief – Page 2
Cantu Consulting legally could not
file separate federal tax returns.
 2 RR 35 – The invoices listed Cantu
Enterprises as the lessor and Cantu
Consulting as the lessee.
“On October 9, 2009, the ‘Non-  3 RR 22 – Cantu Enterprises and
Exclusive Aircraft Lease Agreement’ Cantu Consulting had an oral lease
. . . the only executed Aircraft Lease agreement in place before the
Agreement in this matter, was executed written agreement.
entered into by Cantu Enterprises
and Cantu Consulting, which was
signed by Mr. Cantu on behalf of
both entities.”8
“In essence, Mr. Cantu and his  5 RR 30 – Mr. Cantu testified:
related entities used the Aircraft for “When I use [the aircraft], they send
free.”9 me a bill; I pay for it.”
“In fact, Cantu Enterprises never  5 RR 13 – Mr. Cantu stated that he
leased its Aircraft to any person or did not want the risk of leasing to
entity unrelated to Mr. Cantu’s “somebody that I’m not involved
personal or professional interests.”10 in.” He also talked about reducing
any risk of liability by not leasing to
strangers.
“Cantu Enterprises presented no  5 RR 30 – Mr. Cantu testified that
evidence that Mr. and Mrs. Cantu he paid to use the aircraft.
paid for their personal use of the
Aircraft pursuant to the Lease
Agreement.”11
“In direct contrast to the terms of the  3 RR 27 – “In practicality, the
Lease Agreement, the irrefutable money used to pay for the expenses
documentary evidence demonstrates was Cantu Consulting’s money.
that it was Cantu Enterprises, and Cantu Enterprises has very limited
not Cantu Consulting, that paid for way to generate income. Cantu
8
Id. at 3, 8.
9
Id. at 8.
10
Id. at 9.
11
Id. at 10.
Appellant’s Reply Brief – Page 3
all of the operating expenses for the Consulting through their consulting
Aircraft.”12 business is the one who generated
all the revenue. They’re the ones
who had the clients. So their money
was deposited in the account and
their money was used to pay the
bills. It wasn’t Cantu Enterprises’
money.”
“Moreover, even though Mr. Cantu  3 RR 27 – Cantu Consulting paid for
flew the Aircraft in his professional operating expenses.
capacity to further his diverse  5 RR 30 – Mr. Cantu paid for his
business interests, he never paid for aircraft use.
any of the flights on behalf of his
‘organizations.’”13
“Mr. Cantu candidly admits that the  5 RR 30 – The Comptroller asked:
‘main objective in purchasing the “What was the objective of Cantu
aircraft’ was for ‘convenience and Enterprises, LLC in buying the
flexibility for . . . [his] companies to aircraft?” Mr. Cantu answered:
grow and to be able to do business “Strictly business, leasing.”
quicker,’ not the leasing of the  5 RR 19 – Mr. Cantu also stated that
Aircraft to generate revenue.”14 he wanted to increase his ventures in
leasing and that is why he purchased
the aircraft.15
“The Time Share Agreement did not  2 RR 85 – Cantu Consulting was not
allow Cantu Consulting to collect permitted to collect lease revenue
lease revenue for any flights taken by under the time-share agreement: “Q:
Mr. Cantu, the ‘Sharee’ in this And there is no rental or lease rate
contract, that were not otherwise above those operating expenses? A:
related to Cantu Consulting’s It’s not permitted to be. This tracks
business.”16 the language of the FAA part that
limits the consideration that can be
received on a time-share
12
Id.
13
Id. at 10–11.
14
Id. at 11–12.
15
See also 2 RR 19–20, 22–23 (Bivens); 2 RR 105–08, 166–69 (Cantu); 3 RR 7–9, 4 RR 81–85
(Borrego).
16
Appellees’ Br. at 9.
Appellant’s Reply Brief – Page 4
agreement.”
The Comptroller focuses on the  3 RR 8, 37 – Mr. Cantu’s assets
separate entity structure as evidence were held in separate entities “to
for sham transaction.17 protect his wealth and reduce his
liability, his exposure.”
“Ms. Bivens testified that time-share  2 RR 28–29 – But Ms. Bivens also
agreements are very rigid and create testified that “the consulting
a ‘major limitation’ on the revenue arrangement would allow them to
generated by Cantu Consulting.18 obtain more compensation” in
answering the question “What
possible reasons would they have for
[entering into consulting
arrangements rather than just time-
share agreements]?”
“Although Mr. Cantu has a  5 RR 13 – Mr. Cantu testified that
marketing team for his numerous and he would not lease to strangers to
diverse business interests, Mr. Cantu, reduce risk and liability.
through Cantu Enterprises or Cantu
Consulting, has never, in any way,
promoted or marketed the Aircraft
for sale or lease at any price.”19
“Cantu Enterprises never made a  3 RR 14 – Cantu Enterprises
profit.”20 purchased the aircraft as a long-term
investment and not for profit. The
aircraft purchase created $4 million
in equity.
 3 RR 18–19 – Cantu Enterprises
also purchased the aircraft as a way
to diversify its business.
“Mr. Cantu flew the Aircraft in his  5 RR 30 – Mr. Cantu paid for his
personal and professional capacity, aircraft use.
including for his personal vacations  5 RR 21 – Mr. Cantu flew less than
17
Id. at 7.
18
Id. at 9.
19
Id.
20
Id. at 10–11.
Appellant’s Reply Brief – Page 5
to California, Colorado, and Las 10% of the time for personal
Vegas.”21 reasons.
“In fact, Mr. Cantu has ‘priority’ to  5 RR 21 – Mr. Cantu explained that
use the Aircraft above anyone else he would schedule his flights “way
that may have wanted or needed to ahead of time.”
use the Aircraft within his
‘organization.’”22
“Mr. Cantu further testified that once  Mr. Cantu did explain the main
the Aircraft was paid off, he intended reasons for the aircraft purchase:
on using it to ‘fly around’ and mark o 5 RR 30 – Q: “What was the
off his ‘bucket list.’”23 objective of Cantu Enterprises,
LLC in buying the aircraft?” A:
“Strictly business, leasing.”
o 5 RR 19 – “And then also I’m
looking at other ventures in
leasing.”
o 3 RR 14 – Cantu Enterprises
purchased the aircraft as a long-
term investment and not for
profit. The purchase created $4
million in equity.
o 3 RR 18–19 – Cantu Enterprises
also purchased the aircraft as a
way to diversify its business.
“Cantu Enterprises’ own witness  5 RR 13 – Mr. Cantu did not lease to
further admitted that he was strangers to reduce the risk of
approached by unrelated third- liability.
parties wishing to rent the Aircraft,
but Cantu Enterprises turned down
this revenue each time.”24
“In addition, Cantu Enterprises has  3 RR 8, 37 – The businesses and
no assets other than the subject assets are structured as separate
Aircraft, a bank account, and neither entities intentionally. The purpose is
21
Id. at 10.
22
Id. at 9.
23
Id. at 12.
24
Id.
Appellant’s Reply Brief – Page 6
Cantu Enterprises nor Cantu “to protect [Mr. Cantu’s] wealth and
Consulting have employees.”25 reduce his liability, his exposure.”
The Comptroller references what it  2 RR 90 – This testimony is taken
considers Cantu Consulting’s out of context. Ms. Bivens said that
“exceptionally low rental rate.”26 $600 would be below fair market
rate if that was the only amount
being paid. But she also said that
Cantu Consulting was required to
pay for all operating expenses. (See
also 3 RR 27).
25
Id. at 7.
26
Id. at 30.
Appellant’s Reply Brief – Page 7
Reply to Standard of Review
Subsection 151.006(a)(1)’s language is unambiguous as recognized by the
Texas Supreme Court.27 The Comptroller agrees that § 151.006(a)(1) is
unambiguous.28 Because § 151.006(a)(1)’s language is unambiguous, as explained
in Appellant’s Brief, statutory construction rules do not apply.29 Thus, the
Comptroller’s interpretation should receive no deference and strict construction
should not apply. The Court should only apply § 151.006(a)(1)’s plain language.
Further, no deference should be given to the trial court’s findings because
they result from an improper construction of § 151.006(a)(1) and thus are
immaterial and erroneous.30 Therefore, the Comptroller’s reliance on the findings
of fact should be disregarded.
Finally, because this is a tax refund case, Cantu Enterprises only had to
prove by a preponderance of the evidence that it is entitled to a refund.31 A
27 Combs v. Health Care Servs. Corp., 401 S.W.3d 623, 627 (Tex. 2013) (recognizing that
151.006(a)(1) is unambiguous).
28
Appellees’ Br. at 20.
29
Courts “give such statutes their plain meaning without resort to rules of construction or
extrinsic aids.” Combs v. Roark Amusement & Vending, L.P., 422 S.W.3d 632, 635 (Tex. 2013).
Strict construction of a tax provision, including an exemption, is thus inappropriate if the statute
is unambiguous.
30
Appellant’s Br. at 3–4. See also Titan Transp., LP v. Combs, 433 S.W.3d 625, 642 (Tex.
App.—Austin 2014, pet. denied).
31
Verizon Bus. Network Servs., Inc. v. Combs, No. 07-11-0025-CV, 2013 WL 1343530, at *4
(Tex. App.—Amarillo Apr. 3, 2013) (citing GATX Terminals Corp. v. Rylander, 78 S.W.3d 630,
634, 636 (Tex. App.—Austin 2002, no pet.).
Appellant’s Reply Brief – Page 8
preponderance of the evidence proved Cantu Enterprises’ entitlement to the resale
exemption under § 151.006(a)(1).32
32
See Appellant’s Br. at 1–11.
Appellant’s Reply Brief – Page 9
Reply to Arguments
I. Subsection 151.006(a)(1) applies to transactions involving leases.
The Comptroller asserts that if § 151.006(a)(1) and § 151.006(a)(2) both
include leases of tangible personal property, the provisions would be
“synonymous,” which would go against the Legislature’s intent.33 The Comptroller
further asserts that because the Legislature intended the provisions to be distinct,
§ 151.006(a)(1) cannot apply to transactions involving leases.34 As a result, the
Comptroller concludes that if both provisions are read to apply to lease
transactions, § 151.006(a)(1) would render § 151.006(a)(2) “meaningless or
superfluous.”35 Relying on these arguments, the Comptroller argues that
§ 151.006(a)(1) does not apply in this case because Cantu Enterprises leased the
aircraft to Cantu Consulting, and § 151.006(a)(1) does not apply to lease
transactions.36
However, §§ 151.006(a)(1) and (a)(2) merely overlap in certain respects.
Both provisions apply to lease transactions. But each provision has other distinct
requirements.
33
Appellees’ Br. at 22.
34
Id. at 23–24.
35
Id. at 24.
36
Id. at 20.
Appellant’s Reply Brief – Page 10
It is well-established that the Legislature chooses specific words, and these
words may apply in more than one provision for emphasis or caution.37 Texas
courts have also recognized that statutory provisions may overlap.38 In addition,
Texas courts have recognized that overlapping provisions can be precisely what the
Legislature intended and do not necessarily transform well-thought-out statutory
provisions into mere surplusage or meaningless terms.39 Thus, both
§§ 151.006(a)(1) and (a)(2) may both apply to leases contrary to the Comptroller’s
assertions otherwise.40
More importantly, the Legislature specifically chose to include lease
transactions in both subsections (a)(1) and (a)(2) when it defined “sale” in the Tax
Code. Under § 151.005(2), a “sale” is defined to include a “lease.” Therefore,
§ 151.006(a)(1)’s reference to “sale” includes purchasing an item for the purpose
of leasing it.41 Even the Texas Supreme Court has recognized this.42 The
37 In re City of Georgetown, 53 S.W.3d 328, 336 (Tex. 2001) (noting that statutory redundancies
may mean that “the Legislature repeated itself out of an abundance of caution, for emphasis, or
both”).
38
Combs v. Newpark Res., Inc., 422 S.W.3d 46, 54 (Tex. App.—Austin 2013) (recognizing that
separately listed terms does not render them mutually exclusive) (citing Matagorda Cnty.
Appraisal Dist. v. Coastal Liquids Partners, L.P., 165 S.W.3d 329, 334–35 (Tex. 2005) (noting
that categories listed separately in statute can still overlap)).
39 Greater Houston P’ship v. Paxton, 468 S.W.3d 51, 66 (Tex. 2015).
40
Id. at 22.
41
Appellant’s Br. at 7.
42
Health Care Servs. Corp., 401 S.W.3d at 632.
Appellant’s Reply Brief – Page 11
Comptroller’s assertion that “sale” under § 151.006(a)(1) does not include “lease”
is simply unfounded.43
Further, the fact that both subsections (a)(1) and (a)(2) apply to lease
transactions does not mean that the sections “collapse and subsume” each other as
the Comptroller asserts.44 Each provision has distinct requirements for its separate
definition of “sale for resale”:
“Sale for Resale” Definition Requirements
§ 151.006(a)(1) § 151.006(a)(2)
A sale of tangible personal A sale of tangible personal
property property
Purpose for resale Sole purpose for leasing or
renting only
In the normal course of In the normal course of
business business
In the form or condition in To another person
which it is acquired
Or as an attachment to or But not if incidental to the
integral part of other tangible leasing or renting of real estate
personal property or taxable
service
As shown by the table, § 151.006(a)(1) and § 151.006(a)(2) have different
roles. Subsection 151.006(a)(1) applies to tangible personal property acquired for
resale. This does not have to be the “sole” purpose as the Legislature did not
43
See Appellant’s Br. at 7–8.
44
Appellees’ Br. at 22.
Appellant’s Reply Brief – Page 12
include that language.45 Subsection 151.006(a)(1) also only applies to tangible
personal property that is sold in the form it is acquired or that is integral to other
tangible personal property or a taxable service. For example, § 151.006(a)(1)
applies to hotel consumables such as soap, shampoo, and conditioner.46 These are
purchased for the purpose of resale to the customer and are in the same form as
acquired.
Subsection 151.006(a)(2), on the other hand, only applies to property
acquired for the sole purpose of leasing or renting it. The Legislature specifically
restricted the definition of “sale” by permitting only lease and rental transactions to
qualify.47 Subsection 151.006(a)(2) also differs from § 151.006(a)(1) as it does not
require that the tangible personal property be in the same condition it is acquired.
Subsection 151.006(a)(2) will not apply if the tangible personal property leased or
rented is incidental to the renting or leasing of real estate — § 151.006(a)(1) has no
such limitation. These differences make §§ 151.006(a)(1) and (a)(2) unique. For
example, the hotel consumable example above would not qualify for the (a)(1)
exemption if the consumables were somehow changed before being resold. But,
assuming all other requirements are met, it would still qualify under (a)(2).
Likewise, if the hotel consumables were available for purchase, lease, or rental,
45
If the Legislature had intended resale to the be “sole” purpose of acquiring the tangible
personal property, then it would have stated so as it did in § 151.006(a)(2).
46
DTWC Corp. v. Combs, 400 S.W.3d 149, 152 (Tex. App.—Austin 2013, no pet.).
47
Cf. Tex. Tax Code § 151.005(2).
Appellant’s Reply Brief – Page 13
(assuming all other factors are met) it would qualify for the exemption under (a)(1)
but not (a)(2) as (a)(2) requires that the sole purpose of the purchase is to lease or
rent the tangible personal property.
Because the definitions are distinct, the inclusion of lease transactions in
each provision does not render the provisions identical. Instead, the distinct
provisions mean subsections (a)(1) and (a)(2) cannot “collapse and subsume” each
other.48 Therefore, recognizing that both definitions include lease transactions does
not render one or the other meaningless or superfluous contrary to the
Comptroller’s arguments.49
Further, the Comptroller’s reliance on Rule 3.285 does not change this.50
Rule 3.285 does not distinguish selling and leasing. The Rule, in fact, references
both terms interchangeably.51 To the extent the Comptroller asserts that the Rule
and § 151.006 show a “clear” intent to distinguish “sale” and “lease,” those
allegations are unfounded and contrary to the Tax Code and the Comptroller Rule.
Therefore, the Court should disregard this interpretation.52
48
Appellees’ Br. at 22.
49
Id. at 22–23.
50
Id. at 23.
51
See 34 Tex. Admin Code § 3.285(b) (using “resell, lease, or rent” interchangeably when
discussing a resale transaction).
52
Health Care Servs. Corp., 401 S.W.3d at 630.
Appellant’s Reply Brief – Page 14
II. Cantu Enterprises’ purchase of the aircraft qualifies for the sale for
resale exemption under § 151.006(a)(1).
Subsection 151.006(a)(2) is not at issue because Cantu Enterprises is entitled
to the resale exemption under § 151.006(a)(1) as discussed above. All the points
the Comptroller raises discussing § 151.006(a)(2) are thus irrelevant.53 Although
§ 151.006(a)(2) requires “sole purpose,” § 151.006(a)(1) only requires resale as a
“purpose.”54 The evidence, therefore, does not have to show that Cantu Enterprises
purchased the aircraft solely to resell it.
The evidence in the trial court conclusively established that Cantu
Enterprises’ purchase of the aircraft qualified for the sale for resale exemption
under § 151.006(a)(1): Cantu Enterprises purchased the aircraft (1) for the purpose
of reselling it,55 (2) in the normal course of business,56 and (3) in the form or
condition in which the aircraft was acquired.57
A. Cantu Enterprises purchased the aircraft for the purpose of
reselling it.
As discussed in detail in Appellant’s Brief,58 Cantu Enterprises purchased
the aircraft for the purpose of reselling it. (2 RR 19–20, 22–23 (Bivens); 2 RR
105–08, 166–69 (Cantu); 3 RR 7–9, 4 RR 81–85 (Borrego)). Although the
53
See Appellees’ Br. at 5–8.
54
Apellant’s Br. at 5–7. See also Health Care Servs. Corp., 401 S.W.3d at 627 (concluding that
§ 151.006(a)(1) had no “primary” purpose requirement).
55
Appellant’s Br. at 5–9.
56
Id. at 8–11.
57
The Comptroller does not contest (3) so we do not address it here but refer the Court to
Appellant’s Brief at page 11.
58
Appellant’s Br. at 1–11.
Appellant’s Reply Brief – Page 15
Comptroller cites certain record evidence as support, as stated in the above Reply
to the Statement of Facts, those facts are taken out of context while other facts are
ignored.59 For example, the Comptroller relies on the lack of separate profit and
loss statements and the lack of separate federal income tax returns to assert that
Cantu Enterprises’ transaction with Cantu Consulting was a “sham transaction.”60
But the testimony established that there was no legal need for Cantu Enterprises
and Cantu Consulting to generate separate profit and loss statements. (2 RR 46–
47). Further, the entities, as disregarded entities, were not permitted to file separate
federal income tax reports. (3 RR 12).
Other facts61 that the Comptroller asserts and relies on include inter alia that
Mr. Cantu and his entities used the aircraft for free; that the invoices were not
under Cantu Consulting’s name, and that Mr. Cantu’s purpose for purchasing the
aircraft was not for leasing it.62 But the evidence disproves or clarifies all these
facts: As testified to, the use of aircraft was paid for (5 RR 30; 3 RR 27), the
invoices listed Cantu Consulting as the lessee (2 RR 35), and Mr. Cantu purchased
the aircraft to lease it (5 RR 30; 5 RR 19).63 Thus, the evidence established that
59
See Reply to Statement of Facts supra; see also Appellant’s Br. at 1–2.
60
Appellees’ Br. at 36.
61
To avoid being repetitive, all misconstrued facts relied on by the Comptroller are addressed in
the Reply to the Statement of Facts.
62
Appellees’ Br. at 34.
63
The Comptroller cites testimony in 5 RR 20–21 and 4 RR 52 as evidence that the aircraft use
was not paid for. But the witness said that he didn’t know if it was paid for. (4 RR 52) (“Q. And
would Mr. Cantu ever personally pay for those flights? A. I don't know.”).
Appellant’s Reply Brief – Page 16
Cantu Enterprises purchased the aircraft for the purpose of reselling it. The
Comptroller’s assertions do not overcome this conclusive evidence.
B. Subsection 151.006(a)(1) does not require the series of restrictions
the Comptroller asserts apply here.
Although § 151.006(a)(1) requires that one of the purposes Cantu
Enterprises purchases the aircraft is to resell it,64 it does not require:
 A sale of tangible personal property that does not involve a lease
transaction65 – As stated § 151.005(2) defines “sale” to include a “lease.”66
 The transacting entities be unaffiliated67 – Importantly, Texas law presumes
that two separate entities are distinct entities.68 Further, separate entities can
enter into leasing agreements.69 If the Comptroller’s interpretation applied,
then no transaction between related entities would qualify for the sale for
resale exemption.
 A transfer of title and possession70 – Comptroller Rule 3.294(a)(2) defines
“lease” as a transaction where possession but not title is transferred. Thus, a
“sale,” as defined by § 151.005(2), does not require a transfer of title.
 Maintaining separate profit and loss statements71 – Federal and state law did
not require that Cantu Enterprises and Cantu Consulting maintain separate
profit and loss statements. (2 RR 46–47).
64
See Appellant’s Br. at 5–7.
65
Appellees’ Br. at 7.
66
See also Health Care Servs. Corp., 401 S.W.3d at 632.
67
Appellees’ Br. at 19.
68
BMC Software Belgium, N.V. v. Marchand, 83 S.W.3d 789, 798 (Tex. 2002).
69
The evidence established that the businesses are structured as distinct entities to protect against
liability by reducing exposure. (3 RR 8).
70
Appellees’ Br. at 7, 11.
71
Id. at 36.
Appellant’s Reply Brief – Page 17
 Strict adherence to the parties’ written agreement72 – Cantu Enterprises and
Consulting do not have to follow their agreement word for word. Parties can
amend agreements and consent to the amendments with their actions. Any
actions that were different from the agreement were consented to. The
parties have the right to change their agreement as necessary.73
 Promoting or marketing the aircraft to unknown third parties74 – There is no
statutory requirement that the aircraft be marketed to the general public.
Further, the testimony explained that the aircraft was not leased to unknown
third parties to avoid unnecessary risk and exposure to liability. (5 RR 13).
 A ban on all personal use75 – Subsection 151.006(a)(1) does not ban all
personal use. It only requires that one purpose of the aircraft purchase is to
resell it. The evidence established that Cantu Enterprises purchased the
aircraft to resell it. (5 RR 19, 30). Mr. Cantu’s use of the aircraft for
professional and personal purposes does not negate that purpose. Despite de
minimus use for personal trips (less than 10% of the use), which Mr. Cantu
testified that he paid for, Cantu Enterprises purchased the aircraft to lease it
out as a business venture. (5 RR 21, 30).
 Making a profit76 – Cantu Enterprises did not need to make a profit to
qualify for the exemption. Cantu Enterprises did not purchase the aircraft to
make a profit but instead purchased it as an investment and to diversify its
business. (3 RR 14, 18–19). 77
72
Id. at 37–38.
73
Hanks v. GAB Bus. Servs., Inc., 644 S.W.2d 707, 708 (Tex. 1982) (“A party who elects to treat
a contract as continuing when an agreement is not followed has waived any action for breach.”).
74
Appellees’ Br. at 9.
75
Id. at 26.
76
Id. at 27–28.
77
The testimony also explains that Cantu Enterprises entered into consulting arrangements
versus time-share agreements because Cantu Enterprises could get more compensation that way.
(2 RR 28–29).
Appellant’s Reply Brief – Page 18
 A certain amount of assets78 – The Comptroller considers Cantu Enterprises’
lack of assets an important fact to establish that this was not a valid resale
transaction. But there is no requirement under § 151.006(a)(1) that Cantu
Enterprises have a certain number of assets for qualify for the exemption.79
These other extra-statutory requirements that the Comptroller imposes are
irrelevant to whether Cantu Enterprises’ purchase meets § 151.006(a)(1)’s
requirements. Overall, the Comptroller points to testimony suggesting various
purposes for Cantu Enterprises’ purchase of the aircraft. However, these stated
purposes sidestep the reality that, under § 151.006(a)(1)’s plain language, Cantu
Enterprises only needs to establish resale as one of the purposes for the aircraft
purchase. Thus, the Court should disregard the Comptroller’s extra-statutory
requirements.
Further, in pointing to testimony reflecting these various ancillary purposes,
the Comptroller glosses over the main purpose for Cantu Enterprises’ aircraft
purchase — to resell it to Cantu Consulting. (See 2 RR 19–20, 22–23 (Bivens); 2
RR 105–08, 166–69 (Cantu); 3 RR 7–9, 4 RR 81–85 (Borrego)).80 Because Cantu
Enterprises purchased the aircraft to resell it, and the evidence established this,81
Cantu Enterprises is entitled to the sale for resale exemption under § 151.006(a)(1).
78
Appellees’ Br. at 7.
79
Mr. Borrego testified that his businesses and assets are structured as separate entities “to
protect his wealth and reduce his liability, his exposure.” (3 RR 8).
80
Appellant’s Br. at 1–11.
81
Id.
Appellant’s Reply Brief – Page 19
III. Cantu Enterprises purchased the aircraft in its normal course of
business.
A. There is no objective standard of “normal course of business.”
“Normal course of business” is tailored to the purchaser’s
business.
The Comptroller asserts that Cantu Enterprises did not act in the normal
course of business by referencing a series of characteristics, such as not making a
profit or entering into the time-share agreement, to show “normal course of
business.”82 But the Comptroller cites no supporting authority, no definition, and
no term of art for “normal course of business” to show that the term includes
characteristics it references.83 But “normal course of business” does not refer to
arbitrary requirements set by the Comptroller.
“Normal course of business” refers to the purchaser’s normal course of
business.84 Notably, the Comptroller does not challenge the Texas authority that
establishes this.85
82
Appellees’ Br. at 27, 29. The Comptroller also relies on actions that it asserts are “material”
breaches of the time-share agreement. Id. at 30. The issue is that there were no material breaches.
Under basic contract law, a party who elects to treat a contract as continuing when an agreement
is not followed has waived any action for breach. Hanks, 644 S.W.2d at 708. Because the parties
continued in their agreement as amended by their actions, there was no breach. The Comptroller
also relies on testimony saying that $600 rental rate was below the fair market value as additional
evidence. But the Comptroller ignores the testimony that states Cantu Consulting was also
required to pay for all operating expenses. (2 RR 90).
83
Appellees’ Br. at 28–29.
84
See Appellant’s Br. at 8–11.
85
See DTWC Corp., 400 S.W.3d at 155; Strayhorn v. Raytheon E-Systems, 101 S.W.3d 558, 567
(Tex. App.—Austin 2003, pet. denied).
Appellant’s Reply Brief – Page 20
Further, the Comptroller did not present evidence or authority to dispute the
evidence that Cantu Enterprises was acting in its normal course of business when it
purchased the aircraft. The evidence conclusively established that the aircraft
purchase and lease agreement structure was tailored to Cantu Enterprises’ business
needs. (2 RR 15–16, 23–28, 14–49). The evidence also showed the gains, benefits,
and advantages achieved by the aircraft purchase (3 RR 32–33) and that, as an
investment, the purchase was a “success.” (3 RR 33). Imposing the Comptroller’s
arbitrary “normal course of business” requirements will re-write the statute under
the guise of interpreting it, which Texas courts are not permitted to do.86
B. The Comptroller is not permitted to question the manner of
Cantu Enterprises’ “normal course of business.”
Further, although the Comptroller cites Day & Zimmerman v. Calvert87 to
assert that the terms of a contract can be examined,88 looking to the terms of a
contract is not at issue here. Instead, the issue is that the Comptroller questions the
manner and conditions of an executed agreement to assert that the resale
exemption does not apply. But Day & Zimmerman established that the manner and
conditions of an agreement are not open for debate.89 Thus, the Comptroller has no
basis for questioning, for example, the parties’ actions under the agreement or how
Cantu Enterprises chooses to conduct its business generally. The fact is “a lease
86
Health Care Servs., 401 S.W.3d at 627 n.8.
87
519 S.W.2d 106, 108 (Tex. 1975). See also Appellant’s Br. at 10–11.
88
Appellees’ Br. at 29.
89
519 S.W.2d at 110.
Appellant’s Reply Brief – Page 21
contract is effective and enforceable according to its terms between the parties,
against purchasers of the goods and against creditors of the parties.”90 Thus, the
Comptroller cannot question Cantu Enterprises’ business dealings or set arbitrary
“business standards” to deny Cantu Enterprises the sale for resale exemption.
C. Cantu Enterprises purchased the aircraft and leased it for
diversification, risk management, and investment purposes — all
of which show economic substance.
The economic substance doctrine does not apply in this case.91 But even if
the doctrine applies, the evidence established that the transaction had economic
substance.92 Cantu Enterprises purchased the aircraft for the purpose of leasing it.93
By purchasing and leasing the aircraft, Cantu Enterprises managed risk, diversified
its business, and produced a long-term investment. (3 RR 8, 13–14, 18–19; 5 RR
13–14). Therefore, the transaction is not a sham as it has independent economic
benefits.94
The Comptroller relies on Frank Lyon Co. v. United States,95 which neither
applies nor changes this result. Unlike the parties in Frank Lyon Co., and contrary
to the Comptroller’s assertions, Cantu Enterprises did not simply “draw up papers”
90
Tex. Bus. and Comm. Code § 2A.301 (emphasis added).
91
See Appellant’s Br. at 16–20. The Tax Code repeals common law when it conflicts with a
statute’s plain language. Tex. Tax. Code § 101.004. The economic substance doctrine is a federal
common law doctrine that has not been adopted in the Tax Code.
92
All the cases cited by the Comptroller are inapplicable because the transaction here, unlike the
cases relied on by the Comptroller, has economic substance. Cf. Appellees’ Br. at 32.
93
See Appellant’s Br. at 5–8.
94
Id. at 16–20.
95
435 U.S. 561, 573 (1978).
Appellant’s Reply Brief – Page 22
with Cantu Consulting. Instead, beyond entering into a valid lease agreement with
Cantu Enterprises, Cantu Consulting made lease payments (2 RR 154), entered into
time-share agreements (2 RR 19), operated the aircraft (2 RR 21), and paid for
operating expenses (3 RR 27). None of these transactions would have occurred if
the parties had merely drawn up papers.
The Comptroller’s assertions about Cantu Enterprises’ reliance on Health
Care Services Corp. also do not apply and do not change the fact that Cantu
Enterprises’ transaction had economic substance.96 As stated in Appellant’s Brief,97
Health Care Services establishes that extra-statutory requirements cannot be
imposed in the name of “economic substance”— as the Comptroller is doing here:
However, we also made clear that if the statute does “not impose,
either explicitly or implicitly,” the “extra-statutory requirement” urged
by the Comptroller, “we decline to engraft one-revising the statute
under the guise of interpreting it.” We did not suggest that, in the
guise of considering the economic realities or essence of the
transaction, courts were authorized to impose an entirely new
requirement for a tax exemption that simply is not found in the
language of the statutory exemption.98
The Comptroller disregards the undisputed evidence showing that the
purchase of the aircraft and resale transaction’s purposes were to manage risk,
diversify assets, and create a long-term investment. (3 RR 8, 13–14, 18–19; 5 RR
96
Appellees’ Br. at 33 (saying Cantu Enterprises asserts that economic realities cannot be
considered, citing Health Care Services Corp.).
97
Appellant’s Br. at 14–16.
98
401 S.W.3d at 627 n.8 (emphasis added). See also Appellant’s Br. at 15.
Appellant’s Reply Brief – Page 23
13–14).99 The Comptroller also cites no authority to establish that entering into an
agreement for these business reasons is not sufficient to establish economic
substance.
Further, even though the Comptroller asserts that this was a “sham
transaction” that was not “arms-length” and the parties did not observe “corporate
formalities,” the Comptroller provides no authority to establish the meaning or
even relevance of these terms. Regardless, these terms or characteristics are not the
test for “purpose.” For example, the Comptroller focuses on the fact that Cantu
Consulting and Cantu Enterprises have similar ownership, but does not once
address why distinct corporate entities with similar ownership cannot enter into a
valid leasing transaction. The fact that the entities are related is irrelevant. Cantu
Consulting is an entity wholly separate from its owner, Cantu Enterprises. Texas
Courts “have never held corporations liable for each other’s obligation merely
because of centralized control, mutual purposes, and shared finances.”100 Under the
Comptroller’s interpretation, all leasing transactions between separate corporate
entities with similar ownership would be “sham transactions.”101 This approach is
99
See also Appellant’s Br. at 14–16.
100
SSP Partners v. Gladstrong Invs. (USA) Corp., 275 S.W.3d 444, 445 (Tex. 2009); Coltec
Indus., Inc. v. United States, 454 F.3d 1340, 1358 (Fed. Cir. 2006) (recognizing that
minimization of liability is a bona fide business purpose).
101
The definition of sham transactions says nothing about related entities entering into a
contract. Black’s Law Dictionary 1585 (10th ed. 2014) (“An agreement or exchange that has no
independent economic benefit or business purpose and is entered into solely to create a tax
Appellant’s Reply Brief – Page 24
obviously unreasonable. In sum, the evidence conclusively proved that Cantu
Enterprises’ lease transaction had economic substance. The Comptroller did not
establish lack of economic substance.
Prayer
Cantu Enterprises asks the Court to reverse the trial court’s denial of the sale
for resale exemption and render judgment that Cantu Enterprises is entitled to a
refund of the amount paid under protest plus statutory interest.
Respectfully submitted,
/s/ Doug Sigel
Mark Eidman
Texas Bar No. 06496500
Mark.Eidman@ryanlawllp.com
Doug Sigel
Texas Bar No. 18347650
Doug.Sigel@ryanlawllp.com
Amy Wills
Texas Bar No. 24093379
Amy.Wills@ryanlawllp.com
Ryan Law Firm, LLP
100 Congress Avenue, Suite 950
Austin, Texas 78701
Telephone: (512) 459-6600
Facsimile: (512) 459-6601
Attorneys for Appellant
advantage (such as a deduction for a business loss). • The Internal Revenue Service is entitled to
ignore the purported tax benefits of a sham transaction.”).
Appellant’s Reply Brief – Page 25
Certificate of Compliance
This computer-generated document created in Microsoft Word complies
with the typeface requirements of Tex. R. App. P. 9.4(e) because it has been
prepared in a conventional typeface no smaller than 14-point for text and 12-point
for footnotes. This document also complies with the word-count limitations of Tex.
R. App. P. 9.4(i), if applicable, because it contains 5906 words, excluding any
parts exempted by Tex. R. App. P. 9.4(i)(1). In making this certificate of
compliance, I am relying on the word count provided by the software used to
prepare the document.
/s/ Doug Sigel
Doug Sigel
Certificate of Service
I certify that a copy of the foregoing Appellant’s Reply Brief was served on
Appellees, Glenn Hegar and Ken Paxton, through counsel of record, Jack
Hohengarten and Shannon Ryman, Office of the Attorney General, P.O. Box 12548,
Austin, Texas, 78711-2548, Jack.Hohengarten@texasattorneygeneral.gov and
Shannon.Ryman@texasattorneygeneral.gov, by electronic service through
efile.txcourts.gov on June 8, 2016.
/s/ Doug Sigel
Doug Sigel
Appellant’s Reply Brief – Page 26
Reporter’s Record Volume 2 Reply Reference
2 RR 14–49
2 RR 15–16
2 RR 19–20
2 RR 21
2 RR 22–23
2 RR 23–28
2 RR 28–29
2 RR 35
2 RR 46–47
2 RR 85
2 RR 90
2 RR 105–08
2 RR 154
2 RR 166–69
14
1 that time.
2 Q. Can you walk us through some of the steps that
3 you worked with Mr. Levy on?
4 A. In putting the structure in place, detailing
5 the structure, why that structure was necessary, and the
6 liability protection it would afford, and also the FAA
7 regulatory issues, and putting the lease agreements in
8 place, and also registering for a Texas sales tax
9 account.
10 Q. Did Enterprises already exist when the aircraft
11 at issue was purchased?
12 A. Yes, it did.
13 Q. Did Enterprises own any previous aircraft?
14 A. Yes, it did.
15 Q. Did Advocate assist Enterprises with its
16 purchase of the first aircraft?
17 A. Yes.
18 Q. And what was the purpose of Enterprises
19 purchasing the second aircraft, the aircraft at issue?
20 MS. SAMS: Objection --
21 A. This aircraft was purchased --
22 THE COURT: Excuse me. Once a lawyer
23 stands we have to stop.
24 MS. SAMS: Objection, foundation,
25 Your Honor.
15
1 THE COURT: You have to establish how she
2 would know what the purpose was from firsthand -- some
3 firsthand basis, not what somebody told her. I'm not
4 sure you'd be able to do that with this witness, but go
5 ahead.
6 Q. (BY MS. GOLDBERG) Did you work with
7 Enterprises when -- prior to Enterprises' purchase of
8 the aircraft, were you involved with assisting
9 Enterprises in its objectives for purchasing the
10 aircraft?
11 A. Yes, I was. I was involved in not only
12 drafting the lease agreements but also directing the
13 request for the resale account with Texas.
14 THE COURT: I'm sorry. You were also
15 involved in -- you were involved in drafting the lease
16 agreements but also what?
17 THE WITNESS: Obtaining the resale account
18 so that the entity could register as a dealer in Texas.
19 THE COURT: Okay.
20 Q. (BY MS. GOLDBERG) Were you involved with
21 planning and putting into place the structure of the
22 aircraft?
23 A. The structure was in a large part in place, but
24 how the aircraft would be used in the structure, I was
25 involved in that part of it and detailing the need for
16
1 the lease agreements, the lease agreements being put in
2 place and the resale account being obtained in the state
3 of Texas.
4 Q. And in that work, did you gain an understanding
5 of Enterprises' purchase -- purpose for purchasing the
6 aircraft?
7 A. Yes.
8 MS. SAMS: Objection, hearsay.
9 THE COURT: I don't know where you're
10 headed, but it sounds like you're going to head to "What
11 did they tell you?" I don't know that you'll be able to
12 do that, and it sounds like that's your sole basis.
13 There may be a time later that you can get it in. I
14 don't know. But I'll let you argue that if and when it
15 comes up. Next question.
16 MS. GOLDBERG: Okay. I'll move on.
17 Q. (BY MS. GOLDBERG) Why did Enterprises seek
18 Advocate's assistance with its purchase of the aircraft
19 at issue?
20 A. One of the --
21 MS. SAMS: Objection, foundation.
22 THE COURT: Why did they seek your
23 assistance; I mean, you'd have to establish how she
24 would know why they came to her.
25 MS. SAMS: And hearsay, Your Honor.
17
1 THE COURT: "What did they ask you to do"
2 might be a different -- "When they came to you, what did
3 they ask you to do?" I doubt you'll get an objection to
4 that because it's not offered to prove that anything's
5 true. It's just offered to prove that that's what they
6 asked you to do. I don't know why it helps me, but
7 we'll see. Next question.
8 Q. (BY MS. GOLDBERG) When clients seek Advocate's
9 assistance with its purchase -- with their purchases of
10 aircraft -- why do clients seek Advocate's assistance
11 with their purchases of aircraft?
12 MS. SAMS: Objection, foundation,
13 Your Honor.
14 THE COURT: Why do people generally come
15 to you? I don't -- I think she knows why they -- why do
16 they say they come to you is not offered to prove that
17 what they say is true; it's just offered to prove why
18 they say they come to her. Again, I don't know how that
19 helps me at all to know why they come to you, but I am
20 kind of curious about your business model, so it will
21 satisfy that curiosity even if it doesn't help me in
22 this case.
23 Why do people generally come to you? Why
24 do they say they come to you? That's your question,
25 right.
18
1 MS. GOLDBERG: That is my question.
2 THE COURT: There you go.
3 A. Again, Advocate deals with a specialized niche
4 of aviation and tax work. Our clients are primarily
5 using an aircraft in the operation of a business. And
6 in that complexity -- or a complexity arises where you
7 have to deal with FAA regulatory compliance. There's
8 also a major influence of liability protection because
9 of the liability that stems from the operation of an
10 aircraft. And then there's federal and state tax
11 compliance requirements that are often complex. And
12 without having someone that are fully aware of those
13 separate regimes and how they work together is difficult
14 for a lot of clients, including major corporations, to
15 avoid those trap falls that may result.
16 THE COURT: And by liability, you mean
17 liability for accidents?
18 THE WITNESS: Yes, sir. Insurance is
19 often obtained, but when you have an accident where it's
20 involving an aircraft, insurance is likely not going to
21 be enough to provide you the liability protection you
22 need.
23 Q. (BY MS. GOLDBERG) Are Advocate's clients
24 sophisticated in terms of aircraft transactions?
25 A. Although they're sophisticated in their own
19
1 business operations, the operation of a business
2 aircraft, particularly the FAA regulatory regime,
3 they're often not sophisticated in at all.
4 Q. And do clients involve Advocate for the purpose
5 of avoiding state sales tax?
6 A. That's not the driving force for clients
7 contacting us. The federal regime is more important for
8 most clients.
9 Q. Can you tell me a little bit about the services
10 Advocate provided with respect to the aircraft at issue?
11 A. Yes. The preparation of a lease agreement that
12 was put in place, formation -- I shouldn't say
13 formation, but registration for the resale account with
14 the state of Texas to be able to collect and remit sales
15 tax, analyzing the use of the aircraft to make sure the
16 business use comports with federal requirements as far
17 as recordkeeping and substantiation were primary matters
18 that were done for this aircraft, as well as the Texas
19 property tax rendition, assistance with that.
20 Q. And can you describe the structure Advocate put
21 in place with respect to the aircraft?
22 A. Yes. Enterprise owns the aircraft and leases
23 it to Cantu Consulting, LLC. Cantu Consulting, LLC in
24 turn uses that aircraft for its consulting services as
25 well as entering into time-share agreements.
20
1 Q. Did Advocate assist with the formation of
2 Consulting?
3 A. Yes, it did.
4 Q. And do you mind if I refer to Cantu Consulting
5 as simply Consulting?
6 A. No, I do not.
7 Q. Can you explain why the structure you just
8 described was used?
9 A. Yes. There's an added level of liability
10 protection first starting with segregating the aircraft
11 into its own entity where it's going to be leased to
12 other entities for operation; and then within
13 Consulting, allowing that use pursuant to consulting
14 arrangements and time-share agreements because it
15 provides that added level of liability protection and
16 privacy for the actual users of the aircraft. You will
17 find that a lot of times entities or competitors will
18 track the movement of an aircraft to get a competitive
19 edge; also for liability purposes, again, segregating
20 that asset because insurance is not going to be enough.
21 And on a secondary note, in litigation people will look
22 for high-value assets for deep pockets and to satisfy
23 the judgment, so there's an added level of segregating
24 the asset for that purpose.
25 Q. And does Consulting own the aircraft at issue?
21
1 A. Consulting does not own the aircraft.
2 Q. Was Consulting the operator of the aircraft?
3 A. It was the operator of the aircraft pursuant to
4 a dry lease agreement that was put in place.
5 Q. Please describe how Enterprises acquired the
6 aircraft at issue.
7 A. It acquired the aircraft as part of a 1031 or
8 like-kind exchange, which, although you purchase the
9 aircraft, it allows you to defer any recognition of gain
10 on the purchase under provisions of the Internal
11 Revenue -- I'm sorry, treasury regulations with the
12 Internal Revenue Code.
13 Q. Okay. So I want to direct your attention to --
14 THE COURT: Excuse me. What was the like
15 kind that they did exchange for the purpose of this --
16 THE WITNESS: The previous aircraft that
17 they owned was transferred for this new aircraft.
18 THE COURT: An equal exchange?
19 THE WITNESS: Not an equal exchange in
20 dollar value. There would be gain on the disposition.
21 But because of the provisions of the code, the gain is
22 deferred until the second aircraft is sold.
23 THE COURT: Thank you.
24 Q. (BY MS. GOLDBERG) I want to direct your
25 attention to the chart that's up on the screen. This is
22
1 for --
2 MS. SAMS: Objection, Your Honor. This is
3 not in evidence.
4 THE COURT: Yeah, don't display anything
5 until you've got it admitted. And you may not care.
6 You can use -- both of you can do demonstrative
7 drawings -- you can even draw airplanes if you want,
8 which you're good at it -- and I'm not going to consider
9 it as evidence. Is that okay? Because you may at
10 different times want to, you know, start drawing and
11 have a witness go through your drawings with you. Is
12 that okay? I won't consider it as evidence until it's
13 admitted.
14 MS. SAMS: Yes, Your Honor.
15 THE COURT: All right.
16 MS. GOLDBERG: Yeah, this is simply a
17 demonstrative.
18 THE COURT: All right. Well, we'll see
19 where you go with it.
20 Q. (BY MS. GOLDBERG) Does this chart that's up on
21 the screen help you explain what Advocate did in setting
22 up the transaction?
23 A. Yes.
24 Q. Can you walk us through the transactions set up
25 by Advocate using the diagram?
23
1 A. Yes. The aircraft in this case was purchased
2 by Enterprises. Enterprises purchased the aircraft for
3 leasing. So the lease agreement was put in place
4 between Enterprises and Consulting, and that's the dry
5 lease agreement. Consulting was formed to provide
6 consulting services to various entities within which
7 Mr. Alonzo Cantu has an interest, whether it be a
8 minority or a larger share, but consulting services were
9 provided towards those entities in exchange for
10 compensation, which was generally expenses. In
11 addition, Consulting entered into time-share agreements
12 with parties that would be using the aircraft for issues
13 that were unrelated to any consulting services provided.
14 Q. Which part of the FAA regulations did
15 Enterprises hold the aircraft for lease under?
16 A. Enterprises holds the aircraft for lease under
17 FAA Part 91, but the actual operation of the aircraft is
18 done by Consulting, and that's also under Part 91.
19 Q. Can you explain a little bit about what Part 91
20 is?
21 A. Part 91, most people associate it with business
22 aviation because it's used by businesses in the
23 operation of the aircraft for their own business
24 purposes. It's distinguished from Part 135, which is
25 charter operations, and Part 121, which is commercial,
24
1 such as Southwest Airlines, where a person is offering
2 the use of an aircraft to a party, pilot and crew
3 services are provided, transportation. Part 91, you
4 can't do any of that. You can't transfer -- transport
5 cargo or persons for compensation.
6 Q. And what are the FAA penalties if an aircraft
7 is operated outside of Part 91 without proper
8 certification?
9 A. It's on a sliding scale. It generally ranges
10 from $1,000 to $10,000 per occurrence, which would mean
11 per flight leg. To the extent there's any type of
12 incident in the aircraft, those fines could actually go
13 into the millions.
14 Q. So were the Texas tax implications a
15 significant reason for the structure that Advocate put
16 in place --
17 THE REPORTER: Excuse me --
18 THE COURT: I'm sorry. She didn't follow
19 you either. We need to slow down our pace just a tad.
20 MS. GOLDBERG: Okay. I apologize.
21 MR. SIGEL: I would ask you to slow down,
22 too.
23 Q. (BY MS. GOLDBERG) Were the Texas state tax
24 implications a significant reason for the structure
25 Advocate put in place for the aircraft?
25
1 A. No. Although tax considerations are going to
2 be considered in any transaction, it's definitely not
3 the driving force behind a particular structure.
4 Q. Earlier you used the term time-share. Can you
5 explain what a time-share is?
6 A. Yes. As I said earlier, Part 91, you're
7 generally prohibited from operating the aircraft by
8 providing transportation services of person or cargo for
9 money, but there is a limited exception within Part 91
10 that allows you to time-share the aircraft. And
11 time-share are for large civil aircraft, which
12 essentially means an aircraft that's more than 12,500
13 pounds. With a time-share agreement, you're allowed to
14 transfer the person or cargo for compensation, but that
15 compensation is very limited. It's generally limited to
16 twice the fuel cost and certain incidental fees such as
17 rent fees or airport fees associated with that
18 particular trip.
19 Q. Are time-share agreements required to be in
20 writing?
21 A. Yes, because it is a large civil aircraft, so
22 an agreement would be required to be in writing.
23 Q. And can you just give us a brief example of how
24 a time-share agreement would work under Part 91?
25 A. Yes. With a time-share agreement, using this
26
1 particular case as an example, Enterprises would lease
2 the aircraft to Consulting. Although Consulting is
3 operating the aircraft pursuant to that lease, the
4 purpose of its use is actually for the needs of the
5 time-sharee. So the time-sharee may say I want to go
6 from Texas to Tampa. They would document the fuel
7 cost -- or the fuel burned for that particular trip and
8 any fees that they incur, and the time-sharee would pay
9 twice that amount of fuel plus those incidental fees, if
10 any. In addition, the time-sharee, because it is
11 considered transportation, is going to have to remit
12 excise tax on that payment.
13 Q. And is a time-sharee permitted to use the plane
14 for non-business personal use?
15 A. Yes, the time-sharee can use the aircraft for
16 any purpose. They're just limited in what type of
17 compensation they can pay to Consulting who is providing
18 the time-share.
19 Q. Why did Advocate set up the time-share
20 agreements as part of the structure?
21 A. The time-share agreements would be for use
22 that's not related to the consulting business of
23 Consulting.
24 Q. And was Consulting set up to generate revenue
25 in a different way other than the time-share agreements?
27
1 A. Yes, through the compensation that were
2 received for the consulting with the various entities.
3 Q. Was the consulting entered into through any
4 kind of arrangement?
5 A. Say that again. I'm sorry.
6 Q. Was there a consulting arrangement for the
7 consulting services?
8 A. There were consulting arrangements with a
9 numerous amount of entities being provided by
10 Consulting.
11 Q. Can you kind of explain what a consulting
12 arrangement is?
13 A. Consulting arrangements in this case and in
14 most cases in general, it's a situation where they're
15 going to be providing some type of management or
16 marketing functions, oftentimes long-term strategic
17 management and marketing, in exchange for compensation.
18 That compensation could be a small monthly fee or some
19 type of flat fee in conjunction with reimbursement of
20 expenses or it could just simply be the reimbursement of
21 expenses in conjunction with all those consulting
22 services you may provide.
23 Q. Are there any FAA limitations on the type of
24 compensation Consulting can receive for these consulting
25 arrangements?
28
1 A. No, the FAA would not govern a consulting
2 arrangement. And to the extent that there's travel in
3 furtherance of the consulting, that is separate and
4 apart from the area that the FAA would regulate.
5 Q. So why would Consulting enter into these
6 consulting arrangements rather than just use time-share
7 agreements?
8 MS. SAMS: Objection, Your Honor,
9 foundation.
10 THE COURT: I don't know how she would
11 establish why they would do it or -- I'm not even sure
12 how it helps me.
13 MS. GOLDBERG: This is, you know -- it
14 goes to --
15 THE COURT: What possible reasons would
16 they have for doing it?
17 MS. GOLDBERG: Yeah --
18 THE COURT: What hypothetically -- you
19 want her to answer what hypothetical possible reasons
20 would they have for doing it?
21 MS. GOLDBERG: Yeah, why would a
22 consulting entity enter -- use a consulting arrangement
23 rather than just simply relying on these time-share
24 agreements. This goes to what she advises her clients
25 to do.
29
1 THE COURT: I'm sorry. This goes to what?
2 MS. GOLDBERG: This is what she advises --
3 Ms. Bivins advises her clients to do.
4 THE COURT: I'll allow her to tell me what
5 possible reasons they would have, but I don't know,
6 again, how that's going to help me. I'll let it go to
7 the weight, if any, that I'll give to it.
8 What possible reasons would they have for
9 doing that?
10 THE WITNESS: The consulting arrangement
11 would allow them to obtain more compensation. Again,
12 the time-share agreements must be written, it's very
13 rigid, and limits the compensation that could be
14 received, which is going to be a major limitation on
15 revenue that can be generated.
16 Q. (BY MS. GOLDBERG) So what possible reason
17 would Consulting have for using these time-share
18 agreements?
19 A. Again, there may be a use for the aircraft
20 that's completely unrelated to the consulting services
21 being provided, and that would allow some revenue to be
22 generated.
23 Q. Does Advocate provide any services for its
24 clients on an ongoing basis after they set up the
25 structure?
30
1 A. Yes, we continue to provide services regarding
2 federal return preparation. That includes both income
3 tax and excise tax, any state property tax matters that
4 may be in place and need to put in additional agreements
5 as circumstances change.
6 THE COURT: Where's your office?
7 THE WITNESS: We have offices in Tampa,
8 Florida and Naples, Florida.
9 THE COURT: Where's your office?
10 THE WITNESS: My office is in Tampa,
11 Florida.
12 Q. (BY MS. GOLDBERG) Does Advocate provide its
13 clients with any forms to fill out on an ongoing basis?
14 A. Yes. Because there's recordkeeping
15 requirements by the Internal Revenue Service, and in
16 most cases where there's going to be a lease agreement
17 there's going to be a need to maintain the flight log,
18 we provide them a blank flight log that meets those
19 substantiation and documentation requirements of both
20 the service and what would be required under the lease.
21 And also, if there is any type of excise
22 tax ramifications, which is going to be in place most
23 times when there's a time-share agreement, we provide
24 them with the worksheet to compute that time-share
25 payment that's going to be due as well as the excise tax
31
1 liability that will be on the time-share agreement.
2 Q. I want to go through some of the plaintiff's
3 exhibits with you. I believe they've been pre-admitted.
4 THE COURT: Nothing has been admitted.
5 MS. GOLDBERG: Oh.
6 THE COURT: But if you wish to stand and
7 offer exhibits you may. It's up to you.
8 MS. GOLDBERG: We would like to offer
9 plaintiff's exhibits, which are Nos. 1 through 21.
10 THE COURT: No. 1 is a stipulation of
11 facts. That's an interesting exhibit, but that's fine
12 with me if you've all vetted these exhibits and you want
13 to admit them. You're offering 1 through 21, all of
14 them on your list?
15 MS. GOLDBERG: Yes.
16 THE COURT: Okay. Any objection to any of
17 plaintiff's exhibits?
18 MS. SAMS: No. We met before. We have no
19 objections.
20 THE COURT: Thank you. That's gracious of
21 all of you. Thank you. 1 through 21 are all admitted.
22 (Plaintiff's Exhibit 1 through 21
23 admitted)
24 MS. GOLDBERG: Thank you.
25 Q. (BY MS. GOLDBERG) Ms. Bivins, will you please
32
1 look at Plaintiff's Exhibit 4, which is Tab 4 in the
2 notebook in front of you.
3 A. Yes, I have it in front of me.
4 Q. What is this document?
5 A. This is the dry lease agreement between
6 Enterprises and Consulting for the lease of the
7 airplane.
8 Q. And did Advocate prepare this lease?
9 A. Yes.
10 Q. Who are the parties to the lease?
11 A. Cantu Enterprises, LLC and Cantu Consulting,
12 LLC as the lessee.
13 Q. Did Advocate accept the lease rate in this
14 lease?
15 A. Yes, we did.
16 THE COURT: When you're referencing Tab 4,
17 I'm assuming, but the record will not assume, that Tab 4
18 is the same as Plaintiff's Exhibit 4. Is it?
19 MS. GOLDBERG: Yes, it is Plaintiff's
20 Exhibit 4 when I'm referencing Tab 4, correct.
21 THE COURT: And I would just for the sake
22 of your record make that clear. Every time you're
23 referencing an exhibit, reference it by exhibit number.
24 MS. GOLDBERG: Thank you.
25 Q. (BY MS. GOLDBERG) Please turn to Plaintiff's
33
1 Exhibit 21, which is Tab 21.
2 A. Yes, I'm there.
3 Q. What is this document?
4 A. This is the time-share agreement between
5 Consulting and Alonzo Cantu.
6 Q. Who is the time-sharor in the agreement?
7 A. The time-sharor is Consulting.
8 Q. And who is the time-sharee?
9 A. Alonzo Cantu.
10 Q. Did Advocate prepare this time-share agreement?
11 A. Yes.
12 Q. Thank you. Please look at Plaintiff's
13 Exhibit 11, which is Tab 11.
14 A. Yes.
15 Q. What is this document?
16 A. Flight log for the aircraft owned by
17 Enterprises.
18 Q. Is the flight log generated by Advocate?
19 A. We provide them the format, the blank
20 document -- in this case it was an Excel spreadsheet;
21 now it's an online tool -- but not the actual entry of
22 the flight data.
23 Q. Who does Advocate provide the form to?
24 A. It's provided to the owner of the aircraft,
25 Enterprises.
34
1 Q. Why does the owner get the form?
2 A. The owner wants to maintain a flight log
3 because it's required by Internal Revenue Code
4 provisions.
5 Q. And where does the information in the form come
6 from?
7 A. It's going to come from the operator of the
8 aircraft, the lessee, Consulting.
9 Q. How often does Enterprises submit the flight
10 logs to Advocate?
11 A. On an annual basis, to compute the rental
12 amounts and also evaluate the business use of the
13 aircraft.
14 Q. On this flight log, who is listed as the
15 aircraft owner?
16 A. Enterprises.
17 Q. Please look at Plaintiff's Exhibit 12, which is
18 Tab 12 in your notebook.
19 A. Yes.
20 Q. What is this document?
21 A. This is the aircraft invoice detailing the
22 rental charges pursuant to the lease agreement that was
23 put in place between Consulting and Enterprises. It
24 documents the rental charge for each flight based on the
25 flight hours and then gives the total revenue for the
35
1 year -- or rental fees that has to be paid over from
2 Consulting to Enterprises.
3 Q. Who prepared this document?
4 A. This document was generated by Advocate based
5 on the information we received in the flight logs.
6 Q. The flight logs such as the ones we just looked
7 at in Exhibit 11?
8 A. Yes.
9 Q. Who is listed as the lessor on the invoice?
10 A. Enterprises.
11 Q. And who is listed as the lessee?
12 A. Consulting.
13 Q. What is the purpose of this aircraft's renting
14 invoice?
15 A. It documents the rental payment that's due to
16 Enterprises pursuant to the lease agreement that they
17 have in place.
18 Q. And if Enterprises and Consulting were not
19 operating under the terms of the lease agreement, would
20 a rental calculation be generated?
21 A. If they were not following the terms of the
22 lease they wouldn't need it.
23 Q. Please look at Plaintiff's Exhibit 13, which is
24 Tab 13 in your notebook.
25 A. Yes.
36
1 Q. What is this document?
2 A. This is the sales tax report which gives the
3 sales tax that's due on the rental payment that's on
4 Exhibit 12.
5 Q. Did Advocate generate this sales tax report?
6 A. Yes. The sales tax report is also generated
7 based on the flight log information that's provided.
8 Q. Can you kind of go through the steps of
9 generating the sales tax report?
10 A. Yes. The flight information once obtained is
11 processed to determine the total number of hours. And
12 that total number of hours based on the rate in the
13 lease is multiplied to determine the rate. And then
14 sales tax is applied to the total rental payment.
15 Q. What is the purpose of the sales tax report?
16 A. The sales tax report details the sales tax that
17 have to be collected from the lessee. Because
18 Enterprises is a registered dealer, it has an obligation
19 to collect the tax and remit it to the comptroller.
20 Q. Thank you. Please look at Plaintiff's
21 Exhibit 20, which is Tab 20 in your notebook.
22 A. Yes.
23 Q. What is this document?
24 A. This is the confirmation from the sales tax
25 filing for the sales and use tax that was remitted by
37
1 Enterprises.
2 Q. Who prepared the sales tax filing?
3 A. Advocate did.
4 Q. And who is the taxpayer on this sales tax
5 return?
6 A. The taxpayer is Enterprises. Again, they're
7 the registered dealer with the State of Texas, so they
8 have a duty to collect and then remit over to the State
9 the tax collected.
10 Q. So one of the things mentioned in the opening
11 statement, which you were not here for, was that there
12 were no paper checks from Consulting to Enterprises.
13 Does that mean that no rent was paid on the rental
14 payments?
15 MS. SAMS: Objection, foundation.
16 THE COURT: Let's not make any statements,
17 especially about what lawyers are saying in opening
18 statement. Let's just ask the witnesses questions about
19 what they know. New question.
20 Q. (BY MS. GOLDBERG) Are paper checks required to
21 show that rent was paid from the lessee to the lessor?
22 A. No. The paper checks themselves is not a
23 reflection of the lease transaction. That's documented
24 by the written lease agreement itself. And then further
25 evidence of that is the flight log being maintained by
38
1 the lessee in accordance with the terms of a rental
2 agreement. Then rent being computed on an annual basis
3 in accordance with the terms of the rental agreement,
4 invoicing being provided, sales tax being computed and
5 provided to the lessee as well, those are documents that
6 evidence a lease transaction. Absence of a check itself
7 does not negate the lease transaction.
8 Q. Is it unusual for related entities to not write
9 checks for such lease payments?
10 MS. SAMS: Objection, Your Honor. Calls
11 for an opinion. This is really getting into the area of
12 expert testimony. She's not being offered as an expert.
13 THE COURT: I think it's really just
14 facts, in her observations is it unusual for them to do
15 it this way. I'll let you cross-examine about this.
16 And again, I don't know how much it's going to help me,
17 but we'll just see.
18 Do you remember the question?
19 THE WITNESS: Yes, sir.
20 THE COURT: Go ahead.
21 THE WITNESS: It is not unusual when it's
22 closely held or related entities.
23 THE REPORTER: Related entities?
24 THE COURT: I'm sorry. I don't think she
25 got your answer. "It is not unusual when it's
39
1 closely" ...
2 THE WITNESS: When it's closely held or
3 related entities, it's not unusual for it to be -- or an
4 absence of a physical check transferring payment.
5 Q. (BY MS. GOLDBERG) When Advocate set up the
6 structure related to the aircraft, did Advocate instruct
7 Enterprises on how to do its accounting?
8 A. No, we did not provide instructions on how to
9 do the accounting.
10 Q. And based on the structure that Advocate set
11 up, how would the federal income tax reporting be
12 handled?
13 A. Consulting is a single member limited liability
14 company. That being the case, for federal income tax
15 purposes it does not file its own return unless it makes
16 a special election to be treated as a corporation. That
17 was not done in this case. So all items of income and
18 expense of both Consulting and Enterprises would be
19 reported on a single return of Enterprises.
20 Q. Is Consulting a disregarded entity for federal
21 income tax purposes?
22 A. Yes, it is a disregarded entity for federal tax
23 purposes.
24 Q. Did Advocate recommend to Enterprises how the
25 tax returns should be prepared?
40
1 A. They were advised on how their tax returns
2 should be prepared. There's really no recommendation
3 absent that election. Their required to file one
4 consolidated return. It does not have the ability to
5 file a separate return.
6 Q. Have you become aware of how the accounting was
7 handled?
8 A. Yes, I have.
9 Q. How was it handled?
10 A. On a consolidated basis in line with the
11 federal income tax reporting.
12 Q. In your experience, do closely-related
13 companies keep separate books?
14 A. When you say separate books, that's kind of a,
15 I guess, misnomer. Do they document their transactions?
16 Yes. They may be in one program where they have
17 separate files for each entity, or it could just be one
18 program and they generate the reports as needed to look
19 at activity of a particular entity.
20 Q. So if closely-related companies keep their
21 books in a single file such as in Quick Books, are they
22 still able to generate the reports they need?
23 MS. SAMS: Objection, leading. I'm going
24 to object to the leading.
25 THE COURT: You don't get to lead the
41
1 witness, as you know. Don't say anything to suggest the
2 answer. Why don't you try a new question.
3 Q. (BY MS. GOLDBERG) Do closely-related companies
4 sometimes keep their books in a single Quick Books file?
5 MS. SAMS: Objection, leading.
6 THE COURT: I think you are suggesting the
7 answer. The open-ended question is "How do they keep
8 their books?" So don't suggest the answer and we won't
9 have a leading problem. Next question.
10 Q. (BY MS. GOLDBERG) Is there anything inherently
11 wrong with keeping a consolidated set of books?
12 A. There is no violation of any federal income tax
13 requirements or even accounting principles. Especially
14 with the electronic or automated accounting functions,
15 Quick Books being one of them, it's easy to generate the
16 reports needed to isolate a single activity, so there is
17 nothing prohibiting consolidated books.
18 Q. Did Advocate have an expectation regarding how
19 revenue would be transferred between the two entities?
20 THE COURT: I'm sorry. Did Advocate have
21 what?
22 MS. GOLDBERG: An expectation regarding
23 how revenue would be transferred between the two
24 entities.
25 MS. SAMS: Objection, leading.
42
1 THE COURT: I'm not sure I understand why
2 it would matter what Advocate's expectation was. The
3 question is -- I'm having trouble making sense of it.
4 Do you want to try a different approach?
5 MS. GOLDBERG: Sure. Advocate set up the
6 structure that should be followed, and the defendants
7 are claiming that the structure -- there is something
8 inherently wrong with how the parties operated under
9 that structure.
10 THE COURT: Well, you're just going to
11 need to ask a question that I understand. I don't
12 really understand the question, so try it again.
13 MS. GOLDBERG: Okay.
14 Q. (BY MS. GOLDBERG) Based on your knowledge of
15 the bookkeeping, do you believe that the structure
16 Advocate set up was followed?
17 A. Yes, I do believe that the structure was
18 followed. Again, this was a disregarded entity for
19 federal income tax purposes. They would be filing a
20 consolidated return based on the books that we received
21 on preparation of those returns. The consolidated
22 federal income tax reporting was reflected in their
23 consolidated accounting books.
24 Q. Please look at Plaintiff's Exhibit 5, which is
25 Tab 5 in your notebook.
43
1 A. And I apologize. I am freezing. Is it okay if
2 I get my jacket?
3 THE COURT: It's certainly okay.
4 MR. SIGEL: Or I'll --
5 THE COURT: Counsel may approach the
6 witness in order to provide her jacket.
7 MR. SIGEL: I'll get it.
8 THE WITNESS: I apologize.
9 MR. SIGEL: I'll approach with the jacket
10 with the Court's permission.
11 A. And was that Exhibit 5? I'm sorry.
12 Q. (BY MS. GOLDBERG) Yes, Tab 5.
13 A. I'm there.
14 Q. What is this document?
15 A. This is one of the accounting records from the
16 consolidated books. It's the sales detail.
17 Q. Can you tell whether the sales were made by
18 Consulting or Enterprises?
19 A. Based on the memo and knowing that Consulting
20 is a disregarded entity of Enterprises, I can tell that
21 this is the record of transactions of Consulting.
22 Q. What about the memo tells you that?
23 A. It denotes that it's consultation service --
24 well, consultation, which is in line with their
25 consulting services.
44
1 Q. Is Consulting required to remit federal excise
2 tax?
3 A. Consulting is required to remit federal excise
4 tax on the revenue that's collected from the time-share
5 agreements.
6 Q. Why is it required to remit federal excise tax
7 on the revenue collected from the time-share agreements?
8 A. Because the time-share agreements are
9 considered a transportation service. So although
10 Consulting is leasing the aircraft and a dry lease is
11 not subject to excise tax, it's then in turn using the
12 aircraft to provide transportation services.
13 THE REPORTER: I'm sorry. I want to make
14 sure I got that. Although Consulting is leasing the
15 aircraft ...
16 THE WITNESS: Although Consulting is
17 leasing the aircraft from Enterprises, that dry lease is
18 not subject to excise tax, but because Consulting is
19 then using the aircraft to provide a transportation
20 service, that is subject to excise tax, the tax on air
21 transportation.
22 Q. (BY MS. GOLDBERG) Does Advocate file the
23 excise tax returns for Consulting?
24 A. Yes.
25 Q. Who is the taxpayer on those tax returns?
45
1 A. On those returns -- again, the disregarded
2 entity is a disregarded entity for most federal tax
3 purposes. That's going to include the filing of the
4 excise tax return. So the taxpayer that's listed is
5 Enterprises although the excise tax and the transaction
6 giving rise to the excise tax is the transaction of
7 Consulting.
8 Q. And what was Advocate's expectation regarding
9 how Consulting and Enterprises would report for federal
10 income tax purposes?
11 MS. SAMS: Objection, relevance.
12 THE COURT: How on earth would this help
13 me what Advocate's expectation was regarding Consulting
14 and Enterprises, how they're going to report for federal
15 income tax purposes? Why do I care what Advocate was
16 expecting to happen? Do you see my --
17 MS. GOLDBERG: Yes.
18 THE COURT: I don't know how that -- how
19 that possibly pertains to the tax issue -- the state tax
20 issue in this case.
21 MS. GOLDBERG: Advocate set up the
22 structure, and we want to establish that the structure
23 was followed and that it was proper for Consulting under
24 that structure not to file its own federal income tax
25 returns. We think the defendants are going to argue
46
1 that the lack of federal income tax returns filed by
2 Consulting is somehow indicative of a collapsed
3 structure between Enterprises and Consulting.
4 THE COURT: Okay. Well, I think I can
5 just hear it and decide whether to give it any weight at
6 all. Your argument at the end of the case is going to
7 be give that zero weight, right, that it doesn't matter,
8 not that you don't believe what she's saying, but it
9 doesn't matter?
10 MS. SAMS: Yes, Your Honor.
11 THE COURT: All right. Go ahead.
12 Q. (BY MS. GOLDBERG) So based on the structure
13 Advocate set up, what was the expectation regarding how
14 Consulting and Enterprises would report for federal
15 income tax purposes?
16 A. Although Consulting is a disregarded entity for
17 tax purposes, otherwise a respected entity for state law
18 purposes, we understood that they would be filing a
19 single return where all items of income and expense for
20 both entities would be on one single return and that
21 would be the return of Enterprises.
22 Q. Please look at Plaintiff's Exhibit 6, Tab 6.
23 A. Yes.
24 Q. What is this document?
25 A. This is the consolidated profit-and-loss
47
1 statement of Enterprises and Consulting.
2 Q. Is there any reason for Consulting to generate
3 its own profit-and-loss statement?
4 A. Absent a need to file a federal income tax
5 return, which it wouldn't do because it's a disregarded
6 entity, there is no need for it to generate a separate
7 profit-and-loss statement.
8 Q. Is there a depreciation deduction listed on the
9 profit-and-loss statement? It might be called
10 depreciation expense.
11 A. Okay. Just a second. Yes, it is. There is a
12 depreciation expense for $1,076,761.
13 Q. Who would take that depreciation deduction?
14 A. Depreciation expense is an expense of
15 Enterprises. And although it's listed as an expense,
16 it's really a deduction that's allowed under the Tax
17 Code. It's not a physical or economic outlay of cash.
18 It's a deduction that's done under a five-year
19 depreciation schedule, which in turn adjusts the basis
20 of the aircraft.
21 Q. And which taxpayer on the tax return would get
22 that depreciation deduction?
23 A. Enterprises.
24 Q. Would the depreciation deduction flow through
25 to anyone else?
48
1 A. It would flow through to the members of
2 Enterprises.
3 Q. Who are the members of Enterprises?
4 A. Alonzo and Yolanda Cantu.
5 Q. And is the depreciation deduction a permanent
6 benefit to Alonzo and Yolanda Cantu?
7 A. No. Upon the sale of the aircraft, that gain
8 is subject to ordinary income tax.
9 Q. Earlier you mentioned that Advocate assisted
10 Enterprises with its property tax rendition. Were you
11 involved with any valuation of the aircraft?
12 A. Yes. Part of the property tax rendition, you
13 not only provide the value of the aircraft, which is
14 what you're reporting to the State, but you're also
15 providing the amount of Texas use.
16 THE COURT: We're going to take a break
17 pretty soon. The court reporter's been going an hour
18 and 45 minutes, we all have, just on this case.
19 MS. GOLDBERG: I have two more questions.
20 THE COURT: All right. Good.
21 Q. (BY MS. GOLDBERG) As part of the analysis for
22 property tax purposes, would you expect there to be a
23 positive cash flow in the first few years of aircraft
24 ownership?
25 A. Definitely not within the first several years
49
1 of ownership.
2 Q. Would there eventually be a positive cash flow?
3 A. Due to the long useful life of aircraft,
4 generally anywhere from 40 to 50 years, you would
5 eventually expect a positive cash flow.
6 MS. GOLDBERG: That's all I have for now.
7 Thank you.
8 THE COURT: You pass the witness?
9 MS. GOLDBERG: I pass the witness.
10 THE COURT: All right. We'll go ahead and
11 do cross-examination after the lunch break. I'm going
12 to resume with you at -- I've got to take care of some
13 other matters. It's 12 till 2:00 now. I'll resume with
14 you at 12 till 2:00, exactly two hours from now. I'll
15 see you then.
16 And you may step down if you wish.
17 MR. SIGEL: May I make a quick inquiry to
18 the Court?
19 THE COURT: What is your inquiry?
20 MR. SIGEL: Well, I'm just wondering, do
21 you envision that this trial will go into Thursday just
22 given our scheduling?
23 THE COURT: Well, I've already explained
24 to you I'm not available tomorrow morning at all because
25 of a medical appointment. And tomorrow afternoon I can
85
1 this time-share agreement, if Alonzo Cantu used the
2 plane, he was only supposed to pay the cost that is
3 reflected under No. 2, correct?
4 A. Correct.
5 Q. And that -- would it be a fair characterization
6 that those are the operating expenses of the aircraft?
7 A. Essentially the operating expenses, yes.
8 Q. So this is a time-share agreement between
9 Alonzo Cantu and Cantu Consulting, right?
10 A. Yes, it is.
11 Q. And Cantu Consulting agrees to operate the
12 plane for Alonzo Cantu, correct?
13 A. Essentially that's what it boils down to,
14 correct.
15 Q. And in return, Alonzo Cantu agrees to pay Cantu
16 Consulting the expenses of operating the plane?
17 A. Correct.
18 Q. And there is no rental or lease rate above
19 those operating expenses?
20 A. It's not permitted to be. This tracks the
21 language of the FAA part that limits the consideration
22 that can be received on a time-share agreement.
23 Q. So the answer is that there's no lease or
24 rental rate contained in this time-share agreement?
25 A. Between Mr. Cantu and Consulting, no, there
90
1 Cantu had zero interest?
2 A. That I would not know.
3 Q. The lease agreement required Cantu Consulting
4 to pay for all of the expenses, correct?
5 A. Correct.
6 Q. And the lease agreement also required Cantu
7 Consulting to pay a 600-dollar-per-hour flight hour rate
8 on top of that, correct?
9 A. Correct.
10 Q. And you previously testified that if a lessee
11 were only paying $600 per flight hour, that would be
12 below fair market value, correct?
13 A. I previously testified to that here?
14 Q. During your deposition.
15 A. Okay. What did I testify to?
16 Q. That if a lessee were not paying operational
17 expenses and were only paying $600 per flight hour, that
18 that would be below fair market value for this plane?
19 A. Yes, I did testify that it wouldn't comport
20 with fair market value rates if they paid that decreased
21 rate without taking on the expenses.
22 Q. And when you communicated with Cantu
23 Enterprises, you generally dealt with Rene Borrego,
24 correct?
25 A. Yes.
105
1 THE COURT: No, he didn't ask you what the
2 purpose is. He just said do you know it. Do you know
3 it or -- I guess you do because now you're telling us
4 what it is. But do just listen to his question and only
5 answer that question.
6 Q. (BY MR. SIGEL) Let me just rephrase it. Are
7 you aware of the purpose of Enterprises in buying the
8 plane at issue?
9 A. Yes.
10 Q. And how are you aware of that purpose?
11 A. It was a business decision to get into the
12 leasing business.
13 Q. Okay. Could you explain the purpose of
14 Enterprises in buying the plane at issue?
15 A. The purpose for me was to make money and have
16 an entity that would pay itself over time and have a
17 paid asset over time, which would be the plane.
18 Q. Okay. Could you sort of explain the business
19 plan that --
20 A. Well -- I'm sorry. Go ahead.
21 Q. No, go ahead.
22 A. It's very simple for me. I was able to borrow
23 money at a very low rate, low down payment. I would
24 lease the plane to different entities and get cash flow,
25 pay off the plane and eventually wind up with
106
1 basically --
2 THE REPORTER: I'm sorry. I need you to
3 slow down.
4 THE WITNESS: I'm sorry.
5 THE REPORTER: Wind up with ...
6 THE WITNESS: What I wanted to do is lease
7 the plane to different entities that I -- and with the
8 cash flow that I got, pay off the plane, the note, and
9 then have an entity with an asset that was paid for.
10 Q. (BY MR. SIGEL) Was this a recourse loan or a
11 non-recourse loan?
12 A. Non-recourse loan for a low interest rate and
13 low down payment.
14 Q. What was the significance of it being a
15 non-recourse loan?
16 A. I'm not responsible for the liability of the --
17 THE REPORTER: Not responsible for ...
18 THE WITNESS: For the loan on a personal
19 level, like personal guaranty.
20 Q. (BY MR. SIGEL) Were you expecting to make a
21 short-term profit in this business?
22 A. No. My expectation would have been to have an
23 asset that was free and clear --
24 THE REPORTER: Excuse me. I think I need
25 to adjust this.
107
1 (The Court gave instructions on
2 the use of microphone)
3 THE COURT: Let's go back to a question.
4 THE REPORTER: I'll repeat the question.
5 "Were you expecting to make a short-term
6 profit in this business?"
7 THE WITNESS: No, it wasn't a short-term
8 profit. It was a long-term profit, long-term being,
9 you know, five to eight years.
10 Q. (BY MR. SIGEL) And are you talking about from
11 the perspective of the actual entity Cantu Enterprises,
12 LLC?
13 A. Yes.
14 Q. Did Enterprises have any other purposes in
15 buying the plane besides those you've just identified?
16 A. No.
17 Q. Did Enterprises want to use the plane?
18 A. No.
19 Q. Now, were you anticipating that you would be a
20 passenger in this plane once it was purchased?
21 A. Not -- every now and then. You know, I didn't
22 buy it for me.
23 Q. Is there a distinction between you riding as
24 passenger in the plane and the objective of --
25 objectives of the entity in Cantu Enterprises, LLC?
108
1 A. Well, the objective, like I said, is to lease
2 it and make money, not necessarily to be on the plane.
3 I fly on the plane probably 25, 30 percent of the time.
4 And when I'm flying, I'm flying with one of the entities
5 that leases it, so I get paid. On a personal level, I
6 fly very little.
7 Q. When you mention that you fly on the plane
8 personally, how many times a year do you fly on the
9 plane personally pursuant to the time-share agreement?
10 A. I would say probably ten times a year.
11 Q. Now, if Enterprises had never bought the plane
12 in question, would you still be able to enjoy the
13 personal benefit of being a passenger on a business
14 aviation jet that you currently enjoy?
15 MR. BOLSON: Objection, leading.
16 THE COURT: Well, I'm not really sure it
17 suggested the answer. It may have, but I'm not really
18 sure that it's that controverted, this particular
19 question. In any event, try not -- from this point
20 forward, don't ask any questions that suggest the
21 answer. Just ask open-ended questions and see where
22 they go.
23 MR. SIGEL: Okay. So are you allowing him
24 to answer this?
25 THE COURT: You may not lead. I'll allow
154
1 correctly?
2 A. Correct, but you didn't -- you didn't follow
3 up. The entities don't use the plane for free. They
4 pay a lease. They pay a lease payment depending on the
5 hours, so it's all cash flow. And so I get cash flow,
6 which is the lease, and I have learned a lot from the
7 plane, and I do have a ranch that I opened. And we
8 talked about earlier -- you asked me about equipment
9 leasing, and I haven't started that yet. And it's all
10 about cash flow.
11 Q. Okay. Would you characterize the most
12 important objective for your purchase of this aircraft
13 to be for your business and basically for the
14 convenience for your business?
15 A. I think the number one is priority is to make
16 money. The way we're going to make money is to lease
17 it. Nobody flies the plane for free.
18 Q. I'm going to have you turn to Page 26. But
19 before I do that, I'm sorry, if you could just turn to
20 25, Line 23. Are you there?
21 A. Yes.
22 Q. Question: "You identified a few objectives in
23 your purchase of the subject aircraft, one of which was
24 convenience. Can you --"
25 And then it comes up and said, "The first
166
1 Q. Okay. So let me read this to you and you tell
2 me why you think that's consistent with your testimony
3 on direct. I'm going to read from Lines 5 through 11.
4 "Okay. Now, Mr. Bolson asked you some
5 questions about your personal objectives with respect to
6 this aircraft, and you talked about convenience and
7 wanting to have a plane available. I guess as a
8 follow-up, what was the objective of Cantu Enterprises,
9 LLC in buying the aircraft?"
10 Answer: "Strictly business leasing."
11 Now, is that consistent or inconsistent
12 with your testimony on direct?
13 A. It's consistent, and I've said that before.
14 Q. Okay. Well, I think that on cross-examination
15 Mr. Bolson questioned you about the convenience and
16 flexibility --
17 THE COURT: Let's go straight to questions
18 because you're speaking an awful lot. Let's go to a
19 question. Go ahead. Since this is your witness.
20 Q. (BY MR. SIGEL) Well, you heard -- you heard
21 Mr. Bolson ask you about the convenience and flexibility
22 of having a plane available, right?
23 A. Right.
24 Q. Do you recall that testimony?
25 A. Yes, sir.
167
1 Q. Is the convenience and flexibility of having a
2 plane available the reason why the entity Cantu
3 Enterprises, LLC purchased the plane at issue?
4 A. No. I mean, I can tell you it's just about
5 cash flow, leasing, like my real estate investments.
6 It's the same thing. That's why I'm looking at
7 equipment leasing now. I think it's an entity that
8 generates cash flow. If you have debt, it'll service
9 the debt. Sometimes it's negative. But as long as you
10 have a good hard asset, like I mentioned my house in the
11 Valley a few times, I can rent it, but I don't rent it
12 to just anybody. When I pay off the mortgage, it's an
13 entity that's -- it's an asset I can sell or continue
14 leasing for cash flow.
15 Q. Well, do you disagree with the suggestion
16 that's been made that this plane was purchased for your
17 personal use and that your personal convenience and
18 flexibility justify the purchase of this plane?
19 MR. BOLSON: Objection, leading.
20 THE COURT: I do think you're suggesting
21 the answer, "Don't you disagree with that?" You're
22 really just speaking and getting him to say yes, I
23 disagree with that. So I do think that suggests the
24 answer. Let's ask more open-ended questions since you
25 cannot lead this witness.
168
1 MR. SIGEL: Well, let me reask it.
2 Q. (BY MR. SIGEL) Have you heard Mr. Bolson's
3 suggestion that this plane was purchased for your
4 personal convenience and flexibility?
5 A. I heard him say that. That is not the fact
6 because I don't fly enough. I don't have time to fly.
7 I'm busy all the time. To me it's a business enterprise
8 that generates cash. And hopefully, if it flies enough,
9 we'll have enough cash flow to service the debt.
10 Q. Well, if you hadn't bought the plane, would you
11 have the same convenience and flexibility without having
12 this plane that this entity owns available to you?
13 MR. BOLSON: Objection, leading.
14 THE COURT: I'm not sure that does suggest
15 the answer, at least not in a way that's obvious to me.
16 Go ahead.
17 A. Initially when we bought the plane, we were
18 looking at cash flow and looking at the pros and cons
19 and thought we might have a negative cash flow. And for
20 convenience I could have bought time-share hours; or I
21 don't know what they call it when you fly with someone
22 else. But we decided I think we can generate enough
23 cash flow from the leasing to pay off the debt. And
24 yes, like I told you earlier, I mentioned last week I
25 had to lease a plane to go to Houston. And a few months
169
1 back I had one for Dallas.
2 THE COURT: A different plane?
3 THE WITNESS: A different plane.
4 Q. (BY MR. SIGEL) Well, is it true that as this
5 plane has been made available to you after it was
6 purchased you've seen convenience and flexibility just
7 as a passenger in it?
8 A. Yes.
9 Q. Was that the reason why the plane was purchased
10 by the entity Cantu Enterprises, LLC or not?
11 A. Yes.
12 Q. Well, you're saying convenience and flexibility
13 was the reason?
14 A. No, no, no. The number one priority was cash
15 flow leasing. I think we're getting confused here. I'm
16 all about cash flow and how are you going to get cash
17 flow for leasing. Now, is it convenient for me to have
18 a house at the island? Well, when I go if it's
19 available I'm going to go because it's a nice place,
20 just like the plane. But I'm not going to go buy
21 something for several million dollars to go use it just
22 every now and then because I want it on demand.
23 THE COURT: Why did you have to lease
24 another plane? You've got me curious now. Was this
25 plane not available?
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7
1 A. Contrast my roles? Well, they're very similar.
2 Mr. Cantu trusts me. I've worked for him for a long
3 time. I have a really good knowledge of the way he does
4 business. And I take care of his -- I take care of
5 his -- I take care of his wealth to make sure that we
6 protect his assets and to make sure that we provide him
7 as much liability protection as we can. That's the
8 primary role.
9 Q. Do you work with him on business plans?
10 A. Yes.
11 Q. What is your role with Consulting? And I mean
12 the entity called Consulting.
13 A. With Cantu Consulting, when we -- when we
14 bought the plane, I'm the one who negotiated the loan.
15 I met with several banks and negotiated a non-recourse
16 loan, which means that Alonzo didn't have any -- he
17 wasn't at risk personally if the loan went bad or
18 anything like that. I consulted with the insurance
19 brokers. I consulted with Advocate with the structure.
20 I looked at the planes, the type of planes, that type of
21 stuff.
22 Q. What was your role in the decision to purchase
23 the plane by Enterprises?
24 A. I guess I'm probably the one who spearheaded
25 that, having talked to some brokers that approached us
8
1 about buying and selling planes to us. We looked at
2 things like range of fuel efficiency, cabin size, going
3 to dual pilots instead of single pilot. The first plane
4 was single pilot. The second plane was dual pilot. I
5 looked at all of those things. But I also looked at the
6 fact that business-wise we could -- we could -- it would
7 cash flow in such a way that Alonzo would have an asset
8 that had value for 30 or 40 years once we finished
9 paying the debt. To me it made sense.
10 Q. Now, did you make a distinction -- excuse me.
11 Did you make a distinction between Enterprises as an LLC
12 and Mr. Cantu as an individual?
13 A. Yes. Alonzo's a very complicated individual.
14 He's a sophisticated investor. And every asset that he
15 has we structure in such a way that they're separate
16 entities. For example, his tax return this year, we'll
17 have 90 K-1s that feed into his return this year. So
18 every asset, we meet with estate planners. We meet with
19 attorneys. We meet with our insurance brokers. We do
20 everything we can so that we're structured in such a way
21 to protect his wealth and reduce his liability, his
22 exposure.
23 Q. We've heard some testimony from Ms. Bivins, and
24 I know you were here for that testimony, but I'd like
25 your factual testimony regarding the role of Advocate
9
1 Consulting.
2 A. You know, we rely heavily on Advocate when it
3 comes to the plane. When we bought the plane -- or when
4 we decided to go into the plane business, the leasing
5 planes, we had no idea how complex it is to own a plane.
6 I thought you could just -- like buying a car, you go on
7 and you go wherever you want. That's not the way it
8 works. The FAA heavily regulates the industry for
9 security reasons and for other reasons. It's very, very
10 complicated and the forms that are used. There's no way
11 that I was ever going to be an expert. There's no way I
12 would want to be an expert. I'm just way too busy to
13 get into that. So I'm very dependent and very reliant
14 on Advocate to consult with us, to make sure that we're
15 in compliance on the tax side, on the legal side with
16 the FAA. You know, they're my go-to people. We
17 wouldn't -- we couldn't operate without them.
18 Q. Who was doing the bookkeeping for Enterprises?
19 A. We outsourced that to the Cantu Construction
20 staff.
21 Q. And who was doing the bookkeeping for
22 Consulting?
23 A. The same staff.
24 Q. Can you give an approximation of how many
25 entities that staff does bookkeeping for?
12
1 return. I don't know if I answered the question.
2 Q. Well, was there any other reason why there
3 wasn't a separate bank account set up for Consulting, or
4 have you stated all the reasons?
5 A. No. Well, we talked to our tax accountants,
6 and when they set up Cantu Consulting, it was a single
7 member LLC. And single member LLCs can't file tax
8 returns. They have to file consolidated returns. And
9 we've had some experience in the past. We had a company
10 called Cantu Management, LLC that was also a single
11 member LLC. And we got a letter from the IRS telling us
12 that we couldn't file single member LLC; we had to file
13 a consolidated return. So we do have some experience
14 with single member LLCs. And knowing that we were going
15 to have to do a consolidated return and for the ease of
16 the bookkeeping process, we -- our books were left in a
17 consolidated form to match what we were going to do for
18 the tax return.
19 Q. Now, on a monthly basis, did Enterprises have
20 access to funds, the payment of the various expenses?
21 A. Enterprises really didn't have a way of
22 generating money. They didn't have any -- other than
23 the leasing payments they got from Cantu Consulting,
24 they had no source of revenues. Cantu Consulting was
25 actually the one who generated the revenue. So that
14
1 A. We created wealth.
2 Q. Okay. So you mentioned several times business
3 plans. Were there any business plans done in connection
4 with the decision to purchase the second plane?
5 A. Definitely. I mean, we looked at it. We
6 thought that it would cash flow. We thought that it was
7 a good investment. As a matter of fact, our situation
8 right now is the plane is worth somewhere north of
9 $5 million. Our debt is probably close to a million
10 dollars or less. So we've created like $4 million in
11 equity since we've had this plane.
12 Q. Well, I think you're kind of jumping ahead with
13 me, you know, which is okay, but I want to focus first
14 on the planning that went into this --
15 A. Sure.
16 Q. -- as opposed to the results that you've
17 achieved. Focusing on the planning that went into this,
18 kind of walk us through what analysis was done before
19 the decision was made to buy the second plane to the
20 extent you haven't already done it.
21 MR. BOLSON: I'm going to object because
22 it calls for a narrative, and it's asked and answered.
23 THE COURT: Do you want to take another
24 stab at it or do you want to have an argument about
25 this?
18
1 It's not easy to buy a plane. I'm not an expert on
2 planes or aviation. I'm not an expert on the aviation
3 industry. So I relied heavily on experts to give me
4 guidance as to what type of plane to buy and what kind
5 of structure to create, whether or not the cash flow
6 will be good, range and things like that. It wasn't a
7 decision we took lightly or I took lightly. It was a
8 decision that we worked at, and it was -- it was a
9 business decision. It was not -- it was something that
10 we put some effort into.
11 Q. (BY MR. SIGEL) Well, I want to phrase this
12 question carefully. I don't want you to tell me what
13 Mr. Cantu told you about the decision. I do want you to
14 tell me what you told Mr. Cantu about the decision to
15 buy the plane.
16 A. I told him I thought it would work out fine.
17 There's always risk in every business. And like any
18 other business, there were some risks in this. But I
19 thought that we could reach our objectives in a safe
20 manner. The plane was going to maintain its value. My
21 recommendation to him was that it was a good investment.
22 In fact, we even -- to this day we're looking at maybe
23 buying other planes. We try real hard to diversify
24 ourselves. We're very heavily in real estate. He has
25 a lot of his wealth in the hospital units. He has a lot
19
1 of wealth in the bank stock. And down in the Valley we
2 don't have a lot of big corporations, so you really have
3 to work hard in creating wealth down there. And so
4 we're trying to diversify a little bit, and this was
5 just one effort. The restaurant was a little bit of
6 diversification. The title company was some
7 diversification. We don't have a huge amount of assets
8 invested there, but it is diversification nonetheless.
9 Q. Did Mr. Cantu to your observation take a role
10 in actually looking at the particular plane before it
11 was purchased?
12 A. I don't think he even saw it until we brought
13 it in the market -- until we bought it.
14 Q. Why do you say that?
15 A. I don't remember him looking at it. I don't
16 remember him going to go visit it. I don't remember --
17 I don't think -- I don't recall that.
18 Q. Let me ask about the pilot arrangements. Could
19 you kind of explain how that worked for both of these
20 planes?
21 A. We had a contract with a company called Garza
22 Flight Services. And Garza Flight Services, they're
23 responsible for hiring pilots, for training pilots, for
24 finding pilots and then providing us pilots when we need
25 them.
22
1 Q. So how did the parties operate before the
2 agreement was physically executed by Mr. Cantu?
3 A. Well, the agreements were already -- they were
4 already agreed upon. We already had the -- I guess you
5 would call them oral agreements in place. We already
6 had stipulations of what was going to happen. We
7 already had the structure in place. Nothing was going
8 to change. No one was going to object to the structure.
9 We were all in agreement with the structure. So it was
10 already in place. I don't know, I guess -- I don't
11 really know -- I'm not a lawyer, so I don't know how you
12 describe it, but I guess it would be oral agreements, I
13 guess. I don't know.
14 Q. Well, who was operating the plane before the
15 lease agreement was executed? Cantu Enterprises or
16 Cantu Consulting?
17 A. Cantu Consulting. Cantu Enterprises wasn't
18 operating it.
19 Q. Was the plane delivered to Cantu Consulting in
20 the same form or condition that it was purchased by
21 Cantu Enterprises?
22 A. That's correct. No modifications were made to
23 the plane.
24 MR. BOLSON: I'm going to object. Sorry
25 for being a little late on that, but I'm going to object
27
1 very easy.
2 Q. Has anyone except the comptroller's office
3 objected to the way the bookkeeping was done?
4 A. Not that I'm aware of.
5 Q. Has the IRS objected?
6 A. Not at all.
7 Q. There's been some testimony that you've heard
8 about whether the lease was followed. Have you heard
9 that testimony?
10 A. Yes.
11 Q. And do you understand that one of the questions
12 that's been raised is whether the operating expenses
13 were ultimately charged to Consulting, correct?
14 A. That's correct.
15 Q. And based on your factual knowledge, was the
16 lease followed or not with respect to the operating
17 expenses?
18 A. In practicality, the money used to pay for the
19 expenses was Cantu Consulting's money. Cantu
20 Enterprises had very limited way to generate income.
21 Cantu Consulting through their consulting business is
22 the one who generated all the revenue. They're the ones
23 who had the clients. So their money was deposited in
24 the account and their money was used to pay the bills.
25 It wasn't Cantu Enterprises' money.
32
1 A. I would -- I would probably want to look at
2 multiple years to tell you specifically.
3 Q. Well, you've got 2010, 2011, 2012. Is that
4 enough for you to give us an assessment at least based
5 on those three years?
6 A. Give me just a moment to look at them.
7 Basically, if you -- it's showing some losses, but a lot
8 of that loss is what they call a paper loss. If you add
9 back the depreciation, cash flow-wise they're probably
10 losing somewhere between -- it was I guess about 3 or
11 400,000 the first few years, and I think it's gotten
12 down to -- if I did the math correctly, down to about
13 250 or 300,000 in the more recent statements.
14 Q. Well, I think that there's been a lot of
15 suggestion that these losses somehow are a negative
16 factor. Do you agree that this is a negative situation
17 or not?
18 MR. BOLSON: Objection, leading.
19 THE COURT: I'll allow this.
20 A. In the big picture, I think that we've
21 accomplished what we wanted to accomplish in this
22 particular business. We have an asset that has a value
23 north of $5 million. Our debt is almost gone. Probably
24 within the next couple years the debt will be gone. The
25 asset will have a useful life of 30 to 40 years. In
33
1 comparison to the way we handle other rental properties,
2 it's a very similar type transaction. It worked out the
3 way we wanted it to.
4 Q. So do you label this as a success or a failure?
5 A. I think it's a success.
6 Q. You mentioned that there was some planning to
7 actually buy a third plane.
8 A. I'm sorry. I didn't hear you.
9 Q. You mentioned earlier -- I believe I heard you
10 say there was some planning to purchase a third plane.
11 What were you referring to there?
12 A. We have been talking with a broker in the last
13 few months about buying another aircraft, increasing the
14 fleet size. In the Valley there's not that many
15 charter -- or aren't that many planes in the Valley. I
16 think that we would have -- with the continuing growth
17 of the companies that we do consult with, with the
18 hospital and the bank, I think that we would have been
19 able to justify -- we would be able to justify buying
20 another plane and increasing our services.
21 Q. Now, if you could look at Plaintiff's
22 Exhibit 12, please. Can you tell us what this document
23 shows?
24 MR. BOLSON: Your Honor, I'm going to
25 object on grounds of lack of foundation. I believe
37
1 Enterprises from the point at which the plane at issue
2 was purchased?
3 A. Yes.
4 Q. And why do you say yes?
5 A. Well, Cantu Consulting, they're the only ones
6 that had a mechanism for generating revenue. Cantu
7 Enterprises had no mechanism for generating revenue
8 other than the lease payments that it got from Cantu
9 Consulting. Cantu Consulting, because of the work they
10 did, because of the consultations they did, they
11 generated revenue that created the funds to make it
12 possible to pay the bills and continue to operate the
13 aircraft.
14 Q. From a liability standpoint, were they run
15 separately or the same -- as the same entity?
16 A. They are separate. Like I mentioned to you
17 earlier, we have dozens of lawyers and estate planning
18 attorneys and accountants that consult with us on a
19 regular basis for making sure that our entities are
20 set up in such a way that they shelter other assets from
21 liability.
22 Q. From a recordkeeping standpoint, were these run
23 as separate entities?
24 A. From a recordkeeping I would say no. We had a
25 consolidated set of books.
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1 Q. I'll refer your attention to Line 10. My
2 question at that time was, "Would it be fair to say that
3 the entities that rented the aircraft were either
4 Mr. Cantu or Mr. Cantu's business entities?"
5 And your answer on that date was, "For the
6 most part, yes."
7 A. That's what it says here.
8 Q. And so your answer today is inconsistent with
9 the answer you provided back then. Would you agree?
10 A. Yes.
11 Q. I believe you indicated that Cantu Construction
12 paid for -- or at least operated this aircraft from time
13 to time; is that right?
14 A. It would probably be less than ten flights.
15 Q. And would Mr. Cantu ever personally pay for
16 those flights?
17 A. I don't know.
18 Q. Do you know if Mr. Cantu ever paid for any of
19 the flights on behalf of the entities that you were
20 billing for those flights?
21 A. I don't believe he -- as a matter of practice,
22 I don't think he does that, no.
23 Q. Could I have you turn to Defendant's
24 Exhibit 14, please.
25 A. Okay.
81
1 It's not offered to prove that what the bank said is
2 true but that they made these interrogations. Let's
3 limit it to that and keep doing.
4 Q. (BY MR. SIGEL) Would you please continue your
5 answer?
6 A. I also got the loan officer in contact with
7 Advocate Consulting, and I believe he also talked to our
8 CPAs. But he did a very -- he did a lot -- he asked
9 a lot of documents from me. I had a lot of conversation
10 with him. He ran spreadsheets for me on the mileage of
11 the plane, the efficiency. He also helped us do some
12 research on the acquisition of the plane as well.
13 Q. You mentioned that the bank evaluated the
14 business plan. What was -- what did you communicate to
15 the bank about the business plan?
16 A. Exactly what our intent was on the use of the
17 bank and what services we planned on providing.
18 Q. Did you express to the bank why Enterprises was
19 buying the plane?
20 A. Yes.
21 Q. And what did you tell the bank officer?
22 A. When we met with -- when I met with the bank
23 officer I expressed to him that we felt like the
24 aircraft would help facilitate our consulting business
25 and that it would help grow our clients' businesses with
82
1 Alonzo being able to attend meetings with them and
2 particularly political meetings in Austin and
3 Washington.
4 Q. Was there a discussion of the leasing
5 structure?
6 A. Yes, there was.
7 Q. And did you explain the role, if any, of the
8 lease in the transaction?
9 A. I did to the best of my ability. But like I
10 mentioned earlier, I'm really not an expert on the exact
11 intricacies of each document and what they do and that
12 type of stuff. So a lot of that information they would
13 have had to have gone to Ms. Blevins [sic] to get.
14 Q. Are you talking about Ms. Bivins with Advocate
15 Consulting?
16 A. Ms. Bivins. I'm sorry. Ms. Bivins, yes.
17 Q. So did you put the bank in touch with
18 Ms. Bivins to discuss the details of the transactions
19 that she testified about earlier?
20 A. Yes.
21 Q. And was there a discussion about the business
22 model being a lease structure with the plane being
23 leased by Enterprises to Consulting?
24 A. Yes, there was.
25 MR. BOLSON: Objection, leading.
83
1 THE COURT: Excuse me. Once a lawyer
2 stands you have to stop.
3 MR. BOLSON: My objection is leading.
4 THE COURT: It was leading. Different
5 question.
6 Q. (BY MR. SIGEL) Did you have any discussion
7 with the bank officer with Wells Fargo about the
8 structure that was going to be used?
9 A. I did.
10 Q. And could you describe what that discussion
11 was?
12 A. I spoke to him about the leasing -- or the
13 consultation services that Cantu Consulting would be
14 providing.
15 Q. And was there a discussion about the lease
16 structure where you discussed that with him or not?
17 A. I myself did not get into that specific part of
18 it. I'm sure that he would have had that conversation,
19 though, with Advocate, not with myself.
20 Q. Well, just to clarify, did you provide the
21 lease agreements to Wells Fargo?
22 A. Yes, I did.
23 Q. Okay. So was that you who provided it or was
24 it Advocate who provided the lease agreements?
25 A. Advocate provided me with all of the
84
1 rough drafts and all the -- I'm sorry, with the
2 documents, and I turned around and forwarded them to
3 them -- I'm sorry, turned around and forwarded them to
4 the bank.
5 Q. Well, just to clarify, are you referring to
6 rough drafts or are you referring to the final
7 documents?
8 A. To the final documents.
9 Q. Okay. So you didn't portray those lease
10 agreements as being rough drafts, did you?
11 A. No.
12 Q. Okay. You mentioned that there were flight
13 logs that were submitted. Are you referring to due
14 diligence that was done before the purchase of the
15 second plane or after the purchase?
16 A. Primarily after. The bank every year will --
17 they make a site visit where they inspect the plane just
18 to make sure the asset's still there, it still exists.
19 And they'll also review our flight logs. They'll meet
20 with me to discuss financial statements. They'll look
21 at our tax returns. Every year we need to update their
22 files on all those documents and things.
23 Q. Did the bank get any information from you or
24 others with respect to the lease payments?
25 A. Yes.
85
1 Q. Did the bank see lease payment calculations?
2 A. Yes. The bank reviewed all of those documents,
3 all the financial records.
4 Q. Well, if you could just -- just so we have a
5 very clear record here, if you could look at Plaintiff's
6 Exhibit No. 11. Is that document, which is the flight
7 log that's been discussed here -- was that provided as
8 part of the post-purchase due diligence?
9 A. When they requested of me the flight logs, I'm
10 not certain that they got these flight logs or the
11 flight logs directly from the pilot, because they
12 communicated with myself and also with the pilot,
13 because the pilot is the person who's in charge of
14 maintaining the records for the aircraft, so he would
15 have the official flight logs. So I'm pretty certain
16 that they would have gotten the official logs and not
17 the summary here that was prepared by Advocate.
18 Q. Are you suggesting, just to clarify, that Wells
19 Fargo was actually speaking with the pilot as part of
20 the post-acquisition due diligence?
21 A. More than likely they did just to get the
22 flight logs, because I didn't have possession of the
23 flight logs. They would have had to have gotten them
24 from them.
25 Q. If you could turn to Plaintiff's Exhibit 12,
Reporter’s Record Volume 5 Reply Reference
5 RR 13
5 RR 13-14
5 RR 19
5 RR 20-21
5 RR 21
5 RR 30
13
1 because we don't -- I don't want to take the risk to
2 lease to somebody that I'm not involved in.
3 Q. Let's talk about that. As I understand it, you
4 only lease to related entities. And -- and when I say
5 'you,' I'm referring to Cantu Enterprises or Cantu
6 Consulting.
7 A. That's correct.
8 Q. Okay. And the reason, as I understand it now,
9 is that you don't want to take on the risk of unrelated
10 third parties damaging the aircraft.
11 A. That and also the liability.
12 Q. And what do you mean by 'the liability'? What
13 are -- what are your concerns with regard to that
14 aspect?
15 A. Basically mostly hearsay, but I've heard about
16 airplane accidents and then you get sued and all kinds
17 of stuff. So one of the things that -- when I
18 considered buying the plane, the person that sold it to
19 us said, 'You need to hire a consultant to keep track of
20 all the compliance that goes along with the FAA and the
21 planes and then get insurance,' and all kinds of stuff.
22 And I felt so concerned about the liability that I --
23 THE REPORTER: I'm sorry. 'And I' ...
24 THE WITNESS: I felt so concerned about
25 the liability that I doubled what they were proposing as
14
1 far as liability insurance. And we also set it up into
2 entities to protect me from any liability, if anything
3 ever happens on the plane or the passengers.
4 Q. Okay. And the -- the two entities that you're
5 referring to, I believe, are Cantu Enterprises and Cantu
6 Consulting; is that correct?
7 A. Yes. Yes, sir.
8 Q. Are there any other of your entities that are
9 tasked with management or the business affairs of the
10 aircraft?
11 A. No.
12 Q. Would it surprise you to learn that the
13 Secretary of State documents indicate that the sole
14 member of Cantu Consulting is Cantu Enterprises?
15 A. No. Again, that goes, in my opinion, for
16 compliance. And that's maybe the recommendation from
17 the consultants, but I -- I don't know.
18 Q. Okay. Do you have any day-to-day operations
19 with Cantu Consulting?
20 A. Not day-to-day.
21 Q. How would you characterize your involvement
22 with Cantu Consulting?
23 A. I want to make sure everything is done right,
24 compliant, and legal.
25 Q. And do you do any of the accounting for Cantu
19
1 aircraft that's the subject of this lawsuit?
2 A. Convenience and flexibility for my companies to
3 grow and to be able to do business quicker.
4 And then also I'm looking at other
5 ventures in leasing. So I think this one I've learned
6 how the leasing process works and then through the --
7 through the -- through the plane, through the airplane,
8 I mentioned a while ago that I just bought a ranch and I
9 want to do some leasing there also.
10 Q. You identified a few objectives in your
11 purchase of the subject aircraft, one of which was
12 convenience. Can you --
13 A. The first one would -- convenience, yes.
14 Q. Okay. Would -- would you characterize that as
15 the -- the most important objective of your purchase for
16 this -- of this aircraft?
17 A. No. My most important would be how important
18 it is for my business. I mean, convenience for me. I
19 can take commercial, but sometimes we have to be in
20 Austin the next morning or this afternoon or -- so
21 that -- that -- and then in the last few years we've
22 opened up branches of the bank in San Antonio. And we
23 want to go to Houston also. So with that into
24 consideration, everything involved, and my only thought
25 was just to make sure we're protected from the liability
20
1 of an accident.
2 Q. And so correct me if I'm wrong, but it sounds
3 to me like you need to be able to use the aircraft on a
4 moment's notice.
5 A. Yes, but that's never happened. I usually like
6 to leave -- give my pilots, you know, a week or more
7 notice because they -- they live in Brownsville.
8 Q. Should the need arise, you would need to have
9 ready access to the aircraft at a moment's notice; is
10 that correct?
11 A. That's correct. The -- the pilots are supposed
12 to be on call; but in all the years we've had a plane,
13 we've never had a situation like that.
14 Q. You referenced flexibility as one of the
15 objectives of your purchase of this aircraft. Can you
16 provide a little bit more detail for the Court about
17 what you mean by 'the flexibility of the aircraft'?
18 A. Well, flexibility on my time and the fact that
19 the plane is available. There's been times that I've
20 had a meeting in Houston and I had to have -- be in
21 Austin or San Antonio in the afternoon. So there's
22 no way I could have flied commercial and do all that.
23 Q. Okay. And do you know when you fly in the
24 aircraft who -- what business is operating that -- that
25 aircraft?
21
1 A. Definitely.
2 Q. Which business would that be?
3 A. Well, there's several businesses. It would be
4 Cantu Construction, the hospital, the bank, the Vipers,
5 Lone Star Litho. And, I don't know, I think that's it.
6 There might be one or two others.
7 Q. Has there ever been an occasion where you
8 needed to use the aircraft but someone in a related
9 business was using it and you then were unable to use
10 the aircraft?
11 A. No, because we really don't fly that much.
12 Q. And would you say that you, Alonzo Cantu, have
13 priority over any other people in your organization that
14 need to have access to the aircraft?
15 A. I would say yes, but I don't -- I don't fly
16 that much. In fact, I -- I personally fly maybe less
17 than 10 percent of the time for personal reasons,
18 personal uses. So my time is scheduled way ahead of
19 time.
20 Q. Okay. And so you do use the aircraft for
21 personal uses; is that correct?
22 A. Yes.
23 Q. What sort of personal uses do you use the
24 aircraft for?
25 A. I go to Houston. I've gone to College Station
30
1 A. Well, whatever entity uses the plane would be
2 my -- I mean, that's normally how it's done because I
3 get the bill. When I use it, they send me a bill; I pay
4 for it.
5 Q. Okay. But as far as compliance with the terms
6 in the contract, you're unfamiliar with that; is that --
7 is that correct?
8 A. Compliance, you mean the amount or --
9 Q. Compliance as in in order to comply with the
10 terms --
11 A. Oh.
12 Q. -- of any agreement.
13 A. That's Rene's responsibility."
14 MR. SIGEL: Page 47, Line 5 through
15 Line 11.
16 Q. "Okay. Now, Mr. Bolson asked you some
17 questions about your personal objectives with respect to
18 these aircraft. And you talked about convenience and
19 wanting to have a plane available. I guess as a
20 follow-up, what was the objective of Cantu Enterprises,
21 LLC in buying the aircraft?
22 A. Strictly business, leasing."
23 MR. SIGEL: That concludes those excerpts.
24 THE COURT: You may step down.
25 MR. CHRISTIAN: Thank you, Your Honor.