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

• Court: Court of Appeals of Texas
• Decided: June 8, 2016
• Docket: 03-15-00516-CV
• Status: Published

Opinion

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

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.

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.

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.

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?

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?

9 Q. Was that the reason why the plane was purchased

10 by the entity Cantu Enterprises, LLC or not?

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? Reporter’s Record Volume 3 Reply Reference

3 RR 7–9 3 RR 8 3 RR 12 3 RR 14 3 RR 18–19 3 RR 22 3 RR 27 3 RR 32–33 3 RR 37

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?

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

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. Reporter’s Record Volume 4 Reply Reference

4 RR 52 4 RR 81–85 52

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?

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?

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

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?

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.