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UNITED STATES COURT OF FEDERAL CLAIMS

STOBIE CREEK INVESTMENTS, LLC., and JFW ENTERPRISES, INC., Plaintiffs, v. UNITED STATES, Defendant.

) ) ) ) ) ) ) ) ) ) )

Docket Nos. 05-748 07-520

Pages: Place: Date:

259 through 513 Chicago, Illinois April 10, 2008

HERITAGE REPORTING CORPORATION Official Reporters 1220 L Street, N.W., Suite 600 Washington, D.C. 20005-4018 (202) 628-4888 [email protected]

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259 IN THE UNITED STATES COURT ) ) ) ) ) ) ) ) ) ) ) OF FEDERAL CLAIMS

STOBIE CREEK INVESTMENTS, LLC., and JFW ENTERPRISES, INC., Plaintiffs, v. UNITED STATES, Defendant.

Docket Nos. 05-748 07-520

Courtroom 2266 Kluczynski Federal Building 230 South Dearborn Street Chicago, Illinois 60604 Thursday, April 10, 2008 The parties met, pursuant to notice of the Court, at 9:27 a.m. BEFORE: HONORABLE CHRISTINE O.C. MILLER Judge

APPEARANCES: For the Plaintiffs: COLLEEN FEENEY, Esquire ROBERT E. KOLEK, Esquire MATT CROWL, Esquire Schiff Hardin, LLP 6600 Sears Tower Chicago, Illinois 60606 312-258-5755 For the Defendant: CORY A. JOHNSON, Esquire STUART D. GIBSON, Esquire U.S. Department of Justice Tax Division P.O. Box 403 Washington, D.C. 20044 202-307-6586 Heritage Reporting Corporation (202) 628-4888

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260 C O N T E N T S WITNESSES: For the Plaintiffs: David Waterman Jeffrey F. Welles 265 392 291 --------------DIRECT CROSS REDIRECT RECROSS VOIR DIRE

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261 E X H I B I T S PLAINTIFFS EXHIBITS: 36 143 154 184 IDENTIFIED 279 265 483 275 RECEIVED 280 266 483 277 DESCRIPTION Transcript of Doc. Opinion Welles notes Assignments of Stock

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262 E X H I B I T S DEFENDANT'S EXHIBITS: 93 112 305 326 327 371 377 453 572 573 574 669 684 715 IDENTIFIED 352 349 337 327 345 318 306 374 350 350 350 323 357 370 RECEIVED 352 349 337 329 345 319 308 374 350 350 350 323 357 370 DESCRIPTION Business record Business record Business record E-mail: Ivsan/Guerin Business records E-mail: Ivsan/Guerin E-mail Document Business records Business records Business records Transaction Checklist Business record Notice 2044

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263 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Judge. MR. GIBSON: THE COURT: Nothing, Your Honor. Mr. Kedem informed me that Ms. matters? MR. CROWL: Nothing by the Plaintiffs, be seated. ALL: Good morning, Your Honor. Are there any preliminary THE CLERK: P R O C E D I N G S (9:27 a.m.) Calling the case of Stobie Creek

Investments, LLC and JFW Enterprises, Incorporated for day two of trial. THE COURT: Good morning, everybody, please

THE COURT:

Feeney raised a matter with respect to the reporter. And I wanted to indicate that if there is a desire upon the Plaintiff's behalf to get a daily transcript then you have to enlist the services of different reporter. The government would have to agree and we'd have to make a formal transition on the record whereby this reporter will be responsible for the record up to a certain point, filing the transcript and associated exhibits. However, those exhibits would not be sent

until the conclusion of the trial. Heritage Reporting Corporation (202) 628-4888

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264 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 you. THE COURT: MR. CROWL: Thank you. And you may proceed. And we'll And then the successor reporter would be responsible thereafter. So there would have to be a

formal changing of the guard, and you would just divide this amount. MR. CROWL: And Judge, it would be our We thought we'd arranged,

request to do daily copy.

and apparently we must have somehow miscommunicated. If this court reporting service can give us daily copy, that's terrific, but if not, we would make a formal request. THE COURT: And you're going to deal with

the reporter about this? MR. CROWL: We certainly will, Judge. Thank

Thank you, Judge.

call Mr. Waterman back to the stand, please. THE COURT: THE WITNESS: THE COURT: Good morning, Mr. Waterman. Good morning. You have what's called a durable

oath, it lasted overnight. THE WITNESS: MR. CROWL: THE COURT: MR. CROWL: Okay, I understand. May I proceed, Judge? Please. Thank you.

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DIRECT - WATERMAN 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q Q DAVID WATERMAN, recalled as a witness herein, having been previously duly sworn, resumed the stand and testified as follows: DIRECT EXAMINATION (Cont'd) BY MR. CROWL: Mr. Waterman, when we finished yesterday

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afternoon you had told the Judge about a conference call that you, Jeff Welles, Donna Guerin, and others were all on discussing 2044. A Q I do. And in that conference call you indicated Do you remember that?

that Donna Guerin had said that they would actually include Jenkens & Gilchrist's analysis of 2044, and why they believed it did not apply to the Welles situation in their opinion? A That's correct. (The document referred to was marked for identification as Plaintiff's Exhibit No. 143.) I want to show you now, please, what I have

marked as Plaintiff's Exhibit 143, and ask you to examine that, please. A What is Exhibit 143?

That's one of their opinions, this one

issued to Jeff Welles. Heritage Reporting Corporation (202) 628-4888

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DIRECT - WATERMAN 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q BY MR. CROWL: Mr. Waterman, would you point out to the received. (The document referred to, previously identified as Honor. THE COURT: Plaintiff's 143 will be Q A Q opinion? A I believe so, yes. MR. CROWL: Exhibit 143. MR. JOHNSON: I have no objection, Your Judge, we offer Plaintiff's Did you receive that opinion? Yes. And is it a fair and accurate copy of that

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Plaintiff's Exhibit No. 143, was received in evidence.)

Judge where in this opinion Jenkens & Gilchrist has discussed the inapplicability of Notice 2004, please? A Well, it's in two places. The first on

page, starting at the bottom of page 5, and continuing on to page 6. Q A And what's the paragraph start? Well, when they get to their 2044 reference, In fact,

it's the last sentence starting on page 5. Heritage Reporting Corporation (202) 628-4888

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DIRECT - WATERMAN 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q on August 11, 2000 the IRS issued Notice 2044. Their conclusion is on the next page, last sentence in that paragraph, while Notice 2044 sets forth the IRS position on such loss generation and

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transactions, the Notice does not change the existing law, which we rely upon herein. Q right? A There is. For a more thorough discussion of And then I guess their's a footnote there,

Notice 2044 see section M, M was the last section, two pages. Q A The last two pages of the opinion? The last two pages of the opinion, and it

sets forth their more detailed analysis. THE COURT: MR. CROWL: Are you going into that? I just wanted to highlight that.

BY MR. CROWL: Is there anything you'd like to discuss with

regard to that, Mr. Waterman? A No, it just confirms the advice they had

given us over the phone. THE COURT: one moment, please. (Pause.) BY MR. CROWL: Heritage Reporting Corporation (202) 628-4888 I'm going to do a quick review,

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DIRECT - WATERMAN 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q

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Now, Mr. Waterman, I want to stay with that Turning to page 2 of the exhibit,

exhibit for a bit.

paragraph number 1, can you tell us what that says, please? A It's a recitation of some facts. Item 1, on

March 24, the contributions of Therma-Tru Stock were made to Stobie Creek. Q On March 31 ---

I just want to start with the first

paragraph, okay? A Q Okay. With regard to the March 24, 2000, do you

know whether that was the actual date that there was the transfer, or the contribution of shares of ThermaTru? A That in fact is incorrect, it took place on

April 14th. Q A And why did it take place on April 14th? It was delayed, it was scheduled for March

24th, it was delayed because the company decided to make a so-called triple A distribution, that is a distribution, it's like a dividend of previously taxed income, it comes out tax-free to the shareholders. They had been making distributions for years and years as an S corp, they did that frequently. it was all set up, the wire transfers, to go to the Heritage Reporting Corporation (202) 628-4888 And

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DIRECT - WATERMAN 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 individuals.

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So it was easier to simply send those to

the individuals and delay the transfer into Stobie Creek rather than adjust all the wire transfer instructions. Q right? A Q Yes, correct. Okay. And are there certain representations So that occurred on April 14th, is that

that are made in this opinion letter? A Q A Q Yes. What page are the representations? It starts on page 7. If you would turn to page 7, please? What

is the first representation? A That the purchase and sale of the options

were entered into for a substantial nontax business reasons. Q What is your understanding, by the way, of

when the options were purchased? A Q March 31. Okay. And this representation that they

were purchased for substantial nontax business reasons, did you believe that representation to be true? A I did. Heritage Reporting Corporation (202) 628-4888

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DIRECT - WATERMAN 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q opinion? A Well, this opinion is dated January 2, we Q Judge. THE COURT: MR. CROWL: Q Okay. MR. JOHNSON: MR. CROWL:

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I'll object to the foundation. And that's where I'm going next,

Establish the foundation first. Okay.

BY MR. CROWL: Why did you believe that to be true? MR. JOHNSON: I have an objection to

foundation as well as the timing of all this, when Mr. Waterman received this and review. THE COURT: Mr. Waterman, he's distanced

himself from evaluation and the investment prospect determination as proposed and that's between Mr. Welles. So you'll have to lay a foundation. MR. CROWL: Okay.

BY MR. CROWL: Mr. Waterman, when did you receive this

received earlier drafts, I think starting in August. Q Okay. And do you know if you got this in

January or in February? A Q I do not. Okay. And the earlier drafts, did they also

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DIRECT - WATERMAN 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 have representations similar to this? A Q I believe so. Okay.

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And based upon your belief one way or

the other with regard to these representations, would that affect whether or not you advised or didn't advise Mr. Welles or the family that they should proceed on their income tax returns? A It did. As I explained yesterday, we knew,

regardless of when this document was received, that there would be a representation to this effect, that was important. And we discussed that with Jeff on many occasions, and that's why he did his diligence in researching the proposed investment and doing his own analysis. Q And the income tax returns were then filed

after receipt of this, is that correct? A Q Yes. Okay. So did you have a belief as to

whether or not this was true? MR. JOHNSON: irrelevance. THE COURT: I'm going to sustain the Objection, foundation,

objection, you haven't laid the foundation. MR. CROWL: Okay. Judge, where I'm trying

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DIRECT - WATERMAN 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 say? A I asked him that on several occasions, and Q to go and --THE COURT: MR. CROWL: foundation. THE COURT: I mean, this witness has, if Yes, but don't tell me. Okay, yes, I will lay further

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you're going to elicit testimony, a percipient basis or having impressions about the investment worthiness of the transaction. And that to the extent that he

said, that he expected Mr. Welles to make an analysis, that's one thing. MR. CROWL: THE COURT: Okay. But to the extent that he has

any opinions based on the nature and extent of the thoroughness, et cetera of that analysis is quite another. MR. CROWL: Very well.

BY MR. CROWL: Did you have any conversations with Mr.

Welles regarding whether the options were purchased for substantial nontax business reasons? A Q I did. Okay. And what did you say, and what did he

he responded that he had talked with representatives Heritage Reporting Corporation (202) 628-4888

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DIRECT - WATERMAN 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 of Deutsche Bank and other investment banks.

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As I said, he lived in, lived still in New York, he was involved in the financial community, he knew people who could assist actually in evaluating this. And he made several inquiries, and he reached the conclusion that this was a reasonable investment with a reasonable expectation of profit. Q Now, the options were purchased by

individuals, or by LLCs? A Q They were purchased by LLCs. And are there any tax consequences to

purchasing them through an LLC? A Q A No. Why not? Because an LLC is a disregarded entity, it It has no income tax, or

kind of speaks for itself. any tax consequence to it. Q in an LLC? A

Are there any advantages to purchasing them

Probably, I mean --MR. JOHNSON: I'm going to have an objection

to foundation as to whether this is opinion evidence or this is factual evidence of discussions with Mr. Welles. THE COURT: I refer to the question he asked

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DIRECT - WATERMAN 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q the witness based on his knowledge of the state tax practice. MR. CROWL: THE COURT: that sense. Yes, Judge. And I'm taking the answer in

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I'm not taking the answer in the sense of

the conversation that occurred with Mr. Welles, because the witnesses understand. MR. CROWL: Okay.

BY MR. CROWL: What's your understanding of advantages for

purchasing an LLC? A Q Some liability protection. The next representation, can you tell us

what that is, please? A The options were contributed to the

partnership, in this case Stobie Creek, for substantial nontax business reasons. Q And did you have an understanding of Stobie

Creek's purpose? A Q A I did. And what was that? Stobie Creek's purpose was to provide a

central spot for management of the family's assets, which were expected to be very large, especially on consummation of the Kenner transaction Heritage Reporting Corporation (202) 628-4888

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DIRECT - WATERMAN 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 184. THE COURT: MR. JOHNSON: Mr. Johnson? Q

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And administration and management of those investments was to be vested essentially in Jeff through a separate entity called North Channel, as manager of Stobie Creek, on behalf of all the family members. Q And was Therma-Tru Stock transferred

actually to Stobie Creek? A Q It was. And in fact did your law firm do the

assignment paperwork? A We did. (The document referred to was marked for identification as Plaintiff's Exhibit No. 184.) I'm going to show you what I've marked as What is Plaintiff's Exhibit

Plaintiff's Exhibit 184. 184? A

These are all the assignments separate from

the certificate, it's a common way of assigning a stock certificate, executed, I believe, by all of the family members transferring stock in. MR. CROWL: We offer Plaintiff's Exhibit

Your Honor, I guess I have an

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DIRECT - WATERMAN 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q objection on foundation and also an issue to raise. These are dated April 14th, our other copies of these have March 24. And I don't know if Mr. Waterman has

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established that he ever saw these or witnessed the signatures. THE COURT: Explained earlier the difference

in the dates, but make that clear. MR. CROWL: Yes.

BY MR. CROWL: Mr. Waterman, were these prepared by

Shumaker, Loop & Kendrick? A Q They were. And are they business records as well as

legal documents relating to this particular assignment? A Q files? A Yes. MR. CROWL: Judge, we offer them and I'll be Yes. Okay. Did these come actually from your

happy, once they're in, to also ask about the date change. MR. JOHNSON: Your Honor, I have no

objection to his point of clarification, these are Bates-stamped JFW, and these come from the Shumaker Heritage Reporting Corporation (202) 628-4888

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DIRECT - WATERMAN 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q BY MR. CROWL: Okay. admitted. (The document referred to, previously identified as files. Mr. Crowl? MR. CROWL:

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I don't know the answer to that,

and I think that would be appropriate for crossexamination, Judge. I think I've laid the foundation

for a business record foundation, and also for the legal document. MR. JOHNSON: point, Your Honor. THE COURT: Plaintiff's 184 will be We have no objection at this

Plaintiff's Exhibit No. 184, was received in evidence.)

And can you explain the question that

Mr. Johnson had raised about the dating on April 14th versus there was a March 24th? I know you talked about

it earlier, but if you'll follow up on that. A We had intended to transfer the stock on At some point, it was decided to pay a

March 24th.

dividend out of their Triple A Account, that it called an Accumulated Adjustments Account. With an S corp,

that means a dividend of income that's already been taxed to the shareholders. Heritage Reporting Corporation (202) 628-4888

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DIRECT - WATERMAN 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

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They paid dividends frequently as an S corp for many, many years, and they had it all set up with wiring instructions to the individual shareholders. And it was easier to delay the contribution of the stock to Stobie than it was to change the wiring instructions that were already in place to pay that dividend to the individuals. mechanics, that's all. Q And, Mr. Waterman, in your experience, is It's purely

there a difference in terms of how you approach transactions if you're dealing with people who are all members of the same family? A Q A Yeah, that would certainly be a difference. How so? Just generally --From what? Just state what your

THE COURT:

practice is dealing with members of the family. THE WITNESS: the question. I'm not sure of the nature of

But obviously, if you're dealing with a

family you're documentation is probably not going to be as formal, and you're not going to be quite as careful with it, so the matter of course. There is a level of trust, I don't know that anything need to be necessarily set forth in writing as far as that goes. So you're documentation is

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DIRECT - WATERMAN 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q Q sometimes just sloppier, sometimes follows events, that sort of thing. BY MR. CROWL: The third representation on page 7 of that Could you take us to

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Jenkens & Gilchrist opinion. that one, please? A Q A Yes.

And tell us what that representation is. That the contribution of the LLC interest to

a separate corporation, they had made an S selection, was made for substantial nontax business reasons. Q And indeed, was there a contribution of the

LLC interest to an S corporation? A There was. (The document referred to was marked for identification as Plaintiff's Exhibit No. 36.) I want to show you what I have marked as

Plaintiff's Exhibit 36, it's a little bit lengthy, it's got several tabs. 36? A I would call this a transcript of What is Plaintiff's Exhibit

documentation relating to the LLC and the S corp that Jeff Welles set up, and some assignments relating to this transaction. Heritage Reporting Corporation (202) 628-4888

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DIRECT - WATERMAN 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q BY MR. CROWL: And if you would just take us to the index Heritage Reporting Corporation (202) 628-4888 Judge. MR. JOHNSON: THE COURT: No objection, Your Honor. Q And did Shumaker, Loop & Kendrick prepare

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these documents? A Q A Yes. Okay. And did they come from the SLK files?

Well, now noticing after Mr. Johnson's

comment, this is marked JFW, I'm sure we have similar files. Q Is it kept in the ordinary course of your

business --A Q A Q records? A Yes. MR. CROWL: We offer Plaintiff's Exhibit 36, Yes. -- as representatives? Yes. Is it the regular practice to keep such

Plaintiff's 36 will be received. (The document referred to, previously identified as Plaintiff's Exhibit No. 36, was received in evidence.)

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DIRECT - WATERMAN 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q 1 as well. BY MR. CROWL: So the index comes at the beginning, and so we have a general sense of the documents in Plaintiff's Exhibit 36. A Q Yes. In particular, what does Tab 1 refer to? See the index?

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And just from the index is fine, I just want to give you a --A Tab 1 refers to the Certificate of Formation

issued by Delaware for JFW Investments, LLC, it's a limited liability company? Q And then if you turn to that certificate, is

it just, what, a couple pages behind the index itself? THE COURT: MR. CROWL: THE WITNESS: No, it's a Tab. Yes, tab. Well, the index is part of Tab

then at least in this, there should be something called the State of Delaware, Office of Secretary of State. A confusing. Q Okay. MR. CROWL: you've got that Tab? Heritage Reporting Corporation (202) 628-4888 I just want to make sure, Judge, It's actually part of Tab 1, a little

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DIRECT - WATERMAN 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q important. BY MR. CROWL: So that is the Delaware Certificate of Q A BY MR. CROWL: Beautiful, thank you. Thank you. THE COURT:

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I want you to know, Mr. Crowl, I

really appreciate all the visual aides, and I occasionally have checked, but I just love looking at the documents. MR. CROWL: I can tell, Judge, and that's

Formation for JFW Investments, LLC, is that correct? A Yes, issued by the Secretary of State of the

State of Delaware. Q Okay. I want to have you talk a little bit

about Tab 4. A

What is Tab 4?

Tab 4 is a similar document issued by the

Secretary of State of Delaware, certifying to the incorporation of JFW Enterprises, Inc. Q A And JFW Enterprises, Inc. is what? That is a corporation owned by Jeff, which

subsequent made an S selection. Q and 12. 11? Heritage Reporting Corporation (202) 628-4888 Then I'd like to take you next to Tabs 11 Let's start with Tab 11 in that. What is Tab

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DIRECT - WATERMAN 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q A I already looked at this document before,

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this is another copy of the assignment, separate from an actual certificate, assignment of, in this case, the nonvoting shares of Therma-Tru held by Jeff to Stobie Creek. Q What's the distinction between, why did you

one for nonvoting separate from voting shares? A shares. Because they're two different blocks of We could have done it the same, but they were

represented by different certificates. Q And where is the assignment of Jeff's voting

Therma-Tru Stock to Stobie Creek? A Q That would be Tab 12 just behind it. Okay. THE COURT: Plaintiff's 184? MR. CROWL: THE WITNESS: MR. CROWL: It is Judge. Yes. Let me check and see if that's Well, is this the same as

the --- Judge, Ms. Feeney correctly points out that the other assignment also includes other family members other than just Jeff. it's in the other one as well. BY MR. CROWL: And then what is Tab 13? Heritage Reporting Corporation (202) 628-4888 So you're correct that

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DIRECT - WATERMAN 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A

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Tab 13 looks to be a schedule to the Stobie

Creek Operating Agreement, or to the Stobie Creek records. Q A Okay. We don't have the Operating Agreement here,

so I don't know when that was finalized. Q A And then what is Tab 14? 14 is the assignment of the LLC interest,

Jeff's LLC interest of the LLC entity, JFW Investments, to the corporation JFW Enterprises, Inc. Q Waterman? A No, I don't know why this particular copy And do you know why that's not dated, Mr.

isn't dated. Q Now, you talked in the representations, You talked about how C indicated

representation C.

there was a contribution of the LLC interest to the S corp for substantial nontax business reasons. A Q A Q Yes. Do you see that as to C? Yes. Were there reasons to contribute an LLC

interest to an S corp? MR. JOHNSON: THE COURT: Objection, foundation. He did raise tax advice between

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DIRECT - WATERMAN 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q them. MR. CROWL: MR. JOHNSON: Yes. I'm sorry.

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My objection, Your

Honor, is whether he actually gave any advice and what the relevance of his opinion about this would be. THE COURT: Well, okay. The question is in

the present tense, and if you're asking if he had occasion to give that advice, make that clear. you're asking him today, make that clear. MR. CROWL: Right. Now if

BY MR. CROWL: I'm going to ask you in a minute about those But did you

nontax business reasons, right.

communicate that there were nontax business reasons to members of the Welles family? A Q reasons? A Several actually. The LLCs at that point To Jeff, yes. Okay. So what were those nontax business

were actually thoroughly new, and people were not very comfortable with the extent of their liability protection, especially a single number LLC. Corporations thought, well, if the corporation was well established that you would have that protection. That doubt, if you will, has continued even Heritage Reporting Corporation (202) 628-4888

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DIRECT - WATERMAN 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 to this day. And now, my understanding, because

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Ohio's in this process, states have been adopting legislation to clarify that, and to state specifically that the liability protection it queries to that of the corporation. But that was not clear at the time.

Stobie Creek was expected to have, a second point, vast assets and lots of activity, making the accounting and reporting for the entity very complicated. By positioning each family's interest in

the investment vehicle through a separate S corp that would facilitate transfers among family members without interfering with the internal workings and accountings of Stobie Creek. desirable thing to do. Third, our estate planners had had success then with obtaining multiple discounts, valuation discounts, for gifting of tiered entities. In other That, we thought, was a

words, stacking entities on top of each other and taking discounts at each level on the value of stock that would be gifted. All of those seemed to present

reasonable reasons to convert this to an S corp from that. In addition, and this will take a little more explanation, there was something specific that we wanted to establish for the Ohio residents, which Heritage Reporting Corporation (202) 628-4888

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DIRECT - WATERMAN 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 included David, Jr., and David, and most importantly David's GRAT, which in combination held about 67 percent of the interest in Stobie. This will take a little explanation. let me take you back to the beginning. In about

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Well,

roughly the middle 1990s, the Internal Revenue Code was changed to permit trusts, all kinds of trusts, to hold S corporation stock. before then. That was always problematic

Certain trusts could, but complex

trusts, let me go back to that. Two basic types of trusts, a complex trust is something that is fundamentally taxed at the trust level multiple beneficiary, spring powers. taxed at the trust level. A simple trust, by contrast, would be a revocable trust, or a grantor trust, that's a pure conduit, it comes right through to the creator or to the beneficiary. By making an ESBT election, any So it's

trust, they were intending, I think, to refer to complex trust, but any trust could hold S corporation stock. One other fact, at that point, Ohio did not tax complex trusts, or trusts that were taxed while at the entity level. There simply was no tax. So Ernst

& Young determined that, and was recommending widely, Heritage Reporting Corporation (202) 628-4888

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DIRECT - WATERMAN 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 election? THE WITNESS: Business Trust. ESBT is Electing Small and was widely used too, putting S corp stock into a revocable trust, a pure conduit, making it an ESBT election, so he could hold the S corp stock. THE COURT: What's that term? What's the

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Then let's say you had a transaction,

like Therma-Tru sale, or any sale. All you need is an S corp, related or unrelated to the asset being sold, held in a trust, a purely revocable trust that could be collapsed at any time, together with the asset to be sold, make an ESBT election, sell the asset, there is no Ohio tax. Then

you revoke the trust, the proceeds go right back to the original owner, and you simply bypassed Ohio tax. It may seem too good to be true. But in

fact it worked until the federal, I think the way it was addressed is the federal regulations governing the election itself was changed at the end of the year 2000 retroactive to January 1 of 2000. So that one of

these grantor trust, or revocable trust could not make that election. Ohio, subsequently, amended this law to tax trusts, too. But for the time being, that was a

device that proved to actually work, they seem like it Heritage Reporting Corporation (202) 628-4888

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DIRECT - WATERMAN 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 shouldn't, but it did. And we wanted the Ohio

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shareholders comprising 67 percent of this investment to take advantage of that in the event the strategy outlined by Jenkens was unsuccessful. Q You mentioned that this was a strategy that

Ernst & Young --A Q A Q Yes. -- was recommending? Yes. Did you have any conversations with members

of the Welles family about that strategy at the time it was being recommended? A Yes, actually Therma-Tru was an audit and And when

tax client of Ernst & Young for many years.

they first developed this technique, if you will, they approached all of their clients, probably nonclients too. It's interesting too, it bears on, I think, this

situation. They approached them under a confidentiality restriction to disclose this idea, and for a very high fee. In other words, they were selling this strategy,

this idea, if you will. And they did sell for many years, eventually it became widely known if you would all, everybody did it, or anybody who knew what they were doing did it. Heritage Reporting Corporation (202) 628-4888

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 thank you. THE COURT: Mr. Johnson, did you want a But they approached the family, because

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Therma-Tru was an S corp, could have sheltered lots of Ohio tax on the income being generated by Therma-Tru in those years, which was a terrific amount of income. Q Did the members of the Welles family choose

to pursue that strategy? A Q A No. Why not? Well, in principle, because in that instance

Ernst & Young was not rendering an opinion as to its viability. They gave them a memorandum, which

basically outlined all the reasons why it might not work, and then were not willing to provide an opinion to that affect. MR. CROWL: THE COURT: MR. CROWL: May I have one moment, Judge? Please. No further questions, Judge,

quick break before cross-examination? MR. JOHNSON: organize, Your Honor. THE COURT: MR. JOHNSON: THE COURT: We'll just wait then. Okay. Take your time. We're off the Just a couple minutes maybe to

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 him? A Q In general terms, yes. Okay. Do you recall when that discussion Q A Q record. (Whereupon, a short recess was taken.) THE COURT: Back on the record.

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CROSS-EXAMINATION BY MR. JOHNSON: Good morning again, Mr. Waterman. Good morning. I wanted to talk to you briefly about And

something Mr. Crowl talked to you about to start. that would be Plaintiff's Exhibit 228, that's the Morgan opinion. yesterday? A Q Welles. A Q Yes. And did you talk about this opinion with Yes. Remember talking about that

And this is the opinion you sent on to Jeff

was with him about this opinion? A Well, at the Vero Beach meeting. I think

primarily at the Vero Beach meeting. Q This is the opinion you sent with the March

6th letter, isn't it? Heritage Reporting Corporation (202) 628-4888

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A Q Correct. Okay. Do you think you talked with him

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about this opinion after the March 6th letter? A I don't know that I talked with him about

this opinion after the March 6th letter. Q Okay. But this is the one you sent with the

March 6th letter? A Q opinion? A Q Yes. Now, this opinion deals with a gentleman I believe so, yeah. And you talked with Mr. Welles about this

named Mr. Larry Morgan? A Q Yes. And you became aware of his transaction when

the structure and the amount of the fee Shumaker, Loop & Kendrick was going to earn was brought to your attention, isn't that right? A Q That is correct. Okay. And you have described that fee as a

success fee. A Q Yes. Okay. And by success fee you mean that's a

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 return, isn't that correct? A Q That's correct. Okay. And in this case, Shumaker earned a

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success fee of $1.3 Million, isn't that correct? A Q I think that's right. Okay. And Jenkens & Gilchrist also got a

sizable fee? A Q Yes. And this transaction involved Deutsche Bank

as well, didn't it? A Q Yes, I think so. Okay. This transaction concerns a treasury

short though. A Q Yes. Now, in addition to Mr. Morgan, Shumaker,

Loop & Kendrick have referred other clients to Jenkens too, didn't they? A Q A Q A Q Yes. Okay. Mr. Kasperzak?

Mrs. Kasperzak. I'm sorry? Mr. Kasperzak was deceased. I'm sorry. THE COURT: Spell the name for the reporter,

please, of the one that is living. Heritage Reporting Corporation (202) 628-4888

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q THE WITNESS: Mr. Johnson, there actually

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was a son Kasperzak too, so there was a male --BY MR. JOHNSON: Okay. I'm sorry, I thought we were talking

about Mr. Kasperzak at your deposition, K-a-z-p-e-ra-k. Sound right? A Q A Q A Q A Q (K-a-s-p-e-r-z-a-k) maybe. Yes, I'm sorry. Sounds right, Kasperzak, yes. Mrs. Kasperzak you referred to Jenkens? Yes. And --And her family. And her family. And they were all

shareholders in what corporation? A Q A Calphalon Corp. And you referred them to Jenkens --Actually, I need to correct this. We did

not refer them to Jenkens, I think that's an important distinction. This was the first, this is the

transaction where we became acquainted with Jenkens and the strategy. Q And that's when Mr. Daugerdas came to firm

and gave a presentation? A Yeah, yes. Heritage Reporting Corporation (202) 628-4888

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q A They were referred ---

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The referral of the family to Mr. Daugerdas

was from their CFO from the company. Q And Shumaker assisted in the implementation

of that transaction, correct? A Q We did some, yes. Okay. And the Kasperzaks were anticipating

selling their stock in Calphalon? A Q That's correct. And so they were doing this transaction

because of an anticipated capital gain on that stock? Was that your understanding? A I assume, I don't know. I don't know, I did

not work on that. Q Okay. How about Mr. Morgan? Mr. Morgan was

anticipating a large capital gain on the sale of his stock in his corporation, correct? A Q correct? MR. CROWL: Judge, I'm going to object to That's my understanding, yes. And that's why he did this transaction,

him speculating as to why someone did a transaction without a foundation. THE COURT: Correct.

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q Q

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Mr. Waterman, did you have an understanding

as to why Mr. Morgan was undertaking this transaction? MR. CROWL: THE WITNESS: Morgan, I never met him. office. (Pause.) BY MR. JOHNSON: Mr. Waterman, I'd like to show you the copy Again, foundation, Judge. Not really, I don't know Mr. He was a client of our Tampa

of your deposition taken on Wednesday, August 1, 2007. You remember that, don't you? A Q A Q there? A Q Yes. And counsel for the Plaintiff was there as I do. I took your deposition in Toledo. You did. And your counsel, Christopher Rizik was

well, right? A Q Yes. Okay. Could you turn to page 39 of your

deposition? THE COURT: Under Rule 613 of Federal Rules

of Evidence it's your choice to have the witness read along, you do not need to show him the deposition. Heritage Reporting Corporation (202) 628-4888

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 ahead. THE WITNESS: Can I clarify? 39. Q MR. JOHNSON:

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I wanted to give Mr. Waterman

a chance to read along if he'd like, to be fair. THE COURT: No, if someone chooses not to, Go ahead.

you may change your mind. BY MR. JOHNSON:

Beginning at line 4, Mr. Waterman, on page

The question, Was he selling some stock or a The answer, Oh, yes. What was he selling?

company?

Answer, his company was called Morgan Tire. A Q company? Yes. Question, and he was a stockholder in that Answer, yes. Question, is it your

recollection that he engaged in the transaction because he was about to sell his stock, or some of his stock at least, in Morgan Tire? Answer, yes. Do you

recall giving those answers, Mr. Waterman? A Well, I'm not surprised I said that. MR. CROWL: Judge, I'm objecting, he's

trying to impeach him based upon what he asked him. THE COURT: MR. JOHNSON: under 801 anyway. THE COURT: He had a poor recollection. Go I'm going to allow the question. I believe it's admissible

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q answers. Q Q BY MR. JOHNSON: No. In addition to Mr. Morgan and Mr.

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Kasperzak --MR. CROWL: I'm sorry, I think the witness

wanted to explain that. THE COURT: Say that you can't answer a

question yes or no, without clarification, give your counsel an option, too late after. goes. BY MR. JOHNSON: In addition, I'm sorry --THE COURT: Counsel is entitled to yes or no It's the way it

If you can't answer the question yes or no

then tell him, and it's his choice whether to take the full explanation. Of course on redirect, your counsel

has been fully primed to get your answers, he'll remember it. Go ahead.

BY MR. JOHNSON: In addition to Mrs. Kasperzak and Mr.

Morgan, did Shumaker, Loop & Kendrick also have a client named Mr. Cooley who engaged in a transaction involving Jenkens? A Yes, same transaction, counsel and

transaction. Q And he was selling Calphalon stock as well? Heritage Reporting Corporation (202) 628-4888

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q Honor. BY MR. JOHNSON: Now, you testified yesterday that you were A Q Yes. And it was your understanding that he was

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anticipating a capital gain on that? A Q Yes. Was it your understanding that he undertook

this transaction that involved Jenkens & Gilchrist and Deutsche Bank because he was anticipating that capital gain? A Q A There again, that would be my assumption. Okay. I really don't know. MR. CROWL: And Judge, again, I'm going to

object, because that would be, again, an assumption. THE COURT: Correct. And his deposition

testimony will have it, unless you want to move on? MR. JOHNSON: I'm going to move on, Your

asked by, I believe David Welles, Jr. and Jeff Welles about tax strategies. A Well, I think what I said is I'm not sure

who actually made the inquiry, but we were meeting with the two of them and David, Sr. Q And this inquiry occurred during the course Heritage Reporting Corporation (202) 628-4888

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 of time when you were assisting with the potential sale of the Therma-Tru stock, the Therma-Tru? A Right at the very beginning of the Kenner

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interest, I believe, yes. Q Okay. And the inquiry you received was

whether you knew of any tax strategies that could reduce the taxes that would be due on the sale or redemption of that stock? A Q That is correct. And in response, you referred them to

Jenkens, and in particular Donna Guerin and Paul Daugerdas? A Q My firm did, yes. Okay. And in that conversation with either

David or Jeff, they didn't ask you about any investment opportunities you might know of related to foreign currency options, correct? A Q A Q A Q A Q No. That's not your specialty? That's not my specialty. Now, you went down to Florida, correct? Correct. And talked about the Jenkens strategy? I did. I'd like to show you an exhibit that was Heritage Reporting Corporation (202) 628-4888

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q admitted yesterday, Plaintiff's Exhibit 111. Mr.

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Waterman, do you recall seeing this packet and this set of materials at the Florida meeting? A Q No. Could I ask you to turn to the page, I think

it's 25, it's the one with the Jenkens & Gilchrist executive summary. THE COURT: Page 24.

BY MR. JOHNSON: 24, sorry. Did you provide a copy of this

to the Welles? A Q Florida? A Q A Q meeting? A I think I saw it the day before my I don't believe so, no. Did you see it at the Florida meeting? I don't believe so, no. Did you see it at any time after the Florida I don't believe so, no. Had you seen this before you went to

deposition with you. Q So prior to your deposition in August of

last year you had never seen this? A Q I don't believe so, no. When you talked to them about the strategy, Heritage Reporting Corporation (202) 628-4888

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 had you reviewed any written materials about the Jenken strategy? A Q Well, written materials? Not necessarily.

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Could you take a look at the paragraph That talks about the purchase of short

numbered one?

and long options, do you see that? And your firm assisted with the implementation of the Jenken strategy for the Welles, is that right? A Q That's correct. And do you recall that they purchased long

and short options? A Q A Q A Q Yes. And Deutsche Bank was involved with that? Yes. They were the counterparty? Yep. And the strategy also involved the creation

of LLCs and S corporations, correct? A Q A Q Yes. And your firm assisted with that? Yes. Okay. Both the LLC and the S corps were

created on March 17th, right? A That's my understanding. Heritage Reporting Corporation (202) 628-4888

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q Welles? A Q A Q That's correct. And one S corp for each of the Welles? That's correct also. Now, you said earlier also that it is your And there was one LLC for each of the

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understanding that the options were contributed to Stobie Creek? A Q That is correct. And that's the step that's listed in

paragraph 3, isn't it? A Q Yes. Okay. And you also talked about, with Mr.

Crowl this morning, the transfer of a Stobie interest, reportedly its transfer of the Stobie interest from the LLCs to the S corps? A Q A Q Yes. Do you recall that? The transfer of the LLC to the S corp, yes. Were the LLCs the initial members of Stobie,

do you know? A Q I believe so, yes. And did they obtain new members at some

point, do you know? A I don't really know who the members are. Heritage Reporting Corporation (202) 628-4888 I

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 think some of the children may be members now, or grandchildren, I should say of Dave and Georgia. Q The transfer that you talked about earlier

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with Mr. Crowl from the LLCs to the S corps, that's the step listed there in paragraph 5, isn't it? A Q Yes, a variant of it I guess. And you understood that the S corps were

created on March 17th for the purpose of subsequently becoming members in Stobie, correct? A I can't testify as to the purpose at that

time, but it's a logical assumption, yes. Q But you understood that to be one of the

steps of the Jenken strategy? A Q I did. Okay. And you understood the creation of

the LLC is to be one of the steps in the Jenken strategy? A Well, I think I said before, I see no

significance to the formation of those LLCs, but. Q formed? A I think I said before the only thing I can Do you know of any reason that they were

think of is a separate liability shield for whatever it's worth. Q Now, at the Florida meeting, I think you Heritage Reporting Corporation (202) 628-4888

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 said yesterday that you mentioned to the Welles that the fee that Jenkens would charge would be quite large, is that correct? A Q A Q A Q Yes. Did you give them any estimate?

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I don't recall if I actually defined it --Did you ---- because I didn't know what it would be. Did you provide any information as to how it

would be set? A I said it is relation to the basis

elevation, yes. Q You told them it would be a percentage of

the basis enhancement, is that right? A Q I believe so, yes. Okay. And that's the basis enhancement that

would be claimed pursuant to the Jenken strategy for the Therma-Tru Stock? A Q That's correct. Okay. It was anticipated that that basis

enhancement would then be used for reporting the gain on the redemption of the Therma-Tru Stock? A Q That's correct. Did you give them an indication as to what

the percentage might be? Heritage Reporting Corporation (202) 628-4888

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q A Q I don't recall specifically, no. Now, yesterday, Mr. Waterman, you told us

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that after the Florida meeting you hadn't really heard anything from the Welles for a while, and then you decided to write the March 6th letter, is that right? A I hadn't heard from them regarding this tax

strategy, yes. Q So you hadn't really heard anything from

them from the time of January 24 until March 6, is that fair to say? A Q That's fair to say, I think, yes. Okay. So on March 6th, or thereabouts, maybe

a day before, you drafted a letter to send to them? A I don't think I started in February. (The document referred to was marked for identification as Defendant's Exhibit No. 377.) Mr. Waterman, I'd like to show you what's And that is a

been marked as Defendant's Exhibit 377. copy of a fax, I'm sorry, an e-mail. back up.

Well, let me

At the bottom there's an e-mail, correct,

from Pat Carpenter? A Q assistant? Heritage Reporting Corporation (202) 628-4888 Yes. And she was your secretary at the time, your

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q A Q people. A Q Yes. Okay.

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And it's addressed to, I believe, 12

Are those colleagues of yours from Shumaker? Yes. Okay. And with this e-mail you were sending

a draft of what eventually became the March 6th letter, correct? A Q Correct. And you got comments from some of these

people, correct? A Q Yes. Let's look again at the March 6th letter that

was marked yesterday as Plaintiff's Exhibit 152. MR. JOHNSON: Your Honor, I'd like to move

for admission of 377, Defendant's Exhibit 377, the email we just looked at. THE COURT: MR. CROWL: Mr. Crowl? Judge, I just want to make sure I'm not sure I assume

that Mr. Waterman actually saw this.

that that foundation laid, that he saw it.

that he did, because it's his secretary, but just need to --THE WITNESS: Well, I assume that I did.

BY MR. JOHNSON: You say you saw it, Mr. Waterman? Heritage Reporting Corporation (202) 628-4888

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q BY MR. JOHNSON: Now, Plaintiff's Exhibit 152, that's your A Q Yes. And you asked your secretary to send it to

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these individuals, didn't you? MR. CROWL: THE COURT: No objection, Judge. The document will be received.

Business records work both ways too. (The document referred to, previously identified as Defendant's Exhibit No. 377, was received in evidence.)

March 6, 2000 letter? A Q Yep. And this was retrieved from your

correspondence file? A Q The Stobie Creek file, yes. Okay. And at the top, you have a banner in

bold and all caps, do you see that? A Q I do. Okay. The last line says, retain this

correspondence in a secure place, do you see that? A Q A I do. Why did you say that? Well, honestly, I think this is standard Heritage Reporting Corporation (202) 628-4888

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 language that we put on something that we want to maintain the privilege of. Q Okay. But you're asking the Welles to

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retain this letter there in that sentence? A Q A In a secure place, I think, yes. Okay. So it doesn't get outside of the family,

which would waive the privilege. Q Okay. And you sent this letter to confirm

the information you had given to the Welles at the Florida meeting? A Q That's correct. And in fact, I think you said yesterday,

that the way you left it at the meeting, or one of the last things you said at the meeting was in response to a question from Virginia Jordan, right? A Q Yes. And you testified yesterday that you recall

saying, if I were you I would do this? A Q Yes. And that's what motivated you to write this

letter, correct? A Well, I think I just wanted to confirm my

advice in general. Q Okay. And in this letter you don't say, do

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 you, if I were you I would do this? A Q No, I don't say that specifically, no. And in fact, on the third page, the last

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full paragraph, you said, I believe we have been clear that we are not recommending that you pursue their proposal, correct? A Q clear. I see that, yes. Okay. And you say, I believe we have been

Are you referring to the Florida meeting as

the prior occasion where you conveyed this information? A Q meeting? A Q A Well, let me --Is that correct, Mr. Waterman? We were recommending that they consider it Recommending that they simply do it Probably all along. Okay. So all along, including the Florida

and evaluate it.

without attending to the profit motive, the profitability of the options, and establishment of the partnership, that would not be wise. Q A Q My question, Mr. -That's -My question, Mr. Waterman, is you say, I Are you referring to the

believe we have been clear.

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Florida meeting as an occasion upon which you convey this information, that being we are not recommending that you pursue their proposal? A Q I suppose so, yes. Okay.

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Are there other occasions subsequent

to the Florida meeting you were referring to here when you say, I believe we have been clear that we are not recommending you pursue their proposal? A I think our advice throughout was this had

merit from the technical standpoint, and they should consider it, provided their comfortable with those representations. Q My question, Mr. Waterman, was what other

occasions, if any, you're referring to in that sentence when you say, I believe we have been clear? A Probably earlier conversations about this,

and we didn't have many conversations. Q So conversations between the Florida meeting

and March 6th? A Q No, I think it would be before that. Okay. So you think before the Florida

meeting you conveyed to them that what you say here, that you are not recommending that they pursue the proposal? A I think I conveyed to them exactly what I Heritage Reporting Corporation (202) 628-4888

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 mean? Q I'm asking you about a template for the it? A questions. Q Also in the letter you referenced the said, and that is, we're recommending that they

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entertain it as long as they're comfortable with those representations. important one. Q But you were not recommending that they do So that's a distinction, but an

I couldn't until I had the answers to those

opinion your sending, that's the Morgan opinion, right? A Q Yep. Okay. And I think you said yesterday that

you expected any opinion to the Welles to be about the same. A Q opinions? A Well, the Morgan opinion. Is that what you Similar, yes. Had you seen any templates for those

opinion that could be adapted for the Welles? A The only opinion I reviewed myself was the

Morgan opinion. Q Okay. Now, again on page 3, Mr. Waterman.

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

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At the bottom, at the end of the last full paragraph, the paragraph we looked at earlier, you state in sum that Shumaker would be unable to issue an opinion, the opinion being offered by J&G, correct? A Yes, because of our own confidentiality

restrictions, yes. Q And you also go on to state in that same

sentence that we have not determined that we would be prepared to issue such an opinion even if permitted under our confidentiality restrictions, correct? A Q Yeah. I explained the yesterday.

So putting aside the confidentiality

restrictions, at this point, Shumaker had not determined that it would be prepared to issue such an opinion, correct? A I had explained yesterday, that was being Our tax lawyers felt we

debated within the office. could give an opinion.

We weren't sure that we were prepared to do that, that we had the manpower, and the expertise, and the depth of talent to do that on an ongoing basis. It was being debated. Q Okay. You don't say in this letter that

that's being debated, do you? A I said we were not determined. Heritage Reporting Corporation (202) 628-4888

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q

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You don't say in this letter that it's being

debated, do you? A I didn't use that word, I said, we have not

determined. Q Okay. And you don't say in this letter that

there are some tax lawyers at Shumaker, Loop & Kendrick who thought an opinion could be issued, do you? A Q Well, I told Jeff that, sure. Mr. Waterman, did you say in this letter

that there were some lawyers at Shumaker, Loop & Kendrick who thought a letter --A Q I didn't say that in this letter, no. Okay. So the documentary evidence in this

letter does not include a reference to any lawyers at Shumaker, Loop & Kendrick who thought it could issue such an opinion, correct? A Q That's correct. Okay. This letter is as of March 6th when

you say that the firm is not determined whether we would be prepared to issue such an opinion. Isn't it true, Mr. Waterman, that even subsequent to March 6th you did not feel that Shumaker had ever acquired the depth of experience and expertise on these matters to determine whether or not Heritage Reporting Corporation (202) 628-4888

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 it could issue such an opinion? A We never reached a conclusion that we had

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the expertise independently to reach our own opinions in a matter such as this. Q And you yourself didn't think you had the

expertise to do so, correct? A Q I did not, no. Okay. And you did not write a letter to the

Welles indicating that Shumaker, Loop & Kendrick now had the expertise and experience to issue such a letter, correct? A Q the fee. No. Also in the March 6th letter you reference And that Shumaker, Loop & Kendrick would

receive a portion of the fee. A We'd be offered a portion, yes. That was

our expectation. Q What was your understanding as to what

portion Shumaker would receive at this point? A I'm not sure that I had an understanding, I I mean, actually, it only happened

think it varied. once before. Q

That would be the Morgan instance.

Now, I think you told us yesterday, Mr.

Waterman, that subsequent to this letter, sometime in March, you learned that Jeff Welles had decided to Heritage Reporting Corporation (202) 628-4888

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 proceed with the transaction. A Q Yes, it looked like he was going to, yes. Okay. And during that time period there The fees

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were negotiations about the fees, correct?

to be paid to Jenkens & Gilchrist and Shumaker, Loop & Kendrick? A Q I think so, yes. And that was negotiated between Jeff Welles

and John Ivsan, is that correct? A I'm not sure exactly how the discussions

took place. Q And Shumaker's original proposal, along with

Jenkens & Gilchrist, was that they would get a fee of four percent, is that correct? A Q I'm not sure I recall that, no. And do you recall that the eventual

agreement was that Jenkens & Gilchrist and Shumaker, Loop & Kendrick would share a fee of 3 percent of the basis enhancement? A Q A Q Yes. I'm sorry? Yes, that is correct. Okay. And do you recall if that was a

reduction from the normal fee on a percentage basis that was charged? Heritage Reporting Corporation (202) 628-4888

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A Q A Q A Q No. You know Mr. Bores, don't you? I don't know what the normal fee was. Okay. You know Stephen Bores?

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I know Steve Bores. Okay. And he was a former employee of

Therma-Tru? A Q A Q Yes. And he was a stockholder at Therma-Tru? Yes. And you called him and offered him the

Jenken strategy as well, didn't you? A But, yes. Q And Mr. Bores implemented the Jenken No, I think he inquired of me about that.

strategy as well, didn't he? A Q He did. He entered into digital options with

Deutsche Bank? A Q He did. And he used that to enhance the basis of his

Therma-Tru Stock, didn't he? A Q He did. And Shumaker, Loop & Kendrick charged Mr.

Bores 2 percent of the basis boost, didn't they? Heritage Reporting Corporation (202) 628-4888

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 them. Q Could you take a look at your deposition Heritage Reporting Corporation (202) 628-4888 Q A Q I don't think I know what we charged him. Do you recall that that, his fee was on a

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percentage basis as well? A Oh, yes. (The document referred to was marked for identification as Defendant's Exhibit No. 371.) Mr. Waterman, I'd like to show you what

we've marked as Defendant's Exhibit 371. A Q A Q A Q Okay. Mr. Waterman, do you have 371? Yes. Have you had a chance to look at it? Yes. Okay. Do you recognize this as a copy of an

e-mail with attachments from Mr. Ivsan to Donna Guerin? A Q Yes. Okay. And the charts that are attached,

you've seen these before, haven't you? A Q A I think so. And you saw these back in 2000? I don't know when I saw them, but I've seen

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Honor. Q line 18. BY MR. JOHNSON: Question, Mr. Waterman, we've marked as again, Mr. Waterman, page 168? bottom -MR. JOHNSON: Your Honor, I'm on page 168, You'll see at the

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Exhibit 10 a document Bates-stamped IRSGAG 862 through 867, you're welcome to page through that, have you seen this before, any of its pages? Answer, I've seen Question, did

this, or something similar to it, yes. you see this back in 2000?

Answer, I believe so.

Remember giving those answers, Mr. Waterman,? A Yes. I think that evidence is some

uncertainty. Q Okay. Now, looking at the second page. You're moving it in? Yes, I'm sorry, yes, Your

THE COURT: MR. JOHNSON:

At this point, I'd like to move for admission

of Defendant's 371. MR. CROWL: THE COURT: No objection. It may be admitted. (The document referred to, previously identified as Defendant's Exhibit No. 371, was received in evidence.) Heritage Reporting Corporation (202) 628-4888

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WATERMAN - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that. Q Have you had conversations with her Q BY MR. JOHNSON: Now, as we mentioned earlier, this is an

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e-mail from Mr. Ivsan to Ms. Guerin.

And I think you

said yesterday that Mr. Ivsan was the conduit, I think was your term, to Jenkens & Gilchrist? A Q From the Toledo office at least