[PUBLISH]

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

________________________

No. 17-14573

________________________

Agency No. 010181-08 

CURTIS INVESTMENT COMPANY, LLC, 

 

 Plaintiff - Appellant,

versus

COMMISSIONER OF INTERNAL REVENUE, 

 Defendant - Appellee.

________________________

Petition for Review of a Decision of the 

U.S. Tax Court

________________________

(December 6, 2018)

Before WILSON and JORDAN, Circuit Judges, and GRAHAM,∗ District Judge.

WILSON, Circuit Judge:

In 2000, Curtis Investment Company (CIC) entered into a tax avoidance 

scheme known as a CARDS transaction, allowing it to claim a $27,724,620 capital 

 ∗ Honorable James L. Graham, United States District Judge for the Southern District of Ohio, 

sitting by designation.

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loss on its annual tax return. In 2007, the Internal Revenue Service (IRS) 

Commissioner issued a Final Partnership Administrative Adjustment (FPAA) 

disallowing CIC’s claimed capital loss and fee deductions on its 2000 tax return. 

The IRS also applied a gross valuation misstatement penalty under 26 U.S.C. 

§§ 6662 and 6664. CIC challenged the FPAA and penalties in Tax Court; the court 

upheld both. CIC now contends that the Tax Court erred by incorrectly applying 

the “economic substance” analysis and ignoring facts that supported CIC’s 

reasonable cause defense. After review and with the benefit of oral argument, we 

affirm the Tax Court’s determinations. 

I. Factual and Procedural Background

A. CARDS Basics

A Custom Adjustable Rate Debt Structure (CARDS) transaction is a taxavoidance scheme involving a series of pre-arranged steps whereby (1) a taxindifferent party not subject to U.S. taxation borrows foreign currency from a 

foreign bank, with interest due annually and principal due in a single “balloon” 

payment 30 years in the future, (2) a U.S. taxpayer purchases a small percentage of 

the loan proceeds—in the form of foreign currency or the bank’s promissory 

note—in exchange for taking on joint liability for the entire loan, and (3) the U.S. 

taxpayer then exchanges the purchased foreign currency for U.S. dollars or 

redeems the promissory note. Currency exchanges and promissory note 

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redemptions are taxable occurrences. The U.S. taxpayer claims that its tax basis in 

the exchanged currency or redeemed note is the full amount of the loan proceeds, 

not just the small percentage it actually paid for. 

Section 1012 of the Internal Revenue Code provides that a taxpayer’s basis 

in property is generally equal to its “cost” of acquiring the property, including any 

assumption of a seller’s liabilities. This rule is premised on the expectation that 

buyers will fully pay the assumed liabilities. See Comm’r v. Tufts, 461 U.S. 300, 

308–09, 103 S. Ct. 1826, 1831–32 (1983). In a CARDS transaction, the U.S. 

taxpayer is nominally responsible for payment of the entire principal amount of the 

tax-indifferent party’s loan and thus can claim the entire amount as its basis. In 

these transactions, however, banks always “call” such loans after about one year, 

when a large percentage of the tax-indifferent party’s loan proceeds are available to 

pay the loan at that time. Thus, the U.S. taxpayer is responsible for only slightly 

more than its small share of the loan proceeds rather than the entire loan amount 

but can still claim a large, artificially inflated tax loss to shelter unrelated income. 

In August 2000, the IRS issued Notice 2000-44, warning taxpayers about 

generating artificial losses from schemes that purported to inflate their basis in 

assets. I.R.S. Notice 2000-44, 2000-2 C.B. 255. In March 2002, the IRS issued 

another notice that more specifically targeted the technical argument underlying 

CARDS transactions and imposed disclosure obligations on CARDS shelters’ 

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promoters and participants. See I.R.S. Notice 2002-21, 2002-1 C.B. 730. In 2005, 

the IRS offered a settlement initiative whereby taxpayers could avoid litigation and 

liability for a gross valuation misstatement penalty by conceding the claimed tax 

benefits from their CARDS shelters and paying a reduced penalty. See I.R.S. 

Announcement 2005-80, 2005-2 C.B. 967. 

B. CIC’s Background

Curtis Investment Company (CIC) is an investment holding company 

formed by Henry Curtis for the benefit of his family. Lonnie Baxter was named 

CIC’s managing partner in 1986.1

 Prior to 1995, Baxter made CIC’s investment 

decisions with assistance from private money managers. In 1995, CIC hired Eric 

Zimmerman as an internal investment advisor. CIC alleges that, since 1997, it has 

also relied upon business experts including Matt Levin, Barbara Coats, and others 

at Windham Brannon (Windham), as well as Thomas Rogers and his firm, Rogers 

& Watkins, for tax and business advice. 

In 1998, Henry “Jay” Bird—son of Lonnie Baxter and president of a 

mortgage company called Birdhouse Mortgages—became managing partner of 

CIC. Bird formed an Investment Committee that, along with Zimmerman, created 

an asset-allocation plan for CIC. CIC planned to diversify its portfolio, borrowing 

 1 Lonnie Baxter and her husband, Guy, individually participated in a CARDS scheme as well; 

their tax deficiency case was consolidated with CIC’s in Tax Court. The Baxters are appealing 

their case in the Fourth Circuit. Baxter v. Comm’r, No. 17-2402 (4th Cir. filed Dec. 7, 2017). 

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funds at a low interest rate to make investments that would yield returns greater 

than the interest cost. 

CIC’s principal asset prior to February 2000 consisted of stock in American 

Business Products (ABP). ABP was sold via stock sale in February 2000, 

generating a $27–28 million capital gain for CIC. CIC’s accountants estimated 

that CIC’s partners would owe approximately $7 million in taxes on the gain 

realized on the ABP stock sale. 

C. CIC’s CARDS Transaction

In the fall of 2000, Barbara Coats of Windham learned about CARDS 

transactions from Roy Hahn, founder of Chenery Associates, Inc. (Chenery).2

 

After advisors from Windham met with Hahn, he presented a CARDS transaction 

proposal to Henry Bird and CIC. The transaction would involve a 30-year €35.3 

million loan from HVB, a foreign bank,3 to Brondesbury Financial Trading, LLC

(Brondesbury), a foreign tax-indifferent entity.4

 The loan included a €5.295 

million promissory note; CIC would purchase this note and assume joint and 

several liability on the full €35.3 million loan. Brondesbury would hold the 

 2 Chenery was a San Francisco-based investment firm that developed and marketed CARDS 

plans. 

3 HVB stands for HVB Structured Finance, Inc., a subsidiary of Bayerische Hypo-Und 

Vereinbank, AG. HVB was the bank that provided the loan in this CARDS transaction. 

4 Brondesbury was formed on December 11, 2000, and consisted of two British residents.

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residual €30 million in a HVB deposit account to pay interest, making CIC’s 

€5.295 million note interest-free. 

CIC contends that its advisors investigated the proposed transaction and 

parties involved. CIC negotiated loan terms and refused to proceed with the 

transaction unless it could invest its interest-free loan proceeds in other investment 

opportunities. CIC allegedly relied on Rogers & Watkins and Windham to 

independently analyze the tax consequences of CARDS transactions. These

advisors studied a draft opinion letter from Brown & Wood (B&W), a New York 

law firm, which suggested that it was “more likely than not” that CARDS 

transactions had economic substance. While Chenery said that CIC’s tax benefits 

resulting from the CARDS transaction would be permanent, CIC alleges that its 

advisors at Windham said its taxes would be spread, not eliminated. In December 

2000, CIC’s Investment Committee approved a “Capital Leverage” plan including 

the CARDS transaction. 

HVB deposited 85% of the €35.3 million loan proceeds into a one-year time 

deposit at HVB, and disbursed the remainder in the form of a one-year €5.592 

million promissory note payable to Brondesbury. CIC purchased the €5.592 

million note from Brondesbury and, in exchange, took on joint and several liability 

for 100% of Brondesbury’s €35.3 million debt to HVB. CIC agreed to comply 

with the HVB/Brondesbury credit agreement and to provide a $6.7 million letter of 

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credit from Canadian Imperial Bank of Commerce (CIBC) in favor of HVB as 

substitute collateral in place of the HVB note.5

 In December 2000, CIC entered 

into a one-year forward contract with HVB which would allow CIC to convert U.S. 

dollars into euros on December 14, 2001 at a specified rate: 0.9402 dollar-to-euro.6

Brondesbury’s collateral—the €30.005 million time deposit— was the first 

source of payment for all obligations to HVB under the credit agreement. CIC 

alleges that HVB confirmed that the €35.3 million loan would last for 30 years, 

until December 14, 2030.7

 If the credit agreement remained in place, 

Brondesbury’s collateral would decrease over time due to net outflows of interest, 

and CIC would have to increase the CIBC line of credit. If the loan lasted for 30 

years, CIC would pay interest directly to HVB for the last four years of the term.

After purchasing the €5.592 million note from Brondesbury, CIC redeemed 

the note and directed HVB to exchange it for $4,892,580, which CIC deposited 

into a CIBC interest-bearing account. CIC allocated the proceeds among its 

chosen asset managers six weeks later, at the next Investment Committee meeting 

on February 15, 2001. 

 5 This letter of credit was to terminate on December 27, 2001. 

6 Forward contracts allow parties to exchange an asset at a specified time for a specified amount. 

7 Although the agreement’s expiration date was December 14, 2030, provisions of the agreement 

and related financial instruments had one-year terms, and Brondesbury’s 85% collateral was kept 

in a one-year time deposit. 

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CIC paid Chenery $1,938,465 for its CARDS plan and paid CIBC $241,000 

in upfront fees for its letter of credit. CIC’s payment to Chenery included indirect 

payments to Brondesbury and HVB, as well as an indirect payment of $50,000 to 

B&W for an opinion letter regarding the legality of CARDS plans.

8

 In total, these 

CARDS transaction fees constituted around 45% of the amount received by CIC.

On November 13, 2001, CIC’s advisors learned that HVB planned to call its 

loans to CIC and the Baxters.9

 CIC then received a mandatory prepayment 

election, negotiated a traditional margin loan from CIBC for $8.5 million, and used 

part of that margin loan to satisfy its obligations to HVB. Because Brondesbury’s 

collateral account at HVB still contained most of the original loan amount, CIC 

only paid the equivalent of $5,378,764.49 to retire the entire €35.3 million HVB 

loan. CIC used $5,369,208.60 of the margin loan proceeds to purchase €5,710,709 

from HVB pursuant to their December 2000 forward contract, which it then 

applied to its HVB loan obligation; the forward contract proceeds covered all but 

approximately $9,550 of CIC’s final payment obligation on the €35.3 million loan. 

On its U.S. Return of Partnership Income (Form 1065) for 2000, CIC 

reported a long-term capital gain of $28,597,759 from the ABP stock sale and 

 8 The Tax Court noted that this letter was promised as part of the CARDS package and 

Chenery’s fees were used to pay B&W, indicating that B&W had a conflict of interest. 

Furthermore, executive actors at Chenery (Roy Hahn) and B&W (R.J. Ruble, CIC’s contact at 

the firm) were clearly connected. 

9 Levin testified that HVB told him it was withdrawing due to the events of September 11, 2001.

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claimed a $27,724,620 capital loss generated through its CARDS transaction. In 

calculating this loss, CIC treated the full amount of the HVB debt ($32,617,200) as 

its basis in the HVB promissory note that it redeemed for $4,892,580, under the 

theory that CIC had assumed joint and several liability for the entire HVB loan. 

CIC also claimed a fee deduction of $1,400 for amortized loan origination fees 

paid as part of the CARDS transaction. CIC alleges that it relied upon Windham to 

prepare its tax returns and that Windham assured CIC that it viewed the tax 

treatment as correct. 

D. Post-CARDS Transaction

In 2007, the IRS issued a FPAA disallowing CIC’s claimed $27,724,620 

capital loss and $1,400 fee deductions on its 2000 tax return. The IRS raised 

alternative grounds for disallowing the claimed loss, including (1) CIC’s failure to 

establish its claimed basis and (2) the lack of economic substance in the CARDS 

transaction.10 The IRS also imposed a gross valuation misstatement penalty. 

In 2008, CIC petitioned for redetermination of its 2000 FPAA. The Tax 

Court held a condensed four-day trial for CIC and the Baxters (collectively 

referred to as Taxpayers). Curtis Inv. Co., LLC v. Comm’r, No. 10181–08, 16835–

08, 2017 WL 3314283, 114 T.C.M. (CCH) 141 (2017).11 During the trial, CIC 

 10 In addition, the IRS maintained that CIC’s claimed fee deduction lacked economic substance.

11 The Tax Court made findings with respect to all Taxpayers in a single opinion. 

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presented two experts12 to challenge its FPAA determination, and the IRS 

introduced an expert report by A. Lawrence Kolbe.13 Dr. Kolbe focused on

Taxpayers’ CARDS transactions as financing decisions and did not analyze 

subsequent investments, concluding that the transactions were not economically 

rational because the expected rate of return did not exceed or equal the expected 

rate of return in capital markets on alternative investments of equivalent risk.14 

According to the report, the transaction fees were substantially higher than those 

for a loan that would yield similar proceeds, and the loan interest rate was higher 

than market interest rates, without fees. The report determined that the loans were

unprofitable financing decisions. CIC challenged Dr. Kolbe’s report under Federal 

Rule of Evidence 702, arguing that he should not be admitted as an expert witness. 

The Tax Court admitted Dr. Kolbe’s testimony. 

After trial, the Tax Court issued an opinion upholding the FPAA 

determinations, concluding that the CARDS transactions objectively lacked 

economic substance. The court also held that Taxpayers lacked a business purpose 

 12 James A. Walker, Jr. testified regarding commercial lending practices but did not address the 

profit potential or business purpose of the CARDS transaction. Walker has 47 years of banking 

experience and an M.B.A. from Georgia State University. Dr. Conrad S. Ciccotello testified that 

Taxpayers could have profited from CARDS transactions if their annual returns exceeded 9.5%. 

Dr. Ciccotello has a Ph.D in finance from Pennsylvania State University and is a professor at 

Georgia State University.

13 Dr. Kolbe holds a Ph.D. in economics from the Massachusetts Institute of Technology and 

previously served as an expert witness in Tax Court cases involving CARDS transactions. 

14 Dr. Kolbe’s analysis suggested that the loans would reduce Taxpayers’ wealth by €2.19 

million regardless of the return from the investments. 

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for engaging in the CARDS transactions. Finally, the court upheld imposition of 

accuracy-related penalties, finding that (1) Taxpayers’ claimed basis in their 

redeemed notes was entirely eliminated, and (2) Taxpayers lacked reasonable 

cause for their tax positions. CIC appealed. On February 27, 2018, CIC also filed 

a letter with this Court pursuant to Rule 28(j) of the Federal Rules of Appellate 

Procedure,15 asserting a new challenge to the Tax Court’s imposition of an 

underpayment penalty under 26 U.S.C. § 6571(b)(1). 

II. Economic Substance and Business Purpose of the CARDS Transaction 

A. The Tax Court’s Analysis

CIC argues that the Tax Court failed to consider part of the transaction at 

issue here, leading the court to incorrectly conclude that CIC’s transaction lacked 

economic substance or business purpose other than the generation of tax benefits. 

We review the Tax Court’s legal conclusions regarding the Internal Revenue Code

de novo, and its findings of fact for clear error. Campbell v. Comm’r, 658 F.3d 

1255, 1258 (11th Cir. 2011) (per curiam). Under the clear error standard, “where 

 15 Rule 28(j) states: 

If pertinent and significant authorities come to a party’s attention 

after the party’s brief has been filed—or after oral argument but 

before decision—a party may promptly advise the circuit clerk by 

letter, with a copy to all other parties, setting forth the citations. The 

letter must state the reasons for the supplemental citations, referring 

either to the page of the brief or to a point argued orally. The body 

of the letter must not exceed 350 words. Any response must be 

made promptly and must be similarly limited.

FED. R. APP. P. 28(j). 

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there are two permissible views of the evidence, the tax court’s choice between 

them cannot be clearly erroneous.” Piggly Wiggly S., Inc. v. Comm’r, 803 F.2d 

1572, 1576 (11th Cir. 1986). Factual findings based on credibility assessments are 

entitled to particular deference. See id. 

Section 165(a) of the Internal Revenue Code allows deductions for any 

losses that are actually sustained, and not otherwise compensated for, during the 

taxable year. 26 U.S.C. § 165(a). “Only a bona fide loss is allowable. Substance 

and not mere form shall govern in determining a deductible loss.” Treas. Reg. 

§ 1.165-1(b). “[F]ederal tax law disregards transactions lacking an economic 

purpose which are undertaken only to generate a tax savings. Federal tax law is 

concerned with the economic substance of the transaction under scrutiny and not 

the form by which it is masked.” United States v. Heller, 866 F.2d 1336, 1341 

(11th Cir. 1989). A transaction is not entitled to tax respect if it “lacks economic 

effects or substance other than the generation of tax benefits, or if the transaction 

serves no business purpose.” Winn-Dixie Stores, Inc. v. Comm’r, 254 F.3d 1313, 

1316 (11th Cir. 2001) (per curiam). If a transaction lacks either objective 

economic effects or subjective business purpose, it will be disregarded for tax 

savings. See Kearney Partners Fund, LLC v. United States, 803 F.3d 1280, 1295 

(11th Cir. 2015) (per curiam); United Parcel Serv. of Am., Inc. v. Comm’r, 254 

F.3d 1014, 1018 (11th Cir. 2001). 

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Courts evaluating a transaction for economic substance and business purpose 

should exercise common sense, looking at the totality of evidence and focusing on 

“the specific transactions at issue, not the activities of the entity as a whole.” 

Kearney Partners Fund, 803 F.3d at 1295. A transaction objectively has economic 

substance when it has economic effects other than creation of tax deductions—that 

is, it has “a reasonable possibility of making a profit.” Id. “The kind of ‘economic 

effects’ required to entitle a transaction to respect in taxation include the creation 

of genuine obligations enforceable by an unrelated party.” United Parcel Serv. of 

Am., 254 F.3d at 1018. Taxpayers may use the Internal Revenue Code to their 

advantage, and therefore our subjective “business purpose” analysis distinguishes 

between legitimate transactions structured in a particular way to obtain tax benefits 

and illegitimate transactions created to generate tax benefits. Kearney Partners 

Fund, 803 F.3d at 1295. 

The Tax Court properly focused on the CARDS transaction as the specific 

transaction generating the tax benefit—the artificial loss—at issue in CIC’s 2000 

tax returns. See Gustashaw v. Comm’r, 696 F.3d 1124, 1136–37 (11th Cir. 2012) 

(finding that a taxpayer’s “tax underpayments were ‘attributable to’ a gross 

valuation misstatement within the meaning of § 6662” because the taxpayer 

“report[ed] an artificially inflated basis in currency” and “the abusive tax shelter is 

built upon the basis misstatement, and the transaction’s lack of economic substance 

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is directly attributable to that misstatement”). CIC argues that it was motivated by 

a business purpose and its transaction had economic effects other than tax 

consequences because CIC planned to make a net profit from investments with 

proceeds of the interest-free loan it obtained in its CARDS transaction. These 

investments, however, were collateral to the CARDS transaction and did not 

contribute to CIC’s ability to claim a tax benefit—thus, they are not considered to 

be part of the “specific transaction.”16 If we were to accept CIC’s reasoning and 

include its investments in the relevant “transaction” here, any taxpayer could 

manufacture a transaction to obtain tax benefits and justify it as a financing 

decision with a legitimate business purpose by planning to use the potentially illgotten proceeds in a peripheral high-return investment. All taxpayers are legally 

permitted to structure transactions to obtain tax benefits, but they may not 

manufacture certain transactions solely to avoid paying taxes, which is what CIC 

did here. See Kearney Partners Fund, 803 F.3d at 1295.

The Tax Court concluded that the CARDS transactions reduced Taxpayers’ 

wealth by over €2 million and would have cost even more after one year—

therefore, there was no reasonable possibility of profit. While CIC may have had a 

business purpose to borrow funds for long-term investment, it had no legitimate 

 16 CIC’s 2000 tax return claimed a loss equal to the amount of HVB’s loan to Brondesbury less 

the amount of the promissory note redeemed by CIC, supporting the conclusion that the CARDS 

financing scheme alone was the loss-generating transaction, making it subject to analysis here. 

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business purpose for choosing this particular financing plan, which left 

considerably less money for investment than conventional financing. Moreover, 

the Tax Court found that CIC did not consider financing alternatives and made no 

attempt to reduce its cost of borrowing to maximize funds available for investment. 

Instead, CIC used a new bank—HVB—and paid financing costs of approximately 

45% of the proceeds of its loan.17 The Tax Court discussed further evidence, 

including multiple one-year timeframes in documents related to the transaction,18

suggesting that CIC did not truly enter into the CARDS transaction for long-term 

investment purposes and did not reasonably believe that it had taken on a genuine 

enforceable obligation to repay the full HVB debt. The court thus concluded that 

CIC’s CARDS transaction objectively lacked economic substance and subjectively 

lacked a non-tax business purpose. The CARDS transaction is not entitled to tax 

respect if it lacks either of these qualities; the Tax Court found that it lacked both, 

 17 The Tax Court determined that the fees CIC paid to Chenery and CIBC were significantly

above market rates for comparable financing options, creating a substantial and unnecessary drag 

on the profitability of any investments. Taking these fees into account, CIC only obtained 

around $2.25 million in investable funds. 

18 The Tax Court noted that several items—including Brondesbury’s time deposit at HVB, CIC’s 

forward contract with HVB, and CIC’s CIBC letter of credit—had one-year timeframes, 

indicating the loan would not last for 30 years. The Tax Court thus did not find credible CIC’s

claim that HVB called the loan due to the events of September 11, 2001, nor that CIC believed it 

would liable for the full HVB debt as the primary obligor bearing direct recourse liability to 

Brondesbury for 30 years. Furthermore, CIC rushed to finalize its CARDS transaction before the 

end of tax year 2000, but did not invest the resulting proceeds for nearly six weeks. The Tax 

Court found that the specific timing of the transaction and subsequent investment of proceeds cut 

against CIC’s claim that it pursued the CARDS transaction for investment purposes. 

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and thus should be disregarded for tax savings. The findings of fact and credibility 

determinations made in reaching this conclusion do not constitute clear error. 

B. Expert Witness Testimony

In concluding that CIC’s CARDS transaction lacked economic substance 

and business purpose, the Tax Court relied heavily on a report from the IRS expert 

witness, Dr. Kolbe. Relying on Rule 702 of the Federal Rules of Evidence, CIC 

argues that Dr. Kolbe should have been excluded from testifying as an expert 

because he is not qualified, he is unreliable, and his methodology incorrectly 

segregates finance from investment.

We review a trial court’s decision to admit expert testimony for abuse of 

discretion. Kumho Tire Co. v. Carmichael, 526 U.S. 137, 152, 119 S. Ct. 1167, 

1170 (1999). “That standard applies as much to the trial court’s decisions about 

how to determine reliability as to its ultimate conclusion.” Id.; see also Knight 

through Kerr v. Miami-Dade Cty., 856 F.3d 795, 808 (11th Cir. 2017). 

Federal Rule of Evidence 702 governs admission of expert testimony in Tax 

Court. 26 U.S.C. § 7453, FED. R. EVID. 702.

19 In Daubert v. Merrell Dow 

 19 Rule 702 states: 

A witness who is qualified as an expert by knowledge, skill, 

experience, training, or education may testify in the form of an 

opinion or otherwise if:

(a) the expert’s scientific, technical, or other specialized knowledge 

will help the trier of fact to understand the evidence or to determine 

a fact in issue;

(b) the testimony is based on sufficient facts or data;

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Pharmaceuticals, Inc., the Supreme Court held that Rule 702 compels district 

courts to screen expert scientific evidence for admissibility, and elaborated upon 

what courts should consider in applying the Rule. 509 U.S. 579, 589–595, 113 S. 

Ct. 2786, 2795–98 (1993). In United States v. Frazier, we summarized 

considerations for trial courts determining the admissibility of expert testimony: 

(1) [If] the expert is qualified to testify competently 

regarding the matters he intends to address; (2) [if] the 

methodology by which the expert reaches his conclusions 

is sufficiently reliable as determined by the sort of inquiry 

mandated in Daubert; and (3) [if] the testimony assists the 

trier of fact, through the application of scientific, technical, 

or specialized expertise, to understand the evidence or to 

determine a fact in issue.

387 F.3d 1244, 1260 (11th Cir. 2004) (en banc). The basic requirements—

qualification, reliability, and helpfulness—are distinct, but may overlap. Id. A 

witness’s knowledge, training, skill, education, or experience may qualify her as an 

expert. Id. at 1260–61. 

When determining the reliability of an expert’s opinion, a trial court must 

assess “whether the reasoning or methodology underlying the testimony is 

scientifically valid and . . . whether that reasoning or methodology properly can be 

applied to the facts in issue.” Id. at 1261–62. The court should consider, to the 

 

(c) the testimony is the product of reliable principles and methods; 

and

(d) the expert has reliably applied the principles and methods to the 

facts of the case.

FED. R. EVID. 702.

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extent practicable, (1) whether the expert’s theory can be and has been tested; (2) 

whether the theory has been subjected to peer review and publication; (3) the 

known or potential rate of error; and (4) whether the method is generally accepted 

in the relevant community. Id. at 1262; see also Kumho Tire Co. v. Carmichael, 

526 U.S. 137, 149, 119 S. Ct. 1167, 1174–75 (1999) (extending this analysis to 

experts with “specialized knowledge”). “These factors are illustrative, not 

exhaustive; not all of them will apply in every case, and in some cases other factors 

will be equally important in evaluating the reliability of proffered expert opinion.” 

Frazier, 387 F.3d at 1262. This flexible analysis requires that trial judges “have 

considerable leeway in deciding in a particular case how to go about determining 

whether particular expert testimony is reliable.” Id. (citing Kumho Tire Co., 526 

U.S. at 152, 119 S. Ct. at 1176 (1999)).

“[A]pplication of an abuse-of-discretion standard recognizes a range of 

possible conclusions that the trial judge may reach.” Id. at 1266. The Tax Court’s 

initial decision to admit the testimony of all three proffered experts with extensive 

cross-examination and argument, and then to rely primarily on the testimony of Dr. 

Kolbe, was within its discretion. The Tax Court noted Dr. Kolbe’s relevant 

qualifications20 and considered CIC’s evidence regarding his unreliability—

 20 CIC asserts that Dr. Kolbe has no experience as a loan officer or broker, and did not consult 

any banks in evaluating CIC’s CARDS transaction. We do not, however, require that all expert 

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particularly his potential bias due to significant compensation from the IRS for 

expert testimony in prior cases—before determining that Dr. Kolbe was qualified, 

reliable, and provided useful testimony. Moreover, the court considered the 

testimony and cross-examination of all expert witnesses to determine that Dr. 

Kolbe’s method—focusing on the transaction that generated CIC’s claimed tax 

benefit—was the most reliable and instructive evaluation. Given its thorough 

analysis, the Tax Court did not abuse its discretion in admitting, weighing, or 

relying upon Dr. Kolbe’s testimony. 

III. Imposition of the Underpayment Penalty

CIC argues that, even if its CARDS transaction lacked economic substance 

and business purpose, CIC should not be subject to an underpayment penalty for 

the amount of the loss resulting from the CARDS transaction because it made the 

understatement on its 2000 return with reasonable cause and good faith. “Whether 

a taxpayer acted with reasonable cause and in good faith with regard to an 

underpayment of tax is a question of fact that we review for clear error.” 

Gustashaw, 696 F.3d at 1134. Section 6662(a) imposes a 20% accuracy-related 

penalty on underpayment of tax for reasons listed in § 6662(b), including “[a]ny 

 

witnesses be qualified by virtue of experience or consultation with other entities. Experts may be 

qualified in various ways. Frazier, 387 F.2d at 1260–61. 

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substantial valuation misstatement.” 26 U.S.C. §§ 6662(a), 6662(b)(3) (2000).21 

Section 6662(h) increases the penalty to 40% for “gross” valuation misstatements. 

A substantial valuation misstatement is an overstatement of 200% or more of the 

correct value or basis, and a gross valuation misstatement is an overstatement of 

400% or more of the correct value or basis. See id. at §§ 6662(e), (h). Treasury 

Regulation § 1.6662-5(g) provides: 

The value or adjusted basis claimed on a return of any 

property with a[n] . . . adjusted basis of zero is considered 

to be 400 percent or more of the correct amount. There is 

a gross valuation misstatement with respect to such 

property, therefore, and the applicable penalty rate is 40 

percent.

The IRS bears the burden of production with respect to a taxpayer’s liability 

for a § 6662(a) penalty and must produce sufficient evidence supporting imposition 

of the penalty. See 26 U.S.C. § 7491(c). If the IRS meets this burden, “[t]he 

taxpayer bears the burden of establishing that he acted with reasonable cause and 

in good faith” in underpayment in order to avoid the imposition of misstatement 

penalties described in 26 U.S.C. § 6662. Gustashaw, 696 F.3d at 1139 (citing 26 

U.S.C. § 6664(c)(1) (2000)). 

 21 Sections 6662 and 6664 were amended after 2000; they now (1) carry lesser percentage 

requirements for valuation misstatements and (2) expressly address “reasonable cause” and 

“economic substance.” The 2000 versions of these sections apply to CIC’s 2000 tax return. The 

applicability of any penalty attributable to an adjustment to a partnership item was determined at 

the partnership level in 2000. See id. at §§ 6221, 6226(f) (2000). 

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“Under the regulations, the determination of whether the taxpayer has 

established reasonable cause is made based on all the pertinent facts and 

circumstances.” Id.; see also Treas. Reg. § 1.6664-4(b)(1) (describing the 

evaluation of reasonable cause and good faith as a finding of fact based on the 

totality of the circumstances). “Circumstances that may indicate reasonable cause 

and good faith include an honest misunderstanding of fact or law that is reasonable 

in light of all of the facts and circumstances, including the experience, knowledge, 

and education of the taxpayer.” Treas. Reg. § 1.6664-4(b)(1). Reasonable cause 

and good faith may exist in cases of “first impression” when taxpayers take 

reasonably debatable positions on their return, see Williams v. Comm’r, 123 T.C. 

144, 153–54 (2004), or when taxpayers take positions on initial interpretation of 

unclear statutory text, see Bunney v. Comm’r, 114 T.C. 259, 266 (2000). “A return 

position that is ‘arguable, but fairly unlikely to prevail in court’ satisfies the 

reasonable basis standard.” Bunney, 114 T.C. at 266 (quoting Treas. Reg. 

§ 1.6662-4(d)(2)). 

A taxpayer may also establish reasonable cause by showing that he 

“reasonably relied in good faith on the advice of an independent professional, such 

as a tax advisor, lawyer, or accountant, as to the transaction’s tax treatment.” 

Gustashaw, 696 F.3d at 1139. The professional advice must: (1) rely on the law 

applied to all pertinent facts and circumstances; (2) not rely on another’s 

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unreasonable factual or legal assumptions or unreasonable representations; and (3) 

be objectively reasonable. Id. The advice must contemplate “the taxpayer’s 

purposes (and the relative weight of such purposes) for entering into a transaction 

and for structuring a transaction in a particular manner.”22 Treas. Reg. § 1.6664-

4(c)(1)(i). Reliance is not reasonable if the advisor promoted the transaction or 

otherwise had a conflict of interest about which the taxpayer knew or should have 

known. Gustashaw, 696 F.3d at 1139. Reliance is likewise unreasonable “when 

the taxpayer knew or should have known that the transaction was too good to be 

true in light of all the circumstances.” Id. (internal quotation marks omitted).

The 40% gross valuation misstatement penalty applies to CIC’s reported tax 

loss from the CARDS transaction because (1) the transaction lacked economic 

substance, and (2) the correct basis of CIC’s redeemed note was zero, causing 

underpayments in CIC’s partners’ taxes for 2000. Treas. Reg. § 1.6662-5(g); see 

also United States v. Woods, 571 U.S. 31, 43–44, 134 S. Ct. 557, 565–66 (2013). 

Thus, CIC is subject to this 40% penalty unless it can show that it had reasonable 

cause for its underpayment and acted in good faith. CIC argues that it should not 

be subject to this penalty because it did have reasonable cause to claim the 

 22 “[A]dvice must not be based upon a representation or assumption which the taxpayer knows, 

or has reason to know, is unlikely to be true, such as an inaccurate representation or assumption 

as to the taxpayer’s purposes for entering into a transaction or for structuring a transaction in a 

particular manner.” Treas. Reg. § 1.6664-4(c)(1)(ii).

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$27,724,620 capital loss on its 2000 tax return, and acted in good faith. CIC 

claims that it had reasonable cause because (1) CIC’s managers reasonably relied 

upon counsel of professional advisors—including advice in an opinion letter from 

B&W and the assurances of CIC’s other advisors—regarding the tax treatment of 

CARDS transactions, and (2) CIC took a reasonable position in its 2000 tax return 

under the unclear law that existed at the time. 

The Tax Court addressed CIC’s argument that it had reasonably relied on the 

counsel of professional advisors in claiming a $27,724,620 loss, finding that CIC’s 

reliance upon professional advice from B&W or any of its other advisors was 

objectively unreasonable in light of the facts. The court evaluated witness 

credibility and the facts in the record to conclude that CIC knew or should have 

known that B&W’s opinion letter was not independent advice but was provided as 

part of Chenery’s promotion of the CARDS plan, and CIC also knew or should 

have known that the CARDS transaction was too good to be true, regardless of 

what any advisors may have said.23 The court also concluded that CIC did not 

 23 The Tax Court noted that Chenery selected B&W to evaluate the CARDS transaction. In the 

initial stages of setting up the CARDS transaction, the chief CARDS promoter at Chenery, Mr. 

Hahn, cited as a reference Mr. Ruble, CIC’s contact at B&W. Moreover, B&W’s opinion letter 

was promised as part of the CARDS package and CIC paid B&W indirectly through Chenery, 

clearly indicating that B&W had a conflict of interest. 

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reasonably rely upon its local advisors at Windham or Rogers & Watkins for tax 

advice, because this advice was based on B&W’s opinion letter.24 

In evaluating the reasonableness of CIC’s reliance and good faith with 

respect to the position that it took on its 2000 tax return, the Tax Court determined 

that CIC’s managers were not as “unsophisticated” as they claimed to be. CIC 

argued that its managers lacked tax sophistication, but the court properly 

considered the “education, sophistication, and business experience” of the 

managers and the CIC Investment Committee more broadly.25 See Treas. Reg. 

§ 1.6664-4(b)(1). The court found relevant the CIC managers’ substantial 

knowledge and experience with respect to loans and investment, suggesting that 

they were familiar with ordinary financing transactions and tax consequences. The 

court noted how CIC’s managers had considerable experience in financing 

transactions but did not investigate alternative financing options despite the high 

cost of the CARDS transaction. Ultimately, the court concluded that CIC did not 

reasonably rely on professional advice in drafting its 2000 tax returns. 

CIC also argued that it had reasonable cause for its underpayment in 2000 

because CARDS plans were a novel legal issue at that time, and CIC took a 

 24 CIC’s advisors looked into some of the materials cited in the letter but failed to conduct any 

independent legal research despite the clearly apparent conflict of interest created by the evident 

relationship between Chenery and B&W. 

25 The Committee included an individual with an executive MBA, an individual with a business 

degree, and several people with investment experience. Lonnie Baxter and Henry Bird, 

managers of CIC and members of the Committee, both had significant experience with loans. 

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reasonable position given the unclear nature of the law. Although CARDS was a 

new tax structure in 2000, the legal theory underlying the FPAA issued to CIC was 

already established: transactions lacking economic substance are disregarded for 

tax purposes. The IRS issued Notice 2000-44 in August 2000, warning taxpayers 

about generating artificial losses from schemes that purported to inflate basis in 

assets. I.R.S. Notice 2000-44, 2000-2 C.B. 255. The IRS stressed that it would not 

recognize transactions lacking economic substance or business purpose for tax 

purposes, and taxpayers who claimed artificial tax benefits through such schemes 

would be subject to penalties. Id. 

Notice 2000-44 did not explicitly address the illegality of a CARDS 

transaction, but described improper methods by which taxpayers attempted to 

inflate their adjusted basis to claim a loss in their taxes. Specifically, Notice 2000-

44 stated that “a loss is allowable as a deduction for federal income tax purposes 

only if it is bona fide and reflects actual economic consequences. An artificial loss 

lacking economic substance is not allowable.” Id. Notice 2000-44 then cited ACM 

Partnership v. Commissioner, which described “bona fide losses” and recognized 

the relevant “transactions whose economic substance is at issue” as the 

“exchange . . . which gave rise to the disputed tax consequences.” 157 F.3d 231, 

252, 260 (3d Cir. 1998). 

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Notice 2000-44 also cited Scully v. United States, 840 F.2d 478, 486 (7th 

Cir. 1988) (finding that deductible losses must be “genuine economic loss[es]”), 

and Shoenberg v. Commissioner, 77 F.2d 446, 448 (8th Cir. 1935), to provide 

guidance regarding the nature of bona fide losses with economic substance. In 

Shoenberg, the Eighth Circuit recognized that it was proper to “examin[e] all 

matters, relating to the sale by the taxpayer, which bear upon the deductible 

character of the loss shown by that sale.” 77 F.2d at 448. The Eighth Circuit

stated that the specific transaction to examine was “the entire transaction on 

account of which the deduction was claimed.” Id. at 448–49. When CIC engaged 

in a CARDS transaction, it knew—based on a reading of B&W’s opinion letter—

that the IRS had issued Notice 2000-44. The Tax Court determined that CIC was 

not dealing with a novel tax law issue in 2000, and CIC should have reasonably 

concluded based on the existing law and language in Notice 2000-44 that its 

CARDS loss-generating scheme—which would allow it to overstate its adjusted 

basis—was a plan to “generate an artificial tax loss,” and thus would be subject to 

penalty. I.R.S. Notice 2000-44, 2000-2 C.B. 255.

Regardless of whether a novel issue existed, the Tax Court considered all 

facts and circumstances in evaluating reasonability and good faith. See Treas. Reg. 

§ 1.6664-4(b)(1). Here, the court considered CIC’s alleged reliance on its 

professional advisors, the sophistication and experience of CIC’s managers, and 

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the applicability of existing law in 2000 to determine that CIC lacked reasonable 

cause and good faith. The court supported its findings in its opinion by including 

facts and credibility determinations upon which it relied. Based on the totality of 

circumstances, the Tax Court chose a permissible view of the evidence and did not 

clearly err in finding that CIC lacked reasonable cause and good faith in 

underpayment. 

IV. Challenge Under 26 U.S.C. § 6751(b)(1)

Finally, CIC challenges the IRS imposition of a penalty in this case by 

asserting that the IRS did not comply with 26 U.S.C. § 6751(b)(1), which provides 

that “[n]o penalty under this title shall be assessed unless the initial determination 

of such assessment is personally approved (in writing) by the immediate supervisor 

of the individual making such determination or such higher level official as the 

Secretary may designate.” CIC claims that the recent resolution of Graev v. 

Commissioner, 149 T.C. No. 23 (2017), provided new grounds for challenging the 

Tax Court’s imposition of penalties in the present case under § 6751(b)(1). CIC 

has waived this challenge, and we decline to consider it now.

Appellate courts have discretion to decide whether to consider a legal issue 

or theory raised for the first time on appeal. United States v. S. Fabricating Co., 

764 F.2d 780, 781–82 (11th Cir. 1985) (per curiam). Parties cannot raise new 

issues at supplemental briefing, even if the issues arise based on intervening 

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decisions or new developments. See United States v. Nealy, 232 F.3d 825, 830 

(11th Cir. 2000); see also McGinnis v. Ingram Equip. Co., Inc., 918 F.2d 1491, 

1495–96 (11th Cir. 1990) (noting that waiver usually bars “new arguments and 

issues not presented until a late stage of the proceedings,” but not “new law that 

could be applied to arguments already developed”). 

CIC could have brought a challenge under § 6751(b)(1) during or after Tax 

Court proceedings prior to appeal, as other taxpayers have done. See, e.g., Chai v. 

Comm’r, 851 F.3d 190, 203 (2d Cir. 2017). CIC failed to do so, instead raising the 

issue for the first time in supplemental appellate briefing. We decline to consider 

this non-jurisdictional challenge for the first time now. Accord Mellow Partners v. 

Comm’r, 890 F.3d 1070, 1080–82 (D.C. Cir. 2018) (refusing to consider a § 6751 

challenge brought for the first time on appeal in similar circumstances); cf. Chai, 

851 F.3d at 223 (holding that a taxpayer properly raised a challenge under § 6751 

in a post-trial brief to the Tax Court, thus preserving the issue for appeal).

V. Conclusion

The Tax Court did not err in concluding that CIC’s CARDS transaction 

lacked economic substance or business purpose, nor in finding that CIC was liable 

for a 40% gross valuation misstatement penalty for its 2000 tax return. Finally, the 

Tax Court did not clearly err in determining that CIC lacked reasonable cause and 

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good faith in making an understatement on its 2000 tax return. Accordingly, we 

affirm. 

AFFIRMED. 

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