PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

No. 17-2402

GUY R. BAXTER; LONNIE C. BAXTER,

Petitioners – Appellants,

v.

COMMISSIONER OF INTERNAL REVENUE SERVICE,

Respondent – Appellee.

Appeal from the United States Tax Court. (Tax Ct. No. 016835-08)

Argued: October 31, 2018 Decided: December 7, 2018

Before KING, DUNCAN, and WYNN, Circuit Judges.

Affirmed by published opinion. Judge Wynn wrote the opinion, in which Judge King and 

Judge Duncan joined.

ARGUED: David Decoursey Aughtry, CHAMBERLAIN, HRDLICKA, WHITE, 

WILLIAMS & AUGHTRY, Atlanta, Georgia, for Appellants. Jennifer Marie Rubin, 

UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee. ON 

BRIEF: Jasen D. Hanson, CHAMBERLAIN, HRDLICKA, WHITE, WILLIAMS & 

AUGHTRY, Atlanta, Georgia, for Appellants. Richard E. Zuckerman, Principal Deputy 

Assistant Attorney General, Gilbert S. Rothenberg, Arthur T. Catterall, Tax Division, 

UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.
2

WYNN, Circuit Judge:

Taxpayers Lonnie Curtis Baxter (“Ms. Baxter”) and her husband Guy R. Baxter 

(collectively, with Ms. Baxter, “Taxpayers”) appeal an opinion and decision of the 

United States Tax Court imposing back taxes and penalties attributable to Taxpayers’ use 

of what appellee Commissioner of Internal Revenue (the “Commissioner”) deemed to be 

an unlawful tax shelter. See Curtis Inv. Co., LLC v. Comm’r, 114 T.C.M (CCH) 141, 

2017 WL 3314283 (2017). On their 2000 tax return, Taxpayers claimed substantial 

capital losses attributable to a Custom Adjustable Rate Debt Structure (“CARDS”) 

transaction, which Taxpayers relied on to offset capital gains attributable to the sale of 

their family business. The Commissioner argued—and the Tax Court agreed—that the 

CARDS transaction lacked “economic substance” and therefore that the Taxpayers 

improperly relied on the transaction to offset their capital gains. After careful review, we

affirm the Tax Court’s order and decision in its entirety.

I.

A.

Ms. Baxter is the great-granddaughter of Henry Russell Curtis, the founder of 

American Business Products, Inc. (“ABP”), a successful printing company. Prior to the 

transactions giving rise to the present dispute, Ms. Baxter directly held several shares of 

ABP stock. In 1961, the family formed Curtis Investment Company, LLC (“Curtis 

Investment”), to hold the family’s ABP stock as well as to engage in other investments. 

Ms. Baxter also held a beneficial interest in ABP stock by virtue of her ownership interest 

in Curtis Investment. In 1986, Ms. Baxter became the managing member of Curtis 
3

Investment. Ms. Baxter’s son, Henry J. Bird (“Bird”), succeeded Ms. Baxter as 

managing member of Curtis Investment in 1998, and formed an investment committee—

on which Ms. Baxter continued to serve—to oversee Curtis Investment’s investment 

strategy.

In late February 2000, Curtis Investment and Ms. Baxter sold their ABP stock as 

part of the sale of ABP. Ms. Baxter’s sale of her ABP stock generated a $2,444,383

long-term capital gain and a $18,895 short-term capital gain. Faced with the prospect of 

a sizable tax bill attributable to this sale, Ms. Baxter and Curtis Investment’s investment 

committee considered multiple approaches to sheltering the gain. One of Taxpayers’ 

accountants, Barbara Coats, learned of the CARDS shelter and met with Roy Hahn, 

founder of Chenery Associates, Inc. (“Chenery Associates”), who marketed the CARDS 

shelter. 

Coats and another accountant at her firm, Matt Levin, presented the CARDS 

transaction to Bird. Bird asked Coats and Levin and two lawyers, Thomas Rogers and 

Ann Watkins, to review the transaction and its promoters. To that end, the advisers hired 

a private investigator to investigate Chenery Associates and Hahn. As part of its CARDS 

package, Chenery Associates marketed a model tax opinion letter prepared by R.J. Ruble 

of Brown & Wood LLP, who also served as a reference for Hahn. Taxpayers’ advisers 

spoke with Ruble on several occasions regarding the model opinion letter. After 

reviewing many, but not all, of the authorities cited in the letter, but without conducting 

additional research, Taxpayers’ accountants “independent[ly]” advised the Taxpayers that 

they “thought the tax effects were as outlined in the tax opinion letter.” J.A. 2914. 
4

Neither Taxpayers’ accountants nor their tax lawyers provided Taxpayers with separate

opinion letters, however. Rogers walked through the tax effects of the CARDS 

transaction with Bird, who then conveyed his understanding of those effects to Ms. 

Baxter. Based on this review, Taxpayers decided to move forward with the CARDS 

transaction.

Taxpayers’ CARDS transactions—like all CARDS transactions, see Kerman v. 

C.I.R., 713 F.3d 849, 853 (6th Cir. 2013)—proceeded in the following stages: origination, 

assumption, operation, and unwinding, Curtis Inv., 2017 WL 3314283, at *4–6. 

At the origination stage, two residents of the United Kingdom (and, therefore, not 

subject to U.S. tax law)—Elizabeth Sylvester and Michael Sherry—organized a 

Delaware, LLC: Caledonian Financial Trading, LLC (“Caledonian”). Sylvester and 

Sherry participated in a similar manner in several other CARDS transactions. On 

December 14, 2000, Caledonian entered into a credit agreement with Hypo-Und 

Vereinsbank, AG (“HVB”)—a German bank that regularly facilitated CARDS 

transactions1

—pursuant to which HVB loaned Caledonian €2.9 million. Caledonian’s 

credit agreement with HVB had a 30-year term, but HVB retained the right to call the 

loan at the end of each year. Interest accrued annually at a rate equal to 12-month euro 

 1 In 2006, HVB entered into a deferred prosecution agreement with the United 

States in which it admitted to facilitating several tax shelter transactions, including 

CARDS transactions, during the time it facilitated Taxpayers’ CARDS transaction. 

Gustashaw v. C.I.R., 696 F.3d 1124, 1132 (11th Cir. 2012). HVB further admitted “that 

the transactions had no purpose other than to generate tax benefits for the participants.” 

Id.
5

LIBOR plus 0.5 percent. Under the credit agreement, the €2.9 million loan was morethan-fully collateralized—if Caledonian’s collateral consisted of cash, the agreement 

obliged Caledonian to deposit 102% of its loan obligations with HVB, and if 

Caledonian’s collateral consisted of other assets, the agreement obliged Caledonian to 

deposit assets valued at 108% of its obligations. 

HVB deposited eight-five percent (85%) of the proceeds of the loan in an HVB 

time-deposit account with a one-year term that HVB established for Caledonian. Under 

the then-applicable dollar-to-euro exchange rate, eighty-five percent of the €2.9 million 

loan closely approximated Taxpayers’ approximately $2.4 million expected capital gain 

from Ms. Baxter’s sale of her ABP stock. HVB dispersed the remaining loan proceeds—

which amounted to fifteen percent (15%) of the loaned funds—in the form of a one-year 

promissory note to Caledonian. Caledonian then pledged the promissory note and the 

time deposit—i.e. the entire proceeds it received from the loan—as collateral. Interest on 

both the time deposit and the promissory note accrued at a rate equal to 12-month 

LIBOR, meaning that interest accrued on the time deposit and the promissory note—

Caledonian’s entire proceeds from the loan—at a lower rate than Caledonian paid to 

borrow those proceeds (4.885% interest rate on time deposit and promissory note versus 

5.335% interest on Caledonian loan). The loan agreement barred Caledonian from 

making withdrawals from its newly-form HVB account without providing substitute 

collateral. Caledonian further contracted not to request release of the collateral. 

At the assumption stage, in late December 2000, Ms. Baxter acquired the 

promissory note HVB issued to Caledonian, which promissory note amounted to fifteen 
6

percent (15%) of the loan proceeds. As part of her acquisition of the promissory note, 

Ms. Baxter further agreed to assume 100% of Caledonian’s liability under its loan with 

HVB on a joint and several basis. The parties agreed that the funds in Caledonian’s time 

deposit at HVB would serve as the first source of payment for Caledonian’s obligations 

under the loan. On December 28, 2000, Ms. Baxter—who had no prior relationship with 

HVB—redeemed the promissory note she purchased from Caledonian, depositing 

€435,000 into a newly formed HVB account in her name. Ms. Baxter then asked HVB to 

change the denomination of the funds in her account from euros to dollars, at the thenapplicable dollar-to-euro exchange rate of 0.924, yielding approximately $401,000. 

Ms. Baxter further entered into a forward exchange contract with HVB, pursuant 

to which she was obligated to exchange approximately $442,000 for approximately 

€469,000 slightly less than one-year later, on December 14, 2001, the first-year call date 

for HVB’s loan to Caledonian. That approximately €469,000 figure was nearly identical 

to the amount Caledonian, and therefore Ms. Baxter, would have to repay HVB if it 

exercised its contractual right to recall the loan after one year.

A taxpayer’s currency exchange and note redemption are taxable events. Relying 

on Ms. Baxter’s assumption of joint and several liability with Caledonian for 100% of the 

loan proceeds, Taxpayers claimed a $2,277,660 loss (€2.9 million in assumed liability 

less the €435,000 in loan proceeds she obtained, converted to dollars at the thenapplicable exchange rate) on their 2000 tax return, offsetting nearly all their capital gain 

resulting from Ms. Baxter’s sale of her ABP stock. 
7

At the operational phase, Canadian Imperial Bank of Commerce (“CIBC”)—with 

which Taxpayers had a long-standing relationship—issued to Curtis Investment a $6.7 

million letter of credit, with a stated termination date of December 27, 2001. Pursuant to 

the terms of the agreement, Curtis Investment was obliged to keep at least $6.7 million in 

its accounts at CIBC, meaning that the letter of credit was fully collateralized. CIBC 

charged Curtis Investment $241,000 for the letter of credit. Ms. Baxter then substituted 

the letter of credit as collateral for Caledonian’s loan—pledging to HVB a first priority 

lien and security interest in the letter of credit—and in return HVB dispersed $401,940 to 

Ms. Baxter. Notwithstanding that Taxpayers had business relationships with CIBC and 

several other banks before they considered engaging in the CARDS transaction, 

Taxpayers did not approach any of those banks about obtaining a loan. 

Finally, the process to unwind the transaction began on November 13, 2001, when 

HVB notified Ms. Baxter of its intent to call its loan to Caledonian. Caledonian’s time 

deposit at HVB covered most of the outstanding loan balance, with Ms. Baxter required 

to pay to HVB approximately €470,000 to retire Caledonian’s loan. On December 14, 

2001, pursuant to her forward exchange contract, Ms. Baxter exchanged approximately 

$442,000 for approximately €469,000, which she then applied against her obligation 

under the loan and assumption agreement. That exchange covered all but approximately 

€826 of Ms. Baxter’s obligation to retire Caledonian’s loan. Taxpayers unsuccessfully 

sought replacement loans from several other banks. Ms. Baxter paid Chenery Associates

$154,375 in fees to facilitate her CARDS transaction. Put differently, aggregating 
8

CIBC’s and Chenery Associates’ fees, the Tax Court found that Taxpayers paid 

approximately forty-five percent (45%) of the loan proceeds in fees.

B.

On April 8, 2008, the Commissioner issued a notice of deficiency to Taxpayers for 

tax years 2000 and 2001, asserting, inter alia, that Taxpayers could not claim a taxable 

capital loss deduction as a result of the CARDS transaction because, in the 

Commissioner’s view, the transaction lacked economic substance. The Commissioner 

further stated that Taxpayers were liable for forty-percent accuracy-related penalties for 

making gross valuation misstatements. Taxpayers timely filed a petition with the Tax 

Court.

Following a four-day trial, during which the parties introduced lay and expert 

testimony and evidence, Tax Court Chief Judge L. Paige Marvel held that Ms. Baxter’s 

CARDS transaction lacked “economic substance.” Curtis Inv., 2017 WL 3314283, at 

*9–12. In particular, the Tax Court found that the transaction did not provide Taxpayers 

“with a reasonable possibility of profit” and that Taxpayers’ purported investment motive 

was “not credible.” Id. at *10–11. The Tax Court further concluded that the 

Commissioner properly imposed the accuracy-related penalty because Taxpayers failed 

to show that there was a “reasonable cause” for their inaccurate claiming of the CARDS 

deduction or that Taxpayers took the deduction in good faith. Id. at *14–16. Taxpayers 

timely appealed.

II.
9

This Court reviews decisions of the Tax Court “on the same basis as decisions in 

civil bench trials in United States district courts.” Waterman v. Comm’r, 179 F.3d 123, 

126 (4th Cir. 1999). “Questions of law are reviewed de novo, and findings of fact for 

clear error.” Starnes v. C.I.R., 680 F.3d 417, 425 (4th Cir. 2012). On appeal, Taxpayers 

argue that the Tax Court (A) violated Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 

U.S. 579 (1993), in considering and relying on an expert report prepared for and 

submitted by the Commissioner; (B) erred in finding that Taxpayers’ CARDS transaction 

lacked “economic substance”; and (C) improperly found that Taxpayers failed to 

establish reasonable cause or good faith, and therefore erred by affirming the 

Commissioner’s imposition of accuracy-related penalties. 

A.

First, Taxpayers argue that the Tax Court violated Daubert by improperly

considering an expert report and opinion by Dr. A. Lawrence Kolbe. We review the Tax 

Court’s application of Daubert for abuse of discretion. Cf. Nease v. Ford Motor Co., 848 

F.3d 219, 228 (4th Cir. 2017) (reviewing district court’s application of Daubert for abuse 

of discretion).

Federal Rule of Evidence 702 provides that a witness who is qualified as an expert 

may testify in the form of an opinion if “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.” As part of its Rule 702 “gatekeeping” role, a trial court “must 

ensure that any and all scientific testimony or evidence admitted is not only relevant, but 

reliable.” Daubert, 509 U.S. at 589. “In Daubert, the Court announced five factors that 
10

may be used in assessing the relevancy and reliability of expert testimony: (1) whether 

the particular scientific 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’; 

(4) the ‘existence and maintenance of standards controlling the technique’s operation’; 

and (5) whether the technique has achieved ‘general acceptance’ in the relevant scientific 

or expert community.” United States v. Crisp, 324 F.3d 261, 265–66 (4th Cir. 2003)

(quoting Daubert, 509 U.S. at 593–94).

Kolbe, who works for an economics and management consulting firm and holds a 

Ph.D. in economics from Massachusetts Institute of Technology, offered a report and 

testimony concerning, among other topics: (1) the risk-return characteristics of 

Taxpayers’ CARDS transaction to determine, objectively, “whether a reasonable 

possibility of profit existed apart from any tax benefit”; (2) “the economic rationality of 

what is known about the non-tax business purposes for these transactions”; and (3) the 

economic rationality, before and after tax considerations, of Ms. Baxter’s decision to 

enter into the transactions. J.A. 300–01. After allowing voir dire and hearing argument, 

the Tax Court overruled Taxpayers’ objection to admission of the report and Kolbe’s 

testimony. Relying on standard financial calculations as well as historical data regarding 

then-applicable interest rates, Kolbe estimated the net present value of Ms. Baxter’s loan 

obtained through the CARDS transaction, opining that, as a result of the high up-front 

fees, the net present value was “at least €2.19 million less than it would have been with a 

normal loan, taxes aside.” J.A. 311. Kolbe further opined that due to the high borrowing 

costs, use of the loan “to purchase any investment would create a very material and 
11

entirely unnecessary, drag on the profitability of that investment.” J.A. 313–14. The Tax 

Court credited that analysis in its opinion. Curtis Inv., 2017 WL 3314283, at *10–12.

As they do with the Tax Court’s economic substance analysis, see infra Part II.B, 

Taxpayers argue that the district court erred in admitting Kolbe’s analysis because he 

improperly “segregat[ed] the finance costs from the investment returns on the loan 

proceeds.” Appellants’ Br. at 31. But it is within an economist’s scope of expertise to 

opine that one can analyze the profitability of a loan by holding constant the likely 

returns to the proceeds of the loan, and then comparing the loan actually obtained with 

other available financing options—as Kolbe did here. As the Sixth Circuit held in 

rejecting a Daubert challenge to Kolbe’s report in another CARDS case, “Kolbe[’s] 

compar[ison of] the net present values of ordinary loans at market rates against 

[Taxpayers’] loan” is the “type of economic analysis—calculating the actual cost of 

financing and comparing it against the market rate—[that] ‘both rests on a reliable 

foundation and is relevant to the task at hand.’” Kerman, 713 F.3d at 867 (quoting 

Daubert, 509 U.S. at 597). To that end, this Court and other courts have found similar 

net present value analyses admissible under Daubert. See, e.g., Bresler v. Wilmington 

Trust Co., 855 F.3d 178, 196 (4th Cir. 2017); Tuf Racing Prods., Inc. Am. Suzuki Motor 

Corp., 223 F.3d 585, 591 (7th Cir. 2000). 

Taxpayers also take issue with Kolbe’s estimation of the costs to obtain a “good” 

or “normal” loan, which he used as a comparison point, because he did not use the 

“prime” interest rate or rely on interest rate data from the banks that provided the loan. 

But to the extent that Taxpayers’ disagree with Kolbe’s estimates of the costs of 
12

obtaining a “good” or normal” loan, “such challenges . . . affect the weight and credibility 

of [Kolbe’s] assessment, not its admissibility.” Bresler, 855 F.3d at 196 (internal 

quotation marks omitted). The Tax Court did not abuse its discretion in rejecting 

Taxpayers’ Daubert challenge. 

B.

Second, Taxpayers argue that the Tax Court reversibly erred in finding that the 

CARDS transaction lacked “economic substance” and, therefore, that Taxpayers 

unlawfully claimed losses attributable to the transaction to offset Ms. Baxter’s gains from 

the sale of her ABS stock. “[U]nder the ‘economic substance doctrine,’ a transaction 

may be disregarded as a sham for tax purposes if the taxpayer [1] ‘was motivated by no 

business purposes other than obtaining tax benefits’ and [2] ‘the transaction has no 

economic substance because no reasonable possibility of a profit exists.’” BB&T Corp. v. 

United States, 523 F.3d 461, 471 (4th Cir. 2008) (quoting Rice’s Toyota World, Inc. v. 

Comm’r, 752 F.2d 89, 91 (4th Cir. 1985)). “[T]he first prong of the test is subjective, 

while the second is objective.” Black & Decker Corp. v. United States, 436 F.3d 431, 

441 (4th Cir. 2006). “Nevertheless, while it is important to examine both the subjective 

motivations of the taxpayer and the objective reasonableness of the investment, in both 

instances our inquiry is directed to the same question: whether the transaction contained 

economic substance aside from the tax consequences.” Id. (emphasis added) (internal 

quotation marks and alterations omitted). “Whether under this test a particular 

transaction is a sham is an issue of fact” subject to clear error review. Rice’s Toyota, 752 

F.2d at 92.
13

1.

The first prong of the economic substance test “requires a [subjective] showing 

that the only purpose for entering into the transaction was the tax consequences.” 

Friedman v. C.I.R., 869 F.2d 785, 792 (4th Cir. 1989) (emphasis in original). 

On appeal, Taxpayers assert that the Tax Court reversibly erred in finding that the 

transaction failed the subjective prong because record evidence demonstrates that Bird 

evaluated Curtis Investment’s historical performance and determined, based on that 

performance, that even with the substantial fees payable to CIBC and Chenery 

Associates, the transaction would be profitable—over a thirty-year horizon—because 

Curtis Investment’s historic annual return of 17.2 percent significantly exceeded the 

estimated 7.9 percent long-term annual “hurdle” rate for profitability. In support, 

Taxpayers point to a slide-show prepared by Bird and presented to Curtis Investment’s

investment committee, which listed only the CARDS transaction’s investment benefits, 

not its tax benefits, although the tax benefits of the transaction were discussed at the 

meeting. And Taxpayers further note that Ms. Baxter testified that the investment aspect 

to the transaction was more important to her than the tax benefits and that she would have 

engaged in the transaction even absent the tax benefits.

But the Tax Court made several factual findings pertaining to Taxpayers’ business 

purpose for engaging in the CARDS transaction adverting to and directly refuting these 

contentions. First, the Tax Court found that Taxpayers’ claimed purpose of obtaining the 

loans so as to engage in leveraged investment was not credible in light of the extremely 

high fees and therefore the high costs of borrowing, which would constitute a long-term 
14

drain on investment profitability. Curtis Inv., 2017 WL 3314283, at *10–11. Second, the 

Tax Court found that Taxpayers’ claim that they expect the loan proceeds to be available 

for 30 years—which was essential to their expectation of profitability given that 

Taxpayers would pay the high fees up front—was not credible in light of the one-year 

terms for the time deposit, the promissory note, the letter of credit, and the forward 

currency exchange contract. Id. at *12. Third, the Tax Court found that Ms. Baxter’s 

testimony pertaining to her non-tax-avoidance purpose in engaging in the transaction was 

not credible. Id. at *4 n.14. And, finally, the Tax Court found that Taxpayers were 

aware of the substantial tax liabilities associated with the sale of Ms. Baxter’s ABP 

shares and considered several other tax shelters before choosing CARDS. Id. at *12. Put 

differently, the Tax Court found that because the high-fees payable to Chenery 

Associates and CIBC during the first year of the transaction and the numerous transaction 

documents with one-year terms evidencing that HVB was likely to call the loan after one 

year—meaning that Taxpayers would incur all of the costs of the loan but obtain little of 

their anticipated benefits—Taxpayers’ asserted reliance on the expected long-term 

profitability of the transaction was not credible. 

These findings by the Tax Court are supported by facts in the record, and reflect 

reasonable inferences from those facts, and therefore are not subject to reversal under the 

applicable clear error standard of review. See Rice’s Toyota, 752 F.2d at 94. And the 

Tax Court’s credibility determinations, in particular, are entitled substantial appellate 

deference. See Crispin v. C.I.R., 708 F.3d 507, 516 (3d Cir. 2013). That is particularly 

true given that this Court has recognized that the “‘mere assertions’” of a “subjective 
15

belief in the profit opportunity from [the] transaction ‘particularly in the face of strong 

objective evidence that the taxpayer would incur a loss, cannot by itself establish that the 

transaction was not a sham.’” Black & Decker, 436 F.3d at 443 (quoting Hines v. United 

States, 912 F.2d 736, 740 (4th Cir. 1990)).

In addition to the facts expressly relied on by the Tax Court, this Court also has 

recognized that “promotion materials” distributed to market the tax consequences of a 

purported investment transaction can constitute strong evidence of intent when such 

materials evidence that the transaction was “designed as [a] tax avoidance transaction[].” 

Friedman, 869 F.2d at 793. And when a taxpayer “was in fact able to take large 

deductions as a result of h[er] transaction, just as the promotional materials had 

promised,” that is particularly strong evidence of intent. Id.; see also Hunt v. C.I.R., 938 

F.2d 466, 472 (4th Cir. 1991) (relying on promotional materials as evidence of subjective 

intent); Rice’s Toyota, 752 F.2d at 93 (same). 

Here, Chenery Associates’ promotional materials—which Taxpayers received—

explicitly marketed the tax benefits of the CARDS transaction. Kerman, 713 F.3d at 865 

(noting that the CARDS promotional materials stated that “the taxpayer claims a tax loss 

. . . even though the taxpayer has incurred no corresponding economic loss”). The key 

terms of the various transactions—including the amount of Caledonian’s loan and the 

proportions of the loan proceeds allocated to the promissory note and the time deposit—

were chosen to generate a loss that almost exactly approximated Ms. Baxter’s anticipated 

gain from the sale of her ABP stock. And Taxpayers “t[oo]k large deductions . . . just as 

the promotional material had promised.” Friedman, 869 F.2d at 793. Accordingly, the 
16

Tax Court did not clearly err in finding that the subjective prong of the economic 

substance inquiry supported treating the transaction as a sham.

2.

The second prong of the economic substance test “requires an objective 

determination of whether a reasonable possibility of profit from the transaction existed 

apart from the tax benefits.” Rice’s Toyota, 752 F.2d at 94. At the outset, we point out 

that the Third and Sixth Circuits have considered CARDS transactions and both of those 

courts have persuasively concluded that the CARDS transaction lacked objective 

economic substance. See Kerman, 713 F.3d at 864–65; Crispin, 708 F.3d at 515. 

Likewise, Tax Court decisions universally hold that CARDS transactions lack objective 

economic substance. See, e.g., Kipnis v. Comm’r, 104 T.C.M. (CCH) 530, 2012 WL 

5271787, at *11 (2012); Country Pine Fin., LLC v. Comm’r, 98 T.C.M. (CCH) 410, 2009 

WL 3678793, at *12–15 (2009).

In accordance with those decisions, the Tax Court found that Taxpayers’ CARDS 

transaction failed the objective economic substance test. In rendering this finding, the 

Tax Court pointed to Kolbe’s report as establishing that the transaction “lacked profit 

potential” because of the high fees and that the financing costs for the transaction, 

including those fees, “were substantially above market rates for comparable financing 

options.” Curtis Inv., 2017 WL 3314283, at *11. Additionally, the Tax Court found that 

Taxpayers “could have found less expensive financing options”—but never contacted 

other potential lenders, including banks with which they had existing relationships such 

as CIBC—and that the losses attributable to the high cost to finance the CARDS 
17

transaction “would exist no matter what investment [Taxpayers] made with the proceeds 

because the same investments could have been financed by a more conventional type of 

loan.” Id. at *10–11. These findings, which find ample support in the record, were 

consistent with the reasoning in Kerman and Crispin. See Kerman, 713 F.3d at 865 

(“[N]o credible business purpose for using such an expensive financing vehicle 

existed.”); Crispin, 708 F.3d at 515 (“[T]here was no potential for profit, because the 

interest rate charged on the CARDS Loan was greater than the interest paid on the 

proceeds deposited as collateral at [the facilitating bank].”).

Nevertheless, Taxpayers argue that the Tax Court committed legal error in 

conducting the objective prong analysis because the Tax Court disregarded Taxpayers’ 

expected returns from investing the loan proceeds obtained through the CARDS 

transaction. According to Taxpayers, the Tax Court was required to consider the “whole 

undertaking”—i.e. Taxpayers’ planned investment of the loan proceeds, not just the loan 

transaction itself, Appellant’s Br. at 23—in determining whether “a reasonable possibility 

of profit from the transaction existed apart from the tax benefits,” Rice’s Toyota, 752 

F.2d at 94. And Taxpayers again point to Bird’s analysis and slide-show as showing that, 

even with the high-cost of financing, Bird expected the transaction to be profitable over 

the long-term if the proceeds of the loan appreciated in accordance with Curtis 

Investment’s past performance.

In support of their position, Taxpayers cite a number of cases in which federal 

courts or the Tax Court used the terms “whole” or “entire” transaction in analyzing a 

federal tax question and argue that consideration of the “whole” transaction requires 
18

looking at both the loan and the investments of the proceeds of the loan. See Appellant’s 

Br. at 23–24 (citing, e.g., Comm’r v. Clark, 489 U.S. 726, 738 (1989)). In response, the 

Commissioner notes that this Court and other Circuits have held that the economic 

substance inquiry “focuses not on the general business activities of [the taxpayer], but on 

the specific transaction whose tax consequences are in dispute.” Appellee’s Br. at 35 

(quoting Black & Decker, 436 F.3d at 441 (emphasis added); citing, e.g., Kearney P’ship. 

Fund, LLC v. Comm’r, 803 F.3d 1280, 1295 (11th Cir. 2015)). Taken together, these 

two lines of authority simply beg the relevant question: what is the “transaction”—

“specific” or “entire”—upon which a court must focus in conducting the economic 

substance inquiry? 

As to that question, none of authorities relied by Taxpayers using the “whole” or 

“entire” transaction language dealt with the question at issue here: whether a court must—

as Taxpayers argue—consider a taxpayer’s expected profits from the use of loaned funds 

in determining whether the loan transaction lacked economic substance. By contrast, 

several of the cases cited by the Commissioner are somewhat more closely on point. For 

example, in ACM Partnership v. Commissioner, 157 F.3d 231 (3d Cir. 1998), the Third 

Circuit considered a complex transaction through which Colgate-Palmolive Company 

(“Colgate”) sought to offset substantial long-term capital gains incurred in the sale of one 

of its wholly-owned subsidiaries, id. at 234. Colgate joined and contributed capital to a 

partnership, ACM, with two banks, which partnership almost immediately thereafter 

invested its entire capitalization in $205 million in short term Citicorp notes. Id. at 239–

40. Within weeks, ACM sold $175 million of those notes in exchange “for $140 million 
19

in cash plus LIBOR notes providing for a five-year stream of quarterly payments with a 

net present value of approximately $35 million.” Id. at 240–41. Thereafter, ACM used 

the cash proceeds of the transaction to purchase more than $140 million in Colgate longterm debt. Id. By mid-1991, Colgate was the sole member of ACM by virtue of 

redemptions or Colgate’s acquisition of the banks’ partnership interests. Id. at 242. Due 

to rules related to the tax accounting of the streams of quarterly payments received in 

partial consideration for the sale of the $175 million in notes and Colgate’s ultimate 

ownership of ACM, Colgate claimed a $84.5 million capital loss. Id. at 244. 

Focusing on the exchange of Citicorp notes for LIBOR notes (i.e. ignoring the cash 

component of the sale of notes), the accounting for which transaction allegedly gave rise 

to the loss, the Third Circuit agreed with the Tax Court that the transaction lacked 

objective economic substance because “the transactions with respect to the Citicorp notes 

left ACM in the same position it had occupied before engaging in the offsetting 

acquisition and disposition of those notes.” Id. at 250. Of particular relevance, the Third 

Circuit rejected ACM’s (and therefore Colgate’s) argument “that the Tax Court erred in 

excluding from its profitability analysis ‘the pre-tax income resulting from the investment 

of $140 million of cash received as part of the consideration for the Citicorp Notes.’” Id.

at 260 (quoting ACM’s brief). The Third Circuit held the Tax Court properly disregarded 

those profits because they “did not result from the contingent installment exchange [i.e. 

the note exchange] whose economic substance is in issue” because that exchange “gave 

rise to the disputed tax consequences.” Id. (emphasis added).
20

The Second Circuit reached a similar result in Nicole Rose Corp. v. C.I.R., 320 

F.3d 282 (2d Cir. 2003). There, a European airport purchased computer equipment from 

a Dutch bank, ABN, and then both directly, and by virtue of a series of sublease 

agreements, leased the equipment back to ABN. Id. at 283. One of the lessors then

transferred its interest to taxpayer Nicole Rose Corp. (“Rose”), which in turn transferred 

that interest to a different Dutch bank, Wildervank. Id. Through all the assignments of 

the lessor interest, ABN continued as lessee of the equipment. Id. “Rose claimed a loss 

of approximately $22 million on the transaction with Wildervank,” which Rose used to 

offset gains attributable to Rose’s purchase of Quintron Corp. and subsequent sale of all

Quintron’s assets. Id. at 283–84 (emphasis added). 

The Tax Court determined—and the Second Circuit agreed—that Rose’s lease 

transfer transaction with Wildervank lacked economic substance, in part because Rose 

never had “a significant interest” in the computer equipment sublease. Id. at 284. In 

affirming that determination, the Second Circuit rejected as “meritless” Rose’s argument 

that the transaction had “economic substance because Rose earned a pre-tax profit on the 

transaction ‘which included the Quintron stock purchase and asset sale and the transfer of 

the lease interests and cash to Wildervank.’” Id. (quoting Rose’s brief). “The relevant 

inquiry,” the Second Circuit explained, “is whether the transaction that generated the 

claimed deductions—the lease transfer—had economic substance. Income generated 

through the Quintron purchase and asset sale is irrelevant to this inquiry.” Id. (emphasis 

added).
21

ACM and Rose support the Commissioner’s position because they establish that in 

assessing economic substance, the relevant transaction—be it characterized as “specific” 

or “entire”—is the transaction that gives rise to the gain or loss. In ACM, the relevant 

transaction was the exchange of notes, not the cash proceeds or the investment of the cash 

proceeds of the sale that accompanied the exchange of notes, even though that investment 

was part of the larger series of transactions at issue. In Rose, the relevant transaction was 

the lease transfer, not the Quintron purchase and sale agreements, even though the 

Quintron transactions had some connection to the lease transfer. Other courts have 

likewise focused on the transaction giving rise to the claimed gain or loss, not collateral 

transactions connected to the transaction but not giving rise to the gain or loss. See, e.g., 

Coltec Inds., Inc. v United States, 454 F.3d 1340, 1356 (Fed. Cir. 2006) (holding that “the 

transaction to be analyzed is the one that gave rise to alleged tax benefit” and rejecting 

taxpayer’s argument that economic substance test requires consideration of broader set of 

transactions); Basic Inc. v. United States, 549 F.2d 740, 745 (Ct. Cl. 1977) (refusing to 

consider downstream transaction in economic substance inquiry because “if such an 

explanation were sufficient then all manner of intermediate transfers could lay claim to 

‘business purpose’ simply by showing some factual connection, no matter how remote, to 

an otherwise legitimate transaction existing at the end of the line”).

Here, the particular transaction that gave rise to the loss is the assumption 

agreement pursuant to which Ms. Baxter agreed to be held liable for the eighty-five 

percent of Caledonian’s loan from HVB secured by the time deposits, which liability she 

later claimed as a capital loss. That “specific” and “entire” transaction lacked economic 
22

substance because Caledonian’s loan proceeds related to that liability remained in the 

time deposits with HVB, as Caledonian’s agreement with HVB required, thereby 

rendering Ms. Baxter’s assumption of the additional liability over-and-above the value of 

the promissory note she acquired a riskless and meaningless undertaking. Any returns 

Taxpayers expected to generate from the investment of the fifteen percent of 

Caledonian’s loan proceeds Ms. Baxter received had nothing to do with the economic 

substance of her assumption of the Caledonian’s liability for the remaining eighty-five 

percent of the loan proceeds, and therefore was reasonably excluded from the Tax 

Court’s assessment of the economic substance of the transaction giving rise to the 

purported loss. 

Put simply, Ms. Baxter’s assumption of liability for the remaining eighty-five 

percent of the proceeds did “not correspond to any actual economic losses,” ACM P’ship, 

157 F.3d at 252, and produced only “artificial losses that ha[d] only upsides—they 

appear[ed] on the tax return, but not the profit and loss statement”—and therefore lacked

objective economic substance, Kerman, 713 F.3d at 864–65. Likewise, there was no 

“reasonable possibility of profit from the [assumption agreement] apart from the tax 

benefits,” Rice’s Toyota, 752 F.2d at 94, because Taxpayers received no benefit from and 

incurred no risk for assuming Caledonian’s liability related to the eighty-five percent of 

the loan proceeds placed in the time deposit. 

Accordingly, the Tax Court’s decision to disregard the potential profitability of 

Taxpayers’ investment plan for the loan proceeds is consistent with ACM’s, Rose’s, and 

other courts’ focus on the “transaction” that gave rise to the loss. That approach also is 
23

consistent with the approach that the Tax Court has taken in previous CARDS cases, in 

which it has looked at the profitability of only “the transaction that gave rise to the tax 

loss.” Kipnis, 2012 WL 5271787, at *9 (quoting Country Pine, 2009 WL 3678793, at 

*11). And the Tax Court’s approach is consistent with the Supreme Court’s admonition 

that courts must not accord “tax effect to a ‘meaningless and unnecessary incident’ 

inserted into a transaction” because “‘[a] given result at the end of a straight path is not 

made a different result because reached by following a devious path.’” BB&T, 523 F.3d 

at 474 (quoting Minn. Tea Co. v. Helvering, 302 U.S. 609, 613 (1938)). Here, 

Taxpayers’ assumption of the remaining eighty-five percent of Caledonian’s liability 

under its loan with HVB was a “meaningless and unnecessary incident” to the loan 

transaction when Taxpayers never received any of the loan proceeds giving rise to that 

liability and when that liability remained more than fully collateralized by funds 

Caledonian had on deposit with HVB. 

Even if the Tax Court had reversibly erred in disregarding Taxpayers’ anticipated 

returns from investment of their loan proceeds—which it did not—the Tax Court’s other 

factual findings would nevertheless support its ultimate determination that the broader 

CARDS transaction would not be profitable due to the high fees paid to Chenery 

Associates and CIBC. In particular, the Tax Court found that Taxpayers’ testimony that 

they believed that the loan would remain in place for thirty years was not credible, given 

that many of the operative documents had a one-year term. As explained above, that 

finding is not clearly erroneous, and therefore will not—and cannot—be set aside by this 

Court. See supra Part II.B.1. Accordingly, even assuming it is appropriate, in this 
24

particular case, to consider the profitability of Taxpayers’ investment of the loan 

proceeds, we must consider the expected profitability of the investments during only the 

first year of the transaction, when Taxpayers reasonably could have believed they would 

have access to the loaned funds. 

Assuming Curtis Investment’s historical average annual portfolio gain of 17.9 

percent, then Taxpayers could have expected to turn the approximately $401,000 that 

they received in the CARDS transaction into approximately $472,000 by the end of the 

year. Even if we exclude Taxpayers’ share of the fee Curtis Investment paid to CIBC to 

obtain the letter of credit, the more than $154,000 in up-front fees Ms. Baxter paid to 

Chenery Associates dwarfed that anticipated $71,000 return on the loaned funds. 

Put differently, under the Tax Court’s well-supported factual finding that 

Taxpayers’ testimony that they expected the loan proceeds to be available for more than a 

year was not credible, Taxpayers could not have expected to profit from the transaction, 

given the high upfront fees. Accordingly, no “reasonable possibility of profit from the 

transaction existed apart from the tax benefits.” Rice’s Toyota, 752 F.2d at 94; see also 

Klamath Strategic Inv. Fund ex rel. St. Croix Ventures v. United States, 568 F.3d 537, 

545 (5th Cir. 2009) (declining to consider anticipated returns in later stage of transaction, 

“which was never intended to be reached,” in profitability analysis). 

Although this Court has focused on the “possibility of profit” in assessing the 

objective economic substance of a transaction, other Circuits have recognized that other 

“[i]ndicia of objective economic substance include whether the loss claimed was real or 

artificial, whether the transaction was part of a prepackaged strategy marketed to shelter 
25

taxable gain, and whether the transaction has any practicable economic effects other than 

the creation of income tax losses.” Crispin, 708 F.3d at 515 (internal quotation marks 

and citations omitted) (collecting cases). These additional criteria further support the Tax 

Court’s judgment that the CARDS transaction lacked objective economic substance. The 

purported loss—the difference between Taxpayers’ liability for the entire CaledonianHVB loan and the promissory note Taxpayers received, which was worth only fifteen 

percent of the loan—was “artificial” because that additional liability always remained 

more-than-fully collateralized with Caledonian funds deposited at HVB. Likewise, “the 

transaction was part of a prepacked strategy marketed [by Chenery Associates] to shelter 

taxable gain.” Id. And for the same reason that the purported loss was “artificial,” the 

CARDS transaction had no “practicable economic effects.” Id. 

* * * * *

In sum, the Tax Court did not clearly err in finding that Taxpayers’ CARDS 

transaction failed both the subjective and objective prongs of the economic substance 

test. Accordingly, we reject the Taxpayers’ claim that the Tax Court reversibly erred in 

finding that Taxpayers’ CARDS transaction was a sham.

C.

Third, Taxpayers argue that the Tax Court improperly found that Taxpayers failed 

to establish reasonable cause and good faith for claiming losses based on Ms. Baxter’s 

CARDS transaction, and therefore erred by affirming the Commissioner’s imposition of 

accuracy-related penalties. Specifically, Taxpayers argue that the Tax Court improperly 

affirmed the Commissioner’s imposition of a forty percent (40%) accuracy-related 
26

penalty against Taxpayers because of their unlawful attempt to claim capital losses 

attributable to the CARDS transaction. 

Sections 6662(b)(3) and 6662(h) of the Internal Revenue Code impose an 

accuracy-related penalty for “gross” valuation misstatements, including valuation 

misstatements of the magnitude at issue in Taxpayers’ case. Under Section 6664(c)(1), 

“[n]o penalty shall be imposed under section 6662 . . . with respect to any portion of an 

underpayment if it is shown that there was a reasonable cause for such portion and that 

the taxpayer acted in good faith with respect to such portion.” Taxpayers bear the burden 

of establishing their “reasonable cause” and “good faith.” Gustashaw v. C.I.R., 696 F.3d 

1124, 1139 (11th Cir. 2012). This Court reviews for clear error the Tax Court’s factual 

findings as to reasonable cause and good faith. Id.; Antonides v. Comm’r, 893 F.2d 656, 

659 (4th Cir. 1990).

In determining whether a taxpayer acted with reasonable cause and good faith, 

Treasury Regulations require consideration of “all pertinent facts and circumstances.” 

Treas. Reg. § 1.6664–4(b)(1). “Generally, the most important factor is the extent of the 

taxpayer’s effort to assess the taxpayer’s proper tax liability.” Id. “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.” Id. 

As they did before the Tax Court, Taxpayers argue on appeal that they acted with 

reasonable cause and good faith because (1) they relied on the advice of their accounting 
27

and legal advisers, and (2) the tax issues raised by their CARDS transaction were “novel” 

and “unsettled” at the time they entered into the transaction. We disagree.

1.

As to Taxpayers’ first argument that their reasonable cause and good faith was 

shown by their reliance on professional advice, Treasury regulations provide that

“[r]eliance on . . . professional advice . . . constitutes reasonable cause and good faith if, 

under all the circumstances, such reliance was reasonable and the taxpayer acted in good 

faith.” Id. A taxpayer’s reliance on professional advice is objectively unreasonable if, 

for example, he fails to “suppl[y] the professional with all the necessary information to 

assess the tax matter” or if the professional “suffer[s] from a conflict of interest or lack[s] 

expertise that the taxpayer knew of or should have known about.” Neonatology Assocs., 

P.A. v. C.I.R., 299 F.3d 221, 234 (3d Cir. 2002).

Here, the Tax Court thoroughly considered all facts and circumstances and found 

that Taxpayers failed to establish reasonable and good faith reliance on the advice of their 

advisers. See Curtis Inv., 2017 WL 3314283, at *14–16. 

To begin, the court found that Taxpayers could not reasonably have relied on the 

tax opinion provided by Brown & Wood—which Taxpayers never engaged as their 

counsel—because Brown & Wood operated under a conflict of interest due to the firm’s 

relationship with Chenery Associates, the promoter of the CARDS transaction. Id. at 

*15. Taxpayers should have been aware of that relationship, the Tax Court found,

because it was disclosed in the CARDS promotional materials they received, and their 

advisers were informed of Brown & Wood’s relationship to Chenery Associates. Id.
28

That finding is consistent with the finding of other courts in CARDS cases, which found 

that a taxpayer could not rely on the Brown & Wood opinion because of the firm’s 

apparent conflict of interest. See Gustashaw, 696 F.3d at 1141; Kerman, 713 F.3d at 870; 

see also Mortenson v. C.I.R., 440 F.3d 375, 387 (6th Cir. 2006) (“In order for reliance on 

professional tax advice to be reasonable, however, the advice must generally be from a 

competent and independent advisor unburdened with a conflict of interest and not from 

promoters of the investment.” (emphasis added)).

The Tax Court also found that Taxpayers could not—and did not—reasonably rely 

on their legal and tax advisers’ “independent” review of the transaction because those 

advisers “relied solely on the model opinion letter from Brown & Wood in formulating 

their [oral] opinion,” and Taxpayers knew as much. Curtis Inv., 2017 WL 3314283, at 

*14. Again, that finding is supported by record evidence, e.g. J.A. 2624 (Taxpayers’ 

attorney averring he did not “review cases not cited in [Brown & Wood’s] opinion); J.A. 

2823 (Coats testifying that her firm “read [Brown & Wood’s opinion] and reread it and 

dissected” it but “[d]idn’t check every case or revenue ruling that was referred to”), and is 

consistent with findings rendered by other circuits in CARDS cases, see Gustashaw, 696 

F.3d at 1124; Kerman, 713 F.3d at 871 .

Additionally, the Tax Court emphasized that given Ms. Baxter’s twenty-year 

tenure as assistant manager and manager of Curtis Investment and service on Curtis 

Investment’s investment committee, she should have known that the tax benefits of the 

transaction “were too good to be true.” Curtis Inv., 2017 WL 3314283, at *16. Put 

differently, “the improbable tax advantages offered by the tax shelter”—a $2.4 million-
29

dollar paper loss attributable to a transaction through which Taxpayers received slightly 

more than $400,000 in investable funds (less more than $154,000 in fees paid to Chenery 

Associates)—“should have alerted a person with [Ms. Baxter’s] business experience and 

sophistication to the shelter’s illegitimacy.” 106 Ltd. v. C.I.R., 684 F.3d 84, 93 (D.C. Cir. 

2012). Again, that finding is supported by record evidence and consistent with reasoning 

found not clearly erroneous in another CARDS case, Gustashaw. See 696 F.3d at 1142 

(finding that “unbelievable benefits offered by the CARDS transaction” weighed against 

finding reasonable reliance). 

Finally, the Tax Court specifically found the vast majority of Ms. Baxter’s 

testimony not credible. For example, the court found not credible Ms. Baxter’s statement

that she believed, based on the advice of her accountants and lawyers, that she “would 

ultimately pay tax on the gain over time” because the record was devoid of evidence that 

Ms. Baxter’s advisers rendered such advice, which ran directly contrary to the model 

Brown & Wood opinion on which her advisers relied. Curtis Inv., 2017 WL 3314283, at 

*3 n.12, *12. The Tax Court also found not credible Ms. Baxter’s testimony “that she 

would not have engaged in a CARDS transaction if the tax could have been completely 

avoided.” Id. at *4 n.14. And the Tax Court found Taxpayers “purported investment 

motive” for engaging in the CARDS transaction “not . . . credible.” Id. at *12. “These 

types of credibility determinations are ensconced firmly within the province of a trial 

court [and] afforded broad deference on appeal.” Neonatology Assocs., 299 F.3d at 228 

n.9. And these adverse credibility determinations lend further support for the Tax 

Court’s finding that Taxpayers’ claim of good faith reliance on their professional advisers 
30

was not credible—i.e., that Taxpayers failed to show that they “actually relied in good 

faith on [their] adviser[s’] judgment” in engaging in the CARDS transaction and claiming 

the deduction on their tax return. DeCleene v. C.I.R., 115 T.C. 457, 477 (2000) 

(emphasis added); cf. Al-Adahi v. Obama, 613 F.3d 1102, 1107 (D.C. Cir. 2010) (noting 

“the well-settled principle that false exculpatory statements are evidence—often strong 

evidence—of guilt”).

Taxpayers nevertheless highlight several differences between their case and 

another CARDS case, Gustashaw, to argue that the Tax Court committed clear error in 

finding that Taxpayers failed to establish reasonable cause and good faith, including that 

(1) Gustashaw’s adviser admitted he was unqualified to render advice on the transaction,

whereas all of Taxpayers’ advisers had expertise in the area; (2) neither Gustashaw nor 

his adviser directly dealt with Brown & Wood, whereas Taxpayers’ advisers did; and (3) 

Gustashaw’s adviser did not offer an opinion (because he lacked expertise), whereas 

Taxpayers’ advisers “independently” reviewed the Brown & Wood opinion and advised 

that the opinion was what it purported to be. 

These are potentially significant differences that may have allowed the Tax Court 

to reach a different finding as to good faith and reasonable reliance in this case. But

Taxpayers’ case also is distinguishable from Gustashaw’s in meaningful ways as well. In 

particular, Gustashaw conceded that his CARDS transaction lacked economic substance 

and before the Tax Court challenged only the accuracy related penalties. Gustashaw, 696 

F.3d at 1133. By contrast, both before the Tax Court and this Court, Taxpayers claimed 

that their CARDS transaction did not lack economic substance and, in doing so, made 
31

numerous claims as to their motive for entering into the transaction and the objective 

economic substance of the transaction that the Tax Court found false or non-credible. 

See supra Part II.C. Those false and non-credible exculpatory statements constitute 

“strong evidence” of lack of good faith not present in Gustashaw. See Al-Adahi, 613 

F.3d at 1107. More significantly, Gustashaw did not establish the threshold for 

distinguishing reasonable cause and good faith reliance from the absence of reasonable 

cause and good faith. Rather, under Treasury regulations, courts must consider all facts 

and circumstances in making the factual determination as to whether a taxpayer met his 

burden of establishing reasonable cause and good faith. 

Here, the Tax Court properly considered all facts and circumstances—including 

numerous facts and circumstances relied on by courts in other cases in which taxpayers 

claimed they reasonably relied on the advice of a professional—and found that Taxpayers 

failed to meet their burden to establish their reasonable cause and good faith reliance on 

the advice of their professional advisers. That factual finding is supported by record 

evidence and reasonable inferences therefrom. Accordingly, the Tax Court’s finding as 

to Taxpayers’ failure to establish reasonable and good faith reliance lies within the 

universe of permissible inferences and, therefore, is not clearly erroneous.

2.

As to Taxpayers’ second argument—that the tax issues raised by Ms. Baxter’s

CARDS transaction were “novel” and “unsettled” at the time Taxpayers claimed losses 
32

attributable to the transaction—even assuming novelty is, by itself, a basis for setting 

aside a penalty otherwise mandated by Section 6662(b)(3),

2 Taxpayers’ argument fails. 

As the Tax Court noted, at the time Ms. Baxter entered in the CARDS transaction, 

it was well-established that transactions lacking economic substance must be disregarded 

for tax purposes. See Curtis Inv., 2017 WL 3314283, at *14 (citing Gregory v. 

Helvering, 293 U.S. 465, 468–70 (1935)). At that time, it also was well-established that 

tax losses that “do not correspond to any actual economic losses”—like Taxpayers’ 

purported loss attributable to Ms. Baxter’s assumption of liability for the eighty-five 

percent of Caledonian’s loan proceeds secured by the time deposits and for which she 

received no loan proceeds—“do not constitute the type of ‘bona fide’ losses that are 

deductible under the Internal Revenue Code and regulations.” ACM P’ship, 157 F.3d at 

252; see also Shoenberg v. Comm’r, 77 F.2d 446, 448 (8th Cir. 1935) (explaining that 

losses are deductible only if they are “actual and real”). And at that time, it was wellestablished that in examining economic substance, a taxpayer must look at the transaction 

giving rise to the loss, not collateral transactions, like Taxpayers’ planned investment of 

the proceeds of the exchange of the promissory note. See, e.g., ACM P’ship, 157 F.3d at 

 2 The Tax Court has found, in at least in one case, that a taxpayer acted with 

reasonable cause and good faith when the taxpayer “had an honest misunderstanding of 

the law, and the position [the taxpayer] took was reasonably debatable” due to “complex 

and overlapping issues of tax and bankruptcy law.” Williams v. C.I.R., 123 T.C. 144, 153 

(2004). Given that the Tax Court found numerous material aspects of Ms. Baxter’s 

testimony noncredible, see supra Part II.C, the Tax Court did not clearly err in finding 

Taxpayers could not establish that their decision to claim the deduction did not reflect an 

honest misunderstanding of the law.
33

260 (“The Tax Court properly analyzed the profitability of the transactions . . . which 

gave rise to the disputed tax consequences.”); Basic, 549 F.2d at 745.

Additionally, and as the Tax Court also correctly noted, just months before Ms. 

Baxter entered into her CARDS transaction, the Internal Revenue Service issued a formal 

notice regarding “Tax Avoidance Using Artificially High Basis.” I.R.S. Notice 2000-44, 

2000-2 C.B. 255. That notice—which was cited in the Brown & Wood’s model opinion 

reviewed by Taxpayers’ accounting and legal advisers and discussed with Taxpayers—

alerted “taxpayers and their representatives” that transactions “marketed to taxpayers for 

the purpose of generating artificial tax losses . . . are not allowable for federal income tax 

purposes” because such transactions “lack[] economic substance.” Id. Record evidence 

establishes that Chenery Associates marketed the CARDS transaction as a vehicle for 

generating artificial tax losses. And, as explained above, the Tax Court did not clearly err 

in finding that Taxpayers engaged in the CARDS transaction for the purpose of 

generating artificial tax losses, which finding is reinforced by the fact that the terms of 

Taxpayers’ CARDS transaction were finely tuned to exactly offset Ms. Baxter’s gains 

from the sale of her ABP stock. See supra Part II.B.1. 

Accordingly, the well-established body of case law dealing with the economic 

substance doctrine, the Internal Revenue Service notice, and the record evidence 

pertaining to the subjective and objective economic substance of Taxpayers’ CARDS 

transaction provided ample basis to support the Tax Court’s ultimate finding that, at the 

time they claimed the loss, Taxpayers’ “position [wa]s not reasonably debatable and 

[Taxpayers] did not prove that they acted with reasonable cause and in good faith.” 
34

Curtis Inv., 2017 WL 3314283, at *14.

3

 Therefore, the Tax Court did not reversibly err 

in rejecting Taxpayers’ novelty argument.

III.

For the foregoing reasons, we affirm the judgment of the Tax Court in its entirety.

AFFIRMED

 3 In a letter submitted pursuant to Federal Rule of Appellate Procedure 28(j), 

Taxpayers ask this Court to set aside the accuracy related penalties on grounds that the 

Commissioner failed to comply with Section 6751(b)(1) of the Internal Revenue Code. 

That statute 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.” 26 U.S.C. § 6751(b)(1). Taxpayers did not raise that 

argument before the Tax Court or in its opening brief to this Court, and therefore we 

decline to address it now. See Estate of Carpenter v. C.I.R., 52 F.3d 1266, 1274 (4th Cir. 

1995) (declining to consider argument for the first time on appeal when taxpayer “never 

raised th[e] argument before the tax court”).