Opinion ID: 2794605
Heading Depth: 2
Heading Rank: 2

Heading: CARDS Transactions, Generally

Text: CARDS transactions are designed to create the appearance of a tax loss without any actual economic loss. A CARDS transaction has three steps. In the first step, a Delaware limited liability company (“LLC”) is formed to serve as the borrower. The borrower LLC is comprised entirely of foreign members to avoid being subject to U.S. taxation. Once formed, the borrower LLC obtains a euro-denominated loan from an international bank. The borrower LLC then purchases two certificates of deposit (“CDs”) from the lending bank—one with 85% of the loan proceeds and the other with 15% of the loan proceeds. The loan proceeds, in the form of the two CDs, are immediately pledged to the lending bank as collateral for the loan. In the second step, the CARDS customer buys the smaller, 15% CD from the borrower LLC. In exchange, the CARDS customer assumes joint and several liability for the full value of the loan and agrees to pay 100% of the loan principal when the loan reaches its maturation date. In the third step, the CARDS customer converts the 15% euro-denominated CD into U.S. dollars, which the customer then gives back to the lending bank as collateral for the loan. In the absence of other acceptable collateral, the money never leaves the custody and control of the lending bank. 4 Case: 14-11959 Date Filed: 04/17/2015 Page: 5 of 25 This currency exchange is a taxable event generating tax benefits. To achieve the benefits, the CARDS customer claims that his cost basis in the exchanged currency is the entire loan amount—not just the 15% portion he actually received from the borrower LLC. This discrepancy creates a tax loss of 85% of the original loan amount, which is used to offset ordinary income. However, because both the 85% and 15% CDs are held by the lending bank and are used to repay the loan, the paper loss created by the currency exchange is illusory. C. Plaintiffs’ CARDS Transaction: December 2000–December 2001 Plaintiffs’ CARDS transaction, which commenced on December 5, 2000, and terminated on December 5, 2001, worked as follows. HVB, a large German bank, served as the lender. Wimbledon Financial Trading LLC (“Wimbledon”), formed on October 11, 2000, by two United Kingdom citizens, served as the borrower. On December 5, 2000, Wimbledon entered into a credit agreement with HVB, in which HVB agreed to lend Wimbledon €6,700,000 over a 30-year term with interest. On the same day, Wimbledon requested that HVB transfer the €6,700,000 to Wimbledon’s HVB account. Wimbledon issued a promissory note to HVB for €6,700,000, maturing on December 5, 2030, and HVB credited Wimbledon the same amount. Wimbledon then pledged all of its holdings at HVB 5 Case: 14-11959 Date Filed: 04/17/2015 Page: 6 of 25 as collateral. Also on December 5, 2000, Wimbledon purchased an HVB time deposit in the amount of €5,679,792, maturing on December 5, 2001. On December 21, 2000, Wimbledon and Plaintiffs entered into a purchase agreement and an assumption agreement. Under the purchase agreement, “Wimbledon sold each Plaintiff a portion of the [loan] in the form of a term deposit in the amount of €520,500 (for a total of [€]1,005,000), plus accrued interest, held in Wimbledon’s pledged HVB account.” The term deposits, which amounted to 15% of the €6,700,000 loan, were transferred to Plaintiffs’ HVB account on December 27, 2000. As part of the purchase agreement, Plaintiffs assumed joint and several liability “for all obligations under the [credit agreement] not covered by Wimbledon’s collateral.” Under the assumption agreement, Plaintiffs assumed joint and several liability for Wimbledon’s obligations, including repayment of the entire €6,700,000 loan. As collateral, Plaintiffs pledged all of their right, title, and interest in the accounts and instruments they held with HVB, as well as all proceeds thereof. With these agreements in place, Wimbledon, HVB, and Plaintiffs took the following steps to execute the assumption of the loan. On December 21, 2000, Plaintiffs wired HVB a total of $1,198,000 to buy three time deposits maturing on December 5, 2001. On December 27, 2000, HVB transferred the €1,005,000 6 Case: 14-11959 Date Filed: 04/17/2015 Page: 7 of 25 referenced in the purchase agreement between Plaintiffs and Wimbledon into Plaintiffs’ HVB account. Also on December 27, 2000, HVB exchanged €733,750 of the €1,005,000 it had credited to Plaintiffs for $682,387.50, at a rate of 0.93 U.S. dollars to the euro. On January 11, 2001, HVB exchanged the remaining €271,250 for $256,331.25, at a rate of 0.945 U.S. dollars to the euro. After Plaintiffs deposited $1,198,000 with HVB, HVB allowed M&S to withdraw $1,037,680 of the loan proceeds to use as it wished. On January 11, 2001, Plaintiffs began using the withdrawn loan proceeds. Specifically, Plaintiffs wired (1) $382,000 in fees from their HVB account to an account held by Chenery (as the promoter of the CARDS transaction) 2 and (2) $556,718.75 to M&S’s account at Mellon Bank. On November 13, 2001, less than one year after initiation of the CARDS transaction, HVB informed Plaintiffs that full repayment of the loan was due on December 5, 2001. HVB did so despite its prior representations that it would maintain the loan for 30 years. On December 5, 2001, the mandatory repayment date, Plaintiffs’ deposits at HVB were converted to the euro at the December 22, 2000 exchange rate. Had the December 5, 2001 exchange rate been applied instead, Plaintiffs would have made a profit of $70,200 from the currency 2 Plaintiffs’ complaint fails to allege or approximate the dates that they paid the fees to the CARDS Dealers, other than the wire transfer to Chenery on January 11, 2001. As the district court pointed out, however, all fees would necessarily have been paid no later than the termination of the CARDS transaction on December 5, 2001. 7 Case: 14-11959 Date Filed: 04/17/2015 Page: 8 of 25 exchange. Plaintiffs’ CARDS transaction closed on December 5, 2001, once all of the borrowed money was repaid with the pledged collateral. D. HVB Publicly Admits Fault: February 2006 CARDS transactions and their providers, such as HVB, have been the subject of investigation by federal authorities. 3 As a result of its involvement in CARDS, HVB was charged with participating in a conspiracy to defraud the United States, to commit tax evasion, and to make false and fraudulent tax returns. On February 13, 2006, HVB entered into a deferred prosecution agreement (“DPA”) with the U.S. Department of Justice. HVB admitted that, between 1996 and 2003, it assisted tax evasion by U.S. citizens by participating in and implementing fraudulent tax shelter transactions, including CARDS. HVB acknowledged that “the documentation used to implement CARDS . . . falsely stated that the loans were 30-year loans whereas, in truth and fact, as HVB and other participants knew and understood, they were loans of approximately one year in duration.” HVB admitted that “CARDS transactions . . . involved false representations” and “had no purpose other than generating tax benefits for the clients involved.” 3 The Internal Revenue Service (“IRS”) has issued several notices concerning CARDS transactions. In March 2002, the IRS issued a notice warning taxpayers against claiming tax benefits through CARDS shelters, because such benefits would be subject to penalties. See I.R.S. Notice 2002-21, 2002-1 C.B. 730. On October 28, 2005, the IRS offered a settlement initiative whereby taxpayers could pay a reduced penalty by relinquishing their CARDS-related tax benefits. See I.R.S. Announcement 2005-08, 2005-2 C.B. 967. Plaintiffs did not allege they participated in this 2005 settlement initiative. 8 Case: 14-11959 Date Filed: 04/17/2015 Page: 9 of 25 As part of the DPA, HVB agreed to pay the United States $29,635,125, which included disgorgement of $16,195,999 in fees HVB had collected from its tax shelter activities, restitution to the IRS, and civil penalties. Given HVB’s admissions in the 2006 DPA, the CARDS strategy could never have withstood IRS scrutiny. E. 2007 Notices of Deficiency and Tax Court Petitions On October 4, 2007, the IRS issued notices of deficiency to Plaintiffs. The IRS informed Plaintiffs that the CARDS transaction they had engaged in lacked economic substance and that the tax benefits they had claimed on their 2000 and 2001 federal tax returns were being disallowed. Specifically, the IRS assessed tax deficiencies against (1) Kipnis of $650,914 for 2000 and $346,495 for 2001 and (2) Kibler of $629,361 for 2000 and $351,973 for 2001. On December 31, 2007, Plaintiffs filed petitions in the tax court, challenging the IRS’s deficiency determination. Plaintiffs argued to the tax court that they entered into the CARDS transaction primarily for nontax reasons, namely, to obtain funds to transfer to their contractor company M&S to increase M&S’s bonding capacity. The tax court denied the IRS summary judgment based on a dispute of material fact as to whether Plaintiffs had a nontax business purpose for the CARDS transaction. 9 Case: 14-11959 Date Filed: 04/17/2015 Page: 10 of 25 F. November 2012 Tax Court Decision On November 1, 2012, following a three-day trial, the U.S. tax court issued a decision in favor of the IRS. See Kipnis & Kibler v. Comm’r, 104 T.C.M. (CCH) 530 (2012). The tax court concluded, inter alia, that Plaintiffs’ CARDS transaction “lacked economic substance” and that Plaintiffs “did not have a business purpose for entering into” it. Id. G. November 2013 Complaint On November 4, 2013, nearly 12 years after defendant HVB terminated their CARDS transaction on December 5, 2001, Plaintiffs filed a diversity complaint against HVB in the U.S. District Court for the Southern District of Florida. The complaint raised seven claims arising out of defendant HVB’s participation in Plaintiffs’ CARDS transaction: violation of the Florida Civil Racketeer Influenced and Corrupt Organization (“RICO”) statute (Count 1), common law fraud (Count 2), aiding and abetting Sidley’s and Chenery’s fraud (Count 3), conspiracy to commit fraud (Count 4), breach of fiduciary duty (Count 5), aiding and abetting Sidley’s and Chenery’s breaches of fiduciary duty (Count 6), and negligent supervision of employees and executives (Count 7). Plaintiffs alleged that defendant HVB and its employees conspired with Chenery, Sidley, and other individuals and entities (collectively, “CARDS Dealers”) to perpetuate a fraudulent tax shelter scheme on thousands of their 10 Case: 14-11959 Date Filed: 04/17/2015 Page: 11 of 25 clients, including Plaintiffs. According to Plaintiffs, HVB knew that the scheme would not withstand IRS scrutiny and that CARDS transactions were “nothing more than illegal tax shelters” that Chenery and HVB “developed and implemented . . . for the sole purpose of generating unconscionable fees.” Plaintiffs contended that they were fraudulently induced to enter the CARDS transaction and did so in reliance on the reputations of the CARDS Dealers involved, including HVB. Defendant HVB allegedly “owed Plaintiffs fiduciary duties by virtue of [its] role as Plaintiffs’ lender, its superior knowledge of the CARDS transaction, the control HVB retained over Plaintiffs’ accounts . . . and the trust and confidence that . . . Plaintiffs reposed in HVB.” HVB purportedly breached these fiduciary duties by concealing material information, committing fraud, and advising Plaintiffs to enter into the CARDS transaction. According to Plaintiffs, HVB made several misrepresentations, including that it intended to maintain the loans for 30 years. Plaintiffs “paid a heavy price in damages” as a result of HVB’s wrongdoing, including “substantial fees (and interest payments)” they paid HVB and other CARDS Dealers to participate in the CARDS strategy and “hundreds of thousands of dollars in ‘clean-up’ costs” they incurred after HVB failed to advise them to amend their tax returns. 11 Case: 14-11959 Date Filed: 04/17/2015 Page: 12 of 25 Consequently, Plaintiffs sought to recover the “damages that reasonably flow” from HVB’s misconduct. These damages included fees they paid to HVB and other CARDS Dealers, attorney’s fees and accountant’s fees incurred in litigating against the IRS, back taxes and interest paid by Plaintiffs, punitive damages, treble damages, and attorney’s fees and costs incurred in the instant action. H. Dismissal of Complaint On January 10, 2014, defendant HVB moved to dismiss the complaint, pursuant to Rule 12(b)(6). HVB argued that all of Plaintiffs’ claims were barred by Florida’s four- and five-year statutes of limitations. Even assuming Plaintiffs’ claims were timely filed, the complaint failed to sufficiently allege claims for relief. On April 3, 2014, the district court granted defendant HVB’s motion to dismiss the complaint as barred by the statutes of limitations. Liberally applying Florida’s delayed discovery rule, 4 the district court found that “the various IRS notices regarding tax shelters and CARDS transactions, [HVB’s admissions in] the DPA, and the IRS Notices of Deficiency should have alerted Plaintiffs, through the exercise of due diligence, to all of the facts giving rise to Plaintiffs’ claims in this 4 The district court acknowledged that Plaintiffs expressly disclaimed reliance on the delayed discovery rule. However, because the rule was relevant to Plaintiffs’ fraud-based claims and civil RICO claim, and each of Plaintiffs’ claims arose from the same wrongful conduct, the district court assumed the applicability of the delayed discovery rule to all of Plaintiffs’ claims. 12 Case: 14-11959 Date Filed: 04/17/2015 Page: 13 of 25 lawsuit, including that the various transaction fees Plaintiffs paid to HVB and the other CARDS Dealers were wrongfully obtained.” The district court found that Plaintiffs’ claims accrued no later than December 31, 2007, when Plaintiffs filed their petitions in the tax court. Plaintiffs had until December 31, 2011, to timely file their fraud, conspiracy, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and negligent supervision claims, and until December 31, 2012, to timely file their Florida civil RICO claim. Because Plaintiffs did not file the complaint until November 4, 2013, all of their claims were time-barred. The district court rejected Plaintiffs’ argument that their claims did not accrue until November 1, 2012, because they did not sustain any damages until the tax court issued its final decision. By December 5, 2001—Plaintiffs’ mandatory repayment date—Plaintiffs had sustained part of the damages they sought to recover, including the fees they paid to HVB. The district court found Plaintiffs’ reliance on the Florida Supreme Court’s decision in Peat, Marwick, Mitchell & Co. v. Lane, 565 So. 2d 1323 (Fla. 1990), to be misplaced. Peat, Marwick, which involved accrual of the limitations period in an accounting malpractice action, was wholly distinguishable and limited to professional malpractice claims (which Plaintiffs had not alleged). Accordingly, the district court dismissed Plaintiffs’ complaint as time-barred. 13 Case: 14-11959 Date Filed: 04/17/2015 Page: 14 of 25 This appeal followed.