Opinion ID: 821217
Heading Depth: 2
Heading Rank: 1

Heading: The Liability Decision

Text: Crispin argues that the Tax Court erred in determining that his CARDS transaction lacked economic substance because the Court misapplied the pertinent analytical test and failed to credit testimony that Crispin had a valid business purpose in using the CARDS Loan. In particular, Crispin alleges that the business purpose of the CARDS Loan was to provide long-term financing for the purchase of aircraft to be used in Murus‟s leasing business. Section 165 of the Internal Revenue Code provides that “[t]here shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.” I.R.C. § 165(a). However, “[o]nly a bona fide loss is allowable. Substance and not mere form shall govern in determining a deductible loss.” Treas. Reg. § 1.165-1(b). For a loss to be bona fide, it must therefore satisfy the economic substance doctrine, among other requirements.15 “The economic substance doctrine ... applies where the economic or business purpose of a transaction is relatively insignificant in relation to the comparatively large 15 The Commissioner has also questioned the deductibility of Crispin‟s CARDS loss under several other provisions of the Code, including whether the loss from a currency transaction was ordinary or capital, under I.R.C. § 988, and whether Crispin was “at risk” for the amount of the deducted loss, as required by I.R.C. § 465. Because the Tax Court did not address those arguments, and because we agree that Crispin‟s CARDS transaction fails to satisfy the economic substance doctrine, we do not address the Commissioner‟s other arguments. 14 tax benefits that accrue (that is, a transaction ... which exploit[s] a feature of the tax code without any attendant economic risk) ... .” Neonatology Assocs., P.A. v. Comm’r, 299 F.3d 221, 231 n.12 (3d Cir. 2002) (citation and internal quotation marks omitted). “[I]n that situation, where the transaction was an attempted tax shelter devoid of legitimate economic substance, the doctrine governs to deny those benefits.” Id. “The inquiry into whether the taxpayer‟s transactions had sufficient economic substance to be respected for tax purposes turns on both the objective economic substance of the transactions and the subjective business motivation behind them.” ACM P’ship v. Comm’r, 157 F.3d 231, 247 (3d Cir. 1998) (internal quotation marks omitted). Indicia of objective economic substance include whether the loss claimed was real or artificial, Stobie Creek Invs., LLC v. United States, 608 F.3d 1366, 1377 (Fed. Cir. 2010), whether the transaction was “part of a prepackaged strategy marketed to shelter taxable gain,” id. at 1379, and “whether the transaction has any practicable economic effects other than the creation of income tax losses,” Jacobson v. Comm’r, 915 F.2d 832, 837 (2d Cir. 1990). The subjective intent inquiry focuses on whether the taxpayer entered into the transaction intended to serve a useful business purpose, see ACM P’ship, 157 F.3d at 252-54; Lerman v. Comm’r, 939 F.2d 44, 49 (3d Cir. 1991), and on the “correlation of losses to tax needs coupled with a general indifference to, or absence of, economic profits,” Keeler v. Comm’r, 243 F.3d 1212, 1218 (10th Cir. 2001). The Tax Court found that Crispin‟s CARDS transaction failed both the objective and subjective tests for economic substance. The Court noted that Crispin 15 experienced only a paper loss of $7.6 million,16 and that, after the CARDS Loan was repaid, Crispin experienced no consequences other than receiving the tax deduction. As a result, the Court concluded that “[t]he ordinary loss claimed from the CARDS transaction was fictional” (App. at 27), which it noted was “the hallmark of a transaction lacking economic substance.” (Id. at 28.) As to Crispin‟s stated business purpose, the Tax Court determined that both the structure of the CARDS transaction and the record belie Crispin‟s contention that he engaged in the transaction to obtain long-term financing for use in his aircraft leasing business. Although the Zurich loan had a stated 30-year maturity, the proceeds remained in Zurich‟s complete possession and control as collateral for the loan, and Zurich had the ability to call the loan at any time after the first year, which it in fact did. Also, Crispin never took any action to obtain and use the proceeds of the loan, knowing that he would have to post an offsetting amount of cash collateral. Nor did he ever take any steps to secure Zurich‟s approval to substitute aircraft for cash as collateral for the loan. Finally, there 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 Zurich. Based on the foregoing, all of which is well-supported by the record, we see no error, let alone clear error, in the Tax Court‟s 16 The Tax Court noted that the true net cost of the CARDS transaction to Crispin was only $72,926, primarily the structuring fee paid to Chenery and the cost of the Pullman Opinion. The ordinary loss actually reported by Murus, by comparison, was $7,641,706. 16 ultimate finding that Crispin‟s CARDS transaction lacked economic substance. Crispin objects to the Tax Court‟s conclusion that much of his testimony on the business purpose of his CARDS transaction was not credible. In particular, the Court discounted his testimony that he had approached Zurich about substituting aircraft for cash as collateral for the CARDS Loan, and that he had received assurances from Zurich that it would consider such a change. Evidently that testimony – as well as expert testimony regarding the potential profit that could be generated by using the CARDS Loan proceeds to purchase aircraft – were unimpressive, because the Court found that Crispin did not actually plan to pursue the substitution of collateral. Crispin‟s protestations of unfairness in that finding ring hollow. Assessing whether “taxpayers‟ fact witnesses testified incredibly with regard to material aspects of th[e] case, and that their testimony ... was self-serving, vague, elusive, uncorroborated, and/or inconsistent with documentary and other reliable evidence” constitutes the kind of “credibility determinations ... ensconced firmly within the province of a trial court, afforded broad deference on appeal.” Neonatology Assocs., 299 F.3d at 229 n.9 (internal quotation marks omitted). In this case, there was ample documentary and testimonial evidence that contradicted Crispin‟s account of the business purpose of his CARDS transaction, and the Tax Court did not abuse its discretion in deciding not to credit Crispin‟s evidence.