943 F.3d 464
D.C. Cir.2019Background
- Andrew Beer (the Delta Group/Bricolage) ran a tax-shelter scheme in which partnerships bought paired one-week currency options from Deutsche Bank, designed so one leg produced a large gain in one year and the other a corresponding loss in a later year.
- Deutsche Bank financed the premium loans for the option pairs; one option paid out in Danish kroner and the other in euros (the krone then being pegged to the euro).
- The Tax Court found the parties agreed beforehand to use fixed seven-day forward exchange rates (shown in exchanged spreadsheets) to convert payouts and to settle loans, which eliminated currency-exchange risk and any ex ante profit potential.
- The partnerships (Beer’s clients/affiliates) challenged the Tax Court’s factual finding of a pre-agreed rate and raised evidentiary complaints about the Tax Court suggesting an adverse inference from the absence of Deutsche Bank witnesses.
- The Court of Appeals reviewed factual findings for clear error and affirmed the Tax Court: the record supports rate-fixing, the trades lacked economic substance, and any error about the missing-witness inference was harmless.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the paired currency option trades were shams (lack economic substance) | Trades had potential for profit and a legitimate nontax business purpose (marketing/selling tax losses). | Parties fixed rates so trades carried zero risk and no objective profit potential; no independent nontax purpose. | Affirmed: transactions were shams—no profit potential and no legitimate nontax purpose. |
| Whether parties agreed to fix forward exchange rates used to settle trades | Spreadsheets were internal projections; Deutsche Bank’s use of those rates was accidental, not an agreement. | Spreadsheets contained mutually agreed rates; Deutsche Bank settled using those rates; partnerships never objected. | Tax Court’s finding of rate-fixing was not clearly erroneous. |
| Whether the Tax Court improperly drew an adverse inference from absence of Deutsche Bank witnesses | Drawing an adverse inference was impermissible and tainted the finding of rate agreement. | Partnerships did not produce bank witnesses; even if inference was drawn, ample documentary/pattern evidence existed. | Even if drawing the inference was error, it was harmless; record independently supports the finding. |
| Burden of proof on sham/economic-substance question | Commissioner bore burden of proof. | Allocation immaterial; case resolved on preponderance of evidence after both sides presented proof. | Allocation not outcome-determinative; preponderance standard applied. |
Key Cases Cited
- Horn v. Commissioner, 968 F.2d 1229 (D.C. Cir. 1992) (establishes sham test: no objectively reasonable profit potential and no legitimate nontax business purpose)
- United States v. U.S. Gypsum Co., 333 U.S. 364 (1948) (standard for overturning factual findings for clear error)
- Blodgett v. Commissioner, 394 F.3d 1030 (8th Cir. 2005) (preponderance standard in tax-court contexts when burden-allocation is immaterial)
- United States v. Young, 463 F.2d 934 (D.C. Cir. 1972) (missing-witness inference and harmless-error discussion)
- 106 Ltd. v. Commissioner, 684 F.3d 84 (D.C. Cir. 2012) (deference to Tax Court credibility determinations)
- Bufco Corp. v. NLRB, 147 F.3d 964 (D.C. Cir. 1998) (reversal where agency drew adverse inference against party that did not control missing witness)