2012 Tax Ct. Memo LEXIS 307
Tax Ct.2012Background
- Kipnis and Kibler were 50% shareholders in Miller & Solomon General Contractors (M&S), an S corporation.
- In 2000 they entered a CARDS transaction designed to generate tax losses and purportedly increase M&S bonding capacity.
- Wimbledon Financial Trading LLC (Wimbledon) borrowed €6.7 million from HVB; petitioners were the assuming parties and liable for the loan.
- Petitioners contributed cash and assigned rights to receive proceeds to M&S; proceeds were diverted to promoters and M&S, with collateral swaps and currency hedges.
- HVB terminated the transaction in 2001; the structure required replacing collateral and resulted in no genuine indebtedness; the court found the CARDS transaction lacked economic substance.
- The Commissioner disallowed the loss deductions and the fees, and the Tax Court held the CARDS transaction lacked economic substance and the losses and fees were not deductible.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the CARDS transaction had economic substance | Kipnis and Kibler contend the transaction created legitimate business benefits for M&S. | Respondent argues the CARDS structure lacked business purpose and economic substance. | No; the transaction lacked economic substance and the losses are disallowed. |
| Whether petitioners may deduct the CARDS losses | Losses flowed from the purported financing scheme. | Without economic substance, losses are not deductible. | No; losses disallowed. |
| Whether petitioners may deduct fees paid to enter the CARDS transaction | Fees were ordinary business expenses. | Because the transaction lacked substance, fees are not deductible. | No; fees are not deductible. |
Key Cases Cited
- Kirchman v. Commissioner, 862 F.2d 1486 (11th Cir. 1989) (economic substance tests conjunctive; review of entire transaction)
- United Parcel Serv. of Am., Inc. v. Commissioner, 254 F.3d 1014 (11th Cir. 2001) (economic substance requires more than tax benefits; business purpose matters)
- Knetsch v. United States, 364 U.S. 361 (Supreme Court 1960) (economic substance doctrine foundations; no meaningful profit beyond tax benefits)
- Winn-Dixie Stores, Inc. v. Commissioner, 254 F.3d 1313 (11th Cir. 2001) (costs and benefits of a tax shelter require genuine economic effect)
- American Elec. Power Co. v. United States, 326 F.3d 737 (6th Cir. 2003) (limits of evaluating profitability of tax-driven structures)