Neal Crispin v. Commissioner of Internal Reven
2013 U.S. App. LEXIS 3852
| 3rd Cir. | 2013Background
- Crispin appeals a Tax Court ruling disallowing an ordinary loss deduction from a CARDS transaction and imposing an accuracy-related penalty under § 6662.
- CARDS involves a foreign loan and a U.S. taxpayer’s small purchase of foreign currency to create a large claimed basis and loss.
- Crispin and Murus engaged in a one-year CARDS loan arrangement with Croxley/Zurich, with Murus guaranteeing Crispin’s share of the loan.
- The transaction provided cash collateral control and had no meaningful economic substance or business purpose beyond tax benefits.
- IRS warnings, Notices 2000-44 and 2002-21, suggested losses from CARDS lacked economic substance; Pullman opinion advised otherwise.
- Tax Court found the loss fictional and upheld penalties; Crispin challenged both the economic substance finding and the penalty under § 6662.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the CARDS loss lacked economic substance | Crispin asserts business purpose and substance to the CARDS loan. | Commissioner contends lack of economic substance and motive of tax avoidance. | Yes; transaction lacked economic substance. |
| Whether the 40% valuation misstatement penalty applies | Crispin argues penalty should not apply when deduction is disallowed entirely. | Commissioner argues penalty applies for a gross valuation misstatement under § 6662(h). | Yes; 40% penalty applies. |
| Whether Crispin reasonably relied on the Pullman opinion to avoid penalties | Crispin relied on Pullman to avoid penalties. | Reliance was unreasonable due to misrepresentations and lack of timely, drafted material. | No; reliance not reasonable or in good faith. |
Key Cases Cited
- Gustashaw v. Comm’r, 696 F.3d 1124 (11th Cir. 2012) (economic substance and penalties in CARDS context; 40% penalty applicable where appropriate)
- Merino v. Comm’r, 196 F.3d 147 (3d Cir. 1999) (valuation misstatement penalty applies to disallowed deductions under economic substance doctrine)
- Neonatology Assocs., P.A. v. Comm’r, 299 F.3d 221 (3d Cir. 2002) (reasonable cause and good faith standard; credibility determinations)
- ACM P’ship v. Comm’r, 157 F.3d 231 (3d Cir. 1998) (economic substance test blends objective and subjective analyses)
- Lerman v. Comm’r, 939 F.2d 44 (3d Cir. 1991) (focus on taxpayer’s business purpose and intent behind transactions)