Yet Another Bullshit Tax Shelter Bites the Dust (2/26/13)

In Crispin v. Commissioner, 708 F.3d 507 (3d Cir. 2013), here, as had the Tax Court, the Third Circuit smacked down yet another Bullshit tax shelter, this one of the CARDS variety.  Also, as had the Tax Court, the Third Circuit addressed the credibility of the taxpayer's representations of profit motive.

The CARDS Shelter.  Although the patched together CARDS transactions have nuances, here is the broad overview by the Third Circuit:

      A CARDS transaction is a tax-avoidance scheme that was widely marketed to wealthy individuals during the 1990's and early 2000's. It purports to generate, through a series of pre-arranged steps, large "paper" losses deductible from ordinary income. First, a tax-indifferent party, such as a foreign entity not subject to United States taxation, borrows foreign currency from a foreign bank (a "CARDS Loan"). Then, a United States taxpayer purchases a small amount, such as 15 percent, of the borrowed foreign currency by assuming liability for a an equal amount of the CARDS Loan. The taxpayer also agrees to be jointly liable with the foreign borrower for the remainder of the CARDS Loan and so the taxpayer purports to establish a basis equal to the entire borrowed amount. n3 Finally, the taxpayer exchanges the foreign currency he purchased for United States dollars. That exchange is a taxable event, and the taxpayer claims a loss equal to the full amount of his supposed basis in the CARDS Loan, less the proceeds of the relatively small amount of currency actually exchanged. The taxpayer uses that loss to shelter unrelated income. n4
   n3
The Commissioner contends that that step in the CARDS transaction "is predicated on an invalid application of the ... basis provisions of the Internal Revenue Code." (Appellee's Br. at 4.) Specifically, I.R.C. § 1012 provides that a taxpayer's basis in property is generally equal to the purchase price paid by the taxpayer. That purchase price includes the amount of the seller's liabilities assumed by the taxpayer as part of the purchase, on the assumption that the taxpayer will eventually repay those liabilities. See Comm'r v. Tufts, 461 U.S. 300, 308-09, 103 S. Ct. 1826, 75 L. Ed. 2d 863 (1983). But in a CARDS transaction, the Commissioner argues, the  taxpayer and the foreign borrower agree that the taxpayer will repay only the portion of the loan equal to the amount of currency the taxpayer actually purchases.  [JAT NOTE:  This footnote 3 is as revised by subsequent order, Crispin v. Commissioner, 2013 U.S. App. LEXIS 5341 (3d Cir. Mar. 19, 2013).]   n4 The general structure of a CARDS transaction is well and thoroughly set forth in Gustashaw v. Commissioner, 696 F.3d 1124, 1127-28, 1130-31 (11th Cir. 2012).

The following is the gravamen of the smack down on the merits -- actually lack of merits (footnote omitted):

Is Restitution a Criminal Penalty Requiring the Jury to Speak? (12/6/12)

The Seventh Circuit today decided United States v. Wolfe, 701 F.3d 1206 (7th Cir. 2012), here,, cert. den. 133 S. Ct. 2797 (2013), adopting the minority view that restitution is a civil penalty that does not require the jury to determine the facts.  Doug Berman has a good discussion for an overview of the holding.  See Seventh Circuit rejects extending Southern Union to restitution based on (minority) view it is not a criminal penalty (Sentencing Law and Policy Blog 12/5/12), here.

Aside from the substantive merits of the restitution  issue, Judge Bauer addresses the pressure on a court to override a circuit  court precedent to conform with the majority of the circuits.

Having examined our sister circuits who have addressed whether restitution is civil or criminal in nature, we find ourselves in the minority. Only the Eighth and Tenth Circuits, like us, have found restitution to be civil in nature. See United States v. Millot, 433 F.3d 1057, 1062 (8th Cir. 2006) (stating that restitution orders "are not in the nature of a criminal penalty." (quoting United States v. Carruth, 418 F.3d 900, 904 (8th Cir. 2005))); United States v. Nichols, 169 F.3d 1255, 1279-80 (10th Cir. 1999) (stating that the purpose of restitution under the Victim Witness Protection Act "is not to punish defendants or provide a windfall for crime victims but rather to ensure that victims, to the greatest extent possible, are made whole for their losses." (quoting United States v. Arutunoff, 1 F.3d 1112, 1121 (10th Cir. 1993))).\ 

But a "compelling reason" is required to overrule our Circuit's precedent. United States v. Kendrick, 647 F.3d 732, 734 (7th Cir. 2011). Being in the minority is not enough. This is true even if the trend is against us. See Patel v. Holder, 563 F.3d 565, 569-71 (7th Cir. 2009) (Ripple, J., concurring) (agreeing with the court's judgment because it was based on this Circuit's precedent but writing separately to discuss how our interpretation of the statute "puts us on the distinct minority side of an intercircuit split"); but see Russ v. Watts, 414 F.3d 783, 788 (7th Cir. 2005) (describing why we may overturn our Circuit precedent if no other circuit accepts it (quoting United States v. Hill, 48 F.3d 228, 232 (7th Cir. 1995))). 

Readers will recall that mandatory restitution is not permitted for the Title 26 tax crimes, but is for the Title 28 tax crimes (most prominently, conspiracy).  Usually pleas for Title 26 crimes will include a restitution for the taxes involved.  That provision will then permit the remedies normally available for restitution, as well  as the recently enacted tax assessment remedies for restitution.  See New Statute for Civil Effect of Restitution in Tax Cases (at Least Title 26 Crimes of Conviction) (2/11/11),  here.