708 F.3d 507 (3rd Cir. 2013), 12-2275, Crispin v. C.I.R.

Docket Nº:12-2275.
Citation:708 F.3d 507
Opinion Judge:JORDAN, Circuit Judge.
Attorney:George W. Connelly, [Argued], Chamberlain, Hrdlicka, White, Johnson & Williams, Houston, TX, for Appellant. Gary R. Allen, Tamara W. Ashford, Richard Farber, Judith A. Hagley, [Argued], Gilbert S. Rothenberg, United States Department of Justice, Tax Division, Washington, DC, for Commissioner of I...
Judge Panel:Before: RENDELL, FISHER, and JORDAN, Circuit Judges.
Case Date:February 25, 2013
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

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708 F.3d 507 (3rd Cir. 2013)

Neal CRISPIN, Appellant



No. 12-2275.

United States Court of Appeals, Third Circuit.

February 25, 2013

Argued Jan. 8, 2013.

As Amended March 19, 2013.

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[Copyrighted Material Omitted]

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George W. Connelly, [Argued], Chamberlain, Hrdlicka, White, Johnson & Williams, Houston, TX, for Appellant.

Gary R. Allen, Tamara W. Ashford, Richard Farber, Judith A. Hagley, [Argued], Gilbert S. Rothenberg, United States Department of Justice, Tax Division, Washington, DC, for Commissioner of Internal Revenue.

Before: RENDELL, FISHER, and JORDAN, Circuit Judges.


JORDAN, Circuit Judge.

Neal D. Crispin appeals the decision of the United States Tax Court that he was not entitled to an ordinary loss deduction for his participation in a Custom Adjustable Rate Debt Structure (" CARDS" ) transaction and that he is liable for an accuracy-related penalty under § 6662 of the Internal Revenue Code (" I.R.C." ).1 The Tax Court disallowed the claimed loss on the grounds that Crispin's CARDS transaction lacked economic substance and held that he could not avoid the penalty because he had not relied reasonably or in good faith on the advice of an independent and qualified tax professional. For the following reasons, we will affirm.

I. Background

A. Facts

Crispin is a businessman who has engaged in various enterprises over the years, some through his wholly-owned S-corporation, Murus Equities, Inc. (" Murus" ). Among other things, he has been involved in leasing, structured finance, aircraft acquisition, and mortgage-backed securities investing. He practiced as a certified public accountant and served as chief financial officer of an energy company, before pursuing opportunities in structured finance and aircraft leasing. Crispin has had long and varied experience with tax matters, including tax shelters.

Since 1989, Crispin has been in the business of purchasing and leasing commercial turboprop aircraft through investment syndicates. According to Crispin, his aircraft leasing business purchases used aircraft costing between $1 million and $10

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million and leases them for approximately ten years before reselling them. Prior to his participation in the CARDS transaction that is the subject of this appeal, Crispin had identified three aircraft (the " Aircraft" ) that he expected would be available for purchase in 2002 and that he says he planned to have Murus purchase.2

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.3 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.4

CARDS marketing materials describe the transaction as providing " financing" to the taxpayer. However, there is no net cash available to the taxpayer, because the foreign bank requires that all of the currency purchased with the proceeds of the CARDS Loan (including the portion purchased by the taxpayer) remain at the bank as collateral for the CARDS Loan. The taxpayer only has access to the proceeds of the CARDS Loan if he delivers to the bank an equal amount of cash, cash equivalents, or other collateral acceptable to the bank.

In 2000, prior to the events involved in this case, the Internal Revenue Service (" IRS" ) warned taxpayers about taking tax deductions based on artificial losses generated by inflated bases in certain assets. See Notice 2000-44, 2000-2 C.B. 255 (Aug. 13, 2000) (" Tax Avoidance Using Artificially High Basis" ). The Notice containing that warning said that the IRS would not recognize transactions that created an artificially high basis if they lacked economic substance or a valid business purpose. After the IRS discovered the widespread use

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of CARDS, and before Crispin had filed the tax return at issue in this case, the IRS issued another Notice specifically addressed to CARDS transactions and explaining their technical flaws. See Notice 2002-21, 2002-1 C.B. 730 (Mar. 18, 2002) (" Tax Avoidance Using Inflated Basis" ). The IRS also imposed disclosure obligations on CARDS promoters and users. Eventually, the IRS announced a settlement initiative that allowed CARDS users to avoid penalties for gross valuation misstatements applicable under I.R.C. § 6662, provided that they conceded their CARDS-related tax benefits and agreed to pay a reduced penalty. See Announcement 2005-80, 2005-2 C.B. 967 (Oct. 28, 2005). Some 2,000 taxpayers elected to settle, paying roughly $2 billion in back taxes.

The CARDS transaction at issue in this case was used by Crispin to shelter more than $7 million of income for the 2001 tax year. He learned of the CARDS opportunity from Roy Hahn, the founder of Chenery Associates, Inc. (" Chenery" ), which promoted CARDS and other tax shelter transactions. Crispin claims that Hahn approached him at a time when he (Crispin) planned to have Murus acquire the Aircraft but had not yet arranged financing for that purchase. Hahn proposed to Crispin that he enter into a CARDS transaction that Chenery had designed for another client who had decided not to proceed. In that transaction, a foreign entity would enter into a 30-year CARDS Loan denominated in a Swiss francs; the loan proceeds would be retained by the lender; Crispin would purchase 15 percent of the foreign currency obtained through the CARDS Loan, and he would agree to be jointly and severally liable for the entire CARDS Loan; he would agree to repay the principal at the maturity date; and he would exchange the foreign currency he purchased for United States dollars, claiming as his basis the full amount of the CARDS Loan and garnering a tax loss equal to 85 percent of the total loan value. Hahn also provided Crispin with a sample tax opinion blessing the transaction.5

Crispin decided to proceed with the transaction. He also informed his partner in the mortgage securities business about the CARDS transaction, and the partner agreed to participate as well, with Murus taking a one-third share equal to Crispin's share in that business, and the partner taking the remaining two-thirds. Crispin advised Chenery that Murus would realize $7.6 million in income in 2001 from the mortgage securities business, and the transaction that Chenery designed generated losses that were almost exactly equal to both partners' 2001 income from that business.6

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Chenery arranged the CARDS transaction with Croxley Financial Trading LLC (" Croxley" ) serving as the foreign borrower 7 and Zurich Bank and its affiliates (collectively " Zurich" ) as the lender. In early December 2001, Zurich loaned 74 million Swiss francs to Croxley for a stated 30-year term but callable and repayable at any time after the first year. The proceeds of the CARDS Loan were transferred to Croxley's account at Zurich and pledged to Zurich as collateral for the loan. In late December 2001, Croxley sold Crispin 4.8 million Swiss francs (the " loan assumption proceeds" ) in exchange for Crispin's agreement to be jointly and severally liable for a share of Croxley's loan obligations to Zurich with a value of $9.4 million.8 Crispin immediately transferred the loan assumption proceeds to the Zurich account of Murus, which in turn guaranteed Crispin's loan obligations, and which pledged the Swiss francs to Zurich as collateral for the loan. On the same day, Murus exchanged 3.1 million Swiss francs for United States dollars. Murus received $1.8 million, which it used to purchase a Zurich promissory note that matured at the end of one year and that was held by Zurich as collateral for Murus's guaranty of Crispin's obligations on the CARDS Loan.9

In August 2002, Zurich notified Croxley and Crispin that it was exercising its right to terminate the CARDS Loan. The collateral securing Murus's guarantee was transferred to Croxley, which used it, together with the remainder of the loan proceeds held by Zurich, to repay the loan. The Croxley loan ended up lasting approximately one year, which was typical of the CARDS Loans that Zurich provided to Chenery clients.10

In April 2002, prior to filing his and Murus's 2001 tax returns, Crispin engaged Pullman & Comley, LLC (" Pullman" ), a law firm that provided opinion letters for other Chenery clients, to provide a tax

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opinion regarding the CARDS transaction (the " Pullman Opinion" ). The Pullman Opinion noted that the IRS had expressed negative views of the economic substance and other aspects of CARDS transactions. However, Pullman opined that Crispin's transaction " should have sufficient business purpose to be respected" by the IRS because " [t]he business purpose for [his] entering into the [t]ransactions is clear" and " [t]he financing available to [him] through the [t]ransactions has reduced [his] costs and...

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