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Appeals Settlement Guidelines on CARDS transactions.

The IRS has issued Appeals Settlement Guidelines (ASG) concluding that losses from custom adjustable rate debt structure (CARDS) transactions are not allowable, and that accuracy-related penalties on CARDS participants may be appropriate, depending on the facts and circumstances.

Background: In Notice 2002-21, the Service announced that it had become aware of a type of transaction used by taxpayers to generate tax losses. It warned that the tax benefits purportedly generated are not allowable.

Allegedly, the transaction creates a permanent deduction when a taxpayer acquires property from a limited liability company (LLC), assumes as consideration joint and several liability for LLC debt that exceeds the property's value (and claims basis in the property in the full amount of the debt), then disposes of the property at a loss.

On Mar. 17, 2004, the IRS designated the CARDS issue as an Appeals Coordinated Issue.

No loss: The ASG conclude that CARDS transactions do not result in a deductible loss, for the following reasons:

* The taxpayers did not provide documentary evidence that the transactions establish a reasonable profit potential in excess of the associated fees;

* The transaction was designed as a product to shelter income;

* The taxpayer's basis should be limited to the fair market value of the assets received, rather than the full loan amount; and

* The taxpayers failed to show that their investment in the CARDS transaction was entered into for profit.

Penalties: The ASG state that the determination of whether a Sec. 6662 accuracy-related penalty applies to any portion of the underpayment attributable to a CARDS transaction hinges on the facts and circumstances. It notes that taxpayers generally rely on legal opinions to support the argument that a CARDS transaction met Regs. Sec. 1.6662-4(g)(l)'s tax shelter substantial authority exception. Appeals Officers are directed to consider the law and the court decisions discussed and factors listed in the ASG, when evaluating the hazards of litigation when an accuracy-related penalty is asserted. These factors include items such as:

* The taxpayer's background;

* How the taxpayer got involved in the transaction;

* The extent to which tax benefits influenced the taxpayer;

* Who advised the taxpayer;

* The information the taxpayer was given about tax opinions;

* How the taxpayer chose the law firm representing it;

* Who the taxpayer's investment advisers were; and

* The advice they gave.
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Title Annotation:FROM THE IRS
Author:Laffie, Leslie S.
Publication:The Tax Adviser
Date:Apr 1, 2005
Previous Article:Related-party like-kind exchanges.
Next Article:Schedule M-3.

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