In Uncategorized on 11/01/2012 at 17:40

If the deal where you acquired the money is a sham, using proceeds in a legitimate deal doesn’t give business purpose to the sham. Thus Judge Jacobs to Don Kipnis and Larry Kibler, the golden boys of the Florida construction industry, in Donald J. Kipnis, 2012 T. C. Memo. 306, filed 11/1/12. Don and Larry are consolidated for briefing, trial and disposition.

Don and Larry need more net quick. This is not chocolate milk, but working capital to allow them to get bonded for bigger construction deals. Having taken a big hit on a recent job, their net quick has the bonding companies worried, they say, so they can’t bid the big lucrative jobs where contractors must be bonded.

So Don and Larry enter into a CARDS deal, one of the phony mix-and-matches with an offshore tax indifferent, where a phony loan is floated by a German bank (later the subject of a fraud investigation) with strings attached that guarantee that no one takes a loss or makes a profit (except the promoter of the deal and the bank), but a big tax loss is generated.

Some cash does get thrown off to Don and Larry, which they put into their contracting sub S (M&S), thereby giving them more of the desirable net quick. This, they claim, legitimizes the deal, as everyone agrees M&S is a leading Florida contractor, and net quick gets you bonded.

“The other CARDS transactions are essentially the same as the transaction in this case, with one exception. In the other cases the taxpayers did not use the proceeds arising from the CARDS transaction to actually make an investment. Petitioners assert this difference is significant and mandates a holding that they are entitled to the loss deductions claimed because they, in fact, used the proceeds from the CARDS transaction to increase M&S’ net quick.” 2012 T. C. Memo. 306, at p. 25.

IRS says no: “Respondent [IRS] posits that to look to the use of the proceeds from the CARDS transaction would permit taxpayers to legitimize sham transactions by grafting them onto legitimate business transactions. Continuing, respondent argues that petitioners had no business purpose in entering into the CARDS transaction per se. In sum, respondent asserts that after all was said and done, petitioners’ primary intent was to offset their significant business income with the losses arising from their involvement in the CARDS transaction.” 2012 T. C. Memo. 306, at pp. 25-26.

Don and Larry agree that the CARDS deal had no economic substance, but they needed what little cash they got to build up the net quick. But cash-on-cash, the deal was negative; it cost Don and Larry $1.2 million to net $423K.

“Petitioners were unequivocal about one thing: Any contribution to M&S had to be in the form of a loan. Contributing their own money to M&S was not an option. Both petitioners and their witnesses explained that the construction industry was built on leverage. Moreover, Mr. Kipnis was emphatic that personal considerations prevented him from putting his own money into M&S. And yet, after all was said and done, Messrs. Kipnis and Kibler spent nearly $1.2 million of their own money in order for $423,000 to ultimately reach M&S. No genuine leveraging arose from the CARDS transaction.” 2012 T. C. Memo. 306, at pp. 32-33.

So what Don and Larry did with the money doesn’t matter. They took a huge tax loss. See my blogpost “It Ain’t What You Do With What You Got”, 8/11/11.

A bona fide expenditure won’t save a phony deal.


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