What is a 'Custom Adjustable Rate Debt Structure (CARDS)'

The Custom Adjustable Rate Debt Structure (CARDS) is a type of tax shelter product used by high net worth individuals that involves making a large multimillion-dollar paper loan to a foreign party. This party is usually a company related to the company brokering the tax shelter. After a series of asset related swaps, the individual receives a paper loss that is equivalent to the original value of the loan. This paper loss can then be used to offset real gains that the individual has earned, reducing their taxes owing.

Such investments are deemed illegal by the Internal Revenue Service (IRS). 

Breaking Down 'Custom Adjustable Rate Debt Structure (CARDS)'

Custom Adjustable Rate Debt Structures were used between 2000 and 2002, but the IRS has since deemed them to be illegal, arguing that taxpayers should not be allowed to benefit from losses that were not actually realized. In several court cases, the court ruled in favor of the IRS, finding that CARDS lacked economic substance, the person entering a CARD agreement lacked a profit motive, and CARDS lacked a business purpose. According to the IRS, lowering taxes is not a legitimate business purpose unless the loss is a result of trying to make a profit or is the result of normal business.

Tax Shelter Schemes

Providing CARDS, and other questionable tax shelter products, was so lucrative that some companies based their businesses on providing them. While CARDS were not issued after 2002, slightly different tax shelters pop up every year, usually with a nice acronym like CARDS, FLIP, DAD, COBRA, COINS, and the list goes on. 

While the structure of each tax shelter varies, with subtle changes in how the tax deductions are created, in order to be valid they all must pass the guidelines mentioned above or they face being struck down by the IRS. There must be a profit motive and an economic or business purpose for entering the transaction. Simply trying to create a tax deduction without the above motive or purposes could land the tax shelter in trouble. This is especially true if the taxpayer entering the transaction isn't actually realizing a material loss or isn't risking anything in the first place to realize the loss that will reduce their tax bill.

Several promoters of tax shelters, that were deemed illegal, have been sued by the Department of Justice. The taxpayers involved in the schemes have experienced fines and penalties in many cases, and almost always have any tax advantage they gained by entering the agreement rescinded by the IRS.

  1. Abusive Tax Shelter

    An abusive tax shelter is an investment scheme that claims to ...
  2. Tax Selling

    Tax selling refers to a type of sale in which an investor sells ...
  3. Tax Benefit

    A tax benefit is an allowable deduction on a tax return intended ...
  4. Tax Liability

    A tax liability is the amount an individual, corporation or other ...
  5. Tax Year

    Tax year refers to the 12-month period covered by a taxpayer's ...
  6. Tax Break

    A tax break is a savings on a taxpayer's liability. It is also ...
Related Articles
  1. Managing Wealth

    Get A Step Up With Credit Shelter Trusts

    Don't let unexpected taxes eat away at your inheritance or burden your heirs.
  2. Taxes

    Investment Tax Basics For All Investors

    Asset placement and tax-loss harvesting can reduce the tax burden, however, Investors should still consult tax advisors for investment strategies.
  3. Taxes

    What's IRS Form 1040 For?

    Most U.S. taxpayers will be familiar with the 1040. By the end of filling it out, you'll know how much tax you owe, or what your refund is.
  4. Insights

    How Fortune 500 Companies Avoid Paying Income Tax

    President Donald Trump is not alone in not paying taxes.
  5. Personal Finance

    3 New Types Of Credit Cards To Look For

    These three types of credit cards are becoming popular with customers looking to pay less fees and build up their credit scores.
  6. Personal Finance

    Credit vs. Debit Cards: Which Is Better?

    Credit and debit cards may look identical, but they're not. Be strategic about which type of card you use.
  7. Personal Finance

    Credit Card or Cash: Which To Use?

    Credit cards are more convenient to use than cash, but they're not always the best choice. Here is why you should and shouldn't pay with a credit card.
  8. Personal Finance

    5 Signs You Need a New Credit Card

    High interest rates, hefty annual fees and poor customer service are among the indications that you have a bad credit card.
  9. Managing Wealth

    Assets the Ultra-Rich Use to Reduce (or Avoid) Taxes

    Paintings, oil wells and yachts can get great tax write-offs for their wealthy owners. All it takes is some smart gaming of the tax code.
Trading Center