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.