Sugarloaf Fund, LLC v. Commissioner of Internal Revenue, No. 19-2468 (7th Cir. 2020)
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Rogers designed and implemented a scheme to generate artificial but tax‐deductible losses for high‐income U.S. taxpayers. The “DAD” scheme worked through a partnership’s acquisition of highly distressed or uncollectible accounts receivable from retailers located in Brazil and subsequent conveyance of interests in the receivables to U.S. taxpayers, who deemed them uncollectible and used the concocted loss to reduce their tax liability. DAD schemes were outlawed in the American Jobs Creation Act of 2004. Rogers then devised a modified transactional structure employing trusts.
The Seventh Circuit agreed with the Tax Court that the structural modifications only perpetuated fraudulent tax avoidance and that the Sugarloaf partnership was a sham before and after purported changes. All of Sugarloaf’s income for 2006, 2007, and 2008 should be allocated to an entity wholly owned by Rogers that served as Sugarloaf’s tax matters partner. The court warned that the IRS, Tax Court, and Seventh Circuit “have devoted substantial resources over multiple proceedings to deciphering foreign and domestic transactions, understanding complex tax structures, and separating the fair from the fraud. None of this has gone well for Rogers or his partnership, the Sugarloaf Fund ... caution to those who persist in pressing claims lacking any merit.”
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In the United States Court of Appeals For the Seventh Circuit ____________________ No. 19 2468 SUGARLOAF FUND, LLC and JETSTREAM BUSINESS LIMITED, Petitioners Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent Appellee. ____________________ Appeal from the United States Tax Court. No. 30410 12 No. 15857 13 No. 15858 13 No. 165 14 No. 28657 14 ____________________ ARGUED FEBRUARY 14, 2020 — DECIDED MARCH 6, 2020 ____________________ Before RIPPLE, SYKES, and SCUDDER, Circuit Judges. SCUDDER, Circuit Judge. Before us for a third time is a tax shelter designed by attorney John Rogers that the Tax Court has determined is an abusive sham. We reached the same con clusion in our prior opinions in Superior Trading, LLC v. Com missioner, 728 F.3d 676 (7th Cir. 2013), and Sugarloaf Fund, LLC 2 No. 19 2468 v. Commissioner, 911 F.3d 854 (7th Cir. 2018). We do so again here in an appeal focusing on di erent tax years. Rather than fill the Federal Reporter with what we said in Superior Trading and Sugarloaf I, we assume familiarity with those decisions. Both opinions describe the scheme Rogers de signed and implemented to generate artificial but tax deduct ible losses for high income U.S. taxpayers. Su ce it to say that the scheme worked through a partnership’s acquisition and subsequent transfer of highly distressed or uncollectible ac counts receivable from retailers located in Brazil. The point of the transfers was to convey interests in the receivables—assets with meaningful face value but no economic value in the hands of the Brazilian retailers—to U.S. taxpayers, who then deem them uncollectible and use the concocted loss to reduce their tax liability. The IRS caught on to these so called distressed asset/debt or DAD schemes and encouraged Congress to outlaw them. Congress accepted the invitation with its enactment of the American Jobs Creation Act of 2004, Pub. L. No. 108 357, § 833, 118 Stat. 1589. Rogers then returned to the drawing board to find a workaround. He devised a modified transac tional structure employing various trusts. In Sugarloaf I, we agreed with the Tax Court that the structural modifications changed little and indeed only perpetuated fraudulent tax avoidance. See 911 F.3d at 859. We therefore upheld the Com missioner’s adjustments to the income reported on Sugar loaf’s 2004 and 2005 partnership returns, disallowance of cer tain business expense deductions for those years, and the im position of two distinct penalties. See id. at 859–61. Along the way we explained why the Tax Court was right to conclude that the Sugarloaf partnership was a sham—formed not to No. 19 2468 3 operate a debt collection business but instead to generate fic titious losses designed for U.S. taxpayers to use to evade fed eral tax obligations. See id. Our attention this time around is on tax years 2006, 2007, and 2008. Rogers insists that “Sugarloaf 2006–2008” is “com pletely di erent” than “Sugarloaf 2003–2005.” The key di er ence, he urges, follows from an organizational restructur ing—rollups of the partnership—that resulted in Sugarloaf acquiring new partners and managers from 2006 to 2008 and recommitting to a clear and lawful profit motive. The Tax Court reached the opposite conclusion: it found that the “rec ord lacks any coherent thread of evidence to support Mr. Rog ers’ assertion that a legally enforceable change in ownership occurred.” Even more, the court found that “no economic con sequence resulted from the alleged rollups” of the Sugarloaf partnership. Put most simply, we see no error in the conclu sion that Sugarloaf was a sham partnership before and after the purported rollups. See Estate of Kunze v. Comm r, 233 F.3d 948, 950 (7th Cir. 2000) (noting that we review the Tax Court’s “factual determinations, as well as applications of legal prin ciples to those factual determinations, only for clear error”); Kikalos v. Comm r, 434 F.3d 977, 982 (7th Cir. 2006) (articulat ing the same standard). On another front, Rogers contests the Tax Court’s determi nation that all of Sugarloaf’s income for 2006, 2007, and 2008 should be allocated to Jetstream, an entity wholly owned by Rogers that served as Sugarloaf’s tax matters partner. We see no reason to upset that determination, especially given the overwhelming evidence supporting the Tax Court’s conclu sion that Sugarloaf remained a sham partnership throughout the tax years in question in this appeal. The upshot of the Tax 4 No. 19 2468 Court’s income allocation determination is that Sugarloaf’s income ultimately becomes allocated to Rogers, the individ ual who controlled the partnership for all intents and pur poses. Here, too, we see no error (factual or legal) in that de termination by the Tax Court. Rogers advances a host of other arguments in his briefs. He urges us, for example, to set aside the Tax Court’s findings that certain investor deposits to the trusts constitute income to Sugarloaf and that the partnership cannot deduct certain putative operating expenses. We construe Rogers’s argu ments not so much as rooted in alleged legal errors by the Tax Court, but rather as challenges to specific findings of fact that provided the foundation for the Tax Court’s ultimate legal conclusions. In light of our opinions in Superior Trading and Sugarloaf I, we see little value in a detailed articulation of why the Tax Court’s various findings of fact reflect no clear error. Nor does our fresh look at the Tax Court’s opinion reveal any legal errors a ecting the 2006, 2007, and 2008 tax years. Only one further point warrants underscoring. The Inter nal Revenue Service, Tax Court, and now our court have de voted substantial resources over multiple proceedings to de ciphering foreign and domestic transactions, understanding complex tax structures, and separating the fair from the fraud. None of this has gone well for Rogers or his partnership, the Sugarloaf Fund. While we cannot control any party’s litiga tion choices, we can sound caution to those who persist in pressing claims lacking any merit. The time has come to do so here, and we AFFIRM.
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