Sugarloaf Fund, LLC v. CIR

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 different 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. Suffice 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 different” than “Sugarloaf 2003–2005.” The key differ‐
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. Commʹr, 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. Commʹr, 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 affecting 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.