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Court Error – Tax – Income-allocation

By: Derek Hawkins//April 13, 2020//

Court Error – Tax – Income-allocation

By: Derek Hawkins//April 13, 2020//

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7th Circuit Court of Appeals

Case Name: Sugarloaf Fund, LLC, et al. v. Commissioner of Internal Revenue

Case No.: 19-2468

Officials: RIPPLE, SYKES, and SCUDDER, Circuit Judges.

Focus: Court Error – Tax – Income-allocation

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 conclusion in our prior opinions in Superior Trading, LLC v. Com‐ missioner, 728 F.3d 676 (7th Cir. 2013), and Sugarloaf Fund, LLC 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 designed and implemented to generate artificial but tax‐deductible 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.

Rogers contests the Tax Court’s determination 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 conclusion that Sugarloaf remained a sham partnership throughout the tax years in question in this appeal. The upshot of the Tax Court’s income‐allocation determination is that Sugarloaf’s income ultimately becomes allocated to Rogers, the individual who controlled the partnership for all intents and purposes. 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 arguments 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 Internal Revenue Service, Tax Court, and now our court 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. While we cannot control any party’s litigation 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.

Affirmed

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Derek A Hawkins is trademark corporate counsel for Harley-Davidson. Hawkins oversees the prosecution and maintenance of the Harley-Davidson’s international trademark portfolio in emerging markets.

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