Sugarloaf Fund, LLC v. Commissioner of Internal Revenue

Rogers is a tax lawyer. The Seventh Circuit previously characterized as an “abusive scam” a scheme Rogers implemented for the 2003 tax year. He implemented a similar scheme for later tax years: Rogers forms a partnership (Sugarloaf) that he uses to acquire severely-distressed accounts receivables from Brazilian retailers. For tax purposes, the partnership carries the receivables at their face amount, not at fair value. The partnership then conveys the receivables to U.S. taxpayers, who deem them uncollectible and deduct from their income the associated “loss.” A 2004 Tax Code amendment prohibits such partnerships from transferring built-in-losses on uncollectible receivables to U.S. taxpayers in this manner, 118 Stat.1589. Rogers modified his scheme to involve a trust in which Sugarloaf was both the grantor and beneficiary and additional maneuvering. Under the IRS’s sham determination, the Brazilian retailers’ purported contribution of receivables to Sugarloaf was recharacterized as a sale of assets; Sugarloaf’s original basis in the receivables was reduced to fair value—nearly nothing. The Tax Court and Seventh Circuit affirmed that Sugarloaf was a sham partnership; even if Sugarloaf were a legitimate partnership, the Brazilian retailers’ redemptions of their interest in the partnership was, in substance, a sale of receivables. A 40% penalty applied (26 U.S.C. 6662(h)(1); (2)(A)(1)) to Sugarloaf’s tax underpayment resulting from its gross misstatement of the 2004 cost-of-goods-sold expense, and a 20% penalty applied (section 6662(a), (b)(1) & (2)) to underpayments attributable to its negligence when failing to include certain income and taking disallowed business expense deductions. View "Sugarloaf Fund, LLC v. Commissioner of Internal Revenue" on Justia Law