East v. Comm'r of Internal Revenue

Citation728 F.3d 673
Decision Date26 August 2013
Docket NumberNo. 12–2652.,12–2652.
PartiesJohn E. and Frances L. ROGERS, Petitioners–Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent–Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)

728 F.3d 673

John E. and Frances L. ROGERS, Petitioners–Appellants,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent–Appellee.

No. 12–2652.

United States Court of Appeals,
Seventh Circuit.

Argued April 19, 2013.
Decided Aug. 26, 2013.



John Edward Rogers (submitted), Attorney, Rogers & Associates, Chicago, IL, for Petitioners–Appellants.

Ellen P. DelSole (submitted), Richard Farber, Attorneys, Department of Justice, Washington, DC, for Respondent–Appellee.


Before EASTERBROOK, Chief Judge, and POSNER and WILLIAMS, Circuit Judges.

POSNER, Circuit Judge.

A trial before the Tax Court resulted in a determination that in 2003 John Rogers and his wife had failed without justification to report $984,655 of taxable income attributable to income of Portfolio Properties, Inc. (PPI), an S corporation wholly owned by Mr. Rogers, and to a distribution that he had received from PPI. T.C. Memo 2011–277, 102 T.C.M. (CCH) 536 (2011). For tax purposes the income of an S Corporation is deemed the personal income of the shareholders, 26 U.S.C. § 1366, in this case the share-holder. After the Tax Court rejected Rogers' arguments—repeated in this appeal—that the disputed income had been held in trust for third parties and so wasn't taxable to him, the parties stipulated that if Rogers' arguments were rejected he had a tax deficiency of $269,107 and also owed the government a $5000 penalty. (We disregard his wife. Although the couple filed a joint

[728 F.3d 674]

return, she appears to have had nothing to do with the shenanigans that gave rise to the deficiency.) As a detail, we remark the minuteness of the penalty. The Tax Court determined that Rogers' $269,107 tax deficiency was attributable to his “substantial understatement of income tax,” which is penalized by 26 U.S.C. § 6662(a). The penalty specified in the statute is 20 percent of the deficiency, but the stipulation we mentioned states that only a 5 percent penalty would be imposed, we know not why.

This is a companion case to Superior Trading, LLC v. Commissioner,, 728 F.3d 676 (7th Cir.2013), also decided today, in which we uphold the disallowance of losses claimed by companies created by Rogers to implement a distressed asset/debt tax-shelter (“DAD”) scheme. We also uphold the imposition of a “gross valuation misstatement” penalty. Though the éminence grise of the unlawful tax shelter, Rogers was not a party to that case, the deficiency and penalty assessed against him in this case arose from his creation of the shelter.

Rogers had created a partnership called Warwick Trading, LLC. The partners were a Brazilian retailer named Lojas Arapuã S.A. that contributed receivables to the partnership that were worth a small fraction of their face amount because they were largely uncollectible, and a company owned by Rogers named Jetstream Business Limited that was designated Warwick's managing partner, responsible for collecting the receivables. Because property contributed to a partnership retains its original basis no matter how far its market value has fallen, the receivables had the potential to generate losses that would be deductible from the taxable income of U.S. taxpayers who later entered the partnership, though in Superior Trading we hold that the potential could not be realized because, among other reasons, the partnership was a sham.

Rogers had created PPI—which plays a critical role in...

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12 cases
  • Rogers v. Comm'r, T.C. Memo. 2018-53
    • United States
    • U.S. Tax Court
    • 17 Abril 2018
    ...years. For 2003 petitionersPage 3litigated their income tax liability in Rogers v. Commissioner (Rogers 2003), T.C. Memo. 2011-277, aff'd, 728 F.3d 673 (7th Cir. 2013). The Court determined that petitioners had unreported income from Mr. Rogers' business activities and disallowed certain bu......
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    • 22 Septiembre 2016
    ...as an agent of the corporation and/or deployed them for a corporate purpose." Rogers v. C.I.R., 102 T.C.M. (CCH) 536 (T.C. 2011), aff'd, 728 F.3d 673 (7th Cir. 2013). In determining whether gains are taxable income or non-taxable under the conduit theory, the controlling factor is the econo......
  • Tricarichi v. Comm'r
    • United States
    • U.S. Tax Court
    • 14 Octubre 2015
    ... ... TRICARICHI, TRANSFEREE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent T.C. Memo. 2015-201 Docket No. 23630-12. UNITED STATES ... ...
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