Rogers v. Comm'r, T.C. Memo. 2018-53

• Decision Date: 17 April 2018
• Docket Number: Docket No. 1052-12,Docket No. 30482-13,T.C. Memo. 2018-53,Docket No. 30586-09,Docket No. 20910-14.,Docket No. 15682-13
• Parties: JOHN E. ROGERS AND FRANCES L. ROGERS, ET AL., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

JOHN E. ROGERS AND FRANCES L. ROGERS, ET AL.,¹ Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

T.C. Memo. 2018-53
Docket No. 30586-09
Docket No. 1052-12
Docket No. 15682-13
Docket No. 30482-13
Docket No. 20910-14.

UNITED STATES TAX COURT

April 17, 2018

John E. Rogers, for petitioners.

Craig Connell, Bernard J. Audet, Jr., Thomas A. Deamus, Frederick Petrino, Mayah Solh-Cade, and Briseyda Villalpando, for respondent in docket Nos. 30586-09, 1052-12, 15682-13, 30482-13, and 20910-14.

Elizabeth A. Carlson, for respondent in docket No. 20910-14.

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MEMORANDUM FINDINGS OF FACT AND OPINION

GOEKE, Judge: Respondent issued notices of deficiency to petitioners determining income tax deficiencies and accuracy-related penalties as follows (deficiency years):²

Year	Deficiency	Penalty; sec. 6662(a)	Penalty; sec. 6662(h)	Penalty; sec. 6662A
2005	$2,287,696	$139,449	$633,623	$34,033
2006	4,188,051	694,266	286,688	210
2007	403,465	80,693	-0-	-0-
2009	1,014,065	202,813	-0-	-0-

For 2006 respondent determined a 75% fraud penalty under section 6663 against petitioner John Rogers; the above-listed accuracy-related penalties for 2006 are respondent's alternative position. In his answer for 2009 respondent asserted that petitioners are liable for an addition to tax for failure to timely file a return under section 6651(a).

Petitioner Frances Rogers seeks relief from joint and several liability under section 6015 for 2003 and the above deficiency years. For 2003 petitioners

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litigated 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 business expense deductions related to both petitioners' business activities. Petitioners were assessed with income tax and a penalty for 2003 as a result of our decision in Superior Trading, LLC v. Commissioner, 137 T.C. 70 (2011), supplemented by T.C. Memo. 2012-110, aff'd, 728 F.3d 676 (7th Cir. 2013). In November 2013 the Commissioner issued a notice of intent to levy with respect to 2003, and petitioners requested a collection due process (CDP) hearing. Respondent did not make a determination regarding Mrs. Rogers' request for innocent spouse relief in a CDP hearing.

Petitioners litigated their 2004 tax liability in Rogers v. Commissioner (Rogers 2004), T.C. Memo. 2014-141, which determined that petitioners had unreported income and disallowed business expense deductions related to their business entities. We denied Mrs. Rogers relief from joint and several liability for 2004 in Rogers v. Commissioner, T.C. Memo. 2017-130, appeal filed (7th Cir. Nov. 16, 2017). On January 23, 2018, petitioners filed a motion for partial summary judgment with respect to the penalties against them in these consolidated

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cases on the basis of our decision in Graev v. Commissioner, 149 T.C. ___ (Dec. 20, 2017), supplementing 147 T.C. ___ (Nov. 30, 2016).

After concessions, the issues for consideration are: (1) whether petitioners have unreported income from the following sources: trustee fees relating to Mr. Rogers' implementation of distressed debt transactions in 2006, unreported income from Mr. Rogers' business, Portfolio Properties, Inc. (PPI), for 2005 and 2006, and unreported income for 2005 and 2006 relating to the tax consequences of Mrs. Rogers' transfer of real property to her wholly owned S corporation, Sterling Ridge, Inc. (SRI); we hold that they do; (2) whether petitioners and their wholly owned entities are entitled to the following deductions: a charitable contribution deduction in 2005 for the transfer of real property, a worthless debt deduction relating to Reddy Lab (described infra) or a worthless debt or stock deduction relating to Portfolio Technologies, Inc. (PTI), certain business expenses for 2005, 2006, 2007, and 2009, certain itemized deductions for 2006, and a $5,355 long-term capital loss deduction for 2005; with a few limited exceptions; we hold that they are not; (3) whether Mrs. Rogers is entitled to relief from joint and several liability under section 6015; we hold that she is not; (4) whether petitioners are liable for penalties and an addition to tax as follows: (a) Mr. Rogers, a section 6663 fraud penalty for 2006; we hold that he is not;

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(b) petitioners, accuracy-related penalties under section 6662(a) or (h) or section 6662A for 2005 and 2006 and under section 6662(a) for 2007 and 2009; we reserve this issue for subsequent disposition; (c) petitioners, an addition to tax under section 6651(a)(1) for their failure to timely file an income tax return for 2009; we hold that they are not.

FINDINGS OF FACT

I. Background

At the time the petitions were filed, petitioners resided in Illinois.³ They were married during the years at issue, filed a joint income tax return for each year, and remained married at the time of trial. Mr. Rogers is a tax attorney with over 40 years of experience. He has a juris doctor degree (J.D.) from Harvard University and a master of business administration degree (M.B.A.) from the University of Chicago. From January 1998 to June 2003 he was a partner at the law firm Altheimer & Gray. From July 2003 to May 2008 he was a tax partner at Seyfarth Shaw, LLP (Seyfarth Shaw). In 2008 he formed Rogers & Associates as a sole proprietorship. He is also a certified public accountant. Petitioners also owned a number of business entities. Most of the adjustments in dispute here

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relate to income and deductions from these businesses and Mr. Rogers' activities as an attorney. Mr. Rogers used some of these entities to promote a tax-avoidance transaction involving Brazilian consumer distressed debt (distressed debt transactions) that has been the subject of previous Court Opinions. Kenna Trading, LLC v. Commissioner, 143 T.C. 322 (2014); Superior Trading, LLC v. Commissioner, 137 T.C. 70. Petitioners were assessed additional tax as a result of these partnership-level proceedings.

Mrs. Rogers has a bachelor's degree in chemistry, a master's degree in biochemistry, an M.B.A, a doctorate in educational administration, and a J.D. She worked as a high school chemistry and computer science teacher and an associate principal for over 20 years, retiring in 2005. She also has been a licensed real estate broker since 1967 and a licensed attorney since 1991. In 2009 she began representing clients in property tax appeals, which she taught herself to perform.

II. Petitioners' Business Activities

A. Tax Shelter Promotion Activities

Mr. Rogers implemented and promoted the distressed debt transactions that give rise to respondent's adjustments through three business entities: (1) PPI, (2) Sugarloaf Fund, LLC (Sugarloaf), and (3) Jetstream Business Ltd. (Jetstream). Mr. Rogers formed PPI as its sole shareholder and caused it to elect S corporation

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status in 1992.⁴ He formed Sugarloaf and treated it as a partnership for Federal income tax purposes. He formed Jetstream, a British Virgin Islands limited company, with PPI as its sole shareholder to act as Sugarloaf's sole manager and its tax matters partner. Jetstream is a disregarded entity for Federal tax purposes. Mr. Rogers was Jetstream's sole director and manager. Mr. Rogers indirectly owned no more than 1% of Sugarloaf through Jetstream and PPI. However, he controlled PPI, Jetstream, and Sugarloaf during the deficiency years.

Mr. Rogers used Sugarloaf to promote the distressed debt transactions (Sugarloaf transactions) involved in Kenna Trading LLC v. Commissioner, 143 T.C. 322.⁵ Sugarloaf acquired distressed consumer receivables (distressed debt) from Brazilian retailers in exchange for a purported ownership interest in Sugarloaf, and Sugarloaf then transferred interests in the distressed debt to individual investors in the Sugarloaf tax shelter through either a partnership or trust structure. In 2004 Mr. Rogers used a partnership structure involving trading

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and holding companies for the individual investors to hold the distressed debt. Beginning in 2005 and continuing through 2007 Mr. Rogers used a trust structure for the tax shelters in response to legislative changes in 2004 to the subchapter K partnership rules that prevented the tax shelter loss-shifting benefits in his trading and holding company structure.⁶ Id. at 324, 328. Under the trust structure, Sugarloaf would form a new trust for each individual who invested in the tax shelter (main trust), and then Sugarloaf would contribute distressed debt to the main trust. The individual investors would have each main trust form a subtrust, and the main trust would assign the debt to the subtrust. The investor would contribute cash to the main trust, typically equal to approximately 6% of the face value of the distressed debt held by the main trust. In exchange, the investor would receive an interest in the main trust and the entire beneficial interest in the subtrust. Mr. Rogers was the trustee of both the main trust and the subtrust formed for each investor; Sugarloaf was the beneficiary. For each investor, Sugarloaf, the main trust, and the subtrust treated the distressed debt as having a carryover basis from the Brazilian retailer that was based on the face value of the

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debt. The investor would have the subtrust claim a worthless debt deduction that was based on partial worthlessness of the distressed debt, typically equal to 97% of the face value of the distressed debt, and the investor (as the purported grantor of the subtrust) would pass the worthless debt deduction through to his personal tax return.

In Kenna Trading, LLC v. Commissioner, 143 T.C. at 324-325, 359-360, the Court held that the tax shelter investors were not entitled to worthless debt deductions for the Sugarloaf transactions for 2004 and 2005. The Court held that Sugarloaf was a sham and not a valid partnership for...