Superior Trading, LLC v. Comm'r of Internal Revenue
| Decision Date | 17 April 2012 |
| Docket Number | Docket No. 20867-07,Docket No. 19543-08,Docket No. 20338-07,Docket No. 20243-07,Docket No. 20936-07,Docket No. 20337-07,Docket No. 20652-07,Docket No. 20232-07,Docket No. 20653-07,Docket No. 20655-07,Docket No. 20871-07,Docket No. 20171-07,Docket No. 20230-07 |
| Parties | SUPERIOR TRADING, LLC, JETSTREAM BUSINESS LIMITED, TAX MATTERS PARTNER, ET AL.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent* |
| Court | U.S. Tax Court |
Petitioners
John E. Rogers and Nicholas C. Mowbray, for petitioners.
Lawrence Charles Letkewicz and Laurie A. Nasky, for respondent.
WHERRY, Judge: Each of these consolidated cases constitutes a partnership-level proceeding under the unified audit and litigation provisions of the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, sec. 402(a), 96 Stat. at 648, commonly referred to as TEFRA. Following a lengthy trial conducted the week of October 5, 2009, in Chicago, Illinois, we issued an Opinionon September 1, 2011, Superior Trading, LLC v. Commissioner, 137 T.C. 70 (2011) (Superior Trading I).2
Pursuant to the determinations set forth in Superior Trading I, we entered decisions in all 15 of the previously consolidated cases on September 9, 2011.3 Each decision sustained respondent's adjustments to the partnership items of the purported partnership at issue, and the applicability of penalties, as determined in the underlying notice of final partnership administrative adjustment (FPAA) issued pursuant to section 6223,4 in the given case.
On September 29, 2011, pursuant to Rule 161, petitioners in 13 of the original 15 cases, which continue to remain consolidated here, timely filed a motion for reconsideration of Superior Trading I.5 On October 6, 2011, these moving petitioners filed a motion under Rule 162 to vacate the decisions in the respective cases.6 The two motions contain substantially similar text. Respondent filedobjections to both the motion to reconsider Superior Trading I and the motion to vacate the accompanying decisions.
Reconsideration pursuant to Rule 161 is intended to correct substantial errors of fact or law and allow the introduction of newly discovered evidence that the moving party could not have introduced, by the exercise of due diligence, in the prior proceeding. Estate of Quick v. Commissioner, 110 T.C. 440, 441 (1998). We have discretion to grant a motion for reconsideration but will not do so unless the moving party can point to unusual circumstances or substantial error. Id.; see also Vaughn v. Commissioner, 87 T.C. 164, 166-167 (1986). "Reconsideration is not the appropriate forum for rehashing previously rejected legal arguments or tendering new legal theories to reach the end result desired by the moving party." Estate of Quick v. Commissioner, 110 T.C. at 441-442; see also Estate of Turner v. Commissioner, 138 T.C. ___, ____ (slip op. at 3) (Mar. 29, 2012). For the reasons discussed below, we will deny both motions.
We adopt the findings of fact we made in Superior Trading I.7 For convenience and clarity, we repeat some of these findings as necessary for the disposition of the two motions.
John Rogers is a tax lawyer who devised and marketed the "paternalistically" called DAD (an acronym for distressed asset/debt) shelter at issue in the consolidated cases. See generally Superior Trading I, 137 T.C. at 73-78. To effectuate the DAD shelter in these cases, Rogers set up an elaborate Rube Goldberg machine consisting of: a purported partnership between Arapua, a Brazilian retailer and Jetstream, a British Virgin Islands company, ostensibly for servicing and collecting distressed consumer receivables owed to the retailer; trading companies, which came to hold Arapua's consumer receivables; and holding companies in which individual U.S. investors invested.
In Superior Trading I, we held that: (1) a bona fide partnership was never formed for Federal tax purposes between Arapua and Jetstream; (2) Arapua never made a valid contribution of the consumer receivables to the purported partnership under section 721; (3) these receivables should not receive carryover basis treatment under section 723; and (4) Arapua's claimed contribution and subsequent redemption from the purported partnership should be collapsed into a single transaction and recharacterized as a simple sale of the receivables. These are all alternative holdings, each by itself sufficient to sustain respondent's adjustments to the partnership items of the respective purported partnerships.
As we explained in Superior Trading I, under any one of these holdings, the basis of Arapua's receivables in the hands of the various purported partnerships that came to acquire ownership interests in them is zero. Consequently, each of our alternative holdings results in a gross valuation misstatement within the meaning of section 6662(h)(2)(A)(i). Therefore, in Superior Trading I, we sustained respondent's determination of a 40% accuracy-related penalty for all consolidated cases.
Granting motions to reconsider and vacate lies within our discretion. See generally Intermountain Ins. Serv. of Vail, Ltd. Liab. Co. v. Commissioner, 134T.C. 211, 215 (2010) (), rev'd on other grounds, 650 F.3d 691 (D.C. Cir. 2011).
The motions before us to reconsider and vacate are a curious admixture of a regurgitation of unfounded assertions and half-baked theories soundly rejected in Superior Trading I, a disingenuous criticism of our holdings in that Opinion, and fanciful claims of newly discovered evidence that allegedly undermines our findings of fact supporting those holdings. Consequently, these motions merit no more than a summary denial.
Yet we recognize that the dispute at the center of the consolidated cases could morph and present itself in other manifestations. Therefore, to provide additional guidance on our interpretation of the applicable law, we have set forth in some detail our reasons for denying the motions. In so doing, we have no illusions of persuading all moving petitioners. Instead, we write now for the benefit of the "silent waters that run deep"--the dozens of deep-pocketed investors who acquired ownership interests in the various holding companies, which in turn sought to exploit the inflated basis of the Arapua receivables. After all the linen is washed, these investors constitute the fonts whither the promised tax savings from chimerallosses would have drained and whence the required tax payments for determined deficiencies and accuracy-related penalties will flow.
Under section 6231(a)(2)(B), "The term 'partner' means * * * any * * * person whose income tax liability under subtitle A is determined in whole or in part by taking into account directly or indirectly partnership items of the partnership." As we described in Superior Trading I, the investors in the holding companies were never members in the same limited liability company as Arapua. Regardless, to the extent their income tax liability is affected by the basis of the Arapua receivables, a partnership item in these partnership-level proceedings, these investors are partners for purposes of these proceedings.
Consequently, pursuant to section 6226(c)(1), each such investor "shall be treated as a party to such action". And though it is already too late for these deemed parties to participate in these proceedings, it might not be too early for them to begin preparing for what is surely coming down the pike--computational adjustments by means of either direct assessment or partner-level deficiency proceedings. See generally Thompson v. Commissioner, 137 T.C. 220 (2011).
The twin motions, to reconsider and to vacate, resurrect in the garb of new arguments and novel approaches petitioners' failed claims from Superior Trading I, either advanced at trial or developed in posttrial briefs, that a bona fide partnership was formed between Arapua and Jetstream for servicing Arapua's distressed receivables.
The motions fault Superior Trading I for denying that "Arapua and Jetstream * * * had a common intention to collectively pursue a joint economic outcome * * * [and] that Arapua and Jetstream ever came together to constitute an 'entity' for this purpose." Superior Trading I, 137 T.C. at 81. The motions adduce three grounds for reversing these conclusions: (1) Commissioner v. Culbertson, 337 U.S. 733 (1949), no longer governs whether a partnership exists for Federal income tax purposes; (2) section 704(e)(1) obviates an inquiry into the parties' subjective intent to form a partnership; and (3) Moline Props., Inc. v. Commissioner, 319 U.S. 436 (1943), compels us to find a valid partnership here. All of these arguments repudiate petitioners' own reasoning expounded before, at and after trial, while contorting both statutory law and caselaw.
This allegation is hypocrisy cloaked in hyperbole. Petitioners had espoused fealty to Culbertson well before these proceedings got underway and continued to swear...
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