That Tax Shelter Seemed Like a Really Good Idea at the Time

It helps to be really smart if you want to talk yourself into something really stupid. That’s how a lot of bad tax shelters happen. Let’s call this one the “Dumb-Ass Deduction Distressed Asset-Debt” (“DAD^2” or “DAD-squared”) shelter.

The ingredients:
• A bunch of near-worthless consumer receivables from a struggling Brazilian department store chain.
• A whip-smart Chicago tax lawyer, John E. Rogers.
• A bunch of LLC partnerships for tax-motivated investors.
• Some cash.


The Brazilians contribute their receivables – purportedly with a big built-in loss – to a partnership. This partnership contributes the debt to other LLCs. Shortly afterwards the first LLC buys out the Brazilians, who are desperate for cash, leaving the crappy receivables behind. The investor partnerships then write off the debts as bad debt deductions, giving big tax losses to the investors.

It can’t fail, right? Well, aside from the obvious problems, like:

– The tax law presumes that if a partner (think Brazilians here) contributes stuff to a partnership, and then gets cash back in redemption of the interest within two years, then it wasn’t really a tax-free partnership contribution and distribution. Instead, the tax law presumes that the Brazilian sold the stuff for cash. The partnership was just a place to hide it for awhile.

– If the Brazilians hadn’t sold out, the tax law would have required them to get all of the losses. The tax law doesn’t let taxpayers shift gains or losses to others by joining a partnership. After all, that’s what S corporations are for.

The guy who put this thing together was smart, as people who put together sophisticated tax deals always are. The Tax Court spells it out:

Rogers is a member of the International Fiscal Association, an international tax group. He has also been a trustee of the Tax Foundation, a publicly supported foundation that researches tax policy issues and publishes papers. Rogers has worked with the Governments of Puerto Rico and Romania in developing programs implementing their industrial taxation programs. Rogers has written a number of publications, primarily on international tax matters, transfers of technology, the use of low-tax jurisdictions, and the compensation of executives outside the United States. In 1997 Rogers was invited to testify before the House Ways and Means Committee on fundamental international tax reform.

When a plan by someone who is that smart fails, it fails spectacularly. Tax Court Judge Wherry disallowed all of the bad debt deductions, and imposed penalties, pointing a finger at the lawyer-mastermind:

There has been no showing of reasonable cause or good faith on Rogers’ part in conceptualizing, designing, and executing the transactions. To the contrary, as we have detailed above, Rogers’ knowledge and experience should have put him on notice that the tax benefits sought by the form of the transactions would not be forthcoming…

I’m sure that, over drinks, Mr. Rogers would have me convinced that he was right. That’s why you should never buy a tax shelter until you sober up.

Cite: Superior Trading, LLC, 137 T.C. No. 6

It helps to be really smart if you want to talk yourself into something really stupid. That’s how a lot of bad tax shelters happen. Let’s call this one the “Dumb-Ass Deduction Distressed Asset-Debt” (“DAD^2” or “DAD-squared”) shelter.

The ingredients:
• A bunch of near-worthless consumer receivables from a struggling Brazilian department store chain.
• A whip-smart Chicago tax lawyer, John E. Rogers.
• A bunch of LLC partnerships for tax-motivated investors.
• Some cash.


The Brazilians contribute their receivables – purportedly with a big built-in loss – to a partnership. This partnership contributes the debt to other LLCs. Shortly afterwards the first LLC buys out the Brazilians, who are desperate for cash, leaving the crappy receivables behind. The investor partnerships then write off the debts as bad debt deductions, giving big tax losses to the investors.

It can’t fail, right? Well, aside from the obvious problems, like:

– The tax law presumes that if a partner (think Brazilians here) contributes stuff to a partnership, and then gets cash back in redemption of the interest within two years, then it wasn’t really a tax-free partnership contribution and distribution. Instead, the tax law presumes that the Brazilian sold the stuff for cash. The partnership was just a place to hide it for awhile.

– If the Brazilians hadn’t sold out, the tax law would have required them to get all of the losses. The tax law doesn’t let taxpayers shift gains or losses to others by joining a partnership. After all, that’s what S corporations are for.

The guy who put this thing together was smart, as people who put together sophisticated tax deals always are. The Tax Court spells it out:

Rogers is a member of the International Fiscal Association, an international tax group. He has also been a trustee of the Tax Foundation, a publicly supported foundation that researches tax policy issues and publishes papers. Rogers has worked with the Governments of Puerto Rico and Romania in developing programs implementing their industrial taxation programs. Rogers has written a number of publications, primarily on international tax matters, transfers of technology, the use of low-tax jurisdictions, and the compensation of executives outside the United States. In 1997 Rogers was invited to testify before the House Ways and Means Committee on fundamental international tax reform.

When a plan by someone who is that smart fails, it fails spectacularly. Tax Court Judge Wherry disallowed all of the bad debt deductions, and imposed penalties, pointing a finger at the lawyer-mastermind:

There has been no showing of reasonable cause or good faith on Rogers’ part in conceptualizing, designing, and executing the transactions. To the contrary, as we have detailed above, Rogers’ knowledge and experience should have put him on notice that the tax benefits sought by the form of the transactions would not be forthcoming…

I’m sure that, over drinks, Mr. Rogers would have me convinced that he was right. That’s why you should never buy a tax shelter until you sober up.

Cite: Superior Trading, LLC, 137 T.C. No. 6

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