Justice Department Sues Chicago Lawyer to Halt Tax Shelters with $370 Million in Alleged Sham Deductions
Former Seyfarth Shaw LLP Partner Allegedly Created Illegal Tax Shelters to Help Wealthy Clients Generate Sham Bad-Debt Deductions
WASHINGTON – The United States has asked a federal court in Chicago to permanently bar John E. Rogers, a Chicago tax lawyer and former partner at Seyfarth Shaw LLP, from promoting tax shelters that allegedly use distressed Brazilian debt to illegally lower customers’ reported income, the Justice Department announced today. The suit names two of Rogers’s companies — Sugarloaf Fund LLC and Jetstream Business Limited — as additional defendants.
According to the civil injunction suit, filed in U.S. District Court in Chicago, Rogers designs and promotes the Distressed Asset Debt (DAD) and Distressed Asset Trust (DAT) tax shelters. These shelters allegedly falsely claim to enable Roger’s U.S. taxpayer-customers to use millions of dollars of purported losses from Brazilian debt to offset the customers’ unrelated U.S. income, even though the customers incur no actual losses in connection with the schemes.
In the DAT scheme, according to the complaint, a foreign business (typically a Brazilian retail company) essentially sells low-value, aged “distressed” debt, such as debt from bad checks, to Sugarloaf Fund, a U.S. entity that Rogers created and controls. In return Sugarloaf Fund allegedly pays the foreign company 1 to 2 percent of the debt’s face value. The complaint states that Sugarloaf Fund takes portions of the distressed debt and contributes them to multiple supposed “trusts,” also created and controlled by Rogers. Rogers then allegedly sells the “trusts” to tax shelter customers for a price pegged to the tax loss to be generated by the shelter.
Rogers allegedly tells customers that the Brazilian companies are partners in Sugarloaf, and that the Brazilian companies made genuine partnership contributions to Sugarloaf, rather than sales of debt to Sugarloaf. These statements are false or fraudulent, the complaint says, because the Brazilian retailers are insulated from any profit or loss, and do not intend to become partners in Sugarloaf. Rogers also allegedly tells customers that the distressed debt has a value for federal tax purposes equal to its original face value, not what Sugarloaf paid for it, and that customers can take bad debt deductions equal to most or all of the debt’s face value, and can use those deductions to offset unrelated U.S. income. These statements also are false or fraudulent, according to the complaint, because the supposed built-in-losses were never preserved and passed on to the tax shelter customers.
In an example detailed in the complaint, Rogers allegedly implemented a DAT shelter for a Louisiana businessman. Rogers allegedly drafted the core transactional documents that created the trusts for the customer’s DAT, and performed all the necessary steps to implement the transaction, including contributing a pool of distressed debt supposedly worth nearly $18 million to the customer’s “trust.” According to the complaint, the customer subsequently claimed a bad-debt deduction of more than $17 million in sham losses on his 2006 federal income tax return.
The complaint indicates that sometime after the Internal Revenue Service (IRS) began investigating Rogers, he told his then law firm, Seyfarth Shaw LLP, that he would stop promoting the DAD and DAT schemes. But Rogers allegedly continued to promote the DAT shelter, and concealed his activities from his firm. According to the complaint, when Seyfarth Shaw LLP later discovered his deception in 2008, it required Rogers to resign.
The IRS listed the DAT and similar transactions as tax avoidance transactions in February 2008. This required all material advisors of DAT and similar schemes to disclose their activities to the IRS, to obtain IRS reportable-transaction numbers for their DAT transactions, and to furnish the reportable-transaction numbers to their customers. Customers would then know they were participating in a reportable transaction and that the reportable-transaction number had to be disclosed on their next-filed tax return. Under federal tax law, customers who fail to include a required reportable-transaction number with their returns are subject to substantial monetary penalties. According to the complaint, Rogers failed to file the necessary disclosures for his DAT scheme, did not obtain a reportable-transaction number and failed to furnish a reportable-transaction number to his customers.
Rogers’s abusive DAD and DAT schemes have generated more than $370 million in improper tax deductions for his more than 100 customers, the complaint alleges.
“It is particularly disturbing when a lawyer, who is supposed to help clients comply with the law, instead helps them break it, as is alleged here,” said John A. DiCicco, Acting Assistant Attorney General of the Justice Department’s Tax Division.
“This action is part of our overall efforts at the IRS to deter the promotion of abusive tax shelters. In fairness to the overwhelming majority of taxpayers who pay what they owe, we will continue to pursue people who use sham transactions to try to avoid paying their fair share,” said IRS Commissioner Doug Shulman.
Since 2001, the Justice Department’s Tax Division has obtained hundreds of injunctions to stop the promotion of abusive or fraudulent tax fraud schemes and the preparation of fraudulent returns. Information about these cases is available on the Justice Department website .