its activities all toward the better toward seeking profits other issues that result are who gets taxed if anybody on deposits into investor trust whether mr rogers had self employment income from sugar of and that sugar loaf mr rogers can i ask him a question about your your lead point to try to understand something so i put the question a couple different ways as your follow it and you can you can respond is it are you acknowledge jean that the sugarloaf partnership was a sham before the roll ups let me just start there no your honor but the courts have held so ok i right so you're kind of stuck with that yes ok so how then did did the roll ups affect pains because what i what i understand you can correct me that the roll ups had the effect of the trading companies and the holding companies and effectively in their members affectively becoming owners if you will of the interests in the sugarloaf partnership right that's correct ok so that's just descriptive of what a roll up is yet how how does the fact that the roll up occurred given that the underlying business activity at least is you know i read the papers here it wasn't changing with respect to sugarloaf there in other words there's no return to investors you know in the six hundred and seventy eight year so given that those facts aren't changing what changed is the roll up occurred how does the role of take us from a sham circumstantial to a non sham circumstance well you're either in the sham circumstance of the courts have held that jet stream business limited was the only owner sugarloaf right jetstream was your company that's correct right and what happened with the with the ro deduction for extreme bad debt losses at the sugarloaf level but how how does the fact that there are new partners coming in alone is in your view is is that transformative in other words does that have that completely clean the kind of sham status because that's the part that confuses me a bit i say all right  i understand your point that the ownership structure is kind of a structural informal matter that changed yes but sugarloaf was what it was before and after with respect to you know its business operations or lack thereof returns to investors and satirize yes your honor i'm not taking the position that the addition of additional partners by itself ok transformed sugarlo i'm saying that we changed the management would change the collection procedures and we got into joint like yeah that that's your that's the you know that's right real challenge a face like all i can say is that sugarloaf collected and receivables there were sixty people working on the trading floor and the trading floor was a whole floor of an office building in downtown salt paolo we had a manager who was embezzling so we got rid of him that helped profitability improve we we've brought in new techniques for collections specifically we did protest otto's which is a massive lawsuit in brazil which the government sponsors to go after delinquent note holders or debtors  and we emphasize collection of frauds and frizer checks that were written bad checks that were written on bank accounts opened by the banks by fraudsters and once the bank did that it got tagged with liability for the principal and the interest on the money so that we had mr gable the if you go to page thirty two the new management was particularly effective in transforming the come we brought in tune to fund management experience one was an american carry some or all the other one was a brazilian american by the name of henry dunphy henry dunphy had a large collection company of his own and he was recommended to us by  collections in the appendix that shows collections by year and you see them improving from two thousand and three to four to five to six  d i undertook these activities in two thousand and five and six and that was long before the i r s ever said it was going to audit sugarloaf was certainly on before the two thousand and nine superior trading case i put my own personal money behind it in my time for nine years trying to make an effective profitable business where i would have a substantial ownership position i think there's another factor here and that is that sugar loaf had profitable tax returns for three out of five years at least maybe more out of five that's it at page two of my my list reply brief don't the bottom and i mean it it isn't just something that i'm arguing it's a statute that says in the regulations say if you do this you're presumed to be operating for profit and with respect to nobody getting any any money sugarloaf generated cash flow which at the beginning of two thousand and six it invested in a joint venture with another collection agency and a bank to go after the link with notes held by the bank collect on them that was four hundred and seven thousand dollars went into that joint venture and it generated profits evidence etc that money could as well have been paid out to the members of sugarloaf but that wasn't consistent with sugar loss long term goal of building a business and it was in a in a growth mode so that cash was was maintained in the business and those were those were fresh capital they don't have any if taint of being involved with prior iterations of sugarloaf they came in without tax benefit brazilian investors and joined in sugarloaf and as a percentage of sugar loaf i believe that their percentage ownership was equivalent to ten percent the overall capital of sugarloaf such that it was an arm's length substantial transaction recognized in case law i don't know if that's your way of asking the court to wade into and perhaps resolve questions relating to your own tax return tax returns for years in question i'll just say for my part i i think that issues with respect to your own return the returns i just see is outside the scope of this all i agree your honor this is a partnership case and on me partnership level issues and there are some that issue passages in your briefs know where you're sort of where you're you're talking about well you know income or lack thereof to yourself as  individual taxpayer when that government i will see what he says but then i thought the government has you know underscored that seems correct to me that this case is is about and only about sugarloaf that's correct your honor and but the thing is we have the partnership case and we have partnership issues and sugar and that's saying you didn't have a trade or business were saying we had a trade or business and but that self employment income that might be generated there is barred by p p i rogers holding being escort escorts by our self employment and that's a substantial think perhaps i should stop and leave some time for partnership is what it is that sugar loaf was trying to collect what it was that was central to its debt collection system and these were consumer receivables that at the time they were acquired in two thousand and four were already on average three to seven years past due and he came years and years additionally past you in the years that issued the government's committed to the expert opinions but two witnesses that said that these receivables would never were never likely to be collected on a profitable basis sugarloaf chose not to be cross examined those witnesses chose not to retain or call an expert of its own and that those expert opinions were borne out in reality both mr greer who is a us investor in sugar never collected on a profitable basis the expenses for these kinds of collection were always at least equal to the revenue that was brought in to the extent that there was any revenue so there's no change in substance we have some superficial changes in form but  from the state of affairs and described in our prior opinion that's correct your honor and mr rogers has pointed to shirley's tax returns and said well the tax returns on the whole are showing income in excess of expenses that is true but we'd like to walk through what that actually means in practice none of these amounts are actually collection proceeds  debt collection business or purported business was never turning a profit and so when we look at section one hundred and eighty three dollars d it talks about the gross income derived from an activity exceeding the deductions attributable to such activity debt collection activity was never properly sugarloaf marking of tax shelters was profitable that is the profit that showing up on the returns and just looking at the different years that are issue in two thousand six this is addressed at the rd supplementals deputations of fact there got to twenty nine dollars the only substantial income that's coming in that's over one hundred thousand dollars is six hundred thousand dollars from something called s l f ltd which we understand is sugarloaf investment to half a one million dollars of trust distributions which are not collection proceeds there's also identified one million dollars of accrued credit collection accrued but not received which means that to the extent this is a real number at all it was never turned over to sugarloaf because it was always eaten up by the collection expenses assuming that it was collected at all and this is confirmed by the testimony of mr grimm mr rogers saying no money actually came in sugarloaf from collection across two thousand note as well that sugarloaf books and records were in disarray where it was issuing well over two hundred percent of partnership interest to various investors where there's conflicting evidence regarding who was admitted to as a partner when they were it is  structure because there was some the subsidy to protect the assets from from creditors or other entities at sugarloaf was working with in the chemical trading tax court opinion it put no three in the surrounding text the explanation for why sugarloaf switched from using l l c as holding companies and trading companies husing a trust trucker was because congress actually passed a law saying that with your two partnerships and l l sees that were treated as partnerships this tax shelter would fail as a matter of law sugarloaf changed to a trust structure as opposed to a holding company l l c structure because it had to do that in order to try to keep marketing this tax that's the reason why this happened  raj mr rogers continue to be in complete control of sugarloaf twenty million sixty two thousand and eight just as he was in prior years so is your is your main point that there may have been a role with respect to the roll up of the roll ups  may have been a roll up but the roll up to roll up change nothing that's essential contention correct that there were no economic consequences to roll up where there were never any distributions made to investors where there were never any collection proceeds  tax court had had some real reservations with whether the roll ups or even properly effectuated right whether they were even legitimate to begin with that's correct we think that that's a valid point that there are concerns about whether these were legally effective in the st in because they are substantially affecting the rights of of these putative investors that there's no prior notice given to them that there are certain issues along those lines that they're actually i'm depriving these interest and these investors assert rights but we think that the bigger issue that the more central issues that there was just no change of economics that even that this was done on paper even if it does check all the boxes legally there was no actual fact no real world effect beyond the differen and we would also know that the investors in sugarloaf were seeking tax benefits that was their predominant purpose in fact their only purpose in joining in the sugarloaf and in fact there were points in time at which those tax benefits become point is jet jet stream is the exclusive or super majority holder of the interests of the full interest in sugarloaf that during the tax years in question correct and p p i mr rogers  rm is the sole owner of jet stream correct mr rogers sits about p p i correct ok and then we've already addressed the role of partners that you know we don't think there was any substance and there are questions about even the partners when in fact they were not part of the two thousand the issue then is one of income allocation since jetstream is in fact the only owner of sugarloaf then all the income of sugarloaf is allocated to its sole owner jetstream the deposits into investor trust accounts again the reason why we're using a trust treacherous in an l l c structure is because of the change in the law in penetrating sugarloaf one the court said that these deposits in the trust accounts investor trust accounts were in substance the purchase price that u s investors were trying to acquire tranche of the receivables so they could then use the built in losses to claim financial losses on the tax return these trust transactions reflects abusing the same for documents the same structure under posit into the same bank accounts nothing in substance is different for the two million sixty thousand and eight years and it was in the two thousand and four to two thousand and five years the result is the same although this was nominally a d and then turning to the issue of deduction we would note that this court has repeatedly held that transactions that lack economic substance are not recognized for tax purposes that's what this eleven circuits explicitly is that a deduction that an expense incurred in support of the transaction like the economic substance is also not deductible by analogy if a tax payer was engaged in the construction industry and wanted to avail itself of credits for engaging in new construction and what it did was it went out and say we're not actually going to do the construction we want to get these credits we're going to do is going to pay someone to take a backhoe and dig dig holes in the ground and then fill them back to it we're going to create the appearance that we are doing construction without actually doing the construct we would submit that the cost the expenses of digging these holes in filling them back in would not be deductible because they're not a real business transaction is not a real construction business similarly here the costs and expenses related to debt collection are mere window dressing and because there is no actual debt collection business the corollary is that there cannot be any deductions allowed in support of that not existed as and in any event there are clear substantiation problems as the tax court noted where there are you know the example we gave in our briefing is a consulting fees that were supposedly incurred in two thousand and six in connection with the debt collection enterprise where there are two sets of quick look entries that have different numbers on them sugarless tax return picks a number in the middle of those two pre book entries and mr rogers the trial is on able to explain that discrepancy record backing up the number that is seeking one million one hundred and fifty thousand dollars is not point to any support in the record for this number it instead says look at the entire record of penetrating just several one thousand pages but this course not obligated to try to dig through you have a little over a minute schedule sugarloaf collections july thirty two thousand three hundred november st two thousand and three to july th two thousand and seven and this is before the changes and in management there were two million three hundred and nineteen thousand in collections and the supposedly useless receivables