In the

United States Court of Appeals

For the Seventh Circuit ____________________

No. 18-1046

SUGARLOAF FUND, LLC,

Petitioner-Appellant,

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent-Appellee.

____________________

Appeal from the United States Tax Court.

No. 671-10 — Robert A. Wherry, Judge.

____________________

ARGUED SEPTEMBER 28, 2018 — DECIDED DECEMBER 21, 2018

____________________

Before RIPPLE, SYKES, and SCUDDER, Circuit Judges.

SCUDDER, Circuit Judge. Before us in this appeal is a tax 

shelter almost identical to the one we agreed reflected an abusive sham in Superior Trading, LLC v. Commissioner, 728 F.3d 

676 (7th Cir. 2013). We reach the same conclusion here and 

affirm the Tax Court’s judgment and imposition of penalties. 
2 No. 18-1046

I

A

John Rogers is an experienced tax lawyer and the architect 

of a tax structure that the Commissioner of Internal Revenue

has found to be an abusive tax-avoidance scheme. In Superior 

Trading, we considered the legitimacy of the scheme Rogers 

designed and implemented for the 2003 tax year. Here we 

consider a similar scheme he implemented for tax years 2004 

and 2005. 

Despite some minor changes that Rogers made over time, 

the gist of the scheme has remained the same: Rogers forms a 

partnership that he uses to acquire severely-distressed or 

uncollectible accounts receivables from retailers located in 

Brazil. A distressed or uncollectible receivable is exactly what 

it sounds like—an amount owed to a retailer for which there 

is no prospect of meaningful collection. For tax purposes the 

partnership carries the receivables at their face amount, not at 

the amount (often zero or something close to zero) any retailer 

or debt collector would estimate collecting. The partnership 

then conveys the receivables to U.S. taxpayers, who deem 

them uncollectible and deduct from their income the 

associated “loss.” The upshot is reduced U.S. tax liability. 

Against this general overview, we turn in more detail to 

the scheme at issue here. In April 2003 Rogers formed 

Sugarloaf Fund, LLC, effectively a partnership. Several 

Brazilian retailers then contributed accounts receivables to 

Sugarloaf in exchange for interests in the partnership. 

Sugarloaf structured the retailers’ contributions in such a way 

to purportedly allow the partnership to assume the retailers’ 

original basis in the receivables. Think of this as the 
No. 18-1046 3

partnership acquiring a $100 receivable that nobody in good 

faith believed was worth more than $1 with the partnership 

nonetheless recording the receivable as a $100 asset. In this 

way, Sugarloaf assumed ownership of the receivables with a 

built-in loss ($99 in our example) that, through the scheme, 

would then be passed to U.S. taxpayers to reduce their income

tax liability. 

All of that happened this way: not long after making contributions to the Sugarloaf partnership, each of the Brazilian 

retailers redeemed their interests in the partnership, effectively cashing out the partnership interest they had received 

in exchange for their contribution of receivables. 

Once Sugarloaf owned the uncollectible accounts receivables, the next part of the scheme required transferring them to 

U.S. taxpayers. Rogers did so by forming several limited liability companies in which Sugarloaf became a member and 

contributed the distressed or uncollectible receivables. In a 

complex series of transactions, the LLCs were, for all intents 

and purposes, then sold to various U.S. taxpayers. For tax 

purposes, whenever Sugarloaf sold an entity (and with it, the 

associated uncollectible receivables), it recognized an expense 

in an amount roughly equivalent to the face value of the receivables ($100 in our prior example). Sugarloaf characterized 

this expense as a cost-of-goods-sold expense. The U.S. taxpayer who acquired ownership of the uncollectible receivables also wrote them off and likewise claimed a bad-debt expense, typically for the same amount as the expense claimed 

by Sugarloaf. In this way, and consistent with the principles 

of partnership taxation, the “losses” on the receivables flowed 

through to the U.S. taxpayer who had invested in the LLC.
4 No. 18-1046

The IRS caught on to structures like this and encouraged 

legislation to prevent them. In October 2004, Congress accepted the invitation and amended the Tax Code to prohibit 

partnerships like Sugarloaf from transferring built-in-losses 

on uncollectible receivables to U.S. taxpayers in this manner. 

See American Jobs Creation Act of 2004, Pub. L. No. 108-357, 

§ 833, 118 Stat. 1589.

Undeterred, Rogers modified the scheme. In the new 

structure, the Sugarloaf partnership contributed the uncollectible receivables not in the first instance to an LLC, but instead to a trust in which Sugarloaf was both the grantor and 

beneficiary. Some additional maneuvering then ensued: a 

U.S. taxpayer would contribute cash in exchange for a beneficial interest in the trust; the trust would assign the receivables 

to a sub-trust; and the U.S. taxpayer would be designated as 

the beneficiary of the sub-trust. The U.S. taxpayer then 

claimed ownership of the accounts receivables, wrote them 

off, and deducted the associated bad-debt expense from their 

net income. The end result was the same under this modified 

structure—a reduced tax liability for the U.S. taxpayer.

B

The Commissioner determined that the Sugarloaf partnership was a sham formed solely to evade taxes. This determination had a consequence: the Brazilian retailers’ purported 

contribution of receivables to Sugarloaf was recharacterized 

as a sale of assets from the Brazilian retailers to Sugarloaf. 

Treating the contribution as a sale had the effect of depriving 

Sugarloaf of the built-in-loss on the uncollectible receivables 

that it tried to pass along to U.S. taxpayers. Or, to put the point 

more technically, with the Brazilian retailers’ contributions 

recharacterized as a sale, Sugarloaf’s original basis in the 
No. 18-1046 5

receivables was reduced to the fair value of the receivables—

nearly nothing. 

Upon receiving notice of the Commissioner’s 

determination, Sugarloaf appealed in Tax Court. The parties 

went to trial to resolve the dispute, and the Tax Court issued 

an opinion in October 2014 affirming the Commissioner’s 

determination that Sugarloaf was a sham partnership. In the 

alternative, the Tax Court determined that, even if Sugarloaf 

had been a legitimate or bona fide partnership, the Brazilian 

retailers’ redemptions of their interest in the Sugarloaf 

partnership was, in substance, a sale of receivables from the 

retailers to Sugarloaf. This, too, had a consequence: pursuant 

to the step-transaction doctrine, the Commissioner was 

permitted to collapse the different steps of the scheme into 

one and thereby recharacterize the transaction as a sale of the 

Brazilian retailers’ accounts receivables to Sugarloaf. See 

Atchison, Topeka and Santa Fe R.R. Co. v. United States, 443 F.2d 

147, 151 (10th Cir. 1971) (explaining that under the steptransaction doctrine, a series of formally separate steps that 

are in substance “integrated, interdependent, and focused 

toward a particular end result” may be combined and treated 

as a single transaction”); McDonald’s Restaurants of Ill., Inc. v. 

Commissioner, 688 F.2d 520, 524 (7th Cir. 1982) (describing 

different approaches to analysis under the step-transaction 

doctrine). 

Based on these determinations, the Tax Court affirmed the 

Commissioner’s adjustments to Sugarloaf’s income. Those 

adjustments disallowed the cost-of-goods-sold expense the 

partnership reported for 2004 when it sold its interest in the 

LLCs and associated uncollectible receivables to various U.S. 

taxpayers. Additional adjustments reflected Sugarloaf’s 
6 No. 18-1046

failure to include certain income when reporting its 2004 and 

2005 tax liabilities, and certain business expense deductions it 

reported but were not permitted. 

The Tax Court also upheld penalties the Commissioner 

imposed on Sugarloaf, finding that a 40% penalty applied 

(pursuant to 26 U.S.C. § 6662(h)(1) & (2)(A)(1) (2000 & Supp. 

IV 2004)) to Sugarloaf’s tax underpayment resulting from its 

gross misstatement of the 2004 cost-of-goods-sold expense, 

and a 20% penalty applied (pursuant to 26 U.S.C. § 6662(a), 

(b)(1) & (2)) to Sugarloaf’s underpayments attributable to its 

negligence when failing to include certain income and taking 

disallowed business expense deductions on its 2004 and 2005 

tax returns. 

Sugarloaf now seeks relief in our court.

II

A

A preliminary matter warrants our consideration before 

turning to the merits. At oral argument, we raised a question 

of professional responsibility, asking whether John Rogers 

had a conflict of interest that prevented him from representing Sugarloaf in this appeal. We raised this concern because 

Rogers, in addition to serving as Sugarloaf’s counsel, is the 

beneficial owner of Jetstream Business Limited, an entity that 

in turn owns an interest in Sugarloaf, and, as a result, has a 

personal financial interest in the outcome of the appeal. At 

oral argument Rogers responded by positing that there was 

no conflict of interest in part because he had obtained conflictof-interest waivers from the U.S. taxpayers affected by the 

Commissioner’s determinations at issue in this appeal.
No. 18-1046 7

We requested supplemental briefing on the conflict issue, 

and Rogers responded by maintaining that no conflict existed. 

He also submitted 35 conflict-of-interest waivers, only 12 of 

which were signed by the associated U.S. taxpayer. Rogers’s 

supplemental brief provided little comfort that he was not laboring under an impermissible conflict.

At our request the Commissioner also submitted a brief on 

the conflict question. The Commissioner informed us that “all 

of the U.S. taxpayers whose tax liabilities were ultimately at 

issue in [the proceedings below] have entered into settlement 

agreements with the Commissioner or otherwise resolved 

their liabilities.” The Commissioner added that a decision by 

our court affirming the Tax Court’s judgment will result in no 

person other than Rogers being affected because the consequences of the Commissioner’s adjustments to Sugarloaf’s 

2004 and 2005 partnership tax returns will all flow to Rogers. 

We have no reason not to credit the Commissioner’s representations. That the other U.S. taxpayers who invested in 

Rogers’s scheme will not be affected by our decision is fundamental to our analysis. See Illinois Rules of Professional Conduct, Rule 1.7 (2010). Based on this representation, we conclude that any conflict of interest that otherwise may have existed does not prevent us from allowing Rogers to continue to 

represent Sugarloaf in this appeal. 

All of this takes us to the merits.

B

Our review of the record before us leads us to renew what 

we underscored in Superior Trading: “the absence of a nontax 

business purpose is fatal,” and “[i]f the only aim and effect are 

to beat taxes, the partnership is disregarded for tax purposes.” 
8 No. 18-1046

728 F.3d at 680 (citing ASA Investerings Partnership v. 

Commissioner, 201 F.3d 505, 512 (D.C. Cir. 2000)). “A 

transaction that would make no commercial sense were it not 

for the opportunity it created to beat taxes doesn’t beat them.” 

Id. 

Despite Rogers’s contention at oral argument that Superior 

Trading was “almost irrelevant” to the outcome in this appeal, 

the scheme at issue here is identical in all material respects to 

the one we considered in Superior Trading. Indeed, our observation in Superior Trading that the partnership at issue there

was a sham applies with full force here. Id. (explaining that 

the partnership “was really just a conduit from the original 

owner of the receivables [the Brazilian retailers] to the U.S. 

taxpayers who wanted a deduction equal to the difference between the face amount of the receivables (the promissors’ 

debt) and the receivables’ current, greatly depressed market 

value”).

The only difference here is that, for parts of 2004 and all of 

2005, Rogers used trusts to transfer the tax losses to U.S. taxpayers. (He had not yet implemented this aspect of the 

scheme in Superior Trading.) But this difference has no effect 

on our analysis because it has no effect on the purpose of 

Sugarloaf’s partnership—the modified scheme’s use of trusts 

was nothing more than window dressing for Sugarloaf’s 

method of transferring the uncollectible receivables and related “losses” to U.S. taxpayers.

The Sugarloaf partnership was a sham, and this conclusion is underscored by the record here in much the say way it 

was in Superior Trading. For example, in exchange for their 

contributions, two different Brazilian retailers were each 

granted separate 99% interests in Sugarloaf, a mathematical 
No. 18-1046 9

impossibility that suggests the same blatant disregard for 

partnership formalities we observed in Superior Trading. See 

id. (explaining that the “reason for Rogers’ insouciance regarding formalities was that the aim of the partnership was 

not to make money” but instead “to sell interests in the partnership to U.S. taxpayers seeking tax savings”). 

Take another example. The record indicates that the 

Brazilian retailers’ contribution agreements did not identify 

the specific accounts receivables being transferred to 

Sugarloaf, nor were the agreements ever registered in Brazil, 

making their assignment to Sugarloaf invalid under Brazilian 

law. This fact alone, we observed in Superior Trading, 

undercuts any argument that Sugarloaf intended to engage in 

any good-faith effort to attempt to collect on the receivables. 

See id. (emphasizing that “there is considerable doubt 

whether the receivables, which could be transferred only 

pursuant to Brazilian law, were ever actually transferred to 

[the partnership]”). 

Even if we assumed that Sugarloaf was a bona fide

partnership, the Tax Court properly determined that the steptransaction doctrine permitted the Commissioner to treat the 

Brazilian retailers’ contributions and subsequent 

redemptions as a sale of assets. And with the transaction 

properly recharacterized as a sale, Sugarloaf’s basis in the 

uncollectible receivables is reduced from their face value to 

what it paid for them, thereby voiding the bad-debt expenses 

Sugarloaf tried to pass along to U.S. taxpayers. The scheme 

collapses and is revealed for what it truly is—an abusive 

sham.
10 No. 18-1046

C

Finally, we review the penalties imposed by the 

Commissioner. As a threshold matter, Sugarloaf argues that 

the imposition of penalties was procedurally improper 

because the Commissioner has not shown that the approval 

requirements under 26 U.S.C. §§ 6751 and 7491 were 

obtained, and further, that these requirements are 

jurisdictional in nature and cannot be waived. This contention

ignores what happened in the Tax Court. 

Sugarloaf stipulated in the Tax Court that the 

Commissioner had properly obtained approval for the 

penalties. The partnership cannot now be heard on appeal to 

contend that any procedural requirements imposed by 

§§ 6751 and 7491 are jurisdictional and incapable of being 

waived, and we see nothing in these statutes precluding 

waiver. See Chai v. Commissioner, 851 F.3d 190, 222 (2d Cir. 

2017) (holding that the written-approval requirement is 

appropriately viewed as an element of a penalty claim, but 

not a component of subject matter jurisdiction); accord

Kaufman v. Commissioner, 784 F.3d 56, 71 (1st Cir. 2015) 

(similarly treating as waived a taxpayer’s argument that the 

Commissioner failed to comply with the procedural 

requirements of § 6751). On this record, there was no 

procedural flaw in the Commissioner’s imposition of 

penalties.

Turning to the merits of the penalties, under the standard 

that existed in 2004, a 40% gross-valuation misstatement penalty like the one the Commissioner imposed on Sugarloaf was 

permitted if the partnership’s claimed basis in the uncollectible receivables was 400% percent or more of the actual basis. 

See 26 U.S.C. § 6662(h)(1) & (2)(A)(i) (2000 & Supp. IV 2004). 
No. 18-1046 11

Sugarloaf claimed a basis in the uncollectible receivables that 

was roughly equal to their face value, and as a result, reported 

a cost-of-goods-sold expense of $122,950,000 after transferring the receivables to U.S. taxpayers. In reality, however, its 

actual basis in the receivables (as a matter of economic substance) was a small fraction of what it claimed—clearly satisfying the gross-valuation standard. 

And a 20% penalty like the one the Commissioner imposed on Sugarloaf was permitted if the partnership was negligent or disregarded rules and regulations when it failed to 

include certain income and took impermissible deductions. 

See 26 U.S.C. § 6662(a), (b)(1) & (2). This standard, too, is 

clearly satisfied given Sugarloaf’s failure to reasonably explain why certain income was omitted or to substantiate the

disallowed deductions, as well as its, in the Tax Court’s 

words, “scanty to nonexistent, and noncontemporaneous” 

recordkeeping.

If Sugarloaf could establish that it had “reasonable cause” 

and “acted in good faith” when reporting its income, it could 

have avoided these penalties. 26 U.S.C. § 6664(c)(1); see United 

States v. Boyle, 469 U.S. 241, 250–51 (1986). In Superior Trading

we observed that “there is not even a colorable basis for the 

tax shelter that [Rogers] created.” Just as there was no 

colorable basis then, there certainly is no colorable basis now, 

such that the Tax Court did not clearly error when it found 

Sugarloaf could not avail itself of the reasonable-cause 

defense. The assessed penalties were proper.

For these reasons, we AFFIRM.