John Rogers, formerly a partner at Seyfarth Shaw in Chicago, lost his Tax Court case regarding the Distressed Asset Trust (DAT)/Distressed Asset Debt (DAD) shelters he sold to a hundred clients, for claimed tax deductions of more than $370 million. See Tax Court Rules Against Chicago Lawyer's Distressed Debt Deals, San Francisco Chronicle, Sept. 1, 2011. The judge found "no showing of reasonable cause or good faith on Rogers' part" but noted that his tax expertise "should have put him on notice that the tax benefits sought by the form of the transactions would not be forthcoming."
The shelters involved Brazilian consumer debt and were listed as tax avoidance transactions by the IRS in February 2008. Rogers continued promoting the shelters even after they were listed, and failed to file the appropriate disclosures for listed transactions. Accordingly, the Justice Department sued in federal court in November 2010 to prevent Rogers from continuing to promote the shelters, and that case is still pending. For information on the Justice Department's claims in the suit, see the release here and complaint here, describing these transactions as violating well-known tax doctrines of economic substance, substance over form, step transaction, and sham partnership. The release describes the DAT/DAD transactions as follows:
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.
One district court case involved taxpayer Michael Koretsky, for example, in an attempt to quash the IRS summons for Koretsky's appearance after Rogers had provided an affidavit on behalf of Koretsy in the matter, but the court found no grounds to do so. See Bodensee Fund vs Treasury & IRS (E.D. PA, May 2008) (memorandum opinion and order) here (describing the taxpayer's participation in two DAD transactions, resulting in claims of $39 million in losses in 2003 and $119 million in losses in 2004).