Recently, tax shelters have become the target of much prosecution by the Department of Justice. In the largest criminal tax case ever filed, professional services company KMPG LLP admitted to engaging in fraud and generating at least $11 billion dollars in false tax losses. The multi-billion dollar criminal tax fraud conspiracy involved the elaborate design, marketing, and implementation of fraudulent tax shelters.

Since the 2005 KPMG indictment and subsequent guilty plea, the Department of Justice has continued in its quest to uncover instances of tax shelter fraud. The case of Chicago tax lawyer and former Seyfarth Shaw LLP partner, John E. Rogers, is among the latest in a series of tax shelter fraud criminal prosecutions. Starting in 2010, the U.S. Department of Justice targeted John E. Rogers, ex-Seyfarth Shaw LLP partner, with a civil suit alleging he promoted tax shelters that used distressed foreign debt to unlawfully lower customers’ reported incomes. The tax shelters generated over $370 million in allegedly fraudulent tax deductions.

According to the DOJ suit, Rogers designed and promoted distressed debt and asset tax shelters through two companies, Sugarloaf Fund LLC (“Sugarloaf”) and Jetstream Business Ltd. Rogers allegedly marketed the tax shelters as allowing customers to offset their income by using millions of dollars of losses from the Brazilian debt, at no risk of loss to the customers.

The scheme operated with Brazilian companies selling distressed debt to Sugarloaf, which then placed the debt in several trusts controlled by Rogers. Rogers then sold the trusts to his over 100 tax shelter customers. Rogers informed clients that the Brazilian companies were partners of Sugarloaf, when in fact the companies were connected by the purchase of debt alone. In 2011, an Illinois federal judge entered a judgment barring Rogers permanently from promoting or selling the tax shelters. However, Rogers’ legal troubles, and those of Seyfarth Shaw, did not end there.

Seyfarth Shaw forced Rogers to resign in 2008 after he refused to stop pushing the tax shelters that remained under federal investigation. Nevertheless, the firm still became embroiled in the tax shelter legal troubles after a Texas couple filed a derivative malpractice suit against the firm in an Illinois court, claiming that it knowingly misrepresented U.S. tax benefits of shelter schemes and extorted exorbitant fees from clients.

Plaintiffs Billie and Douglas Jenkin urged that they fell victim to Seyfarth’s promises that a tax shelter featuring a distressed asset trust tax structure would be a solid investment strategy. Instead of receiving any tax benefit, the couple paid the firm a $100,000 fee.

Recently, the Rogers tax shelter case appeared back in the news when the U.S. Tax Court ruled with the IRS, denying $1.7 million in bad debt deductions to the company. The court additionally upheld several penalties against Rogers and his companies due to underreported income.

The court held that Sugarloaf, Roger’s company used to purchase Brazilian debts and package them as trusts through which investors in the tax shelter could claim losses, will not be entitled to claim bad debt deductions from 2004 and 2005.

What the John Rogers Tax Shelter Case Means for You

Many high-income tax payers seeking to reduce their taxable income turn to tax shelters. Tax shelters can be entirely legal and legitimate, sometimes saving taxpayers considerable sums. Tax shelters can also be questionable and even illegal. Even tax shelters developed and marketed by the partner of a well-known law firm can be subject to scrutiny, as in the Rogers case.

As such, it is important that you seek the assistance of a reputable tax attorney versed in criminal tax defense before you create or purchase into a tax shelter. For more information on the above, or if you have questions about your own case, connect with me on TaxConnections.

Original Post By:  Michael DeBlis