Superior Trading, LLC v. Commissioner of Internal Revenue

Record contained sufficient evidence to support Tax Ct.’s determination that upheld disallowance by IRS of losses claimed by partners in partnership/tax shelter that was created to avoid taxes for partners, when partnership had acquired essentially worthless receivables from bankrupt Brazilian retailer that had certain “built-in” losses that could, in theory, be transferred to partners. Instant partners could only claim losses up to amount of each partner’s basis in partnership, and record showed that increased contributions made by partners to inflate their basis in partnership in order to take full advantage of built-in losses came in form of promissory notes that were essentially sham transactions, where partnership had no intention to enforce them. Moreover, instant partnership/tax shelter was sham entity, where partnership lacked any profit motivation for its operation and had as its only aim its attempt to avoid taxes on behalf of partners. Also, Tax Ct. did not err in imposing penalty, where partnership had failed to establish reasonable cause to deduct entire built-in losses, and where partners overstated their basis in partnership and participated in sham transactions.