Record contained sufficient evidence to support Tax Ct. judgment, finding that plaintiff-partnership was sham that was formed solely to evade taxes, which resulted in adjustments to plaintiff’s income as well as imposition of certain penalties. Plaintiff’s scheme was essentially same scheme found to be sham in Superior Trading, 728 F.3d 676, where partnership: (1) acquired severely-distressed or uncollectible accounts receivables from Brazilian retailers by selling interests in partnership; (2) retailers then redeemed their interests in partnership; (3) partnership then transferred receivables to several newly-formed companies; (4) U.S. taxpayers then acquired newly formed companies, received receivables and then wrote off receivables as bad-debt expenses; and (5) partnership asserted cost-of-goods sold expense. As such, Tax. Ct. could properly find that partnership was sham since only aim and effect of partnership was to “beat” taxes. Moreover, individual who created partnership disregarded partnership formalities by awarding two 99 percent interests in partnership to Brazilian retailers, and Brazilian retailers failed to identify accounts receivable being transferred to partnership. Also, step-transaction doctrine allowed Commissioner to treat Brazilian retailers’ contributions and redemptions of partnership as sale of assets, which would reduce partnership’s basis in receivables to what it had actually paid for them.
Federal 7th Circuit Court
Civil Court
Income Tax