Readers of my blogpost “More Shell Games”, 9/2/11, will remember Superior Trading LLC, Jetstream Business Limited, Tax Matters Partner, et al., 137 T.C. 6, filed 9/1/11. Judge Wherry therein waxed rhapsodic about the academic and other attainments of John E. Rogers, attorney and tax whiz.
This Mr Rogers, not to be conflated with the beloved television personality, constructed numerous distressed asset debt deals (DADs), and sold them to parties seeking to defer taxable gain. Incidentally, Mr. Rogers pocketed a good deal of cash.
He sought to disguise his receipts by claiming he held some of this money in trust in his Subchapter S Corporation (of which he was sole shareholder, director and officer) for his various disregarded single-member LLCs.
Alas, Judge Haines is much less impressed with Mr Rogers’ academic credentials in John E Rogers and Frances L Rogers, 2011 T.C. Mem. 277, filed 11/23/11. The so-called trust funds that Mr Rogers never reported for the year at issue were not segregated from Mr Rogers’ personal funds, there was no escrow agreement or other documentation memorializing any trust relationship, and the income in question was received by the Sub S which Mr Rogers entirely controlled, and not by Mr Rogers as manager of either of his LLCs. Only Mr Rogers’ self-serving testimony evidenced any “trust” relationship. So Mr Rogers has to pick up the “trust fund” income per the Sub S rules.
In simplest terms, “The economic benefit accruing to the taxpayer is the controlling factor in determining whether a gain is income.” 2011 T.C. Mem. 277, at p. 7 [citations omitted]. Mr Rogers had it all, so he has to pay. But pay what?
There’s a Rule 155 coming up, as Mr Rogers switched his corporation from a C to an S some years after incorporation, so we have to sort out retained earnings and profits (if any) above the allocated adjustment account as between dividends and return of capital, and Mr Rogers’ adjusted basis in his shares (sale or exchange to the extent the remaining distribution exceeds his adjusted basis).
Sounds like a fun project.