As I was lamenting the absence of good material for this blog yesterday, along comes Judge Posner and the Seventh Circuit, who lays a beating on John Rogers and his DADs, along with a sideways slap at Judge Wherry, in Superior Trading, LLC, et al., v. Com’r, Nos. 12‐3367, 12‐3368, 12‐3369, 12‐3370 and 12‐3371, decided 8/26/13.

Judge Posner affirms Judge Wherry’s deconstruction of Mr. Rogers’ phony partnerships among US highrollers looking for writeoffs and a Brazilian retailer with bum paper. For background, see my blogposts “More Shell Games”, 9/2/11, “Mr. Rogers’ Neightborhood – The Adventure Continues”, 11/23/11, and “Night Of The Living Dead – Mr. Rogers’ Neighborhood”, 5/10/13.

So no deductions. Therefore penalties: but is it the 20% substantial understatement or the 40% substantial overvaluation? Of course, IRS wants the 40% hammer that Judge Wherry gave them, but that’s not cut-and-dried.

After all, if the deal was a sham from the get-go, then the valuation, over or under, is beside the point, no? See my blogpost “It’s A Sham – And That’s An Understatement – Not!”, 9/25/12.

No, says Judge Posner: “There is a disagreement among courts of appeals concerning the applicability of the penalties for misstating valuation when the transaction involving the overvalued asset is itself disregarded because it lacks economic substance. Compare, e.g., Crispin v. Commissioner, 708 F.3d 507, 516 n. 18 (3d Cir. 2013); Gustashaw v. Commissioner, 696 F.3d 1124, 1136–37 (11th Cir. 2012), and Fidelity Int’l Currency Advisor A Fund, LLC v. United States, 661 F.3d 667, 672 (1st Cir. 2011), with Keller v. Commissioner, 556 F.3d 1056, 1059–61 (9th Cir. 2009), and Heasley v. Commissioner, 902 F.2d 380, 383 (5th Cir.1990). The majority view, which we now join, is that a taxpayer who overstates basis and participates in sham transactions, as in this case, should be punished at least as severely as one who does only the former. The Supreme Court has granted certiorari to resolve the circuit conflict. United States v. Woods, 133 S. Ct. 1632 (2013).” Decision, at pp. 9-10.

And Judge Posner has little sympathy for the “partners” in Mr. Rogers’ deals. “The appellants would have avoided the penalty had they proved they had “reasonable cause” to deduct the built‐in losses. 26 U.S.C. § 6664(c)(1); see United States v. Boyle, 469 U.S. 241, 250–51 (1985); University of Chicago v. United States, 547 F.3d 773, 785 (7th Cir. 2008); Richardson v. Commissioner, 125 F.3d 551, 558 (7th Cir. 1997). They didn’t prove that. They were all just tools—extensions, really—of Rogers, an experienced tax lawyer who had more than 30 years of experience in the taxation of international business transactions. The tools had no more autonomy than his fingers. There is not even a colorable basis for the tax shelter that he created and the appellants implemented. There are as we’ve seen multiple grounds for disallowing the partnership losses that Rogers engineered (in fact more grounds than we’ve bothered to discuss), and all are grounds that he either knew about or should, given that he is no tax neophyte, have known about.” Decision, at p. 10.

Now, having affirmed Judge Wherry all along the line, Judge Posner waxes waspish, parenthetically: “(We note with disapproval the loquacity of, and lame attempts at humor in, the Tax Court’s opinion, which include making fun of Rogers’ name, as in the section title ‘Mr. Rogers’ Neighborhood.’)”. Decision, at pp. 2-3.

“Lame attempts at humor” from that whimsical jurist, Judge Wherry? Aw, Judge Posner, can’t ya take a joke?