Kickback Income Tax Problem Resolution

Kickback Income Tax Fraud – Ballard finally prevails in reversal by Eleventh Circuit

Ballard, (CA 11 4/7/2008) 101 AFTR 2d ¶ 2008-659

Mike Habib, EA

In the latest chapter of a case with a long and storied history, the Eleventh Circuit rejected the Tax Court’s findings that a taxpayer fraudulently failed to pay tax on kickback income. Instead, the Eleventh Circuit sent the case back to Tax Court directing it to adopt the original Special Trial Judge’s Report as the Tax Court’s opinion.

    Observation: That was good news for the taxpayer because the Special Trial Judge found that the taxpayer did not sell his influence for kickbacks and hence did not fraudulently underreport his income.

Background in brief. Claude Ballard, Burton W. Kanter, and Robert Lisle received multiple notices of deficiency going back several years. Specifically, IRS charged that, during the ’70’s and ’80’s, Ballard and Lisle, real estate executives at the Prudential Life Insurance Company of America, had an arrangement with Kanter, a tax lawyer and business entrepreneur, under which people seeking to do business with Prudential made payments to corporations controlled by Kanter. IRS said that those payments were then distributed to Kanter, Ballard, and Lisle, or to entities they controlled but were not reported by Ballard, Kanter, and Lisle on their individual tax returns. The taxpayers went to Tax Court where their cases were consolidated and assigned to Special Trial Judge (STJ) Couvillion. His findings were given to Tax Court Judge Dawson, who found that Ballard, Kanter, and Lisle had acted with intent to deceive IRS, and held them liable for underpaid taxes and substantial fraud penalties. In so ruling, Judge Dawson purported to collaborate with Judge Couvillion and adopt the findings contained in the report submitted by Judge Couvillion.

The taxpayers came to believe that the document titled “Opinion of the Special Trial Judge” was not in fact a reproduction of Judge Couvillion’s report. A declaration by Kanter’s attorney attested to conversations with two Tax Court judges who said that Judge Couvillion had concluded that Ballard, Kanter, and Lisle did not owe taxes with respect to payments made by certain individuals seeking to do business with Prudential, and that the fraud penalty was not applicable.

The taxpayers filed motions in Tax Court to get the underlying special report released but the Tax Court refused to do so. They appealed to their respective Circuits Courts of Appeal (Fifth, Seventh and Eleventh Circuits) and lost. Having rejected the taxpayers’ objection to the absence of the special trial judge’s report from the record on appeal, the Seventh and Eleventh Circuits proceeded to the merits of the Tax Court’s final decision and affirmed that decision in principal part.

The Supreme Court agreed that no statute authorizes, and the then-applicable text of Rule 183 (governing two-tier proceedings in which a STJ hears the case but the Tax Court itself renders the final decision) did not warrant, concealment of the special trial judge’s report. It thus reversed the holdings of the Seventh and Eleventh Circuit Courts of Appeal that disclosure was not required and directed those Courts to conduct further proceedings in accordance with its decision.

In response to the Supreme Court’s holding, the Tax Court amended Rule 183 to provide a procedure for service on the parties of a Special Trial Judge’s recommended findings of fact and conclusions of law and the filing of objections and responses.

Subsequently, the Seventh Circuit remanded the Kanter cases to the Tax Court “for further proceedings consistent with the Supreme Court’s decision ….” The Eleventh Circuit then remanded the cases to the Tax Court, directing, among other items, that: (1) the collaborative report and opinion of the Tax Court be stricken; (2) the original report of the STJ be reinstated; and (3) the matter be assigned to a regular Tax Court Judge who had no involvement in the preparation of the collaborative report. The Eleventh Circuit directed that: (1) the Tax Court to proceed to review the matter giving due regard to the credibility determinations of the special trial judge and presuming correct fact findings of the trial judge; and (2) Special Trial Judge Couvillion’s findings of fact are to be presumed correct “unless manifestly unreasonable.” Finally, the Fifth Circuit directed the Tax Court to reexamine its findings consistent with the Eleventh Circuit’s instructions.

In Estate of Burton W. Kanter, deceased, Joshua S Kanter, Executor, et al, TC Memo 2007-21, a mammoth 457-page decision dealing with 23 different issues, the Tax Court, in an opinion by Judge Haines, by and large sustained IRS’s positions. Moreover, in two instances, the Tax Court rejected as “manifestly unreasonable” the STJ report’s acceptance of the taxpayers’ testimony. There were, however, three exceptions in which the taxpayer prevailed (dealing with an ’86 interest expense deduction, an ’80 business expense deduction, and an ’83 charitable contribution), and a finding in one instance that an adjustment was overlooked. Ballard appealed to the Eleventh Circuit.

Eleventh Circuit reversal. The essential question before the Eleventh Circuit was whether Judge Haines (the Tax Court judge in the 2007 decision) gave due regard to the fact findings of the STJ. For reasons explained in considerable detail in its opinion, the Eleventh Circuit held that Judge Haines did not.

The Appeals Court concluded that the STJ’s findings of fact and credibility determinations were supported by the record and that his finding that Ballard was not responsible for a deficiency and had not committed fraud were not manifestly unreasonable. The Eleventh Circuit concluded that, in finding otherwise, Judge Haines did not presume the STJ’s findings to be correct or give his credibility determinations their due deference, as required by Tax Court Rule 183. Rather, Judge Haines conducted a nearly de novo review of the facts in violation of Rule 183 and the Eleventh Circuit’s prior instructions.

The Eleventh Circuit did acknowledge that this case was a close call. It noted that had Judge Haines been the original trial judge, his rulings would probably be entitled to an affirmance. However, he was not the trial judge and did not see or hear the witnesses. The STJ did and found them credible. Accordingly, the Appeals Court sent the case back to the Tax Court with instructions to vacate Judge Haines’ opinion and enter an order approving and adopting the STJ’s original report as the opinion of the Tax Court.

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