337 F.3d 833 (7th Cir. 2003), 01-4316, Estate of Kanter v. C.I.R.
|Citation:||337 F.3d 833|
|Party Name:||Estate of Kanter v. C.I.R.|
|Case Date:||July 24, 2003|
|Court:||United States Courts of Appeals, Court of Appeals for the Seventh Circuit|
Argued Sept. 4, 2002.
Rehearing and Rehearing En Banc Denied Oct. 21, 2003.
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Richard H. Pildes (argued), New York University Law School, New York City, for Petitioner-Appellant.
Steven W. Parks (argued), Joan I. Oppenheimer (argued), Gary R. Allen (argued), Steven W. Parks (argued), Dept. of Justice Tax Div., Appellate Section, Washinton, DC, John J. Comeau, Internal Revenue Service, Chicago, IL, for Respondent-Appellee.
Before FLAUM, Chief Judge, CUDAHY and KANNE, Circuit Judges.
The Estate of Burton Kanter and Naomi Kanter appeal a decision of the Tax Court. This consolidated appeal deals with six out of forty-one separate issues decided by the Tax Court with respect to alleged deficiencies of the late Burton W. Kanter, his wife, Naomi Kanter, and related entities, as well as two additional post-trial issues. We affirm in part and reverse in part.
The late Burton W. Kanter, 1 and various family entities associated with him, have been audited by the Internal Revenue Service virtually, if not literally, every year since Richard Nixon was President. Kanter was a well-known and accomplished tax and estate lawyer. He graduated from the University of Chicago Law School. He had a very successful law practice beginning in 1956, founding what would eventually become the law firm of Neal, Gerber & Eisenberg. Among Kanter's clients was the Pritzker family of Hyatt Corporation fame. Kanter was also an accomplished businessman, with "extensive exposure" to a "good many public .... [and] private companies." (Tr. at 5278.) 2 Kanter wrote extensively on tax-related subjects (originating a "Shop Talk" column in the Journal of Taxation), and was an expert on the subject of trusts and estate planning. See, e.g., Burton W. Kanter & Michael J. Legamaro, The Grantor Trust: Handmaiden to the IRS and Servant to the Taxpayer, 75 TAXES 706 (1997); Sheldon I. Banoff & Burton W. Kanter, LLC Announcements: Damage Control, 80 J. TAX'N 255 (1994); Burton W. Kanter & Sheldon I. Banoff, Tax Planning for the Elderly, 70 J. TAX'N 191 (1989); Burton W. Kanter, AARP--Asset Accumulation, Retention and Protection: Prelude to Transmission, 69 TAXES 717 (1991); Burton W. Kanter, Cash in a "B" Reorganization: Effect of Cash Purchases on "Creeping" Reorganization, 19 TAX L. REV. 441 (1964). In the 1960s and 1970s, Kanter helped Hollywood finance movies through tax shelter arrangements, and was involved in the production of many major Hollywood films, including "One Flew Over the Cuckoo's Nest." The IRS's extraordinary attention to Kanter is understandable given that from 1979 to 1989 Kanter, the highly successful tax attorney, who hobnobbed with Pritzkers and Hollywood producers and who participated in countless extremely large and lucrative business ventures, reported a negative adjusted gross income each year on his federal tax return and paid no federal income taxes. (Tr. at 5290-91.)
This consolidated appeal involves Kanter's petitions for review of deficiencies assessed during the years from 1978 to 1986, which is itself only a portion of the original consolidated case tried by the Tax Court in 1994--a trial that generated almost 5500 pages of transcript, more than 4600 pages of briefs and thousands of exhibits consuming hundreds of thousands of pages, and was eventually, five years later, distilled into a 606 page opinion covering forty-one separate issues. A thorough description of the entire factual background to this case can be found in the Tax
Court's opinion. Investment Research Associates, Ltd. v. Comm'r, 78 T.C.M. (CCH) 951 (1999) [hereinafter IRA ]. The trial was conducted by Special Trial Judge Couvillion, to whom the Tax Court had assigned the case under 26 U.S.C. § 7443A(b)(4). See also Tax Court Rule 180. 3 Under the Tax Court's rules, the Special Trial Judge (STJ) then submitted a report containing findings of fact and opinion to the Tax Court's Chief Judge, who then assigned the case to Tax Court Judge Dawson. See Tax Court Rule 183(b). Judge Dawson subsequently issued his opinion, which stated that the Tax Court "agrees with and adopts the opinion of the Special Trial Judge, which is set forth below." IRA, 78 T.C.M. (CCH) at 963. Of the forty-one issues decided by the Tax Court, six were appealed to this court: 4
1. Fraud: The Tax Court determined that Kanter (and two colleagues) helped individuals obtain business opportunities in exchange for payments that later were fraudulently diverted through a series of Kanter-controlled entities in order to disguise the payments' origins and lower the tax assessed on the income (by dividing it up and assigning parts of it to various entities claiming losses). Kanter concedes that there was an underpayment of taxes but disputes that the Commissioner was able to prove by clear and convincing evidence that the underpayment was due to fraud.
2. Bea Ritch Trusts: Kanter challenges the Tax Court's determination that capital gains reported in 1986 by the Bea Ritch Trusts (BRT) were properly taxable to Kanter under the grantor trust provisions of the Internal Revenue Code (IRC).
3. Washington Painting: Kanter challenges the Tax Court's refusal to allow him to deduct expenses he incurred during an aborted sale of a painting.
4. 1982 Bank Deposits: Kanter challenges the Tax Court's determination of a deficiency for the year 1982 based upon an analysis of his bank deposits. He argues that the Commissioner failed to meet his burden to prove a deficiency, that the Tax Court erred in presuming the Commissioner's deficiency determination to be correct, and that in any event the evidence Kanter presented at trial was sufficient to overcome any presumption of correctness.
5. Equitable Leasing: Kanter challenges the Tax Court's determination that payments from Equitable Leasing Company to Kanter entities were taxable commissions and not loans.
6. Cashmere: The Tax Court disregarded a series of transactions involving (a) the contribution of certain partnership interests to a shelf corporation (Cashmere) and (b) the subsequent installment sale of Cashmere's stock, the result of which was an immediate recognition of capital gain to Kanter on the partnership interests. Kanter argues that the transactions had economic substance and should not have been disregarded as an attempt to avoid the payment of federal income tax.
The remaining two issues in this appeal concern events after the conclusion of the Tax Court's trial. Beginning in April 2000, Kanter sought repeatedly to have the original report filed by the STJ placed in the record, or in the alternative made available for this Court's review in camera. Kanter alleged that informal conversations with two Tax Court judges had revealed that the issued opinion had undergone significant alterations from the original report filed by STJ Couvillion. The Tax Court denied all of Kanter's motions. Kanter appeals the Tax Court's refusal to produce the STJ's original report. The final issue concerns Kanter's wife's (Naomi's) efforts to seek innocent-spouse relief from the deficiencies levied against her husband's estate.
To make this very complex case easier to understand we have placed a brief statement of facts relevant to each issue immediately preceding that issue's analysis. We begin with the broadest (and least fact dependent) issue: whether the STJ's original report should have been made part of the record on appeal. Then we address the six transactional issues from the Tax Court's decision. Finally, we address Naomi Kanter's post-trial motions.
The United States Courts of Appeals have exclusive jurisdiction to review decisions of the United States Tax Court. 26 U.S.C. § 7482(a)(1); Seggerman Farms, Inc. v. Comm'r, 308 F.3d 803, 805 (7th Cir. 2002).
I. The STJ's Report
Kanter's first argument is that the STJ's original report must be made a part of the record on appeal so that this court can determine whether the appropriate degree of deference had been paid to it by the Tax Court judge, whose opinion is before us. Kanter claims that informal conversations between his attorney and other Tax Court judges revealed that the STJ who presided over the trial of this case submitted a report that found Kanter credible and recommended rejection of much of the Commissioner's assessed deficiencies, specifically the fraud deficiency. Kanter argues that the STJ's report cannot be rejected by the Tax Court unless clearly erroneous, and that, without the STJ's report in the record, there is no way for this court to determine if proper deference was accorded it. Moreover, this secret and unaccountable process of review allegedly violates Kanter's due process rights. Kanter, relying on a Supreme Court case examining the relationship between U.S. district court judges and magistrate judges, argues that this quasi-collaborative process affords a Tax Court the opportunity to reverse an STJ's credibility findings without first hearing or seeing the witnesses itself--thus offending due process. See United States v. Raddatz, 447 U.S. 667, 681 n. 7, 100 S.Ct. 2406, 65 L.Ed.2d 424 (1980) (observing in dicta that in the criminal context a district court judge's reversal of a magistrate judge's credibility...
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