Lisle v. CIR ( 2003 )

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
July 30, 2003
FOR THE FIFTH CIRCUIT
Charles R. Fulbruge III
Clerk
No. 01-60639
CONS/W
Case No. 01-60640
Case No. 01-60641
Case No. 01-60642
ESTATE OF ROBERT W. LISLE, Deceased; ESTATE OF DONNA M. LISLE,
Deceased,
Petitioners-Appellants,
THOMAS W. LISLE, Independent Co-Executor; AMY L. ALBRECHT,
Independent Co-Executor,
Appellants,
versus
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.
Appeals from a Decision of the
United States Tax Court
Before HIGGINBOTHAM, DUHÉ and DeMOSS, Circuit Judges.
HIGGINBOTHAM, Circuit Judge:
Taxpayers appeal the judgment of the United States Tax Court
which found that they fraudulently failed to declare and pay tax on
approximately $1,280,000 of income.1 The court determined that
1
Donna M. Lisle was a participant in this dispute solely as
a result of having filed joint tax returns with Robert W. Lisle.
Both Robert and Donna Lisle’s estates were found liable for the
Robert W. Lisle, along with Claude M. Ballard and Burton W. Kanter,
earned the unreported income through an elaborate scheme involving
the sale of influence by Lisle and Ballard at Prudential Life
Insurance Co. of America, whereby Lisle and Ballard would direct
business to those persons who agreed to pay a commission on the
business to Kanter. Through numerous transactions involving
various sham corporations and trusts, the kickbacks were
distributed among Lisle, Ballard, and Kanter in a 45-45-10 percent
split.
The Lisles assert that the evidence does not support the
finding of fraud or the assessed deficiencies. They also allege
that their due process rights were violated by the application of
Tax Court Rule 183, whereby the Tax Court Judge reviewed the
findings of the Special Trial Judge without making the findings of
the Special Trial Judge available to them or this court. After an
exhaustive review of the record, we find that the Tax Court clearly
erred in determining that the government proved a deficiency due to
fraud by clear and convincing evidence. However, the evidence
supports the assessment of a deficiency under the less strenuous
standard of a preponderance of the evidence, and we therefore
affirm the deficiencies for those years not barred by the statute
of limitations. Finally, we decide that the application of Rule
183 did not violate the Lisles’ right to due process.
I.
income tax deficiencies, while only Robert Lisle’s estate was found
liable for the fraud penalties and penalty interest.
It is well settled that “the courts afford IRS determinations
of deficiency a presumption of correctness.”2 To rebut this
presumption, “the taxpayer bears the burden of proving by a
preponderance of the evidence that the determination is arbitrary
and erroneous.”3 Once the taxpayer has established that the
assessment is arbitrary and erroneous, “the burden shifts to the
government to prove the correct amount of any taxes owed.”4 In
addition, when the Commissioner in his Tax Court pleadings
increases the deficiency asserted against the taxpayer, he bears
the burden of proof for the increase by a preponderance of the
evidence.5 We review the Tax Court’s approval of the
Commissioner’s determination of taxable income for clear error.6
To reverse the Tax Court’s approval of the Commissioner’s
deficiency, we must find that the Tax Court clearly erred when it
determined that Lisle failed to rebut the presumption of
correctness of the Commissioner’s deficiency by a preponderance of
the evidence, or that the Commissioner failed to prove the
additional deficiencies by a preponderance of the evidence.
2
Yoon v. Comm’r, 135 F.3d 1007, 1012 (5th Cir. 1998).
3
Id.
4
Portillo v. Comm’r, 932 F.2d 1128, 1133 (5th Cir. 1991).
5
See Tax Court Rule 142(a)(1) (which reads in part, “in
respect of any ... increases in deficiency ... pleaded in the
answer, [the burden of proof] shall be upon the respondent”);
Merino v. Comm’r, 196 F.3d 147, 151 (3d Cir. 1999) (stating that
any new matter must be proved by a preponderance of the evidence).
6
See Yoon, 135 F.3d at 1012.
In addition to the deficiency, the Tax Court found that Lisle
was liable for a fraud penalty. Pursuant to I.R.C. § 7454(a) and
Tax Court Rule 142(b), the Commissioner bears the burden of proof
with respect to the deficiencies in tax and penalties for fraud by
clear and convincing evidence.7 To sustain a fraud penalty Rule
142(b) requires proof by clear and convincing evidence both that an
underpayment exists, and that some portion of the underpayment is
attributable to fraud.8 In proving an underpayment by clear and
convincing evidence, “the Commissioner may not rely on a taxpayer's
failure to carry his or her burden of proof with respect to the
underlying deficiency.”9
While we have observed that fraud must be proved by clear and
convincing evidence,10 we have never addressed the Tax Court’s rule
creating two elements, each of which must be proved by clear and
7
See I.R.C. § 7454(a) (“In any proceeding involving the issue
whether the petitioner has been guilty of fraud with intent to
evade tax, the burden of proof in respect of such issue shall be
upon the Secretary”); Tax Court Rule 142(b) (“In any case involving
the issue of fraud with intent to evade tax, the burden of proof in
respect of that issue is on the respondent, and that burden of
proof is to be carried by clear and convincing evidence”); Patton
v. Comm’r, 799 F.2d 166, 171 (5th Cir. 1986) (stating that “[t]he
Commissioner bears the burden of proving fraud, which must be
established by clear and convincing evidence”).
8
See Duncan & Assocs. v. Comm’r, 85 T.C.M. 1428 (T.C.
2003) (stating that the Commissioner must prove both that an
underpayment exists and that some portion is attributable to
fraud); Aston v. Comm’r, 85 T.C.M. 1260 (T.C. 2003) (same).
9
Duncan, 85 T.C.M. 1428.
10
See, e.g., Patton, 799 F.2d at 171 (“The Commissioner bears
the burden of proving fraud, which must be established by clear and
convincing evidence.”).
convincing evidence. Without challenge by the Commissioner of the
Tax Court’s reading of Rule 142(b), we assume that both the
underpayment and the fraud must be proved by clear and convincing
evidence to sustain the penalty. Here there is a significant
functional overlap of the two elements, as the effort to prove
underpayment and fraud is sustained by much the same evidence -
establishing a kickback scheme to hide income proves both an
underpayment and points toward fraud, on our facts.
We review the Tax Court’s finding that there was an
underpayment of tax and that a portion of that underpayment was due
to fraud for clear error.11 We will sustain the penalty for fraud
unless we find that the Tax Court clearly erred when it determined
that the Commissioner, by clear and convincing evidence,
established an underpayment by Lisle and that a portion of the
underpayment was attributable to fraud.
A finding is clearly erroneous when, “although there is
evidence to support it, the reviewing court on the entire evidence
is left with the definite and firm conviction that a mistake has
been committed.”12 Whether a finding is clearly erroneous must be
viewed in light of the burden of proof.13 If the burden of proof
11
See Payne v. Comm’r, 224 F.3d 415, 421 (5th Cir. 2000)
(applying clearly erroneous standard to Tax Court’s finding of
fraud).
12
Anderson v. City of Bessemer City, 470 U.S. 564, 573 (1985)
(citation omitted).
13
See Concrete Pipe and Prods. of Cal., Inc. v. Constr.
Laborers Pension Trust, 508 U.S. 602, 623 (1993) (discussing the
is by the preponderance of the evidence, the Tax Court’s conclusion
that a deficiency was proved would not be clearly erroneous if the
Tax Court chose between competing inferences from the facts.14 The
same evidence may fail, however, to meet the requirement that proof
be clear and convincing.15
II.
A.
The IRS mailed notices of deficiency for tax years 1984, 1987,
1988, and 1989 to Lisle and his wife on August 15, 1991, July 24,
1991, July 2, 1992, and April 5, 1993, respectively. In connection
with the notices of deficiency, the Lisles filed actions on
September 9, 1991, September 23, 1991, July 16, 1992, and April 16,
1993. The Tax Court consolidated the Lisles’ suit with twenty-four
additional Tax Court actions involving the other participants in
the alleged scheme. After a five week trial, the Tax Court filed
a 600 plus page opinion and then entered final judgment in the four
cases concerning Lisle and his wife on July 24, 2001. The Lisles
timely appealed. Lisle and his wife died during the pendency of
the actions, and their estates were substituted as parties. The
relationship between standards of review and burdens of proof).
14
Anderson, 470 U.S. at 574 (stating that “[w]here there are
two permissible views of the evidence, the factfinder's choice
between them cannot be clearly erroneous”).
15
See Marsellus v. Comm’r, 544 F.2d 883, 885 (5th Cir. 1977)
(stating that while the clearly erroneous standard applies to the
Tax Court’s finding of fraud, “we must judge the Tax Court’s
findings in light of the government’s burden of proving fraud by
‘clear and convincing’ evidence”).
following narrative is stated in the light most favorable to the
government.
B.
The income deficiencies stem from an elaborate scheme of
alleged influence selling, kickbacks, and money laundering through
sham corporations and trusts. The case centers around five
business arrangements whereby Lisle, Ballard, and Kanter assisted
individuals in obtaining business opportunities or venture capital
from the Prudential Life Insurance Company of America. Lisle
worked for Prudential in real estate development and mortgage
financing from 1950 to 1982, and Ballard worked there from 1948 to
1982. Between 1968 and 1970, they worked together in a regional
office in Houston, Texas. At the request of Donald Knab,
Prudential’s senior vice-president in charge of real estate
investments, both Lisle and Ballard moved to Prudential’s corporate
headquarter in Newark, New Jersey, in the early 1970s.
As the head of real estate development from about 1975 to
1982, Ballard had the ability to influence the selection of
contractors and builders on projects. Ballard’s staff bought,
leased, and sold Prudential’s real estate and supervised the
property managers and leasing agents of that real estate.
Ultimately, Ballard became senior vice-president in real estate
operations – the highest position in Prudential’s real estate
operation – placing him in charge of all operations, acquisitions,
sales and portfolio management of the equity investments in real
estate.
At the same time, Lisle headed Prudential’s mortgage
operations and was responsible for lending money and buying and
developing real estate. Lisle had authority to commit any loan up
to $20 million and to award construction contracts. He conducted
his work through a subsidiary corporation of Prudential called PIC
Realty Corp. (PIC Realty), of which he was president.
Kanter began practicing law in Chicago, Illinois, in 1956. At
the time of the trial and for the previous ten years, Kanter taught
courses in estate and gift taxation and estate planning at the
University of Chicago Law School. He has written and lectured
extensively in the area of federal tax law. As a result of his
expertise, Kanter had a highly successful law practice and was
involved in consultation, development, and investments in a number
of business fields and enterprises. Kanter represented the
Pritzker family, who owned the majority of stock in the Hyatt
Corporation. While at the opening of the Houston Hyatt Regency in
the early 1970s, Kanter met Lisle and Ballard. Kanter and Lisle
invested in partnerships together, and Kanter’s law firm did estate
work and established insurance trusts for Lisle.
Kanter established a number of corporations, partnerships, and
trusts allegedly to receive, distribute, and disguise illegal
kickbacks from five business arrangements at issue here. These
five transactions and their principal participants are referred to
by the parties and the Tax Court as “the Five.”
Most of the payments in this case initially were made through
Investment Research Associates, Inc. (IRA), which Kanter
incorporated in Delaware. Solomon Weisgal, trustee of Kanter’s
family’s Bea Ritch Trusts, owned fifty percent of the company's
voting stock. Mildred Schott, a legal secretary and real estate
broker, owned the remaining 50 percent of the voting stock. Bea
Ritch Trusts owned 1,000 shares of common stock, and Schott owned
1,000 shares of class A preferred voting stock. No individual,
business, estate, or trust owned more than fifty percent of the
corporation's total voting stock. Delores Keating, a real estate
sales person, served as IRA’s president until 1975. Schott was
president from 1975 to 1980. Lawrence Freeman served as president
from 1980 to 1989. Other officers of IRA included Sharon Meyers,
who was the company's secretary, and Patricia Grogan, who served as
a director. It was Kanter, however, who controlled IRA at all
times, directing the activities of Weisgal, Schott, Keating,
Freeman, Meyers, and Grogan.
IRA employed only bookkeepers and paid no salaries in any year
other than 1981 and 1982, when it paid salaries of $9,969 and
$26,079, respectively. It owned controlling interests in several
subsidiary corporations including Carlco, Inc., TMT, Inc., and BWK,
Inc. As we will discuss, in 1983, IRA distributed all of its
assets to Carlco, TMT, and BWK in a 45-45-10 percent split, which
were thereafter managed respectively by Lisle, Ballard, and Kanter.
The government asserts that forty-five percent of the payments from
the Five to Kanter corporations were distributed to Lisle based on
this arrangement.
C.
- 1 -
The first of the Five arrangements involves J.D. Weaver and
Hyatt’s contract to manage the Embarcadero Hotel in San Francisco.
Lisle and Ballard met Weaver, an officer of a Tenneco Corp.
subsidiary, in the late 1960s. The Tenneco Corp. was working with
Prudential to build the Houston Hyatt during this time. In the
early 1970s, Prudential participated in a joint venture to build
the San Francisco Embarcadero Hotel. Lisle supervised the building
of the Embarcadero and participated in the selection of a
management company to operate it.
Intercontinental Co., Del Webb Co., and the Hyatt Corporation
expressed interest in the contract. A.N. Pritzker, who controlled
the Hyatt Corp., hoped to manage the Embarcadero because the hotel
would become the third or fourth Hyatt-operated hotel in the United
States at which major conventions would be held. But Lisle was not
interested in a bid from Hyatt as Hyatt was simultaneously planning
a hotel to compete with the Embarcadero. As a result, Pritzker
offered Weaver a share of the management fees if he assisted Hyatt.
Weaver then convinced Lisle to allow Hyatt to bid on the contract.
Hyatt submitted the only bid and was awarded the Embarcadero
management contract. On February 25, 1971, Hyatt agreed to
compensate Weaver’s corporation, K.W.J. Corp., for Weaver’s help in
obtaining the contract. Under the agreement, Hyatt was obligated
to pay KWJ ten percent of its net cash profits from the Embarcadero
management contract. Pursuant to the agreement, Hyatt paid KWJ a
total of $2,589,710 for the 1976 through 1993 operating years.
In 1976, Weaver and Kanter agreed that IRA would buy all of
KWJ’s outstanding stock for $150,000, plus annual payments of
thirty percent of KWJ’s commissions from the Embarcadero management
contract. This agreement was framed as a four-year option to buy
KWJ’s stock. In a letter dated September 27, 1979, Kanter informed
Weaver of IRA’s election to acquire KWJ’s shares, effective
retroactively to November 1, 1978. The purchase resulted in IRA
obtaining seventy percent of Hyatt’s commissions to KWJ, and
allowed IRA to control KWJ’s net worth, which was $115,084 as of
January 1, 1979. As agreed, Weaver received thirty percent of the
commissions.
- 2 -
The second of the Five involved Bruce Frey, a certified
property manager, real estate broker, and insurance broker. Frey
did business through his company BJF Development, Inc., which
engaged in real estate development and management. Frey was the
sole shareholder. In the late 1970s, Kanter introduced Frey to
Ballard. From that point on, Frey began doing business with
Prudential. Frey's first condominium conversion project with
Prudential was the Village of Kings Creek, a 1,000 unit complex in
Miami, Florida, which was owned by a Prudential pension fund that
Ballard managed. Prudential and BJF participated in five other
joint ventures: Calais, Chatham, Old Forge, Valleybrook, and the
Greens. Prudential owned the properties and BJF converted them and
marketed and sold the units.
Zeus Ventures, Inc., one of IRA’s wholly-owned subsidiaries,
was a limited partner in the Prudential and BJF partnership. Zeus
was to receive five percent of BJF’s developer’s fees and twenty
percent of its profits on all prior and subsequent condominium
conversions of Prudential properties. Under this agreement, BJF
paid Zeus over $1,000,000 between 1980 and 1985.
- 3 -
The third arrangement began when Kanter invited William
Schaffel, a real estate broker, to have dinner with Lisle and
Ballard in New York City in 1979. Schaffel had previously met
Lisle briefly but had not done business with him. He had not met
Kanter or Ballard before the dinner. At the meeting, Kanter asked
Schaffel if he wanted to arrange the financing for a casino hotel
to be built in Atlantic City, a deal which did not involve
Prudential. Kanter said he would introduce Schaffel to the
appropriate people in return for fifty percent of Schaffel’s fees
from the deal. Schaffel agreed, but the transaction never
materialized.
Later, Schaffel agreed to give Kanter fifty percent of any
fees earned by doing business with Prudential. This agreement also
applied to finders fees that Schaffel obtained for procuring
business from Prudential for real estate developer Bill Walters and
for Torcon, Inc. Schaffel’s first deal with Prudential was
negotiating the sale of the IBM headquarters in Lexington,
Kentucky, to Prudential. Schaffel dealt with Ballard in its
initial stages, but as usual, the deal went through the local
Prudential office. As agreed, Schaffel paid fifty percent of his
broker’s fee to IRA.
In late 1979 or early 1980, Schaffel introduced Benedict
Torcivia, Torcon's sole shareholder and chairman of the board, to
Ballard. Before this introduction, Torcon had done no business
with Prudential. However, after the introduction, Torcon did
"quite a bit" of business with Prudential, also first approved by
the local Prudential office. Schaffel also introduced Walters to
Prudential executives including Ballard. Schaffel assisted
Walters’ companies in obtaining financing from Prudential for two
buildings located in Aurora, Colorado. Prudential agreed to
contribute about $30 million in financing to the Ramada Renaissance
Hotel project, and about $15.6 million to the Cherry Creek Place II
project. In written agreements, Walters’ companies acknowledged
that Prudential participated in the ventures primarily as a result
of Schaffel’s efforts and, therefore, he was entitled to
compensation.
Between 1979 and 1983, Schaffel paid IRA a total of $1,184,876
as a result of his business dealings with Prudential, which ended
when Ballard and Lisle left that company. He then began doing
business with Travelers Insurance Co., Lisle’s new employer.
Although he initially paid IRA a portion of his fees for these
deals, he stopped making the payments. Schaffel told Kanter that
the deals were not with Prudential, and were therefore not covered
by their agreement. Kanter persuaded him that, because he
continued to get business as a result of Kanter’s introduction of
Schaffel to Lisle, their agreement applied. Schaffel resumed
making the payments, only now they were made to a different Kanter
corporation, Holding Co.
- 4 -
The fourth involves Kenneth Schnitzer. During the 1960s and
1970s, Kenneth Schnitzer conducted business through Century
Development Corp. and was engaged in real estate development in
Houston, Texas. In 1974, CDC acquired Fletcher Emerson Co., a
property management and cleaning company, for $1.3 million. After
its purchase, Fletcher Emerson was renamed Property Management
Systems, Inc., and Schnitzer became the company's chairman of the
board and chief executive officer.
In 1974, Schnitzer arranged a meeting with Ballard, whom he
first met when Ballard was working in Prudential's regional office
in Houston, and offered Prudential a fifty percent interest in some
PMS management contracts in return for more business opportunities
with Prudential. Prudential declined because it managed pension
plans that owned some of the properties, and owning both the
property and the property management company would create a
conflict of interest. Prudential did thereafter give PMS
additional business.
Schnitzer then offered PMS stock to Kanter. On November 7,
1977, three years after initially meeting with Ballard, and after
talking to Ballard about Kanter’s ability to send business to PMS,
particularly through Kanter’s contacts with Pritzker and Hyatt, CDC
agreed to sell forty-seven and a half percent of the PMS common
stock to IRA’s predecessor for $150,000. The sale took place on
February 14, 1978.
Eventually, Prudential became PMS’s largest customer. In
March 1979, Schnitzer informed Kanter that he wanted to repurchase
the PMS stock because its business with Pritzker had not increased
as Schnitzer had anticipated. On November 30, 1979, CDC reacquired
IRA’s PMS stock for $3.1 million payable in installments over ten
years. IRA received a total of $4,590,388 in connection with the
stock repurchase. The increase in value was due in large part to
the increase in PMS’s business with Prudential, which began after
Schnitzer’s initial meeting with Ballard in 1974.
- 5 -
The final transaction in the Five involved John Eulich, a real
estate developer. Eulich met Lisle and Ballard in the mid-1960s
through his transactions with Prudential, and Kanter in the late
1960s or early 1970s through Pritzker. In 1975, Eulich
participated in the formation of Motor Hotel Management, Inc., a
hotel management business. Eulich became MHM’s majority
shareholder and chairman of its Board of Directors. His role was
to find management contracts and financing for the company. During
that year, MHM obtained seventeen management contracts, each part
of a joint venture with Prudential as lender and a Eulich
corporation as developer.
John Connolly owned the Gateway Hotel Management Co., which
managed the Gateway Hilton Hotel in Newark, New Jersey, a
management contract obtained through Prudential. Connolly also
obtained a contract to manage the Midland Hilton Hotel in Texas,
which Prudential owned.
Eulich, Kanter, and Connolly formed a partnership called the
Essex Hotel Management Co. Essex’s partners were MHM (47.5%
interest), Connolly (5% interest), and Kanter’s entities, IRA
(26.125% interest) and Holding Co. (21.375% interest). Essex
entered into representation and marketing agreements with GHM and
MHM, effective January 1, 1982, requiring Essex to perform liaison
functions. In return, Essex was to receive a large part of GHM’s
and MHM’s management fees. Of Essex’s partners, only MHM performed
any consulting or liaison services. IRA and Holding Co. did not
contribute money or services to the partnership but received a
total of forty-seven and a half percent of its distributions.
From 1982 to 1988, Essex reported $1,334,601 in commission fee
payments from GHM. During the same period, Essex reported
$1,563,412 in commission fee payments from MHM. In addition, Essex
made the following distributions from 1982 to 1989: $788,452 to
IRA; $645,028 to Holding Co.; $150,899 to Connolly, and $1,433,551
to MHM. The distributions to all of Essex's partners from 1982 to
1989 totaled $3,017,930.
D.
In 1982, three corporations were formed: Carlco, TMT, and
BWK. At the end of 1983, IRA acquired the common stock of these
three companies and listed them as its subsidiaries on its 1983
federal income tax return. Also in 1983, IRA liquidated KWJ, which
it had purchased from Weaver. KWJ's assets and Zeus's accumulated
funds were distributed to IRA. By the end of 1983, IRA had
accumulated $4,771,445 from payments flowing from the Five
arragements.
In 1984, Kanter directed IRA’s president to distribute funds
it had received in those transactions in the following ratios:
forty-five percent to Carlco, forty-five percent to TMT, and ten
percent to BWK. It was then agreed that Lisle would manage
Carlco’s assets, Ballard would manage TMT’s assets, and Kanter
would manage BWK. Notably, Carlco, TMT, and BWK were not listed as
subsidiaries on IRA's federal income tax return for 1984.
On December 31, 1984, IRA transferred its partnership interest
in Essex to Carlco, TMT, and BWK in the 45-45-10 ratio. IRA never
informed Essex of this transfer, and therefore continued to receive
payments from Essex, which IRA then transferred to Carlco, TMT, and
BWK. After 1984, IRA also distributed the payments it received in
connection with the PMS stock repurchase to Carlco, TMT, and BWK in
the 45-45-10 ratio. Likewise, in 1984, after the corporation
called KWJ had been liquidated, the KWJ partnership was formed.
Carlco and TMT each had a forty-five percent interest and BWK had
a ten percent interest in the KWJ partnership. Weaver forwarded
the Hyatt commission checks to the KWJ partnership which paid
Weaver his thirty percent share, and the balance was distributed to
Carlco, TMT, and BWK. Weaver never informed Hyatt of the
liquidation of KWJ corporation or the formation of the KWJ
partnership.
From 1982 to 1989, first the KWJ corporation and then the KWJ
partnership paid “consulting fees” of $1000 per month to each of
two of Lisle’s and two of Ballard’s adult children. The payments
were allegedly for their submission of proposed real estate deals.
Lisle’s children testified that they spent very little time
reviewing properties and that none of the deals they proposed were
consummated by the KWJ partnership. In February 1990, after the
IRS began checking Lisle’s, Ballard’s, and Kanter’s tax returns,
Kanter terminated the fee arrangement on behalf of IRA. In a
letter, Kanter indicated that it appeared as though no services had
been performed by the children for a number of years but that IRA
did not intend to seek reimbursement for payments made.
At trial, Lisle admitted that he had complete control over
Carlco. He claimed his function in Carlco was to invest its assets
in municipal bonds. However, he never obtained a fee for his
services. Lisle and his family members were Carlco’s officers and
directors, having signatory authority over the Company’s accounts.
In 1989, when Lisle and his wife Donna moved from Connecticut to
Texas, Carlco’s money was deposited into an account at the North
Dallas Bank. Lisle maintained signatory authority over that
account. The Christie Trust, which Kanter created in 1983 for the
benefit of Lisle’s wife and children, owned all 300 shares of
Carlco’s issued preferred stock. IRA owned all 1000 shares of
Carlco’s common stock.
In addition, between 1973 and 1980, Lisle established three
grantor trusts: RWL Cinema Trust, RWL Cinema Trust II, and the
Basking Ridge Trust. Lisle’s wife and children were the
beneficiaries of these trusts. Kanter’s companies made loans
totaling $220,000 to Lisle and the three trusts from 1974 to 1990.
Neither Lisle nor the trusts paid any interest on these loans. IRA
wrote off some of these loans as worthless in 1987. Lisle never
reported the discharge of this indebtedness as income on his 1987
return or any other subsequent return.
III
A.
As there is no evidence of payments from the Five directly to
Lisle, the Tax Court’s opinion as well as the Commissioner’s
argument hinge on Lisle receiving money paid to the various Kanter
corporations. The linchpin of the government’s theory that there
was an arrangement among Lisle, Ballard, and Kanter to sell
influence in return for kickbacks is Lisle’s actual receipt of
monies equal to forty-five percent of the payments from the Five -
the government’s theory simply cannot stand if Lisle did not
receive the money. We ask then whether any of the money paid to
the Kanter corporations can be attributed to Lisle, first in light
of the clear and convincing evidence standard required for a
finding of fraud, then under the more lenient preponderance of the
evidence standard.
The Tax Court relied on three rationales for attributing
payments by the Five to the Kanter corporations to Lisle: (1)
Carlco was the alter ego of Lisle; (2) by the assignment of income
doctrine, under which Lisle, the person who earned the income, is
responsible for the tax on the income regardless of an assignment
of that income to the Kanter corporations; and (3) the Commissioner
could reallocate the income paid to the Kanter corporations to
Lisle pursuant to § 482.
B.
The first theory is that the Kanter corporations were
incorporated pocketbooks, and that Carlco was the alter ego of
Lisle. Where a corporation is the alter ego of an individual, the
government ignores the corporate identity and assigns the income to
the controlling individual. Here, the source of the payments to
Carlco is largely irrelevant in determining whether Carlco was the
alter ego of Lisle, since the question of alter ego turns on
control and use.
We have established a non-exhaustive list of factors to
consider in determining whether a subsidiary is the alter ego of a
parent corporation, but the question is ultimately determined by
examining the totality of the circumstances.16 Although this list
was developed in the context of a parent corporation and its
subsidiary, it has been adapted and applied to the relationship
between an individual and a corporation.17 Additional factors we
have considered in the context of a corporation as alter ego of an
16
See Oxford Capital Corp. v. United States, 211 F.3d 280, 284
n.2 (5th Cir. 2000); United States v. Jon-T Chem., Inc., 768 F.2d
686, 691-92, 694 (5th Cir. 1985). The factors include:
(1) the parent and subsidiary have common stock
ownership; (2) the parent and subsidiary have common
directors or officers; (3) the parent and subsidiary
have common business departments; (4) the parent and
subsidiary file consolidated financial statements; (5)
the parent finances the subsidiary; (6) the parent
caused the incorporation of the subsidiary; (7) the
subsidiary operated with grossly inadequate capital; (8)
the parent pays salaries and other expenses of
subsidiary; (9) the subsidiary receives no business
except that given by the parent; (10) the parent uses
the subsidiary's property as its own; (11) the daily
operations of the two corporations are not kept separate;
(12) the subsidiary does not observe corporate
formalities.
Oxford Capital Corp., 211 F.3d at 284 n. 2.
17
See Century Hotels v. United States, 952 F.2d 107, 110 (5th
Cir. 1992). In applying this list, we have recognized that there
is no need to distinguish between state and federal law, as the
test for alter ego is indistinguishable. Id. at 110 n.4; Jon-T
Chem., Inc., 768 F.2d at 690 n.6.
individual include: “the total dealings of the corporation and the
individual, the amount of financial interest the individual has in
the corporation, the ownership and the control that the individual
maintains over the corporation, and whether the corporation has
been used for personal purposes.”18
The Tax Court relied on several pieces of evidence to conclude
that Carlco was a sham corporation and the alter ego of Lisle.
First, the court concluded that contrary to the position of the
petitioners, Lisle, Ballard and Kanter were far more than mere
managers of Carlco, TMT and BWK, respectively. The court noted
that “[p]etitioners used the funds for their personal benefit.”
This conclusion, as it applies to Ballard and Kanter, is well
supported by the evidence - specifically, the findings that both
diverted hundreds of thousands of dollars from their respective
corporations for personal use.
With Lisle, the government’s case quickly thins; it can only
cite two incidents where Lisle potentially diverted Carlco’s funds
for personal use. First, Lisle used $3,000 of Carlco’s funds to
pay a receivable on the books of Administration Co., ostensibly for
his grantor trust, RWL Cinema Trust. The government contends that
this payment was for personal purposes. The only evidence to
support this conclusion is that the notation on the check stated
“Payment for Loan,” and while Lisle and the Lisle family trusts
owed money to Kanter and his corporations, the government offered
18
Gundle Lining Constr. Corp. v. Adams County Asphalt, Inc.,
85 F.3d 201, 209 (5th Cir. 1996).
no evidence that Carlco owed Kanter any money. The court
concluded, without additional evidence, that the payment was for
the loan to RWL Cinema Trust.
The other alleged personal use of Carlco funds was the KWJ
partnership’s payment of consulting fees to Lisle’s and Ballard’s
adult children. KWJ paid two of Lisle’s children $1,000 a month
each between 1982 and 1988. The total paid to Lisle’s children was
$158,000, all of which was reported by the children as income.
Prior to 1984, IRA owned and controlled KWJ, which it purchased
from Weaver. After IRA distributed its assets to Carlco, TMT, and
BWK, Carlco received a forty-five percent share of the KWJ
partnership which continued to pay Lisle’s and Ballard’s children
the consulting fees. Although both children had backgrounds in
real estate and were paid to submit proposed real estate deals to
KWJ, which they did, none of these deals were ever pursued and the
children received the payments regardless of how many potential
deals they submitted.
It is not clear how this is evidence of an abuse of Carlco for
personal gain by Lisle. IRA, undeniably controlled by Kanter, was
the sole owner of KWJ before the formation of the partnership when
KWJ first started paying the consulting fees. Kanter or one of his
employees at IRA was responsible for initiating the consulting fees
to Lisle’s children. Neither the court nor the government cites
any evidence that Lisle used Carlco to cause the KWJ partnership to
continue to make the payments once the partnership was formed.
There is no evidence that Lisle exercised any power over Carlco to
that end, since IRA retained majority ownership of Carlco, TMT, and
BWK after the partnership was formed, and it was Kanter, on behalf
of IRA, who eventually terminated the payments. There is no
evidence that Lisle used his position at Carlco to ensure that
payments to his children continued. This speculation, combined
with the possible payment of a $3,000 personal loan, will not
support the finding of alter ego.
The court pointed to Lisle’s admissions that as manager of
Carlco’s assets, he had “complete authority” over Carlco and “full
discretion” over the use of its funds; that Lisle maintained
possession of Carlco’s records at his home; that the address for
Carlco was the same as Lisle’s personal residence and when Lisle
moved to Texas, Carlco’s address was changed to Lisle’s new
residence. In addition, Lisle, his wife, and brother had signatory
authority over Carlco’s corporate accounts. From 1984 through
1988, Lisle’s brother was Carlco’s president, and Lisle’s wife was
its vice-president. In 1989, Lisle was Carlco’s president, his
wife was its secretary, and their son was its vice-president.
Although the government has not cited to any abuse of these
positions or the signatory authority held by Lisle and his family,
aside from the $3,000 payment already discussed, it argues that the
mere fact that they could have accessed Carlco’s accounts means
that it was their alter ego – the fact that they chose not to does
not diminish the control they had over Carlco, and thus negate a
finding of alter ego.
Again, this speculation cannot sustain a finding of alter ego.
It was undisputed that Lisle was managing the assets of Carlco for
the purpose of investing in municipal bonds. That he used his
personal residence as the address for Carlco and that he had
signatory authority over its assets then means little. That said,
this is evidence that Lisle exercised a great deal of control over
Carlco.
The government also relies on the fact that in a letter from
Administration Co.19 distributing money to Carlco, Lisle and Carlco
were referred to interchangeably. The letter stated that a check
payable to Carlco, Inc. was enclosed and that “your 45% comes to
$63,000.” The letter also states that another check represents
interest earned “through the time that we sent the various monies
to you as a transfer of funds.” The government contends this
indicates that Lisle was the true owner of Carlco’s funds. While
this is suggestive of a failure to distinguish between the
corporation and the individual, it provides little support for
finding an alter ego.
The court’s final piece of evidence is that a trust created by
Kanter for the benefit of Lisle’s wife and children purchased 300
preferred shares of Carlco. According to Kanter, this was done to
disperse IRA’s ownership of Carlco so that Carlco was no longer
19
A Kanter-controlled recordkeeping entity.
included in IRA’s consolidated group for tax purposes. Kanter
testified that this was necessary so that Carlco could maximize the
tax benefits of its investments in municipal bonds. He stated that
the family trusts were sold the shares so that Lisle’s investment
decisions would not be second-guessed by a minority owner. The Tax
Court rejected this argument, noting that IRA still controlled 100%
of the 1000 shares of common stock and thus its ability to second-
guess Lisle remained unimpeded. The court reasoned that the
preferred stock was issued to give Lisle an effective ownership
interest in Carlco through his family trust, thereby facilitating
Lisle’s use of Carlco as an incorporated pocketbook.
The court found that the restrictions on the preferred stock
were ambiguous and speculated that it could have been worth much
more than the $1650 the trust paid for it. The certificates
authorizing the preferred shares granted the board of directors
authority to fix the preferences of the preferred shares, but the
record does not contain any evidence of resolutions passed by the
board. The stock certificates contain several restrictions, two of
which were important to the court: “Redemption by company at any
time upon 10 days notice at 105 percent,” and “Priority on
liquidation equal to original purchase price per share.” The court
speculated that “105 percent” could refer to retained earnings
rather than “par value” as Lisle asserted. Likewise, “original
purchase price” could include not only the purchase price, but a
share of the remaining assets or a value for the uncompensated
services of Lisle. This inference is too tenuous and taxes the
plain meaning of the restrictions.
Considering the evidence in light of the factors we have
articulated in the past and the totality of the circumstances, the
court erred when it concluded that clear and convincing evidence
established that Carlco was Lisle’s alter ego. Lisle personally
had no interest in Carlco. Although his wife and children were
beneficiaries of a trust which owned some preferred stock, the
government failed to prove that the value of that stock was not
minimal in comparison to the total assets of Carlco. While Lisle
did exercise complete control over Carlco’s assets in his role as
manager, there is only the slimmest evidence that he used Carlco’s
assets for personal purposes. Control alone will not support a
finding of an alter ego relationship.
That is not to say that there is no evidence to support a
finding of alter ego. That Kanter and Ballard both used BWK’s and
TMT’s assets for their personal benefit suggests Lisle owned
Carlco’s assets and could have done the same. But it is also
plausible that Lisle took his position as manager of Carlco’s
assets seriously, and honestly managed the money entrusted to him.
The potential for a manager who has control over a company’s assets
to abuse his position cannot alone be the basis for abandoning the
corporate form. As we have explained, the other evidence relied on
by the court is also insufficient. In sum, there is no clear and
convincing evidence to warrant the conclusion that Carlco was the
alter ego of Lisle.
C.
In addition to the alter ego theory, the court alternatively
relied on the assignment of income doctrine to attribute forty-five
percent of the income from the Five to Lisle. The basic principle
of the assigned income doctrine is that the person who earns the
income is responsible for the tax on that income, regardless of
whether the individual assigns that income to another person or
corporation.20 “[I]t is a well established rule that income is
taxed to the person who earns it, regardless of any ‘anticipatory
arrangements and contracts however skillfully devised to prevent
the salary when paid from vesting even for a second in the man who
earned it.’”21 The government argues, and the court found, that
Lisle was the actual earner of forty-five percent of the income
from the Five that was paid to the Kanter corporations, and thus
Lisle is liable for the taxes on his share of that income.
The Tax Court’s opinion, as complete as it is in most
respects, does little to distinguish among the actions of Lisle,
Ballard, and Kanter. Rather, the court refers to them collectively
as the “petitioners.” This common brush of the individual actions
20
See Srivastava v. Comm’r, 220 F.3d 353, 358-59 (5th Cir.
2000); Caruth Corp. v. United States, 865 F.2d 644, 648 (5th Cir.
1989); United States v. Buttorff, 761 F.2d 1056, 1060-61 (5th Cir.
1985).
21
Buttorff, 761 F.2d at 1060-61 (quoting Lucas v. Earl, 281
U.S. 111, 115 (1930)) (citation omitted).
of the taxpayers bleeds the court’s analysis, as it presupposes the
question to be answered in charging that the actions of Kanter and
Ballard are attributable to Lisle. On this record, it is not
sufficiently clear that Lisle, rather than Kanter, earned the
income from the Five.
The Tax Court begins its discussion of the assignment of
income doctrine by stating that:
The record shows that Kanter was in control of
negotiations concerning the amount of commissions and
that he earned those commissions by performing the work
for them. He directed members of the Five where to make
payments. The various entities were entirely subject to
Kanter’s control: he set up the entities, and managed
the entities in that Meyers, Schott, Weisgal, and Freeman
were subject to his control. There is no evidence that
IRA, Holding Co., or any of the other entities earned
these funds.22
These findings point to Kanter, not Lisle, as the earner of the
payments from the Five.
The court continues by stating that “[p]etitioners handled the
accounts as if they were their own, moving funds around from
location to location and using the funds for their personal
benefit.”23 As we discussed, there is little evidence to support
the claim that Lisle used Carlco funds for his personal benefit.
As it did in its discussion of the alter ego doctrine, the court
attributed behavior to Lisle for which Ballard and Kanter are
responsible - it is they, and not Lisle, who used the IRA
22
Inv. Research Assocs., Ltd. v. Comm’r, 78 T.C.M. 951
(T.C. 1999) (emphasis added).
23
Id.
subsidiaries they managed for personal gain. This clustering of
the “petitioners,” as opposed to Kanter as the mover of the funds
from location to location is contrary to the evidence and the
court’s own findings:
Kanter did virtually all of the planning and implementing
of the transactions. The officers, directors, and
trustees signed documents and entered transactions as
Kanter directed including issuing and redeeming stock,
liquidating corporations, purchasing and selling stock,
distributing funds, and executing contracts and
agreements. There is very little evidence that IRA or
the other entities had anything to do with these
transactions other than to be the named recipients of the
checks.24
There is little evidence that Lisle had anything to do with the
shuffling of money from the Five between the various Kanter
entities.
Other findings by the court also point to Kanter as the true
earner of the income, not Lisle. The court noted that “[e]ven
though the payments were made to various corporations, it is clear
that the other parties to the transactions viewed IRA, Holding Co.,
their subsidiaries, and Kanter as one and the same.” Schaffel paid
IRA half of all commissions he earned on deals involving
Prudential. The court found that all payments to IRA, including
those from Schaffel, were split 45-45-10 among Ballard, Lisle, and
Kanter. Yet when Lisle moved to Travelers, Schaffel initially
refused to continue the payments on business he was now receiving
from Travelers. Kanter protested, arguing that he was still
getting business as a result of Kanter’s introduction of Schaffel
24
Id.
to Lisle. Schaffel acquiesced, and resumed making the payments;
however, they were now directed to Holding Co. rather than IRA.
The court found that none of the payments to Holding Co. were ever
distributed to Lisle. In arguing that IRA and Holding Co. were
sham corporations, the court noted that “[i]f IRA, rather than
Kanter, had been the true party in interest ... the payments for
the Travelers deals would have been paid to IRA.”25 The court
failed to explain why, if Lisle was selling his influence, he would
receive forty-five percent of the commissions while at Prudential,
but none when he moved to Travelers even though Schaffel was now
receiving business from Travelers. This suggests that Kanter, and
not Lisle, was the true earner of the commissions from Schaffel.
Similarly, in discussing the purchase of the Schnitzer-PMS stock,
the court stated that Schnitzer “sold it at a bargain price for
Kanter’s services.”26
The conclusion that Kanter was the true earner of the payments
is consistent with the testimony of those members of the Five who
testified. As the court noted, at trial, all of the witnesses
associated with the Five explicitly denied that the payments were
“kickbacks” or “payoffs” for Ballard’s and/or Lisle’s help in
steering business to them. These same witnesses did confirm,
however, “that they entered into these arrangements in exchange for
25
Id.
26
Id. (emphasis added).
Kanter’s influence in obtaining business.”27 It is clear that the
Five sought the assistance of Kanter in obtaining business, not
only through his contacts with Lisle and Ballard, but also through
his numerous other business contacts, such as the Pritzker family.
Thus, the evidence is far from clear and convincing that payments
were for the services of Lisle, rather than Kanter.
The government argues that Kanter could not have assisted the
Five without the help of Ballard and Lisle, and that Lisle and
Ballard needed Kanter’s assistance in laundering the money.
Therefore, they agreed to the 45-45-10 split, regardless of whether
Ballard or Lisle was most responsible for securing the business for
Kanter’s acquaintances. Thus, while Kanter negotiated the deals
and directed the payments from the Five to the various Kanter
corporations, Lisle and Ballard earned a portion of those payments
and are responsible for taxes on their portion.
While it is true that Kanter could not have procured
additional business for the Five without the assistance of
influential friends such as Ballard, Lisle, and Pritzker, it does
not follow that Ballard, Lisle or Pritzker therefore earned a
portion of the commissions paid by the Five to Kanter. At the same
time, if Kanter, Ballard, and Lisle did in fact agree to work
together and split the income, they would each be liable for taxes
on their share of that income. The court concluded that “it is
clear from the record that Kanter, Ballard, and Lisle agreed to
27
Id. (emphasis added).
share and did share the money from the Prudential transactions in
a 45-45-10 split.”28 We cannot agree.
The assertion that Lisle was the true earner of forty-five
percent of the payments because he received forty-five percent of
the proceeds, and therefore we will assign forty-five percent of
the proceeds to Lisle because he earned them is circular. Yet both
the Tax Court and the government walk close to this line of
reasoning. For example, while trying to prove that Lisle was
selling his influence, the government relies in part on the “fact”
that he eventually received forty-five percent of the payments.
Later, when trying to prove that Lisle received forty-five percent
of the payments as income, the government argues that he earned it
by selling his influence. The question is what is the evidence of
Lisle actually receiving any of the payments which the Five made to
Kanter, without simply assuming that he earned them and therefore
the funds were his. The government relies on several pieces of
evidence, the three most substantial being Lisle’s control of the
assets of Carlco, the payment of consulting fees to Lisle’s
children, and the loans to Lisle and the trusts which benefitted
Lisle’s family.
We have discussed Lisle’s control over Carlco and concluded
that the evidence does not support the application of the alter ego
doctrine. For the same reasons, we cannot agree with the court’s
conclusion that Lisle received forty-five percent of the payments
28
Id.
by managing Carlco’s assets. While the counter proposition is not
without purchase, as with the alter ego doctrine, we simply cannot
agree that there is clear and convincing evidence that the funds in
Carlco belonged to Lisle. At most, Lisle used $3000 of Carlco’s
millions of dollars in assets for personal gain.
The government argues that in light of the other payments to
Lisle from IRA which we will discuss, we can assume that Lisle
owned the funds in Carlco, but unlike Ballard and Kanter with
respect to TMT and BWK, simply chose not to use them. The
government analogizes the situation to a bank account which an
individual owns but from which he chooses not to withdraw any
money. While it is true that failure to use the funds in the
account is not proof that the individual is not the owner of those
funds, the analogy fails when the evidence of ownership of the
account is lacking in the first place. Here, we do not find clear
and convincing evidence that Lisle was the true owner of Carlco’s
assets.
The government and the court also rely on the payments to
Lisle’s children and the trusts which benefitted Lisle’s family as
evidence that a portion of the money paid to IRA was in fact earned
by Lisle. We have discussed the payments to Lisle’s children, and
as we noted, there is no evidence of Lisle’s involvement in
authorizing them. It is true that Kanter, Ballard, and Lisle could
have had an arrangement to split the funds from the Weaver deal,
and accomplished this by funneling some of the money through KWJ to
Lisle and Ballard’s children. Alternatively, it is also possible
that Kanter hired the children of a close family friend who both
had some real estate experience to bring potential real estate
investments to his attention. In fact, one of Lisle’s children was
otherwise employed full-time by Kanter. The question is whether
the evidence supports the conclusion that Lisle was funneling money
from the Weaver deal to his children.
When the Weaver transaction is examined closely, the evidence
is far from clear that Lisle and Ballard were receiving kickbacks
laundered through Kanter to their children. First, one must assume
that Ballard and Lisle agreed with Weaver to split the commission,
and that after meeting Kanter, decided to use him to help launder
the money years later. Weaver received a commission from Hyatt for
his help in getting Hyatt the Embarcadero contract in 1970 or 1971.
Ballard and Lisle did not meet Kanter until 1972. The agreement
between Kanter and Weaver for the purchase of the Hyatt commission
payments through the purchase of KWJ corporation was not reached
until 1976, and the purchase did not take place until 1979. The
funds from commission payments were not disbursed to Carlco, TMT,
and BWK until 1983, although small payments to Lisle’s and
Ballard’s children began in 1982. If Lisle had agreed to sell his
influence to Weaver for a cut of the commission Weaver received
from Hyatt, it is not credible that he would rely on a deal
formulated years later by Kanter, a man he did not even know at the
time he allegedly sold his influence to Weaver. And if the
commission paid to KWJ belonged to Lisle, Ballard, and Kanter in a
45-45-10 split, there is no explanation for why KWJ made payments
to the children which were not in proportion to this split. There
may be some overarching rationalization for these inconsistencies,
but we have not discerned it.
Nor does the government explain how Lisle was able to get the
other partners in the Embarcadero deal to give the contract to
Hyatt. Lisle represented Prudential, only one of the prominent
partners involved in the deal. Speculation that he threatened to
block the deal unless Hyatt paid the commission is not supported by
the record. The government offered no evidence to refute the
testimony that Hyatt got the deal because it submitted the only
bid.
Finally, the government attempts to rely on the court’s
finding that a letter from Weaver to Kanter forwarding a commission
check from Hyatt which instructs Kanter to “deposit and issue
appropriate checks to the participants” refers to Kanter, Ballard,
and Lisle. Pursuant to the sale of KWJ to Kanter, Weaver was to
receive thirty percent of the commission, and KWJ, now owned by a
Kanter corporation, was to receive the remainder. There is no
support in the record for the conclusion that “participants” refers
to Lisle, Ballard, Kanter, and Weaver, as opposed to just Kanter
and Weaver.
We conclude that while the government’s theory of Lisle’s role
in this elaborate scheme is plausible, it is not proved by clear
and convincing evidence. We cannot agree that because Lisle’s
children received $1,000 a month in questionable commissions from
KWJ, Lisle was the true earner of forty-five percent of all the
payments from the Five.
Finally, the government argues that Lisle and trusts
established for the benefit of Lisle’s wife and children borrowed
money from Kanter corporations and did not repay it. Unpaid loans
to Lisle and these trusts total more than $220,000 between 1974 and
1990. As no interest was ever paid to the Kanter entities for
these loans, and a large portion of the amount was written off as
worthless in 1987, the court determined that these were never
legitimate loans, but were part of the scheme to distribute
kickbacks to Lisle and Ballard.
Once again, we cannot agree that clear and convincing evidence
supports this conclusion. The government does not explain how
these loans can be characterized as kickbacks when they began
before the Five ever made any payments to Kanter’s corporations.
In fact, many of the largest loans to the Ballard and Lisle family
trusts occurred before the first payment by a member of the Five in
1977. Of the $220,000 loaned to Lisle and his family’s trusts over
the sixteen years cited by the court, $68,000 was loaned before
1977. While this does not mean that later loans were not
distributions of income from the Five, it casts serious doubt on
that conclusion.
We are left with the definite and firm conviction that a
mistake has been committed. We cannot agree that the government
has established by clear and convincing evidence that Lisle earned
forty-five percent of the payments from the Five, and therefore the
assignment of income doctrine cannot be applied. As we will
explain, these findings are not without evidentiary support. It is
rather that to support a penalty for fraud, the government bore the
burden of proving a deficiency in income by clear and convincing
evidence and we cannot agree with the Tax Court that this burden
has been met.
D.
We now turn to the court’s final theory for attributing forty-
five percent of the payments from the Five to Lisle, the
application of 26 U.S.C. § 482.29 The court applied § 482,
reasoning that the petitioners, Lisle, Ballard, and Kanter,
distributed income among the various Kanter corporations in order
29
26 U.S.C. § 482 reads:
In any case of two or more organizations, trades, or
businesses (whether or not incorporated, whether or not
organized in the United States, and whether or not
affiliated) owned or controlled directly or indirectly by
the same interests, the Secretary may distribute,
apportion, or allocate gross income, deductions, credits,
or allowances between or among such organizations,
trades, or businesses, if he determines that such
distribution, apportionment, or allocation is necessary
in order to prevent evasion of taxes or clearly to
reflect the income of any of such organizations, trades,
or businesses. In the case of any transfer (or license)
of intangible property (within the meaning of section
936(h)(3)(B)), the income with respect to such transfer
or license shall be commensurate with the income
attributable to the intangible.
to avoid paying taxes on the income. Thus, the court reasoned that
under § 482, that income could be reallocated from the Kanter
corporations to the petitioners. Even if § 482 can be applied to
individuals, the absence of clear and convincing proof that Lisle
was the earner of forty-five percent of the payments from the Five
makes § 482 inapplicable.
IV.
We next turn to the court’s findings regarding the deficiency,
independent of fraud. Here, the government enjoys a presumption of
correctness for the deficiencies stated in the original notices,
and must prove any additional deficiencies asserted before the Tax
Court only by a preponderance of the evidence.30
We have already discussed the government’s case at length.
From our review of the record, we cannot say that the court clearly
erred in finding that the government established the deficiencies
by a preponderance of the evidence. Thus, even if Lisle shifted
the burden of proof to the government on all deficiencies as
appellants argue, the government has met its burden.31 While much
of the evidence is equivocal, when the burden of proof is by a
30
See Payne v. Comm’r, 224 F.3d 415, 420 (5th Cir. 2000); Tax
Court Rule 142(a)(1) (providing that, “in respect of any ...
increases in deficiency ... pleaded in the answer, [the burden of
proof] shall be upon the respondent”); Merino v. Comm’r, 196 F.3d
147, 151 (3d Cir. 1999) (stating that any new matter must be proved
by a preponderance of the evidence).
31
Once the taxpayer has established that the assessment is
arbitrary and erroneous, “the burden shifts to the government to
prove the correct amount of any taxes owed.” Portillo v. Comm’r,
932 F.2d 1128, 1133 (5th Cir. 1991).
preponderance of the evidence, we will not find clear error if the
evidence supports either of two theories.
We affirm the Tax Court’s finding that Lisle owes additional
taxes for the years 1987, 1988, and 1989. However, without a
finding of fraud, the assessment of taxes for 1984 is barred by the
statute of limitations.32 The court relied on 26 U.S.C. §
6501(c)(1), which provides that the tax may be assessed at any time
in the case of fraud.33 With no finding of fraud the limitations
period is three years.34
The government argues that appellants waived this issue
because they failed to renew the argument in their opening brief.
While we may in our discretion decline to consider issues not
raised in an initial brief, we choose to address the issue here.35
32
26 U.S.C. § 6501(a) reads in relevant part:
Except as otherwise provided in this section, the amount
of any tax imposed by this title shall be assessed within
3 years after the return was filed (whether or not such
return was filed on or after the date prescribed) ... and
no proceeding in court without assessment for the
collection of such tax shall be begun after the
expiration of such period.
33
26 U.S.C. § 6501(c)(1) reads:
In the case of a false or fraudulent return with the
intent to evade tax, the tax may be assessed, or a
proceeding in court for collection of such tax may be
begun without assessment, at any time.
34
The government began pursuing Lisle for tax deficiencies in
1991.
35
See Cousin v. Trans Union Corp., 246 F.3d 359, 373 n.22 (5th
Cir. 2001) (noting that although issues not raised in initial brief
are normally waived, court has discretion to decide issue); see
also Bridges v. City of Bossier, 92 F.3d 329, 335 n.8 (5th Cir.
The appellants raised the issue of statute of limitations in the
Tax Court and renewed their argument that the court’s finding of
fraud was erroneous before this court. The government suffers no
prejudice by the absence of the issue in the opening brief.
V.
Appellants also raise a due process challenge to the Tax
Court’s application of Tax Court Rule 183.36 Briefly stated,
appellants argue that it is a violation of their due process rights
for the Tax Court to not make the Special Trial Judge’s initial
report available to the parties. This issue was recently addressed
1996) (electing to examine purely legal issue not raised by party
in opening brief, but raised by amicus curiae in its initial
brief); United Paperworkers Intern. Union AFL-CIO, CLC v. Champion
Intern. Corp., 908 F.2d 1252, 1255 (5th Cir. 1990) (finding that
argument indirectly raised in opening brief was not waived).
36
Tax Court Rule 183 reads in relevant part:
[T]he following procedure shall be observed in cases
tried before a Special Trial Judge:
(b) Special Trial Judge's Report: After all the briefs
have been filed by all the parties ... the Special Trial
Judge shall submit a report, including findings of fact
and opinion, to the Chief Judge, and the Chief Judge will
assign the case to a Judge or Division of the Court.
(c) Action on the Report: The Judge to whom or the
Division to which the case is assigned may adopt the
Special Trial Judge's report or may modify it or may
reject it in whole or in part, or may direct the filing
of additional briefs or may receive further evidence or
may direct oral argument, or may recommit the report with
instructions. Due regard shall be given to the
circumstance that the Special Trial Judge had the
opportunity to evaluate the credibility of witnesses, and
the findings of fact recommended by the Special Trial
Judge shall be presumed to be correct.
by the Seventh Circuit in Kanter v. Commissioner of Internal
Revenue,37 and by the Eleventh Circuit in Ballard v. Commissioner
of Internal Revenue,38 the companion cases to this one. We find the
reasoning of the Seventh and Eleventh Circuits direct and
persuasive, and adopt it here. We hold that the application of
Rule 183 in this case did not violate Appellants’ due process
rights.
VI.
In conclusion, we find that the Tax Court clearly erred when
it concluded that the government had proved by clear and convincing
evidence that Lisle had earned forty-five percent of the payments
from the Five and therefore owed taxes on that income. Without
clear and convincing evidence of a deficiency, the element of
fraudulent intent is not reached, although in this case the two are
nearly indistinguishable. We therefore reverse the Tax Court’s
finding of fraud.39 As a result of our reversal of the Tax Court’s
finding of fraud, we also reverse its conclusion that § 6501(c)(1)
applies and that the three-year statute of limitations does not bar
the assessment of taxes for 1984. We affirm the Tax Court’s ruling
37
-- F.3d --, 2003 WL 21710242, at *3-*7 (7th Cir. July 24,
2003).
38
321 F.3d 1037, 1042-43 (11th Cir. 2003).
39
We note that the evidence of fraud on the part of both
Kanter and Ballard was far more substantial than for Lisle,
explaining the Seventh and Eleventh Circuits’ affirmance of the Tax
Court’s finding of fraud with respect to each of them. See Kanter,
2003 WL 21710242 at *7-*11; Ballard, 321 F.3d at 1043-46.
sustaining the assessment of a deficiency for years 1987, 1988, and
1989. We remand the case to the Tax Court for the limited purpose
of recalculating the deficiencies and additions to tax, consistent
with this opinion. REVERSED in part, AFFIRMED in part, and
REMANDED.