Joshua Kanter v. CIR

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 08-1036, 08-1037, 08-1038, 08-1039,
08-1040, 08-1041, 08-1042
JOSHUA S. K ANTER, E STATE OF
B URTON W. K ANTER, and
E STATE OF N AOMI R. K ANTER,
Petitioners-Appellants,
v.
C OMMISSIONER OF INTERNAL R EVENUE,
Respondent-Appellee.
Appeals from the Decisions of the United States Tax Court.
Nos. 712-86, 1350-87, 31301-87, 33557-87, 3456-88,
32103-88, 25251-90—Harry A. Haines, Judge.
A RGUED M AY 27, 2009—D ECIDED D ECEMBER 1, 2009
Before C UDAHY, R IPPLE, and W OOD , Circuit Judges.
W OOD , Circuit Judge. This case began in 1986, when
Burton W. Kanter, a well-known tax attorney and busi-
nessman, filed a petition seeking review of the Commis-
sioner of Internal Revenue’s determination that he
had not paid all his taxes. Since then, the case has taken a
2 Nos. 08-1036, 08-1037, et al.
yo-yo path through our judicial system, from the Tax
Court to the Supreme Court and back again. In this itera-
tion, Kanter’s Estate and related parties appeal from
an unfavorable Tax Court decision that rejected many of
the factual findings of the Special Trial Judge (“STJ”)
that presided over the trial. (We refer to the petitioners
collectively as “Kanter.”) The theme of Kanter’s argu-
ments on appeal is that the Tax Court did not defer, as
it should have, to the STJ’s original findings of fact. In
evaluating the issues Kanter raises, we review the STJ’s
original findings of fact for clear error.
Kanter raises five issues on appeal. The first includes
within it a number of challenges to the Tax Court’s finding
that Kanter and his associates orchestrated a kickback
scheme and then fraudulently concealed the resulting
income. Kanter argues that the Commissioner is pre-
cluded from litigating this point, as the Fifth and
Eleventh Circuits have already ruled against him in
cases dealing with the liability of Kanter’s associates for
the same underlying business arrangements. He also
argues that the Commissioner is barred by the statute
of limitations from seeking tax fraud penalties for 1983.
Kanter’s second issue concerns entities called the Bea
Ritch Trusts. The Tax Court found that he was the true
owner of these Trusts and thus should have paid certain
taxes on their economic gains. Kanter argues that he
was not the owner of these Trusts. Third, Kanter urges
that he should not be taxed for half of the earnings of
Century Industries, as the Tax Court lacked jurisdiction
over many of the years at issue and he owed taxes propor-
tional only to his stated ownership interest because all of
Nos. 08-1036, 08-1037, et al. 3
the partners were true partners. Fourth, he argues that
the Tax Court should not have counted as taxable
income over $1,000,000 that Kanter deposited in his bank
accounts in 1982, as those monies were nontaxable loans
or returns on investment. Finally, Kanter asserts that
the Tax Court violated his due process rights by over-
turning various credibility determinations made by the
STJ in his original report.
On the first issue, we reject Kanter’s preclusion argu-
ment, because nonmutual collateral estoppel does not
apply against the United States. On the merits, we con-
clude that the STJ’s factual findings are not clearly errone-
ous with respect to Kanter’s tax liability and tax fraud.
As a result, we do not reach Kanter’s argument based on
the statute of limitations. Next, we find no reversible
error in the STJ’s conclusion that Kanter was not the
owner of the Bea Ritch Trusts; this means that Kanter is
not liable for the tax deficiencies that the Commissioner
assessed. Third, with respect to Century Industries, we
hold that the Tax Court lacked jurisdiction over the 1983,
1984, and 1986 tax years; we further find that the STJ’s
conclusion that only the 1% interest that Kanter held
in Century Industries for the 1981 and 1982 tax years
was taxable is not clearly erroneous. We note that the
government has conceded the issue relating to the
$1,000,000, but for the sake of completeness we confirm
that the STJ did not clearly err in finding that this
deposit was nontaxable income. Finally, in light of our
other findings, we have no reason to reach Kanter’s due
process argument.
4 Nos. 08-1036, 08-1037, et al.
In summary, we conclude that the Tax Court did not
show the proper level of deference to the STJ’s factual
findings. We therefore reverse and remand with instruc-
tions to vacate the Tax Court’s judgment, to enter an order
adopting the STJ’s report as its opinion, and to enter
judgment consistent with that opinion.
I
Given the complexity of the arrangements before us,
we have chosen to set forth the facts pertinent to each
part of the appeal in the relevant section below. We begin,
however, with the procedural history that has brought
us to this point, since the earlier rulings in the case estab-
lish the standard of review that applies. In 1986, Kanter
sought review of the Commissioner’s assessed deficiencies
for various tax years between 1978 and 1986; the case
later expanded to include the 1987-1989 tax years as
well. Kanter passed away in 2001, and so since then, this
litigation has proceeded through his estate and that of
his wife, Naomi R. Kanter, who is a party only by virtue
of the joint tax returns she filed with Kanter for the years
at issue.
In 1994, the Tax Court referred Kanter’s case, along with
those of his associates Claude M. Ballard and Robert W.
Lisle, to Special Trial Judge Irvin D. Couvillion. See 26
U.S.C. § 7443A(b)(4). Judge Couvillion conducted a five-
week trial and compiled a sizable record. Then, between
May of 1996 and December of 1999, no entries appear
on the relevant dockets. At the end of that time,
Judge Couvillion produced a 303-page report setting forth
Nos. 08-1036, 08-1037, et al. 5
his factual findings and recommending legal conclusions.
The Tax Court then assigned Judge Howard A. Dawson
to review the STJ’s report, and on December 15, 1999,
the Tax Court released a decision, signed by Dawson and
Couvillion, that stated that it “agrees with and adopts the
opinion of the Special Trial Judge, which is set forth
below.” Investment Research Assocs. v. Comm’r, T.C.M. (RIA)
99,407, *1 (1999). The Tax Court decision was unfavorable
to Kanter, but two unnamed Tax Court judges informed
him that the Tax Court’s assertion that it had adopted the
STJ’s report was actually false. Kanter asked the Tax
Court to enter the STJ’s report into the record to verify
this information, but it refused.
On appeal to this court, Kanter argued that the Tax
Court was obligated to release the STJ’s decision, and he
further challenged several of the conclusions of the Tax
Court decision with respect to his taxes. Lisle and Ballard
pursued their own appeals in the Fifth and Eleventh
Circuits, respectively. See Estate of Lisle v. Comm’r, 341
F.3d 364 (5th Cir. 2003) (“Lisle I”); Ballard v. Comm’r, 321
F.3d 1037 (11th Cir. 2003) (“Ballard I”). Taking the STJ and
Tax Court at their word that the Tax Court decision was
the same as the STJ’s, we did not require the Tax Court
to release the STJ’s decision. Estate of Kanter v. Comm’r, 337
F.3d 833, 843-44 (7th Cir. 2003) (“Kanter I”). Instead, we
reviewed the Dawson opinion of December 15, 1999,
concluded that the findings of fact it set forth were not
clearly erroneous, and affirmed the judgment. Kanter
and his associates then appealed to the Supreme Court,
which held that the Tax Court was obliged to release the
STJ’s report. Ballard v. Comm’r, 544 U.S. 40, 52 (2005). We
6 Nos. 08-1036, 08-1037, et al.
remanded to the Tax Court for proceedings consistent
with the Supreme Court’s decision. See Estate of Kanter
v. Comm’r, 406 F.3d 933, 934 (7th Cir. 2005) (“Kanter II”).
The Fifth and Eleventh Circuits did the same for Lisle
and Ballard. See Estate of Lisle v. Comm’r, 431 F.3d 439 (5th
Cir. 2005) (“Lisle II”); Ballard v. Comm’r, 2006 WL 4386510(11th Cir. July 10, 2006) (“Ballard II”). On remand, the Tax
Court assigned Kanter’s case to Judge Harry A. Haines.
The Tax Court then issued another decision, in which
it explicitly reversed several of the STJ’s factual findings
and conclusions of law. See Estate of Kanter v. Comm’r,
T.C.M. (RIA) 2007-021 (2007). Lisle and Ballard have
already appealed from that decision to their respective
circuits, which have reversed and remanded the case
with instructions to adopt the STJ’s decision as the
decision of the Tax Court. See Estate of Lisle v. Comm’r, 541
F.3d 595, 605 (5th Cir. 2008) (“Lisle III”); Ballard v. Comm’r,
522 F.3d 1229, 1255 (11th Cir. 2008) (“Ballard III”). It is
now our turn to confront the case, focusing on Kanter’s
role and responsibility.
II
Before we proceed to the merits of Kanter’s appeal, we
must clear up some issues about the proper standard of
review. We review factual findings for clear error. See
Cabintaxi Corp. v. Comm’r, 63 F.3d 614, 619 (7th Cir. 1995).
The parties dispute, however, whether we apply
this standard to the STJ’s report (Kanter’s position) or
to the Tax Court’s decision (the Commissioner’s posi-
tion). Sometimes the law requires the court of appeals to
Nos. 08-1036, 08-1037, et al. 7
look to the original fact findings. See, e.g., Old Ben Coal Co.
v. Prewitt, 755 F.2d 588, 589 (7th Cir. 1985) (reviewing
whether the Administrative Law Judge’s findings—not
the Benefits Review Board’s decision to reverse the Ad-
ministrative Law Judge—were supported by substantial
evidence under the Black Lung Benefits Act); In re Land
Investors, Inc., 544 F.2d 925, 933 (7th Cir. 1976) (applying
the clearly erroneous standard to the bankruptcy referee’s
findings of fact, rather than to the district court’s ap-
plication of that standard). At other times, the proper
point of reference for the court of appeals is the
reviewing body’s decision. See, e.g., Moab v. Gonzales, 500
F.3d 656, 659 (7th Cir. 2007) (reviewing the opinion of the
Board of Immigration Appeals, not the Immigration
Judge, when the Board issues a superceding opinion
under the Immigration and Nationality Act); Hall v.
Norfolk S. Ry. Co., 469 F.3d 590, 594 (7th Cir. 2006) (re-
viewing the decision of the district court, when the
district court itself was reviewing an order of the magis-
trate judge); Schwartz Mfg. Co. v. NLRB, 895 F.2d 415, 416
n.5 (7th Cir. 1990) (applying deference to the factual
findings of the Board—not the Administrative Law
Judge—as required by statute at 29 U.S.C. 160(e)). It is the
legal relationship between the entities that determines
which set of findings is entitled to deference.
To resolve the issue now before us, we start with the
text of Tax Court Rule 183, which governs the relation-
ship between the STJs and the Tax Court. It states that
[d]ue 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
8 Nos. 08-1036, 08-1037, et al.
recommended by the Special Trial Judge shall be
presumed to be correct.
U.S. T AX C T . R. 183(d). The plain language of this rule
mandates deference to the STJ: it identifies the STJ as the
key actor and says that his or her findings must be
given “due regard” and are entitled to a presumption of
correctness. Nothing in that rule suggests that the pre-
sumption evaporates after the Tax Court has acted and
the case has moved on to the court of appeals. If the
Supreme Court’s opinion in Ballard tells us anything, it
is that the STJ’s findings of fact play a significant role in
the appellate review of tax decisions. 544 U.S. at 53-64.
The history of the rule also supports this interpretation.
As the Supreme Court noted in Ballard, this Tax Court
rule derives from Rule 147(b) of the former Court of
Claims, which interpreted its own rule to require
deference to the trial judge’s findings of fact. See id., at 54-
55; Hebah v. United States, 456 F.2d 696, 698 (Ct. Cl.
1972) (“Under our rule, the commissioner’s findings of
fact are presumed to be correct because of his oppor-
tunity to hear the witnesses and to determine the weight
to be accorded to their testimony.”). Both the rule and its
history therefore support the proposition that we, too,
should ensure that the Tax Court deferred to the STJ’s
findings of fact (and in so doing, defer to those findings
ourselves).
Congress provided that the court of appeals must
review decisions of the Tax Court in the same manner as
it reviews decisions of the district court sitting without a
jury. 26 U.S.C. § 7482(a)(1). That standard is easy to
Nos. 08-1036, 08-1037, et al. 9
apply in cases where the Tax Court judge does not use
a special trial judge. In the latter group of cases, however,
we must find the best analogy to district court practice.
When a magistrate judge prepares a report and recom-
mendation for a district court, the governing statute
provides that the district court “shall make a de novo
determination” with respect to any contested matter. See
28 U.S.C. § 636(b). Rule 53, governing masters, is different.
It provides that the district court’s review of matters
that are the subject of an objection is de novo unless the
parties have stipulated (with the court’s approval) that
review will be for clear error. See F ED. R. C IV. P. 53(f)(3).
When a district court uses a special master, we typically
apply deferential review to the original fact-finder’s
report, ignoring the decision of the district court, al-
though this court at times has reviewed the district
court’s handling of the report for abuse of discretion.
See, e.g., Cook v. Niedert, 142 F.3d 1004, 1011 (7th Cir.
1998) (applying the abuse of discretion standard to the
district court decision to reject the master’s recom-
mended method for calculating attorneys’ fees).
The lesson that we draw from these statutes and rules,
as well as from the cases we noted earlier, is that each
area of the law must be evaluated on its own. The
National Labor Relations Act may call for deference
to the Board, the Black Lung Benefits Act may call for
deference to the underlying Administrative Law Judge
findings, the Magistrate Judges’ Act may require
deference to the district court, and Rule 53 may take a
middle approach for masters. Our problem is to deter-
mine what the correct rule is for the Tax Court. We are
10 Nos. 08-1036, 08-1037, et al.
satisfied, based on the language of Tax Court Rule 183, the
gist of the Supreme Court’s 2005 decision in Ballard, and
our sister circuits’ opinions in Lisle III, 541 F.3d at 600-01,
and Ballard III, 522 F.3d at 1235, that deference under this
regime is owed to the factual findings of the STJ. The Tax
Court’s application of those findings raises a mixed
question of law and fact, and it may be that we would owe
some deference to its decisions at that level. We review
legal decisions de novo, including the legal decision of the
Tax Court to review the STJ’s fact-findings with a free hand
rather than for clear error. See Johnson v. Orr, 551 F.3d 564,
567 (7th Cir. 2008).
The Eleventh Circuit picked up that last theme when it
identified one sense in which the court of appeals
applies clear error review to the Tax Court. As it noted,
a central question the appellate court is asking is
whether the Tax Court “committed clear error when [it]
failed to accord the original findings of fact, credibility of
witnesses and conclusions of Judge Couvillion the due
deference required under the law.” Ballard III, 522 F.3d
at 1235 n.6. This suggests that review in the court of
appeals should proceed through the lens of the question
whether the Tax Court gave proper deference to the
STJ’s findings. To that end, the Supreme Court in Ballard
noted that the publication of the STJ’s findings equipped
taxpayers “to argue to an appellate court that the Tax
Court failed to give the special trial judge’s findings the
measure of respect required by [the Rule].” 544 U.S. at 56.
In the final analysis, this approach takes us to the same
point: the STJ’s findings are the ones reviewed for clear
error, not those of the Tax Court.
Nos. 08-1036, 08-1037, et al. 11
This court’s role under clear error review is limited. We
must not reverse unless we are “left with the definite
and firm conviction that a mistake has been committed.”
United States v. United States Gypsum Co., 333 U.S. 364, 395
(1948). Thus, if the STJ’s account of the evidence is
plausible in light of the record viewed in its entirety,
the court of appeals may not reverse it even though
convinced that had it been sitting as the trier of fact,
it would have weighed the evidence differently. Where
there are two permissible views of the evidence, the
factfinder’s choice between them cannot be clearly
erroneous.
Anderson v. Bessemer City, 470 U.S. 564, 574 (1985); United
States v. Raibley, 243 F.3d 1069, 1076 (7th Cir. 2001). When
the STJ’s findings involve credibility determinations, the
clear error standard “demands even greater deference
to the trial court’s findings; for only the trial judge can
be aware of the variations in demeanor and tone of voice
that bear so heavily on the listener’s understanding of
and belief in what is said.” Anderson, 470 U.S. at 575;
Wells Fargo Bank, N.A. v. Siegel, 540 F.3d 657, 663 (7th Cir.
2008). This does not prevent us from finding clear error,
however; the “[d]ocuments or objective evidence may
contradict the witness’ story; or the story itself may be
so internally inconsistent or implausible on its face that a
reasonable factfinder would not credit it.” Anderson, 470
U.S. at 575. With these principles in mind, we turn to the
issues presented on appeal.
12 Nos. 08-1036, 08-1037, et al.
III
The Commissioner’s primary case against Kanter, Lisle,
and Ballard rests on his determination that they did not
report and in fact fraudulently concealed income
received for facilitating business transactions with five
people: J.D. Weaver, William Schaffel, Bruce Frey, Kenneth
Schnitzer, and John Eulich (“the Five”). The Commis-
sioner’s theory is as follows: Kanter and his associates
derived income in the form of “kickbacks” in exchange
for using their influence within Prudential Life Insur-
ance Company to channel business opportunities to the
Five. Kanter then allegedly diverted this income to
various entities under his control so that he and his
associates would not have to report the income on their
personal income tax returns. Instead, it appeared on the
tax returns of these entities. The Commissioner assessed
tax deficiencies and penalties for tax fraud based on
these alleged activities. For a lengthy discussion of the
factual background of the Five’s specific business trans-
actions, see Ballard III, 522 F.3d at 1235-49.
A tax deficiency arises when a taxpayer fails to report
taxable income on a personal income tax return. Kanter
bears the burden of demonstrating that the Commis-
sioner’s determination with respect to the deficiencies
he has identified is incorrect. See Welch v. Helvering, 290
U.S. 111, 115 (1933) (noting that the Commissioner’s
“ruling has the support of a presumption of correctness,
and the petitioner has the burden of proving it to be
wrong”). Tax fraud is a more serious charge, and so a
higher standard of proof applies. For fraud charges, the
Nos. 08-1036, 08-1037, et al. 13
government “must demonstrate by clear and convincing
evidence that the taxpayer intended to evade taxes that
he knew or believed he owed.” See Toushin v. Comm’r,
223 F.3d 642, 647 (7th Cir. 2000). As this suggests, it is the
government that bears the burden of proof on a fraud
charge. See 26 U.S.C. § 7454(a) (“In any proceeding in-
volving 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.”).
In this case, the Commissioner alleges that Kanter
disguised personal income as income of entities that did
not in fact earn it. In order to determine whether the
entity reporting income is the true earner of that income,
this circuit examines the totality of the circumstances.
Schuster v. Comm’r, 800 F.2d 672, 678 (7th Cir. 1986) (reject-
ing the two-part test of Johnson v. Comm’r, 78 T.C. 882,
891 (1982), and noting that a “flexible test, allowing con-
sideration of all of those factors, better serves our
analysis in attempting to determine whether income is to
be taxed against the person or entity who actually earned
it or against someone else.”). Similarly, the question
whether fraud has been committed is one of fact that
requires an analysis of the entire record. See DiLeo v.
Comm’r, 96 T.C. 858, 874 (1991).
In reviewing the record produced at trial, the STJ found
that no kickback schemes existed. He based this finding
largely on the unanimous testimony of the witnesses at
trial. With that established, he then rejected the govern-
ment’s theory about Kanter’s assignment of income, since
the generation of income through something like the
14 Nos. 08-1036, 08-1037, et al.
alleged kickback scheme needs to be established before
it is appropriate to examine where that income goes. See
United States v. Basye, 410 U.S. 441, 448-49 (1973). The STJ
went on to find that the government had not met its
burden of proving fraud, as no kickback schemes existed
and all the income at issue had been reported by other
entities, as opposed to going totally unreported. The STJ
also found it significant that no examining agent had
recommended that a fraud penalty should be asserted
against Kanter and his associates.
The Tax Court rejected the STJ’s finding that there was
no kickback scheme; in the process of doing so, it over-
turned several of the STJ’s credibility determinations. It
rejected Kanter, Lisle, and Ballard’s testimony as self-
serving and contradictory to documentary evidence
showing the flow of funds. It dismissed the Five’s testi-
mony on the basis that it was irrelevant because they
did not know about the kickback scheme and thus could
not be expected to testify to its existence. The Tax Court
also overturned the STJ’s finding that there was no
fraud. It relied on evidence that it believed showed the
existence of a kickback scheme; it also inferred from the
complex array of financial mechanisms Kanter created
that he intended to commit fraud.
Kanter’s case overlaps with those of his associates
Ballard and Lisle with respect to these tax deficiency
and fraud issues. The Fifth and Eleventh Circuits have
already held that the STJ’s findings on these issues
are not clearly erroneous and that the Tax Court should not
have rejected them. See Ballard III, 522 F.3d at 1254-55;
Lisle III, 541 F.3d at 602. Kanter invokes the doctrine of
Nos. 08-1036, 08-1037, et al. 15
nonmutual defensive collateral estoppel to argue that
the government should be precluded from establishing
liability against him by relitigating that factual issue in
this court. See Parklane Hosiery Co. v. Shore, 439 U.S. 322(1979). While acknowledging that nonmutual (offensive)
collateral estoppel against the government is prohibited
by United States v. Mendoza, 464 U.S. 154 (1984), Kanter
invites us to carve out an exception to the Mendoza princi-
ple for preclusion for factual issues. The government
believes that this possibility is foreclosed by Mendoza
itself, as well as this court’s more recent decision in
Harrell v. United States Postal Serv., 445 F.3d 913, 921 (7th
Cir. 2006).
The debate over the application of this preclusion
doctrine arises because the Supreme Court used some-
what ambiguous language in Mendoza:
We hold, therefore, that nonmutual offensive collateral
estoppel simply does not apply against the Govern-
ment in such a way as to preclude relitigation of
issues such as those involved in this case.
464 U.S. at 162 (emphasis added). We acknowledge that
the Mendoza Court was talking about offensive issue
preclusion (that is, the use of a finding of fact from an
earlier proceeding by a plaintiff, to establish part of its
case), not defensive issue preclusion (the use of an
earlier finding of fact to support a defense). The policy
reasons for treating the government differently, how-
ever, seem to us to be just as powerful when applied to
defensive preclusion. That said, we note as well that it is
not clear what the Court meant in Mendoza when it
referred to “issues such as those involved in this case.”
16 Nos. 08-1036, 08-1037, et al.
In Adkins v. Commissioner, 875 F.2d 137 (7th Cir. 1989), we
entertained the possibility that the Supreme Court
wanted to leave open the question whether purely
factual issues could be the subject of nonmutual issue
preclusion against the government. See Adkins, 875 F.2d
at 141 (“other passages in the [Mendoza] opinion
arguably leave open the possibility that estoppel may
apply against the government wit h respect to specific
fact determinations, not embracing policy choices and
legal issues”). We think it more likely, however, that the
Court intended to create a uniform rule precluding the
use of the doctrine against the government, and later
cases in this circuit support that approach. See Harrell,
445 F.3d at 921 (“the Supreme Court has established
that nonmutual offensive collateral estoppel does not
extend to litigation against the United States”); see also
18A W RIGHT, M ILLER & C OOPER, F EDERAL P RACTICE AND
P ROCEDURE § 4465.4 (2d ed. 2002) (“[A]t least three
factors must be counted in favor of finding in the
Mendoza opinion a broad uniform rule that prohibits any
nonmutual offensive preclusion against the govern-
ment. The court of appeals had looked for evidence of a
‘crucial need’ to permit relitigation; the Court rejected this
approach . . . . The Court also observed that its holding
did not in any way depend on the uncertain policies
against preclusion as to ‘ “unmixed questions of law” ’. . . .
And perhaps most important, there is a powerful fairness
argument [for preclusion in Mendoza as the] injury to the
public interest from [finding preclusion] is not great. To
deny preclusion in face of this argument may be to show
that other arguments for preclusion also will fail.”). Thus,
Nos. 08-1036, 08-1037, et al. 17
we reject Kanter’s argument that he is entitled to defend
this case based on the fact that the question whether he
participated in a kickback scheme and engaged in tax
fraud has already been determined against the Commis-
sioner.
Nevertheless, while the findings of the Fifth and Elev-
enth Circuits do not resolve the question before us, the
opinions of those courts are entitled to the same
respectful consideration that we would always accord
to sister circuits faced with an identical or similar case.
This court never lightly creates a conflict in the circuits,
see Seventh Circuit Local Rule 40(e), and we see no
reason to do so here with respect to the factual issues
that are common to Kanter’s case and those of Ballard
and Lisle. Like our colleagues, we conclude that the
Tax Court’s reasons for overturning the STJ’s credibil-
ity determinations do not reflect clear error review,
but instead amount to a de novo look at all of the evi-
dence. Moreover, the Commissioner’s reasoning that
the Five’s testimony should be discounted because they
were unknowingly engaged in a kickback scheme seems
odd at best. This is not to say that there is not plenty of
evidence in the record that supports the Commissioner’s
position and the Tax Court’s decision. There is. When we
last saw this case, we affirmed the Tax Court’s previous
decision that found that Kanter engaged in tax fraud with
respect to the Five’s transactions, finding that such a
conclusion could not be branded “clearly erroneous.” See
Kanter I, 337 F.3d at 849. But this does not mean that the
only possible view of the facts was the one that the Tax
Court had reached. Just as it is possible in the new trial
18 Nos. 08-1036, 08-1037, et al.
context “for two judges, confronted with the identical
record, to come to opposite conclusions and for the appellate
court to affirm both,” see United States v. Williams, 81 F.3d
1434, 1437 (7th Cir. 1996) (emphasis in original), it is
possible for two judges to review the same record and
reach different factual conclusions, each of which can
withstand clear error review. Critically, at the time we
decided Kanter I, we did not have before us the STJ’s
report, which is the one that is entitled to deferential
review and which contains the fact-finder’s original
credibility determinations.
The Commissioner argues that Kanter is liable for
transactions with the Five under two theories: fraud and
deficiency. With respect to the fraud theory, we are
satisfied that STJ Couvillion did not clearly err when he
found that no kickbacks were paid. The Commissioner
argues that the STJ erred because he did not further
investigate the flow of funds from these transactions. That
evidence, the Commissioner believes, establishes that
money flowed from the Five to Kanter, Lisle, and Ballard.
But the STJ was correct—as were the Eleventh and Fifth
Circuits—when he reasoned that this theory turns on the
existence (or nonexistence) of kickbacks. If there were
no kickbacks, then the flow-of-funds argument does
nothing to resurrect the fraud theory. See Ballard III, 522
F.3d at 1253; Lisle III, 541 F.3d at 603. Largely for the
reasons that the Fifth and Eleventh Circuits have
spelled out, we conclude that the STJ’s findings about
tax fraud are not clearly erroneous.
The deficiency issue is somewhat different. The flow-of-
funds argument could be evidence of a tax deficiency
Nos. 08-1036, 08-1037, et al. 19
even if the payments were not kickbacks and were not
the result of fraud. Merely identifying non-fraudulent
payments among corporate entities does not establish a
deficiency. Rather, the key question is whether the
income should be attributed to the individual rather than
the entity. The Fifth Circuit rejected these theories as
applied to Lisle, Lisle III, 541 F.3d at 603-04, and
the Eleventh Circuit rejected the argument that Ballard
personally earned the income in question, Ballard III, 522
F.3d at 1254. We come to the same conclusion for Kanter.
Contrary to the Commissioner’s assertions, the STJ ad-
dressed these arguments. The STJ rejected the applica-
tion of the assignment-of-income doctrine, holding that
it “is not applicable because there was no improper
shifting of income to a different tree from that on which . . .
[such income] grew.” The STJ also made a finding
rejecting the assertion of identity between Kanter and
the Kanter entities—in fact, the STJ held that the
Kanter entities exercised significant control over Kanter’s
activities. In short, the STJ held that “there was no under-
payment of taxes.” Given that corporate entities are
generally recognized for tax purposes, and that the STJ
was in the best position to find facts and make
credibility determinations, we see no reason to overturn
this finding. We recognize that the taxpayer must demon-
strate that the Commissioner has incorrectly identified
deficiencies. We also recognize that the STJ’s opinion
does not explicitly spell out that Kanter met this
burden with regard to income from transactions with the
Five. But, as we are stressing throughout, our review is
cabined by the clear error standard. And, despite the
20 Nos. 08-1036, 08-1037, et al.
fact that it strikes us as a close call, we have accepted the
STJ’s finding that there was no underpayment of taxes.
We therefore conclude that the STJ did not clearly err
with respect to liability based on his transactions with
the Five. This holding makes it unnecessary for us to
address Kanter’s argument based on the statute of limita-
tions governing the fraud penalty for 1983.
IV
The Bea Ritch Trusts (“BRTs”), named for Beatrice
Ritch (Kanter’s mother), are a series of 25 trusts estab-
lished for the benefit of members of the Kanter family.
Ritch, the alleged grantor, funded each of the trusts with
$100 in 1969. The trust instrument named Solomon
Weisgal as the trustee, and Kanter was named a beneficiary
of 24 of the 25 trusts (the exception being the Naomi Trust,
whose sole beneficiary was his wife, Naomi Kanter).
Kanter also possessed the power of appointment for the
trusts for which he was a beneficiary, but he testified at
trial that he had renounced all beneficial interests and
appointment powers in the trusts in the 1970s.
Despite the modest initial corpus, the BRTs acquired
substantial assets and net worth by 1987, primarily through
investments in various entities, many of which Kanter
brought to the attention of Weisgal in his capacity as
trustee. The most important for our purposes is the BRTs’
purchase in 1973 for $18,000 of an 18% interest in
Oyster Bay Associates (“OBA”), a partnership formed to
invest in the then-nascent cable television industry. The
investment must have exceeded the trustee’s fondest
Nos. 08-1036, 08-1037, et al. 21
dreams. The entities in which OBA had a stake sold their
interests in the cable television venture in 1987, generating
substantial capital gains of $2,033,368 that flowed back
to the BRTs. The BRTs also made loans to Kanter, $287,030
of which he had not paid back by 1987.
The key date is (or was) 1987 because that is when the
Commissioner determined that Kanter was the “true
settlor” of the BRTs and thus that at least some portion of
the BRTs’ gross receipts, interest income, dividend
income, passive activity partnership losses, and capital
gains income were actually attributable to Kanter for
tax purposes, rather than to the BRTs. On further exam-
ination, the Commissioner realized that much of the
BRTs’ capital gains income generated from its invest-
ment in OBA had accrued in the 1986 tax year, and the
Tax Court granted an oral motion to amend the
pleadings to this effect. Kanter does not appeal that
technical ruling here.
The default rule under sections 671 to 679 of the Internal
Revenue Code is that owners are taxed for trust income,
and generally the grantor is treated as the owner. The
grantor of a trust (also known as the settlor) is the person
who gratuitously transfers assets for the creation of the
trust. Normally, the grantor/settlor is the person who
established the trust (here, Bea Ritch), and that person’s
identity is noted in the trust document. It sometimes
happens, however, that a person is a settlor “in name
only.” When there is reason to be concerned about that
possibility, the court will conduct a more searching
inquiry, examining all the circumstances, to determine
22 Nos. 08-1036, 08-1037, et al.
who the true settlor might be. Stern v. Comm’r, 77 T.C. 614,
647 (1981). If a grantor is deemed an “owner” of a portion
of a trust, that portion attributable to the grantor must
be included in the true owner’s taxable income. 26 U.S.C.
§ 671. There are several ways, outlined at 26 U.S.C. §§ 672-
79, in which a grantor may be deemed an owner of a
trust, but only two of them are relevant for our analysis.
26 U.S.C. § 674(a) states that:
The grantor shall be treated as the owner of any
portion of a trust in respect of which the beneficial
enjoyment of the corpus or the income therefrom is
subject to a power of disposition, exercisable by the
grantor or a nonadverse party, or both, without the
approval or consent of any adverse party.
Alternatively, the grantor may be treated as the owner
of a portion of the trust if
[t]he grantor has directly or indirectly borrowed the
corpus or income and has not completely repaid the
loan, including any interest, before the beginning of
the taxable year. The preceding sentence shall not
apply to a loan which provides for adequate interest
and adequate security, if such loan is made by a
trustee other than the grantor and other than a
related or subordinate trustee subservient to the
grantor.
26 U.S.C. § 675(3).
The STJ considered whether Kanter should be con-
sidered the grantor of the BRTs, given that Bea Ritch was
named as the trust’s settlor. The judge rejected the Com-
Nos. 08-1036, 08-1037, et al. 23
missioner’s theory that Kanter funded the trusts by di-
recting income from various entities he controlled to the
BRTs. (This finding went hand-in-hand with the STJ’s
prior finding that Kanter was not funneling income
from his kickback scheme to the BRTs or other entities
with which he was associated.) The STJ concluded that
the BRTs’ substantial assets were the result of its wise
(or lucky?) investment choices, particularly in the
emerging field of cable television. Even if Kanter were the
grantor, the STJ already had found that Kanter had re-
nounced the assignment power, precluding a finding of
ownership under § 674(a). Because he had found that
Kanter was not a grantor, the STJ did not delve into
whether the loans the BRTs made to Kanter were of a
type that would trigger tax liability under § 675(3).
Again, the Tax Court rejected the STJ’s findings. It
found that Kanter—not Bea Ritch—was the true settlor of
the trusts. To support this finding, it noted that Kanter
failed to provide evidence beyond the trust document
of Ritch’s initial funding of the trusts. It also found im-
plausible that the BRTs had such investment success
without being aided by transfers of funds from Kanter’s
various entities, which were funded in turn by income
from his alleged kickback scheme with the Five. After
finding that Kanter was the true settlor, it also found
that Kanter had the power of disposition over the trusts’
assets, disbelieving Kanter’s assertion that he had re-
nounced that power. It found particularly meaningful
the fact that some 60 trusts were added as beneficiaries
after Kanter allegedly renounced his appointment power.
The Tax Court’s two findings that Kanter was the settlor
24 Nos. 08-1036, 08-1037, et al.
and possessed the power of disposition were enough
to make him the true owner of the BRTs under 26 U.S.C.
§ 674(a). Like the STJ, the Tax Court did not specifically
address the possible tax liability created by 26 U.S.C.
§ 675(3) for the loans the BRTs made to Kanter.
The critical issue for us is whether the STJ’s finding
that Kanter was not the grantor of the BRTs is clearly
erroneous. If he is not the grantor, then he cannot be
the true owner of the BRTs under either of the provi-
sions outlined above. In this connection, it is important
that we already have found no clear error in the STJ’s
finding that Kanter did not assign income from a sup-
posed kickback scheme to various entities in which the
BRTs owned an interest. That alleged device therefore
cannot be a basis for finding that he was the true
grantor. The Commissioner does not point to any evidence
in the record to establish that Kanter provided the
funds necessary for the $18,000 OBA investment. What
remains is the Commissioner’s speculation that the
growth of the BRTs’ investments (both prior to OBA and
afterwards) was so unusual that Kanter, and no one
else, must have funded them. It is true that the BRTs ex-
perienced strong growth from their inception, but the
combination of Kanter’s business advice to Weisgal and
the wise choice to invest in cable television at the dawn
of that industry can explain much if not all of the
growth. At the very least, it provides a strong enough
basis in the record, in the absence of anything but specula-
tion to the contrary, to support the STJ’s finding that
Kanter did not fund the BRTs. After the BRTs invested
in OBA, Kanter may have directed investors to OBA to
Nos. 08-1036, 08-1037, et al. 25
his ultimate benefit. But this does not require the STJ to
find that the BRT-OBA deal was predicated on Kanter’s
efforts (and was thus attributable to him).
Once again, we conclude that the STJ’s finding is not
clearly erroneous, even though we freely acknowledge
that a rational person could just as easily have come to
the opposite conclusion on this record. As a result, we
need not reach the question whether Kanter had indeed
given up his appointment power. We also need not
inquire into the nature of the BRTs’ loan to Kanter.
V
In 1979, the Century Industries (“CI”) partnership was
formed, and it was reconstituted in 1980. In this reconsti-
tuted form, CI had several claimed partners: Kanter,
Weisgal, the Bea Ritch Trusts, four Weisgal family trusts,
and a partnership composed of irrevocable trusts for
the benefit of the Weisgal family (later replaced with
another partnership of the same type in 1984). CI’s main
purpose was to discover attractive investment oppor-
tunities that needed capital, which would be supplied by
the trust partners. Although Kanter and Weisgal each had
only a 1% partnership interest in CI, they did the work of
evaluating potential investment opportunities. Various
entities paid CI “standby commitment fees” to consider
their projects, and these fees were CI’s primary source
of income during its early years, as it did not pursue
any investments until 1987. In 1998 or 1999, the CI partner-
ship was dissolved. For the tax years of 1981-1984 and
1986, the Commissioner determined that Kanter and
26 Nos. 08-1036, 08-1037, et al.
Weisgal were the only true partners in CI and thus attrib-
uted half of CI’s income during this period to Kanter.
Because Kanter did not report this income, the Commis-
sioner assessed a deficiency against him based on that
income.
Kanter raises the threshold question whether the Tax
Court had subject-matter jurisdiction over the 1983, 1984,
and 1986 tax years. We review this legal question de novo.
Johnson, 551 F.3d at 567. Here, jurisdiction depends on a
particular factual question: whether Kanter and Weisgal
were CI’s only real partners. We review the STJ’s findings
related to this jurisdictional fact, like his other factual
findings, for clear error.
The Tax Court’s jurisdiction depends on whether the
Tax Equity and Fiscal Responsibility Act of 1982
(“TEFRA”), 26 U.S.C. §§ 6221-33, applies to CI and the
relevant income. In enacting TEFRA, Congress
intended “administrative and judicial resolution of dis-
putes involving partnership items to be separate from
and independent of disputes involving nonpartnership
item s.” M axwell v. Comm’r, 87 T.C. 783, 788
(1986). Partnership items include “income, gain, loss,
deduction, or credit of the partnership.” 26 C.F.R.
§ 301.6231(a)(3)-1(a)(1)(i). The statute calls for dis-
putes regarding partnership items to be settled at
the partnership level, rather than at a partner-level pro-
ceeding in Tax Court. 26 U.S.C. § 6231(a)(3). In con-
trast, if the partnership in question is a “small partner-
ship,” defined as a partnership with fewer than 10 part-
ners, an individual partner-level proceeding may be
Nos. 08-1036, 08-1037, et al. 27
appropriate. 26 U.S.C. § 6231(a)(1)(B)(i). To determine
whether someone qualifies as a partner, this court consults
whether, considering all the facts—the agreement, the
conduct of the parties in execution of its provisions,
their statements, the testimony of disinterested per-
sons, the relationship of the parties, their respective
abilities and capital contributions, the actual control
of income and the purposes for which it is used, and
any other facts throwing light on their true intent—the
parties in good faith and acting with a business pur-
pose intended to join together in the present conduct
of the enterprise.
Comm’r v. Culbertson, 337 U.S. 733, 742 (1949).
There is no dispute that we are dealing with partnership
items, which ordinarily would receive partnership-level
treatment under the TEFRA. The question is whether the
small-partnership exception lifts this requirement. The STJ
found that the listed partners of CI were in fact its true
partners. This brought CI within the ambit of TEFRA (as
CI had more than 10 partners), and therefore deprived
the Tax Court of jurisdiction in this proceeding. The STJ
based his ruling on the fact that during the period in
question, CI entertained investment proposals from
several entities, including ones unrelated to Kanter and
Weisgal, and that the trust partners had sufficient re-
sources to commit capital to any investment project that
could have come down the line. The STJ did not base
his ruling on the fact that capital from the other partners
was a material income producing factor (a test derived
from Internal Revenue Code § 704(e)); instead, he found
28 Nos. 08-1036, 08-1037, et al.
that the partners had a good-faith intent to conduct a
business enterprise.
The Tax Court took a different view. It found that only
Kanter and Weisgal were partners in CI, and that CI’s
income was solely the result of personal consulting
services that Kanter and Weisgal rendered to the various
entities that paid CI. To arrive at this conclusion, the Tax
Court relied on the relative inactivity of CI during the
relevant period as well as letters in the record from
various entities that could be read as establishing a con-
sulting relationship with Kanter and Weisgal. In the Tax
Court’s eyes, CI fell within the small-partnership excep-
tion of TEFRA, the income was taxable at the partner
level (i.e. Kanter’s level), and thus the Tax Court retained
jurisdiction over the relevant years.
We find, applying the test outlined in Culbertson, that the
record adequately supports the STJ’s finding that all of the
claimed partners of CI were the actual partners. The Tax
Court attaches great importance to the letters in the
record from entities that paid CI to consider their propos-
als. For instance, it points to a letter from Satcorp, Inc., to
CI that notes that Kanter and Weisgal will serve as “finan-
cial engineers” whose involvement is “planning and
structuring transactions for financings for Satcorp.” While
one interpretation of this language (shared by the Tax
Court and the Commissioner) is that Kanter and Weisgal
were running an unrelated consulting firm disguised as
CI, that letter also can support the STJ’s view that Kanter
and Weisgal were screening various investment proposals
to see if CI might provide financing to these entities.
Nos. 08-1036, 08-1037, et al. 29
Perhaps an even more damaging piece of evidence (from
Kanter’s standpoint) is the City & Suburban Distributors
letter, in which Weisgal bills the company for the time
that he and Kanter spent on their projects. This letter
could be seen as describing a consulting business hiding
behind the façade of CI. If the Tax Court had been sitting
as the original fact-finder, then the Satcorp and City &
Suburban letters may have been sufficient to justify
holding that Kanter and Weisgal were the only true
partners. But, as we have now observed repeatedly, it
was not, and neither are we. Confronted with two inter-
pretations of the evidence, we defer to the original fact-
finder.
As CI had more than 10 partners, it fell within the
provisions of TEFRA. The Tax Court thus lacked jurisdic-
tion over the CI partnership item of partner compensation.
See Blonien v. Comm’r, 118 T.C. 541, *19-*20 (2002). The
remaining issue is whether half of CI’s income is attribut-
able to Kanter for the pre-TEFRA years of 1981 and 1982.
This question turns on the same factual determination
that governed the jurisdictional issue: whether Kanter
and Weisgal were the only true partners for CI. As we
have already explained, we do not find clearly erroneous
the STJ’s finding that CI’s other partners were bona fide.
Thus, there are no grounds on which to attribute half of
CI’s income to Kanter, and the Commissioner assessed
a deficiency against Kanter for these years in error.
VI
In 1982, Kanter deposited over $2.8 million in three bank
accounts at American National Bank in Chicago. Linda
30 Nos. 08-1036, 08-1037, et al.
Gallenberger, Kanter’s accountant, used Kanter’s check
register, which recorded the source and nature of these
deposits, to determine that $443,046.35 of the deposits
constituted taxable income. Kanter reported that income
on his 1982 tax return. The Commissioner maintains that
an additional $1,303,207 constituted taxable income and
assessed a deficiency against Kanter for the taxes attribut-
able to that amount. Kanter contests this, claiming that
those deposits were nontaxable loans and returns of
investment from other entities. While the Commissioner
has conceded this issue, we still must consider it to deter-
mine whether, or to what extent, the Tax Court erred in
its decision to reverse the STJ.
The Commissioner is empowered to use several
methods to reconstruct a taxpayer’s taxable income. See
Holland v. United States, 348 U.S. 121, 130-32 (1954) (“To
protect the revenue from those who do not render true
accounts, the Government must be free to use all legal
evidence available to it in determining whether the
story told by the taxpayer’s books accurately reflects his
financial history.”) (internal quotation marks omitted). One
permissible method is examining a taxpayer’s bank
deposits. See, e.g., Nicholas v. Comm’r, 70 T.C. 1057, 1063
(1978) (using the bank-deposits method). Evidence of
bank deposits constitutes prima facie evidence of income,
see Boyett v. Comm’r, 204 F.2d 205, 208 (5th Cir. 1953),
and the taxpayer bears the burden of proving that the
Commissioner’s determinations are erroneous. See
Welch, 290 U.S. at 115.
Noting that the Commissioner had failed to present any
evidence to the contrary, the STJ found that Kanter had
Nos. 08-1036, 08-1037, et al. 31
reported all his taxable income in 1982. In doing so, it
relied on Gallenberger’s testimony, which it found credi-
ble, and Kanter’s check register. The Tax Court reversed
the STJ, finding that Kanter had not produced enough
evidence at trial to satisfy his burden of proof. The
factors to which it pointed as support for its decision
were the large amount of money that was at issue, its
previous findings regarding the kickback scheme and
tax fraud, and Gallenberger’s initial recalcitrance in
producing certain documents, which became the subject
of summons proceedings.
Neither the Tax Court nor the Commissioner has pro-
vided a good reason to doubt the STJ’s findings. The size
of the deposits alone is not a basis for reversing the STJ;
it is not surprising that Kanter, a successful businessman,
dealt with large sums of money for investment and other
purposes. We already have rejected the Commissioner’s
and Tax Court’s arguments with respect to the Five and
have upheld the STJ’s findings on that issue, and so that
argument fails as well. Finally, Gallenberger’s behavior
cannot be a basis for reversal either, as she eventually
produced all the documents that were requested, and the
summons proceedings related to other tax years. See
United States v. Administrative Enters., 46 F.3d 670, 674
(7th Cir. 1995) (noting that the summons requested docu-
ments relating to tax years 1983-1988). We thus cannot
find the STJ’s factual findings on this issue to be clearly
erroneous.
32 Nos. 08-1036, 08-1037, et al.
VII
As we have found in Kanter’s favor on the other issues
in his appeal, we need not address his due process argu-
ments.
* * *
For these reasons, we R EVERSE the Tax Court’s judgment
and R EMAND with instructions for the Tax Court to
V ACATE its decision and enter an order adopting the
STJ’s report as the decision of the Tax Court.
12-1-09