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.
The opinion of the court was delivered by: Wood, Circuit Judge.
Before CUDAHY, RIPPLE, and WOOD,Circuit Judges.
This case began in 1986, when Burton W. Kanter, a well-known tax attorney and businessman, filed a petition seeking review of the Commissioner of Internal Revenue's determination that he had not paid all his taxes. Since then, the case has taken a yo-yo path through our judicial system, from the Tax Court to the Supreme Court and back again. In this iteration, 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 arguments 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 precluded 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 proportional only to his stated ownership interest because all of 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 argument, because nonmutual collateral estoppel does not apply against the United States. On the merits, we conclude that the STJ's factual findings are not clearly erroneous 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.
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 instructions 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.
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 establish 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 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 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.
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 position). Sometimes the law requires the court of appeals to 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 Administrative 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 application 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 magistrate 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 relationship 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 recommended by the Special Trial Judge shall be presumed to be correct. U.S. TAX CT. 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 presumption 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 opportunity 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 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 recommendation 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 FED. R. CIV. 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, although 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 recommended 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 determine what the correct rule is for the Tax Court. We are 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.
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 ...