U.S. Supreme Court rejects secrecy in tax proceedings

• The U.S. Tax Court, where taxpayers challenge the IRS, must disclose reports by special trial judges, the nation’s highest court ruled in reversing two federal appellate court decisions.

March 10, 2005 — The U.S. Supreme Court Monday invalidated the U.S. Tax Court’s “idiosyncratic” practice of concealing special trial judge reports from taxpayers who appeal the court’s rulings.

In a 7-2 decision, the high court held that the Tax Court’s rules do not allow it to shield such reports from the record during appeals. The decision reversed judgments from the 7th Circuit in Chicago and the 11th Circuit in Atlanta upholding the Tax Court’s practice.

Following a 1984 rule change, the Tax Court has withheld the reports as part of a collaborative effort between a special trial judge — an auxiliary officer named by the Tax Court’s chief judge to hear certain cases — and a Tax Court judge appointed to oversee such cases.

“The Tax Court’s practice of not disclosing the special trial judge’s original report, and of obscuring the Tax Court judge’s mode of reviewing that report, impedes fully informed appellate review of the Tax Court’s decision,” Justice Ruth Bader Ginsburg wrote for the majority.

The case marked a posthumous win for well-known tax lawyer Burton W. Kanter, who with two others was found liable for a $30 million tax deficiency in 1999, The New York Times reported. The Hollywood-connected Kanter, who died in 2001, and Prudential Life Insurance real-estate executives Claude M. Ballard and Robert Lisle were charged with conducting a kickback scheme in the 1970s and 1980s in which Prudential clients paid corporations controlled by Kanter. The payments were then distributed to the three men, who allegedly failed to report the income on their individual tax returns.

Kanter, Ballard and Lisle challenged the Internal Revenue Service’s charges to the U.S. Tax Court in Washington, D.C. The cases were consolidated, and the court appointed Special Trial Judge D. Irvin Couvillion to preside over the 1994 trial. Under Tax Court Rule 183, Couvillion submitted a post-trial report of his factual findings and his opinion to the Tax Court, which assigned Tax Court Judge Howard A. Dawson Jr. to review it.

In 1999, Dawson issued a Tax Court decision that said it “agrees with and adopts the opinion of” Couvillion and attached a 600-page document titled “Opinion of the Special Trial Judge.” Concluding Ballard, Kanter and Lisle had deceived the IRS, the Tax Court held them liable for underpaid taxes.

Kanter’s attorney, Randall G. Dick, later learned that the opinion did not reflect Couvillion’s original report. In a sworn statement, Dick said two other Tax Court judges told him Couvillion actually had found that Ballard, Kanter and Lisle did not owe certain taxes or penalties, but that Dawson had changed Couvillion’s findings.

The businessmen then asked the Tax Court for Couvillion’s original report or, alternatively, permission to place it under seal in the record of appeal. The request was denied. The parties appealed to three different federal appeals courts, based on where they lived. The Fifth, Seventh and Eleventh circuits agreed with the IRS that Couvillion’s signature on the Tax Court’s final decision meant it reflected his report, and that the original report was confidential. Ballard and Kanter appealed to the U.S. Supreme Court.

The high court rejected the conclusions of the federal appeals courts. Instead, it determined that nowhere in Rule 183 does it say the Tax Court can treat the special trial judge’s original report “as a draft subject to collaborative revision.” Moreover, the Tax Court’s own rules require it to generally defer to the findings of the special trial judge, who was the one to hear the testimony and observe the witnesses.

“One would be hard put to explain . . . how a final decisionmaker, here the Tax Court judge, would give ‘[d]ue regard’ to, and ‘presum[e] to be correct,’ an opinion the judge himself collaborated in producing,” the Supreme Court ruled.

The IRS had argued in support of the practice, which the Court noted was “curious” given that it enabled the Tax Court to shield findings by a special trial judge that favored the government rather than the taxpayer.

Taxpayers use traditional courts to battle the IRS if they sue to recover paid taxes. People who want to contest IRS determinations before paying use the U.S. Tax Court, according to The Associated Press.

(Ballard v. Commissioner of Internal Revenue; Attorney for Petitioners: Stephen M. Shapiro, Chicago, Ill.) — KK

© 2005 The Reporters Committee for Freedom of the Press

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