Ballard, Claude, et ux. v. Commissioner of Internal Revenue (CIR) / Estate of Kanter, Burton, et al. (03/07/2005)

Questions presented: Whether the Due Process Clause requires that the "original" report of the Tax Court's Special Trial Judge that is made to the Chief Judge be made public by inclusion in the record or be disclosed to the parties?

BY ERIN STEWART, MEDILL NEWS SERVICE

Burton W. Kanter was an accomplished tax lawyer, representing major companies such as the Hyatt Corporation. Kanter, who died in 2001, helped finance movies through tax-shelter arrangements and was involved in an array of other financial ventures. Yet despite his wealth, Kanter paid no taxes from 1979-1989 and reported a negative gross income each year.

Not surprisingly, Kanter and his estate became the focus of an Internal Revenue Service audit in 1994. A special trial judgeof the U.S. Tax Court spent more than five years reviewing Kanter's tax deficiencies, deposing witnesses and reviewing Kanter's finances.

At the same time, Kanter's business associate, Claude Ballard, was also investigated in the five-year proceeding by the same special trial judge. Ballard had worked with Kanter on many of his business ventures.

The end result of the fact-finding trial was more than 10,000 pages of transcripts and briefs, which were turned over to Tax Court Judge Howard Dawson for a decision on both men. In his ruling, Dawson stated that he "agreed with and adopted" the opinion of the special trial judgethat Kanter had fraudulently diverted money to Ballard through a series ofs and partnerships in order to disguise the payments and lower the taxable value of the income. Dawson ruled that Ballard received kickback proceeds for his assistance in the tax evasion scheme.

In separate appeals in 2003, both Kanter and Ballard said they were denied due process rights because the report of the special trial judge, the fact finder in the case, was not made public to the parties. Without access to the special trial judge's findings from the five-year investigation, Kanter and Ballard argued that they had no idea whether Dawson's ruling of fraud truly reflected the findings of the special trial judge.

Kanter's estate, which appealed in the 7th Circuit Court of Appeals, agreed that he had underpaid his taxes, but disputed whether the court was able to prove that his underpayments were fraudulent. He was unable to review the court's proof, however, because the report of the special trial judgewas kept private.

His suspicions that Dawson's ruling was inconsistent with the special trial judge's report were heightened when Kanter's attorney filed an affidavit saying that two tax court judges had told him that the original report of the special trial judge had concluded that Kanter was not responsible for fraud. The affidavit stated that the two judges had said some sections of Dawson's opinion were "wholly contrary to the findings made" by the special trial judge.

Ballard, who appealed in the 11th Circuit Court of Appeals, and Kanter thus argued that Dawson had either completely ignored the findings of the original trial report or had convinced the special trial judge to change his opinion. Either way, both Ballard and Kanter argued that their inability to review the original trial report for a discrepancy violated their due process rights.

In 2003 opinions, both federal appeals courts affirmed the Tax Court's decision, ruling that neither Kanter nor Ballard had a due process right to review the original findings of the special trial judge.

The 7th Circuit said most of Kanter's arguments were deemed immaterial because the appeals court accepted Dawson's statement that he agreed with and adopted the opinion of the special trial judge. Since the appeals court took the Tax Court's opinion at its word, Kanter's due process argument was moot.

"In as much as the final Tax Court opinion purports to agree with and adopt the opinion of the Special Trial Judge, we therefore believe that the final opinion reflects the true legal opinions and findings of the Special Trial Judge," the court's 2003 opinion stated.

The court added that even if the term "agrees with and adopts" meant that there had been some change in the opinion, the Tax Court still did not have an obligation to disclose the trial findings.

"Unlike other administrative actions, the Federal Rules of Appellate Procedure thus do not require that Tax Court decisions be reviewed in light of the preliminary findings upon which the decision is based."

In a lengthy dissent, Judge Richard Cudahy argued that the Tax Court's failure to disclose fact-finding proceedings was inconsistent with every other arena in the U.S. justice system and thus violated due process rights.

"Transparency is the universal practice of agencies and courts employing these decisional practices. The question then becomes, if there are policy reasons that dictate transparency for everyone else, why do these reasons not apply to the Tax Court?" Cudahy asked. "I am not impugning the integrity of the Tax Court judges here, or at any point in this dissent; I am merely questioning the propriety of their denial of procedural transparency in a circumstance where every other like process known to the law is transparent."

In Ballard's case, the 11th Circuit used similar arguments, saying it too believed the Tax Court's statement that it had adopted the special trial judge's findings. Even if the findings had been changed because of discussion between Dawson and the special trial judge, the court ruled that there "is nothing unusual about judges conferring with one another about cases assigned to them."

The U.S. Supreme Court accepted the two cases for review as a consolidated case on April 26, 2004.

The main issue before the nation's High Court was whether due process requires the original fact-finding report of the special trial judge to be disclosed for review by the parties, as well as by courts of review.

Larger than the issue of whether Dawson actually adopted the special trial judge's report, is whether the Tax Court was out of line with judicial procedure by concealing the original report of the only judge who actually heard witnesses and weighed evidence.

Without the ability to review the original findings, both Kanter and Ballard argued that the appeals courts and the parties have no way of determining whether the Tax Court truly adopted the special trial judge's opinion, coerced him into changing his opinion, or disregarded his opinion altogether. They argued that lack of review gives them fewer due process rights than any other defendant in the U.S. justice system.

"This case suggests to us that if the judges have any disagreement, they talk secretly and all you see at the end of the day is the final output," said Kanter's attorney, Richard Pildes. "That's a bizarre, unconstitutional and unprecedented way to do it."

Pildes added in his petition that hundreds of taxpayers are subject to proceedings before special trial judges at the Tax Court. Without review of those proceedings, he said taxpayers cannot be confident that the factual findings are given due respect.

Ballard's attorney, David Schenck, said one of the first issues the Supreme Court will have to address is why the fact-finding reports are being kept secret. If the government fails to give a valid answer, Schenck said the Supreme Court will have to decide why the Tax Court should give fewer due process rights than other courts.

"That procedure of changing a decision without disclosure to the parties is drastically out of step with procedure everywhere else," he said.

On March 7, 2005, the Court resolved the matter, holding 7-2 for Ballard that the Tax Court can't exclude from the record reports by the special trial judge.

Justice Ruth Bader Ginsburg wrote the majority opinion. Chief Justice William Rehnquist and Justice Clarence Thomas dissented, arguing that the Court should have deferred to the Tax Court’s interpretation of its own rules.