The Tax Court trial judge has released his decision on remand in Kanter, the case that led the Supreme Court to reject the Tax Court's interpretation of its own rule and require release of the special trial judge (STJ) opinion as a part of the official record that would be given considerable deference on findings of fact. Almost 500 pages long, it represents a careful and detailed review of the record in the case, adopting in large part the STJ's findings of fact, but adding important new findings and rejecting critical findings of the STJ as "manifestly unreasonable", the standard that the Seventh Circuit set for overturning credibility findings and other findings by the STJ.
Here, for instance, is the trial judge's statement on the kickback scheme following a lengthy and detailed accounting of the various corporations, partnerships, purported loans, and other complicated dealings through which the judge tracked the 45/45/10 distribution of kickbacks among the three collaborators Kanter, Ballard, and Lisle to conclude that objective evidence in the record required overturning the STJ's reliance on the uncorroborated testimony of Kanter and others at trial.
"As previously discussed, we have weighed the recommended findings of fact and credibility determinations set forth in the STJ report against the entire record in these cases. On the basis of our review, with particular emphasis on the additional findings of fact that we have culled from the record in an effort to fully illuminate the transactions in dispute, we reject as manifestly unreasonable the STJ report’s acceptance of Kanter’s and Ballard’s testimony, and Lisle’s statement to IRS agents, that they were not participants in a kickback scheme. There is abundant and overwhelming objective evidence of record that the payments from The Five constituted income earned by Kanter, Ballard, and Lisle (and in some instances by Kanter alone) and that income was delivered to Kanter, Ballard, and Lisle by way of a circuitous and well-concealed route through various Kanter related entities. The objective evidence regarding Kanter’s, Ballard’s, and Lisle’s general conduct and the flow of funds in these cases wholly discredits petitioners’ testimony that they were not involved in a kickback scheme. Consequently, we reject petitioners’ testimony as inherently improbable and conclude, contrary to the STJ report, that Kanter, Ballard, and Lisle earned income in the form of payments from The Five during the years at issue and failed to report that income on their tax returns."
at 295-96. Id.
The opinion also deals with an incorporation transaction used by Kanter in an attempt to avoid gain on a sale of partnership interests with zero basis and subject to liabilities. The interests were first transferred to a shelf corporation (Cashmere) along with promissory notes for almost $500,000 under the gambit rejected in the Tax Court in Alderman because such notes have no bases that can help a transferor to overcome a section 357(c) excess liabilities problem. The Kanter court found alternatively that (i) the transfer to a corporation (and the later sale of the corporate stock to another related corporation, and finally the sale of the stock to the intended buyer of the partnership interests) had no business purpose, (ii) the transfer of the liabilities had a tax avoidance purpose resulting in treatment of all the liabilities as boot under section 357(b)'s tainted debt provision, and (iii) the notes had no bases and thus liabilities exceeded bases under section 357(c), resulting in gain to the extent of the excess.
(Note that the Ninth Circuit in Lessinger and the Second Circuit in Peracchi, with very different reasoning, both allowed taxpayers to avoid recognition of section 357(c) gain but in each case with reasoning that disregarded the coherent structure of the incorporation provisions, the clear intent of Congress to tax taxpayers when they make a formal transfer of property to a corporation with liabilities in excess of basis, and the functioning of the basis provisions that give the corporation basis in property transferred equal to the transferor's basis plus the gain recognized by the transferor on the transfer.)
The opinion will no doubt be appealed. At this point, the petitioners have fought to hard to concede the fight here. And the judge clearly intended his opinion to withstand a challenge with respect to the instances in which he overturned the STJ's factual findings. (He also found that the STJ had commited at least one error of law and so stated.) Each additional finding is supported by a citation to the record. Each statement that contravenes the STJ's factual findings and reliance on the petitioners' testimony is supported by an explicit statement that the STJ conclusion was "manifestly unreasonable."
All of those tax issues are interesting. But for non-tax geeks, what this case provides is a fascinating window into the world of high-stakes real estate development and hotel management, the "fees" that can be earned for knowing the right people and getting people in high places (in this case, at Prudential Insurance and at Travelers) to steer business towards your clients, and the sheer complexity involved-- use of multiple nominees, partnerships, grantor trusts and alter ego corporations as conduits, combined with accommodating secretaries, clerks, managers and other buddies to head the entities and ensure that orders are always followed, lack of corporate formalities, undocumented "loans" that are later "forgiven" (without being included in income of the debtor), and lack of records--to carry out a complex scheme to obscure income and manipulate tax liability by assigning income anywhere that it could end up not taxable or subject to lesser tax, such as children or corporations with losses. What the case shows, too, is a prominent tax practitioner who was, according to the Tax Court opinion, willing to commit tax fraud to avoid paying taxes--a perfect example of how not to respect the attorney's duty to the integrity of the law.
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