In the

United States Court of Appeals

For the Seventh Circuit ____________

Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

ESTATE OF BURTON W. KANTER, deceased,

JOSHUA S. KANTER, executor, and NAOMI KANTER,

Petitioners-Appellants,

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent-Appellee.

____________

Appeals from a Decision of the United States Tax Court

Nos. 712-86, 1350-87, 31301-87, 33557-87,

3456-88, 32103-88, 26251-90.

____________

ARGUED SEPTEMBER 4, 2002—DECIDED JULY 24, 2003

____________

Before FLAUM, Chief Judge, CUDAHY and KANNE, Circuit

Judges.

PER CURIAM. The Estate of Burton Kanter and Naomi

Kanter appeal a decision of the Tax Court. This consolidated appeal deals with six out of forty-one separate

issues decided by the Tax Court with respect to alleged

deficiencies of the late Burton W. Kanter, his wife, Naomi

Kanter, and related entities, as well as two additional posttrial issues. We affirm in part and reverse in part.
2 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

1 Burton W. Kanter died on October 31, 2001. His estate was

subsequently substituted as the principal party to this litigation.

In order to avoid semantic contortions, this opinion refers

interchangeably to the current Petitioners collectively, the Estate

of Burton W. Kanter individually and to the late Burton Kanter,

as “Kanter.”

2 “Tr.” refers to the transcript for the Tax Court trial. “App.” will

refer to the appendix to Petitioners’ brief.

INTRODUCTION

The late Burton W. Kanter,1

 and various family entities

associated with him, have been audited by the Internal Revenue Service virtually, if not literally, every year

since Richard Nixon was President. Kanter was a wellknown and accomplished tax and estate lawyer. He graduated from the University of Chicago Law School. He had a

very successful law practice beginning in 1956, founding

what would eventually become the law firm of Neal, Gerber

& Eisenberg. Among Kanter’s clients was the Pritzker

family of Hyatt Corporation fame. Kanter was also an

accomplished businessman, with “extensive exposure” to a

“good many public . . . . [and] private companies.” (Tr. at

5278.)2

 Kanter wrote extensively on tax-related subjects

(originating a “Shop Talk” column in the Journal of Taxation), and was an expert on the subject of trusts and

estate planning. See, e.g., Burton W. Kanter & Michael J.

Legamaro, The Grantor Trust: Handmaiden to the IRS and

Servant to the Taxpayer, 75 TAXES 706 (1997); Sheldon I.

Banoff & Burton W. Kanter, LLC Announcements: Damage

Control, 80 J. TAX’N 255 (1994); Burton W. Kanter &

Sheldon I. Banoff, Tax Planning for the Elderly, 70 J. TAX’N

191 (1989); Burton W. Kanter, AARP—Asset Accumulation,

Retention and Protection: Prelude to Transmission, 69

TAXES 717 (1991); Burton W. Kanter, Cash in a “B” Reorganization: Effect of Cash Purchases on “Creeping” Reorgani-
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 3

01-4321, 01-4322, & 02-1220

3 All Rule references are to the Rules of the United States Tax

Court (Tax Court Rules) unless otherwise indicated.

zation, 19 TAX L. REV. 441 (1964). In the 1960s and 1970s,

Kanter helped Hollywood finance movies through tax

shelter arrangements, and was involved in the production of many major Hollywood films, including “One Flew

Over the Cuckoo’s Nest.” The IRS’s extraordinary attention to Kanter is understandable given that from 1979 to

1989 Kanter, the highly successful tax attorney, who

hobnobbed with Pritzkers and Hollywood producers and

who participated in countless extremely large and lucrative

business ventures, reported a negative adjusted gross

income each year on his federal tax return and paid no

federal income taxes. (Tr. at 5290-91.)

This consolidated appeal involves Kanter’s petitions for

review of deficiencies assessed during the years from 1978

to 1986, which is itself only a portion of the original consolidated case tried by the Tax Court in 1994—a trial that

generated almost 5500 pages of transcript, more than

4600 pages of briefs and thousands of exhibits consuming

hundreds of thousands of pages, and was eventually, five

years later, distilled into a 606 page opinion covering fortyone separate issues. A thorough description of the entire

factual background to this case can be found in the Tax

Court’s opinion. Investment Research Associates, Ltd. v.

Comm’r, 78 T.C.M. (CCH) 951 (1999) [hereinafter IRA]. The

trial was conducted by Special Trial Judge Couvillion, to

whom the Tax Court had assigned the case under 26 U.S.C.

§ 7443A(b)(4). See also Tax Court Rule 180.3

 Under the

Tax Court’s rules, the Special Trial Judge (STJ) then

submitted a report containing findings of fact and opinion

to the Tax Court’s Chief Judge, who then assigned the case

to Tax Court Judge Dawson. See Tax Court Rule 183(b).

Judge Dawson subsequently issued his opinion, which
4 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

4 The Tax Court trial consolidated the petitions of Kanter and

two other individuals (Lisle and Ballard) against whom the Commissioner assessed deficiencies. Under 26 U.S.C. § 7482(b)(1)(A),

appeals from Tax Court decisions are reviewed by the U.S. Court

of Appeals for the circuit in which the legal residence of the

petitioner lies. Of the three petitioners, only Kanter’s legal

residence lies within the Seventh Circuit. Parallel appeals for the

other petitioners are ongoing in the Fifth and Eleventh Circuits. During the pendency of this appeal the Eleventh Circuit

issued its opinion. Ballard v. Comm’r, 321 F.3d 1037 (11th Cir.

2003).

stated that the Tax Court “agrees with and adopts the

opinion of the Special Trial Judge, which is set forth below.”

IRA, 78 T.C.M. (CCH) at 963. Of the forty-one issues

decided by the Tax Court, six were appealed to this court:4

1. Fraud: The Tax Court determined that Kanter (and

two colleagues) helped individuals obtain business opportunities in exchange for payments that later were fraudulently diverted through a series of Kanter-controlled

entities in order to disguise the payments’ origins and lower

the tax assessed on the income (by dividing it up and

assigning parts of it to various entities claiming losses).

Kanter concedes that there was an underpayment of taxes

but disputes that the Commissioner was able to prove

by clear and convincing evidence that the underpayment

was due to fraud.

2. Bea Ritch Trusts: Kanter challenges the Tax Court’s

determination that capital gains reported in 1986 by the

Bea Ritch Trusts (BRT) were properly taxable to Kanter

under the grantor trust provisions of the Internal Revenue Code (IRC).

3. Washington Painting: Kanter challenges the Tax

Court’s refusal to allow him to deduct expenses he incurred during an aborted sale of a painting.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 5

01-4321, 01-4322, & 02-1220

4. 1982 Bank Deposits: Kanter challenges the Tax

Court’s determination of a deficiency for the year 1982

based upon an analysis of his bank deposits. He argues

that the Commissioner failed to meet his burden to prove

a deficiency, that the Tax Court erred in presuming the

Commissioner’s deficiency determination to be correct,

and that in any event the evidence Kanter presented

at trial was sufficient to overcome any presumption of

correctness.

5. Equitable Leasing: Kanter challenges the Tax Court’s

determination that payments from Equitable Leasing

Company to Kanter entities were taxable commissions

and not loans.

6. Cashmere: The Tax Court disregarded a series of

transactions involving (a) the contribution of certain

partnership interests to a shelf corporation (Cashmere)

and (b) the subsequent installment sale of Cashmere’s

stock, the result of which was an immediate recognition of

capital gain to Kanter on the partnership interests. Kanter

argues that the transactions had economic substance

and should not have been disregarded as an attempt to

avoid the payment of federal income tax.

The remaining two issues in this appeal concern events

after the conclusion of the Tax Court’s trial. Beginning in

April 2000, Kanter sought repeatedly to have the original report filed by the STJ placed in the record, or in the

alternative made available for this Court’s review in

camera. Kanter alleged that informal conversations with

two Tax Court judges had revealed that the issued opinion had undergone significant alterations from the original report filed by STJ Couvillion. The Tax Court denied

all of Kanter’s motions. Kanter appeals the Tax Court’s

refusal to produce the STJ’s original report. The final issue

concerns Kanter’s wife’s (Naomi’s) efforts to seek innocent-
6 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

spouse relief from the deficiencies levied against her husband’s estate.

To make this very complex case easier to understand

we have placed a brief statement of facts relevant to each

issue immediately preceding that issue’s analysis. We begin with the broadest (and least fact dependent) issue:

whether the STJ’s original report should have been made

part of the record on appeal. Then we address the six

transactional issues from the Tax Court’s decision. Finally,

we address Naomi Kanter’s post-trial motions.

The United States Courts of Appeals have exclusive

jurisdiction to review decisions of the United States Tax

Court. 26 U.S.C. § 7482(a)(1); Seggerman Farms, Inc. v.

Comm’r, 308 F.3d 803, 805 (7th Cir. 2002).

I. The STJ’s Report

Kanter’s first argument is that the STJ’s original report

must be made a part of the record on appeal so that this

court can determine whether the appropriate degree of

deference had been paid to it by the Tax Court judge, whose

opinion is before us. Kanter claims that informal conversations between his attorney and other Tax Court judges

revealed that the STJ who presided over the trial of this

case submitted a report that found Kanter credible and

recommended rejection of much of the Commissioner’s

assessed deficiencies, specifically the fraud deficiency.

Kanter argues that the STJ’s report cannot be rejected

by the Tax Court unless clearly erroneous, and that,

without the STJ’s report in the record, there is no way

for this court to determine if proper deference was accorded

it. Moreover, this secret and unaccountable process of

review allegedly violates Kanter’s due process rights.

Kanter, relying on a Supreme Court case examining the

relationship between U.S. district court judges and magis-
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 7

01-4321, 01-4322, & 02-1220

trate judges, argues that this quasi-collaborative process

affords a Tax Court the opportunity to reverse an STJ’s

credibility findings without first hearing or seeing the

witnesses itself—thus offending due process. See Raddatz

v. United States, 447 U.S. 667, 681 n.7 (1980) (observing

in dicta that in the criminal context a district court

judge’s reversal of a magistrate judge’s credibility findings

without the district judge hearing or seeing the witnesses

would raise “serious questions”). Kanter argues that in

addition, our review of the Tax Court’s decision is unconstitutionally impaired by the omission of the STJ’s report

from the record. Kanter’s challenge of the Tax Court’s

refusal to include the “original” STJ report presents

questions of law that we review de novo. Pittman v.

Comm’r, 100 F.3d 1308, 1312 (7th Cir. 1996).

Of course, Kanter’s arguments are immaterial if the

Tax Court’s final opinion is the STJ’s report. See Ballard,

321 F.3d at 1042-43. The Tax Court’s final opinion clearly

states that it “agrees with and adopts the opinion of the

Special Trial Judge.” IRA, 78 T.C.M. (CCH) at 963. The

Chief Judge of the Tax Court, Judge Dawson, and Special Trial Judge Couvillion himself all signed that final

opinion, and we take their statement at face value. Therefore, notwithstanding Kanter’s attorney’s declaration, we

accept as true the Tax Court’s statement that the underlying report adopted by the Tax Court was in fact Special

Trial Judge Couvillion’s. See Ballard, 321 F.3d at 1042-43.

This renders moot all of Kanter’s arguments.

But even if, as the dissent suggests, the phrase “agrees

with and adopts” masks what is in fact a quasi-collaborative judicial deliberation in which an STJ’s initial findings

are malleable, neither the Tax Court’s own rules of procedure, the Federal Rules of Appellate Procedure, nor

Congress’ scheme for appeals from Tax Court decisions

would require the Commissioner to include the STJ’s
8 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

preliminary report as part of the appellate record. Furthermore, this purportedly quasi-collaborative process would

not offend our notions of fundamental fairness, nor would

due process require the inclusion of the report in the

appellate record to preserve the fairness of our review.

First, it is clear that the Tax Court’s own rules do not

require the report to be disclosed to the parties or made

part of the appellate record. To the contrary, its rules

specifically preclude the report’s disclosure. That the Tax

Court has the power to prescribe its own rules of procedure

is undisputed. See 26 U.S.C. § 7453; Stone v. Comm’r, 865

F.2d 342, 347 (D.C. Cir. 1989) (“The Tax Court is of

course free to make its own rules determining the relation

between it and its Special Trial Judges.”). Having exercised

that rulemaking authority, the Tax Court no longer requires an STJ’s report to be made available to the parties

and, by extension, no longer allows those parties to file

objections to it. Compare Tax Court Rule 182(b), (c), 60 T.C.

1149 (1973) (providing for service of the STJ’s report on

each party and allowing each party to file objections to the

report’s findings), with Tax Court Rule 183, 81 T.C. 1070

(adopted 1983) (noting that “[t]he prior provisions for

service of the [STJ’s] report on each party and for the filing of exceptions to that report have been deleted”).

Neither do the Tax Court procedures prescribe any

particular level of deference due the STJ’s report. Under

the current rule, the Tax Court maintains sole authority

to decide cases assigned to an STJ. Tax Court Rule 183(c)

(“The Judge to whom or the Division to which the case

is assigned may adopt the [STJ’s report] or may modify it

or may reject it in whole or in part . . . .”); see also Freytag

v. Comm’r, 501 U.S. 868, 875 n.3 (1991) (“[A] special trial

judge has no authority to decide a case assigned under

[§ 7443(b)(4)].”). The Tax Court thus acts as the original

finder of fact. Conversely, the STJ’s inability to decide
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 9

01-4321, 01-4322, & 02-1220

cases limits the amount of deference that the Tax Court, as

the original factfinder, must pay to those preliminary

findings. Although the Rule requires that “due regard” be

given to the STJ’s opportunity to evaluate the credibility

of witnesses and that those findings be presumed correct,

see Tax Court Rule 183(c), to impose the further requirement that the Tax Court review an STJ’s findings for

clear error, as Kanter urges, would all but abdicate the

Tax Court’s original decisionmaking authority. Instead,

we believe Rule 183’s due-regard language merely instructs the Tax Court to be cognizant that the STJ had

the opportunity to evaluate the credibility of witnesses,

and allows the Tax Court to overcome the presumption of

correctness it prescribes should it find that the evidence

suggests those findings were incorrect. Consequently,

secreting the report does not offend any rule-mandated

check on the Tax Court’s power to decide cases assigned

to an STJ.

Second, Congress has by statute precluded direct appellate review of STJ reports. We lack jurisdiction to review anything but “decisions of the Tax Court.” 26 U.S.C.

§ 7482(a)(1). We have repeatedly held that the use of the

term “decisions” in § 7482 means that the appellate

courts can review only (i) dismissals (e.g., for lack of jurisdiction) or (ii) formal determinations of deficiency (or lack

thereof). See, e.g., Krieder v. Comm’r, 762 F.2d 580, 584 (7th

Cir. 1985). In other words, a “decision” of the Tax Court

is the final formal ruling of the Tax Court; a preliminary

“report” is not a decision. See 26 U.S.C. § 7459(a) (“A report upon any proceeding instituted before the Tax Court

and a decision thereon shall be made as quickly as practicable. The decision shall be made by a judge in accordance with the report of the Tax Court, and such decision

so made shall, when entered, be the decision of the Tax

Court.” (emphasis added)). An STJ report, therefore, is
10 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

5 Federal Rule of Appellate Procedure 14 states that “[a]ll

provisions of these rules, except Rule 4-9, 15-20, and 22-23, apply

to review of a Tax Court decision.” FED. R. APP. P. 14.

6 Federal Rule of Appellate Procedure 13 provides in relevant

part:

(d) The Record on Appeal; Forwarding; Filing.

(1) An appeal from the Tax Court is governed by the

parts of Rules 10, 11, and 12 regarding the record on

appeal from a district court, the time and manner of

forwarding and filing, and the docketing in the court of

appeals. References in those rules and in Rule 3 to the

(continued...)

not reviewable, see Estate of Smith v. Comm’r, 638 F.2d 665,

670 (3d Cir. 1981), which lends credence to the Commissioner’s argument that Congress intended STJ reports to

be treated as preliminary findings comprising part of the

Tax Court’s internal deliberative process.

Third, the Federal Rules of Appellate Procedure do not

require that STJ reports be made part of the statutorily

required record on appeal of a “decision” of the Tax Court.

Federal Rule of Appellate Procedure 14 excepts appeals

of Tax Court decisions from certain rules of appellate

procedure.5

 Among those rules not applicable to Tax

Court review is Rule 16, which provides that the record on

review of an administrative order shall include “any

findings or report on which [the order] is based.” FED. R.

APP. P. 16(a)(2). 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 was based.

Instead, Rule 13 notes that Rule 10 governs the contents

of a Tax Court appellate record, and that rule does not

require the record to include any preliminary findings or

reports. FED. R. APP. P. 13 & 10(a)6
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 11

01-4321, 01-4322, & 02-1220

6 (...continued)

district court and district clerk are to be read as referring to the Tax Court and its clerk.

FED. R. APP. P. 13(d)(1). And Federal Rule of Appellate Procedure

10 provides in relevant part:

(a) Composition of the Record on Appeal. The following items

constitute the record on appeal:

(1) the original papers and exhibits filed in the district

court;

(2) the transcript of proceedings, if any; and

(3) a certified copy of the docket entries prepared by the

district clerk.

FED. R. APP. P. 10(a).

With these considerations in mind, we find that the

relationship between the preliminary reports of STJs and

the final, reviewable “decisions” of the Tax Court bears

striking resemblance to the relationship between reports

of “divisions” of the Tax Court and final decisions of the

Tax Court itself. A “division” is a subset of the Tax Court

(often a single judge) that is designated to hear a single

case and is empowered to make determinations with respect to disputes before the Tax Court. 26 U.S.C. §§ 7444(c),

7460(a). Under § 7460, the division’s decision generally

becomes the decision of the Tax Court, but the Tax Court

retains the power to review the division’s decision and

render its own. Those preliminary recommendations of

the division which do not become part of the final decision

of the Tax Court also do not become part of the record for

any additional future review. Id. § 7460(b) (“The report

of a division shall not be a part of the record in any case in

which the chief judge directs that such report shall be

reviewed by the Tax Court.”).
12 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

Thus, the two circuits to have interpreted § 7460 have

ruled that a division’s preliminary report is not part of the

appellate record and not available for review by a federal

appeals court once the Tax Court has undertaken an

internal review. See Estate of Varian v. Comm’r, 396 F.2d

753, 755 n.2 (9th Cir. 1968); Heim v. Comm’r, 251 F.2d 44,

48 (8th Cir. 1958). The Ninth Circuit noted a congressional intent in § 7460 to preclude a two-tier appellate

relationship between the division and the full court

and determined that such a mandate did not offend the

court’s notions of fundamental fairness. Varian, 396 F.2d

at 755 n.2.

Given the similarities between these two relationships,

we are led to the same conclusion that the Ninth Circuit

reached in Varian: there is no two-tier appellate relationship between STJs and the Tax Court. Instead, STJ

reports are treated by the Tax Court as preliminary

findings only and, in accordance with applicable rules

and statutes, are not required to be made part of the record on appeal.

The dissent takes issue with this comparison, noting

that divisions are comprised of one or more Tax Court

judges, who are all presidentially appointed and serve a

fifteen-year, statutorily mandated term of office from

which they can be removed only for “inefficiency, neglect

of duty, or malfeasance in office but for no other cause.” 26

U.S.C. § 7443(f). STJs, however, serve at the discretion of

the Chief Judge and have no statutorily mandated term of

office. Id. § 7443A. If Tax Court Rule 183 provides for a

quasi-collaborative process, the dissent fears this distinction between the participants impairs the judicial

independence of the STJ. As a result, the dissent questions whether an STJ can participate meaningfully in

this internal deliberative process. See post at 87.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 13

01-4321, 01-4322, & 02-1220

We respectfully disagree. We are hesitant to suggest that

members of the Tax Court would either expressly coerce

or by nature of their office exert undue influence over an

STJ. Nor will we discredit an STJ’s express statement that

the final Tax Court opinion “agrees with” his own based

solely on this observed distinction.

This procedure, while admittedly unusual vis a vis typical judicial procedure, does not offend our notions of

fundamental fairness. See Varian, 396 F.2d at 755. In this

respect, we agree with the dissent’s conclusion that

due process neither requires the Tax Court to be constrained by a formal degree of deference to the STJ nor

requires the Tax Court to rehear witnesses whether or not

it ultimately reverses the STJ’s findings. See post at 89-94

(discussing United States v. Raddatz, 447 U.S. 667 (1980)

and Universal Camera Corp. v. NLRB, 340 U.S. 474, 492-94

(1951)). Although dictum in the Supreme Court’s decision

in Raddatz suggests that “serious questions” may arise

from a district court’s reversal of a magistrate judge’s

credibility findings without the opportunity to personally

see or hear the witnesses, see 447 U.S. at 681 n.7, that

observation was made within the context of a criminal

appeal. In a civil tax proceeding, a party’s interests are

more akin to those at stake in a typical administrative adjudication, and we agree with the dissent that

the risk of erroneous deprivation in a civil proceeding is

neither “as high, nor the costs as great, as would be the

case in a criminal milieu.” See post at 93 (discussing Tax

Court Rule 183 within the procedural-due-process framework established by Matthews v. Eldridge, 424 U.S. 319,

333 (1976)). Moreover, we agree that the “only fully responsive remedy” to Kanter’s complaint would prove

unworkable, as it would require the enormous burden

and prohibitive cost of rehearing witnesses, which would

ultimately prove to add little value given the continued
14 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

input that the STJ retains under Tax Court Rule 183’s

purportedly quasi-collaborative process. See post at 93-94.

But the recognition that little value would be added to

the process given the STJ’s continued involvement—

signified by his adoption of the statement that the final

Tax Court opinion reflects his own opinion—is ultimately why we take issue with the dissent’s conclusion

that our review of the Tax Court’s opinion is unconstitutionally impaired by this procedure. The conclusion rests

on the premise that STJs do not enjoy an equal voice in

this purportedly quasi-collaborative process. See post at

100-02. As discussed above, we reject this premise. In as

much as the final Tax Court opinion purports to agree with

and adopt the opinion of the STJ, we therefore believe that

the final opinion reflects the true legal opinions and

findings of the STJ. Any differing preliminary recommendations—if they ever existed—would no longer be constitutionally relevant because the STJ has abandoned them.

Should he feel otherwise, we would expect him—or the Tax

Court—to say so.

As the Eleventh Circuit recently noted, “there is nothing unusual about judges conferring with one another

about cases assigned to them.” Ballard, 321 F.3d at 1043.

If Tax Court Rule 183 in fact provides the opportunity for

STJs and Tax Court judges to conference regarding the

STJ’s preliminary findings, then we have every reason to

believe that Tax Court judges would duly regard the input of the STJ and that he, in turn, would participate

meaningfully in the exchange. Like the Ninth and the

Eleventh Circuits, we too are loath to interfere with another court’s deliberative process. See id.

In any event, the issue is academic since the Tax Court’s

opinion in this case purports to “agree with and adopt”

Special Trial Judge Couvillion’s opinion. We will take the
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 15

01-4321, 01-4322, & 02-1220

7 As the Tax Court opinion notes, there were additional sets

of transactions that involved only Lisle and Kanter during

Lisle’s post-Prudential career at Traveler’s Insurance Company

as well as transactions involving Kanter alone. IRA, 78 T.C.M.

(CCH) at 970-71. These transactions followed the same pattern

detailed here where Kanter used his influence to secure business opportunities for individuals in return for compensation

that was then diverted through a series of entities in order to

disguise the origin of the funds and avoid income tax liability. For

the sake of simplicity we will refer only to the transactions

involving Prudential and the Five as representative of all of the

transactions detailed by the Tax Court.

Tax Court at its word and, thus, move on to a discussion on

the merits of Kanter’s appeal.

II. Fraud

A. Facts

The bulk of the Tax Court’s opinion involves its determination that certain income tax underpayments were

made with fraudulent intent. The facts surrounding the

fraud issue are the most complex of all and will be described as succinctly as possible.

The Tax Court’s decision tells a story of Kanter and

two business associates—Robert Lisle and Claude Ballard.

Lisle and Ballard worked in real estate, principally as

managers in the real estate division of Prudential Insurance Company, where they had significant authority and

influence over the conduct of Prudential’s business. Kanter,

Lisle, and Ballard concocted a plan whereby they would

use Lisle and Ballard’s positions along with Kanter’s legal

skills to collect and hide payments from people who

wanted to do real estate business with Prudential.7
16 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

8 The Five were J.D. Weaver, Bruce Frey, William Schaffel,

Kenneth Schnitzer, and John Eulich. The details of the transactions involving the Five are in the Tax Court opinion at 78 T.C.M.

(CCH) at 976-1019.

9 IRA was originally incorporated in 1974 in Delaware as Cedilla

Co. It was intended as a vehicle for making investments. Cedilla

changed its name to Investment Research Associates in 1979.

IRA owned as relevant subsidiaries, at various times, Carlco, TMT

and BWK, Inc. IRA conducted no business and had no employees other than bookkeepers and paid virtually no amount

in salaries.

The Tax Court focused on five individuals (referred to

collectively as the Five) who paid Kanter, Lisle, and Ballard for their influence.8

 For the Five, Lisle and Ballard

would help secure business opportunities with Prudential,

and in return the Five made payments, including cash

and partnership interests, to Kanter.

It was at this point that the IRS became interested.

According to the Commissioner these payments were

diverted (the Commissioner and Tax Court use the more

highly charged word “laundered”) to entities created

by Kanter or someone acting at Kanter’s direction. The

dominant method was to divert payments to a Kantercontrolled corporation called Investment Research Associates, Ltd (IRA).9

The payments to IRA were deposited in the accounts

IRA kept with another Kanter-controlled entity called the

Administration Company. The Administration Co. was

exactly what its name indicates: a company that administered the records and funds of its clients. It maintained books and records for its clients, and often prepared

client tax returns. Additionally, it administered client

funds, collecting receivables and paying bills. Money for

clients was kept in pooled bank accounts listed under
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 17

01-4321, 01-4322, & 02-1220

10 In 1988, the Administration Co. filed for bankruptcy. Concurrently, a company called Principal Services was organized, and

took over many of Administration Co.’s clients, operating with

the same purposes and in the same way as had Administration

Co.

Administration Co.’s name. Two of these accounts were

called the Special E account and the TACI Special Account.

Client funds were pooled in order to get the higher rate

of return on aggregated funds and to avoid a multiplicity

of account maintenance charges on many, smaller client

bank accounts kept in the clients’ individual names.

Administration Co. itself (and not the bank where the

accounts were kept) tracked individual client balances

within the pooled accounts on its internal records for

each client. IRA and many of its subsidiaries were clients

of Administration Co.10 In fact, it does not appear that

Administration Co. had any significant clients not directly associated with (or controlled by) Kanter.

The payments by the Five to IRA that were deposited

in the accounts of the Administration Co. were commingled with other non-Five-related funds of IRA as well

as the funds of other Administration Co. clients. This

commingling and the inadequate record keeping of Administration Co. made it difficult to track or account for the

payments from the Five.

It was IRA—and not Kanter, Lisle, or Ballard—that

reported the income from the Five’s payments on its tax

return (where it was off-set by aggregated losses). Subsequently, IRA distributed the income into subsidiary

“sham” corporations, BWK, Carlco, and TMT, controlled

by Kanter, Lisle, and Ballard, respectively, in a 10/45/45

ratio, respectively, that represented the division of

the payments allegedly agreed to by Kanter, Lisle, and
18 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

11 Carlco, TMT, and BWK were “shelf” corporations formed by

Kanter in 1982. In 1983, they became active, and IRA acquired

100% of the common stock of each. In 1984, each corporation

issued shares of preferred stock. Carlco issued its preferred shares

to the Christie Trust, a trust established by Kanter for the benefit

of Lisle’s family. TMT’s preferred shares were issued to the

Orient Trust, established by Kanter for the benefit of Ballard’s

family. BWK’s preferred shares were issued to the BK Children’s

Trust, established for the benefit of Kanter’s family. As part of

the scheme, Lisle controlled Carlco’s investment decisions, Ballard controlled TMT’s and Kanter controlled BWK’s.

12 The actions summarized in these few sentences took place over

many years.

Ballard.11 These sham corporations were used, in effect, as

the personal bank accounts of Kanter, Lisle, and Ballard,

and these men could withdraw or use the funds contained in them at their leisure.12 The funds withdrawn

were never repaid and were eventually written off as bad

debts. Alternatively, the controlled corporations’ funds

were used to fund the personal expenditures of Kanter,

Lisle, and Ballard, as well as their families.

Kanter, on the other hand, argues that the payments

to the corporations were merely investments by the entities, “ceded” to them by Kanter. The underlying scheme

of securing business opportunities for the Five interested

individuals in return for payments to Kanter (through

Kanter entities) is disputed in its entirety by Kanter.

The Commissioner argued, and the Tax Court agreed,

that this income was properly taxable to the individuals,

and a deficiency was assessed. The Tax Court held that

the diversion of these funds from the individuals to the

sham corporations was undertaken with the fraudulent

intent to evade the payment of taxes. According to the

Tax Court, this arrangement not only disguised income
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 19

01-4321, 01-4322, & 02-1220

earned by the individuals, but also hid their activities

from Prudential.

In the Tax Court, Kanter presented an impressive list

of witnesses associated with Kanter, Lisle, Ballard, the

Five, and the various relevant entities—all of whom

expressly denied that the Five paid “kickbacks” to Kanter

for steering business the Five’s way. But the Tax Court

found that these witnesses had testified that the Five had,

in fact, entered into payment arrangements with Kanter,

Lisle, and Ballard in exchange for their influence in

obtaining business. IRA, 78 T.C.M. (CCH) at 1065. This

testimony established that Kanter had not reported income on which he was taxable and had therefore underpaid his federal-income-tax obligations. The Tax Court

found that these underpayments were undertaken with

intent to evade taxes based on, inter alia, the following

factors: the lack of credibility of Kanter’s testimony;

Kanter’s legal education and experience indicating an

awareness of his obligation to report income accurately

and pay taxes; Kanter’s substantial underreporting of

income for many years; Kanter’s creation of a complex

laundering network of sham corporations and other entities that made it difficult to trace the flow of funds;

Kanter’s lack of cooperation with the IRS—namely, the

withholding of documents and the destruction of documents subject to summonses; Kanter’s commingling of

“kickback” monies with other monies in the Administration

Co.’s accounts; Kanter’s movement of monies through

conduits that had no legitimate business purpose showing an intent to disguise sources of funds; Kanter’s reporting of his personal income on the tax returns of IRA

in order to create the appearance that income was earned

by IRA; and Kanter’s use of phony loans to disguise distributions to himself, later written off as bad debts. IRA, 78

T.C.M. (CCH) at 1083-85.
20 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

B. Analysis

A finding of fraud by the Tax Court is a factual finding

that we review for clear error. Toushin v. Comm’r, 223 F.3d

642, 647 (7th Cir. 2000). As with all findings of fact of

the Tax Court, we must view the evidence in the light

most favorable to the Tax Court’s findings and reverse

only if we are left with the definite and firm conviction

that a mistake has been made. Pittman, 100 F.3d at 1312-

13.

To establish fraud, the Commissioner must prove by

clear and convincing evidence that Kanter’s underpayment

of taxes was done with intent to evade taxes that he

knew or believed were owed. Toushin, 223 F.3d at 647;

Pittman, 100 F.3d at 1319. Fraud may be proven through

circumstantial evidence. Pittman, 100 F.3d at 1319. There

are a variety of commonly recognized indicia of fraud, “such

as keeping a double set of books, making false entries

or alterations, [using] false invoices or documents, [destroying] books or records, [concealing] assets or covering up

sources of income, handling . . . one’s affairs to avoid

making the records usual in transactions of the kind, and

[undertaking] any conduct, the likely effect of which

would be to mislead or to conceal.” Spies v. United States,

317 U.S. 492, 499 (1943). Additionally, fraud can be shown

by significant and repeated understatement of income,

Pittman, 100 F.3d at 1320, by a lack of cooperation with

investigating agents, Korecky v. Comm’r, 781 F.2d 1566,

1568-69 (11th Cir. 1986); Zell v. Comm’r, 763 F.2d 1139,

1146 (10th Cir. 1985), by destruction of records, Powell v.

Granquist, 252 F.2d 56, 59 (9th Cir. 1958), or by considering the legal experience and education of the taxpayer,

Plunkett v. Comm’r, 465 F.2d 299, 303 (7th Cir. 1972).

Kanter’s principal argument is based on the representation he makes above concerning the STJ’s report: Kanter
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 21

01-4321, 01-4322, & 02-1220

and his witnesses were found credible, and his story was

believed by the STJ. Therefore, there can be no finding

of intent to defraud. It was, Kanter alleges, only the

rejection of the STJ’s findings by the Tax Court judge

that led to the finding that Kanter was not credible and

that the underpayment of taxes was accomplished with

fraudulent intent. As discussed above, we refuse to credit

Kanter’s allegations in light of the Tax Court’s statement

that it “agrees with and adopts” the opinion of the STJ.

Therefore, Kanter’s principal argument is without merit.

The Tax Court found that Kanter’s testimony was not

credible and also found significant circumstantial indicia

of fraud. Kanter’s arguments now do not demonstrate

that this is clearly erroneous.

Kanter’s remaining arguments are also meritless. He

argues that it is a common estate planning technique to

cede personal investments to family trusts and corporations. But he does nothing to undermine the considerable evidence cited by the Tax Court that demonstrates

that the Five paid for Kanter, Lisle, and Ballard’s help

in securing business opportunities, and that those payments went through IRA to Carlco, TMT, and BWK for

division of the proceeds in a 10/45/45 split. And inasmuch as this argument seeks to show a lack of fraudulent

intent by attacking the existence of a deficiency, this

argument was expressly waived by Kanter.

Additionally, Kanter argues that fraud was raised by

the respondent late in the process by the Commissioner’s amendment to his Answer, that none of the Commissioner’s notices of deficiency indicated fraud and that

IRS agents’ reports had found no intent to defraud. While

the Tax Court might have found this persuasive when, as

the trier of fact, it considered the issue of fraud, this

argument is unpersuasive at this stage. Kanter does not

argue that the Commissioner’s amendment was improp-
22 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

erly allowed or otherwise defective. Nor is the Commissioner’s delayed amendment particularly probative of

the sufficiency of the fraud evidence, given the difficulties facing the Commissioner in unraveling the relevant transactions during the time leading up to (and

during) the trial.

Finally, Kanter’s attacks on the circumstantial indicia

of fraud are little more than efforts to recharacterize the

evidence in a manner favorable to Kanter’s version of

events. But a review of the record in the light most favorable to the Tax Court’s findings makes clear that it

was not clear error to find significant indicia of fraud.

To review just a few of the relevant indicia: first and

foremost, even Kanter concedes that he significantly

underreported his income from the transactions with

the Five over many years. (Pet. Br. at 33.)

Second, the money earned by Kanter through the transactions with the Five was diverted to IRA and commingled

with other monies, where the funds were reported as

income earned by IRA, before ultimately becoming available to Kanter personally—a complicated money trail

that made it difficult to trace the flow of the funds and

gave the appearance that the money had been earned by

IRA.

Third, there was evidence that Kanter and those acting

at his behest did not cooperate with investigating agents

and even destroyed records that the IRS had requested

formally through its summons power. See 26 U.S.C. § 7602.

James Lunk, an IRS Case Manager, was asked during

his testimony at trial what records Kanter and his representatives had provided voluntarily, to which he responded, “Generally they were records that really wouldn’t

do us a lot of good in the examination in terms of really

getting at the type of information we needed to examine
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 23

01-4321, 01-4322, & 02-1220

13 Kanter’s argument that the documents were destroyed according to a standard document retention policy is unpersuasive. The

existence of a document retention policy, which appears to have

been enforced inconsistently, cannot justify the destruction of

documents that were already subject to an IRS summons.

Further, we agree with the Tax Court and believe that it is

clear from the record that Linda Gallenberger (Kanter’s accountant and Administration Co. employee) and Solomon Weisgal

(Kanter’s associate and trustee/officer for various Kanter entities)

acted at the direction of Kanter.

the transactions that we were most interested in.” (Tr. at

1055-56.) IRS Agent Paul Dion testified similarly:

I have some very direct recollection[s] of the meeting,

because it was the first time I met Mr. Kanter. And at

the very beginning of the meeting, we discussed some—

had a very nice conversation relating to very general

type[s] of topics. I remember art was one of them, and

a few other generalities. And as soon as we started

discussing the required documentation, it was almost

as if a different person appeared. And that person

became, I guess, very demonstrative in terms of not

wanting to provide us with the information that we

asked for; basically saying that he was going to frame

the issue and not us.

(Tr. at 831-32.) The Commissioner had to seek the assistance of the district court in order to enforce summonses against Kanter seeking documents relevant to

the present case. The district court, in two separate rulings, indicated that Kanter had not cooperated and that

documents had been destroyed even after the IRS summonses for those documents had been issued.13 The court

stated that

[Solomon] Weisgal testified that since [receiving a

summons to compel production of documents], some of
24 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

the BK documents, including summoned documents

relating to the Kanters, had been turned over to the

Administration Company and that some have been

discarded as part of a three-year record retention and

discard policy. . . . [Linda] Gallenberger testified that

she disposed of some documents [related to Kanter]

after receipt of the IRS summons.

United States v. Administration Co., 74 A.F.T.R.2d 94-5252,

1994 WL 240518, at *2 (N.D. Ill. May 31, 1994). The district court went on to note that

The facts are that the Kanters first promised to produce the documents sought from [entities involved

in the present case] and then, in early February 1994,

notified government counsel that the Entities were

third-parties over whom they had no control. The

eleventh-hour change of position by the Kanters is

indicative of bad faith on the part of the Kanters.

Id. at *3. Less than a month later, the same judge held

Gallenberger in contempt for a continuing failure to comply fully with IRS summonses. United States v. Administration Co., 74 A.F.T.R.2d 94-5256, 1994 WL 285064, at *2

(N.D. Ill. June 23, 1994) (“Gallenberger misconceives her

duty to use all reasonable efforts to comply with the

summonses. A half-hearted request and cursory further

search are insufficient.”) (internal quotations and citations omitted).

These and the other indicia cited by the Tax Court, when

considered in a light favorable to the Tax Court’s findings, paint a clear and convincing picture of an intent by

Kanter to evade the payment of taxes he knew or believed that he owed. It was not clearly erroneous for the

Tax Court to find that Kanter’s underpayment of taxes

involved fraud.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 25

01-4321, 01-4322, & 02-1220

III. Bea Ritch Trusts

A. Facts

The Bea Ritch Trusts (BRT) are a group of twenty-five

trusts established in 1969 under one trust document. The

trust document named Beatrice Ritch, Kanter’s mother,

as the grantor of BRT, Kanter’s friend and business associate Solomon Weisgal as the trustee and the members

of Kanter’s family as the beneficiaries. According to the

trust document, Beatrice Ritch funded each of the separate BRT trusts with a $100 check. No evidence (beyond the trust document itself) was presented to substantiate that this actually happened. Kanter himself

was originally named as a beneficiary of twenty-four of

the twenty-five trusts and he alone was granted a power

of appointment over the beneficial interest of BRT. Kanter

allegedly renounced his interest in BRT in 1971, 1977, and

1978, thereby purportedly eliminating his power of appointment over BRT. At sometime during or before 1987,

however, sixty new beneficiaries were added to BRT.

Before 1987, Kanter borrowed money from BRT, and as

of January 1, 1987, Kanter still owed the trust $287,030.

This debt does not appear to have been secured, nor is

there any indication in the record that a reasonable interest rate (if any) was charged on the loans.

In the early 1970s Kanter participated in business

ventures in Long Island, New York, involving the then

nascent cable television industry. He and other members

of his law firm helped an entity that eventually became

Cablevision Co. raise funds, secure financing and find

investors for its cable business. In return, Kanter (along

with others) was to receive interests in partnerships that
26 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

14 We speak in generalities in order to avoid further confusing

the situation by expanding the alphabet soup of partnership and

trust abbreviations, whose exact identities are not necessary to

explain the factual background of this issue. The Tax Court’s

opinion fully identifies all the relevant entities. See IRA, 78

T.C.M. (CCH) at 1093-1100. We will simply refer to the partnership interests transferred to IRA for Kanter’s services to

Cablevision as the Cablevision partnership interests.

15 The partnerships in which BRT was a partner sold their

respective interests in Cablevision itself, triggering a capital

gain to the partnerships that then flowed-through to BRT. See

IRA, 78 T.C.M. (CCH) at 1093.

themselves owned interests in Cablevision.14 Kanter

arranged to have BRT receive the Cablevision partnership

interests to which he was entitled—in essence he contributed the Cablevision partnership interests to BRT. The

Tax Court found that the contribution of Kanter’s Cablevision partnership interests (along with other income

and assets) to BRT was the principal source of funding

for BRT. Kanter, therefore, was the true grantor of BRT.

IRA, 78 T.C.M. (CCH) at 1098-99.

In 1987, BRT reported capital gains of $2,033,368 for the

fiscal year ending September 30, 1987, from the sale of

the Cablevision partnership interests owned by BRT.15

Because Kanter was the true grantor of BRT and because

he had a power of appointment to name beneficiaries of

BRT, the Commissioner assessed a deficiency for the

year 1987 against Kanter with respect to BRT’s income

from the Cablevision sale. At trial, the evidence made

clear that the income at issue had been earned during the

calender year 1986, and the Commissioner sought to

amend his pleadings and reallocate the BRT deficiency

from 1987 to 1986. The Tax Court allowed the amendment, and denied Kanter’s request to shift the burden of
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 27

01-4321, 01-4322, & 02-1220

proof to the Commissioner for having raised a “new matter.”

See Tax Court Rule 142(a)(1).

The Tax Court found that Kanter had failed to prove

that he did not fund BRT and, despite his three renunciations of any beneficial interest in BRT, that he had not

appointed the 60 new beneficiaries. As a result, the Tax

Court held Kanter liable for tax on BRT’s income for 1986

and 1987 under the IRC’s grantor trust provisions. 26

U.S.C. §§ 671, 674. The Tax Court also found that, in the

alternative, Kanter’s borrowing of trust funds made him

taxable on BRT’s income. See 26 U.S.C. § 675(3).

B. Analysis

1. Was the allowance of the amendment proper?

Kanter’s first argument concerns the Tax Court’s allowance of an amendment of the pleadings to conform to

the proof that the alleged deficiency relating to BRT applied to 1986 rather than to 1987. Kanter argues that it

was error to allow this amendment at all, and that, once

allowed, the Tax Court further erred by not treating this

as a “new matter” under Tax Court Rule 142(a), which

would have shifted the burden of proof on the issue to

the Commissioner.

The decision to allow or deny an amendment of the

pleadings under Tax Court Rule 41 is reviewed for abuse

of discretion. See Estate of Ashman v. Comm’r, 231 F.3d

541, 542 n.2 (9th Cir. 2000); LeFever v. Comm’r, 100 F.3d

778, 786 (10th Cir. 1996); Braude v. Comm’r, 808 F.2d 1037,

1039 (4th Cir. 1986). It was not an abuse of discretion

for the Tax Court to allow the amendment of the Commissioner’s pleadings to reallocate the BRT deficiency

to 1986. Kanter was on notice as to the specific partnership income of BRT that was the subject of the assessed
28 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

16 A fair reading of the trial transcript is that Kanter’s strategy

regarding the BRT income was from the beginning to demonstrate

that the income in question had been earned in 1986, not 1987,

and to try to shift the burden of proof to the Commissioner

in precisely the manner argued here. (Tr. at 4455-4501.) With

Kanter’s clear advance knowledge of the calender mistake and

his apparent strategic decision regarding that mistake, we find

it hard to believe Kanter when he says this “was not an issue

that Kanter was prepared to defend at trial”—except inasmuch

as this statement may reflect Kanter’s belief at trial that a

shifting of the burden of proof to the Commissioner would obviate any need to mount a substantive rebuttal defense.

deficiency. (Tr. at 4483-86.) There was no prejudice to

Kanter in the adjustment of the date, and he had a fair

opportunity to defend with respect to the amended claim.

In fact, it was Kanter, and not the government, who elicited the testimony (from Kanter’s accountant, Gallenberger) that revealed the timing error and prompted the

government’s request for amendment.16 The government apparently did not realize its error until Kanter

pointed it out at trial. Further, Kanter points to no additional evidence that he was prevented from introducing

by virtue of the late amendment. The amendment of the

pleadings to conform to the evidence was proper.

2. Should the amendment have shifted the burden

of proof?

Kanter argues next that the amendment to the pleadings was a new matter that shifted the burden of proof

on this issue to the Commissioner. See Tax Court Rule

142(a)(1) (“The burden of proof shall be upon the petitioner,

except . . . that, in respect of any new matter, . . . it shall

be upon the respondent.”). The distribution of burdens is

a question of law that we review de novo. This argument
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 29

01-4321, 01-4322, & 02-1220

17 The Commissioner appears to be offering to split the baby

with respect to the burden of proof issue by conceding that he

bears the burden to prove that BRT actually had taxable income

in the form of capital gains in 1986, but claiming he has met

that burden. There can be no serious dispute that the monies

in question were reported as earned in 1986 by BRT. It was

Kanter’s own accountant, Gallenberger, who, on redirect by

Kanter, provided the testimony with respect to this fact. (Tr. at

4455-4501.) The only substantive issue in dispute is Kanter’s

status as grantor and owner of BRT under the IRC’s grantor

trust provisions, a theory unaffected by the amendment.

fails as well. The Commissioner is allowed the latitude

to amend his pleadings and even adopt entirely new

theories supporting assessed deficiencies without triggering Rule 142’s shift in burden, so long as the new theory

is not inconsistent with the original allegation, does not

require new evidence in its support, nor increases the

amount of the deficiency. See, e.g., Friedman v. Comm’r, 216

F.3d 537, 543 (6th Cir. 2000) (“A new position taken by

Commissioner is not necessarily a ‘new matter’ if it merely clarifies or develops Commissioner’s original determination without requiring the presentation of different

evidence, being inconsistent with Commissioner’s original

determination, or increasing the amount of the deficiency.”);

Abatti v. Comm’r, 644 F.2d 1385, 1390 (9th Cir. 1981)

(same); Achiro v. Comm’r, 77 T.C. 881, 890 (1981) (same).

The problem for Kanter is that the Commissioner’s

amendment did not offer a new theory for the alleged

deficiency. The theory under which the Commissioner

proceeded at all times was that specific transactions

produced taxable income that was reported by BRT but

which was properly taxable to Kanter by virtue of the

grantor trust provisions of the tax code.17 The case relied

upon by Kanter here supports our conclusion. Achiro
30 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

18 This should obviously not be read to preclude the possibility

that an amendment of the Commissioner’s pleadings to shift

an assessed deficiency from one year to another would result in

a shifting of the burden under Rule 142(a)(1). But where, as here,

the amendment results from a good faith error in the timing

of when specific income was earned from specific transactions

and does not involve any change in the underlying theory of the

deficiency, there is no shifting of the burden of proof to the

Commissioner.

involved an amendment under which the Commissioner

alleged for the first time that a deduction was improper

under a section of the tax code completely different from

the section originally argued. 77 T.C. at 889-90; see also

Shea v. Comm’r, 112 T.C. 183, 190-92 (1999). The Commissioner’s amendment here presented a much more modest change, more akin to a clarification of the original allegation. Nor is Kanter correct when he alleges

that the amendment increased the assessed deficiency.

The stated deficiency remained constant, and involved

the same income from the same transactions, but was

re-allocated from one disputed year to another disputed

year to correct a calender error that did not prejudice

Kanter’s case.18 The Commissioner did not propose additional income nor require Kanter to defend against a

larger deficiency than had been assessed before the amendment. Therefore, it is incorrect to claim that the amendment resulted in “an entirely new and increased deficiency in a different year.” (Pet. Br. at 46 (emphasis in original).) The Tax Court was correct in determining that the

amendment did not shift the burden of proof to the Commissioner.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 31

01-4321, 01-4322, & 02-1220

3. Kanter was the grantor of BRT

Although Kanter argues principally that the Commissioner should have borne the burden of proving that Kanter

was the grantor and owner of BRT, and that the Commissioner could not meet that burden, Kanter maintains

that, regardless of burden, he is not taxable on BRT’s

income under the IRC’s grantor trust provisions. A finding

of grantor status is a factual finding that we review for

clear error. Scott v. Comm’r, 226 F.3d 871, 874 (7th Cir.

2000). Kanter has failed to show that the Tax Court’s

decision was clearly erroneous.

Despite the trust document’s showing that Beatrice

Ritch was the grantor of BRT, the familiar principle of

substance over form views as the true grantor the one

who principally funded the trusts. Schulz v. Comm’r, 686

F.2d 490, 496 (7th Cir. 1982); United States v. Buttorff, 761

F.2d 1056, 1060-61 (5th Cir. 1985). In Schulz, for example, the petitioner’s wife was considered the grantor of

a family trust because both the Commissioner and this

court disregarded the conveyance of the wife’s assets,

which were subsequently used to fund the trust in question, to the petitioner. 686 F.2d at 496. The wife, in substance, provided the funds for the trust, and the form of

the funding, by routing the funds through the petitioner,

was ignored. Similarly, although Kanter was not listed

in the trust document as a grantor, and, even if Beatrice

Ritch actually did contribute $100 towards the funding

of each BRT trust, there is evidence that Kanter contributed to BRT income and assets he earned, to substantially

fund the twenty-five trusts.

The Tax Court found that Kanter transferred to BRT

income and assets associated with his services in the

Cablevision transactions as well as others. IRA, 78 T.C.M.

(CCH) at 1098. Kanter provided no evidence (other than
32 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

the trust document itself) to show that Beatrice Ritch

actually funded the trusts nor any evidence to show from

whence the substantial assets owned by BRT originated.

Kanter’s assertion that he merely ceded investment opportunities in Cablevision to BRT does nothing to undermine the Tax Court’s findings and, further, depends on

his credibility, which the court found to be lacking. Because Kanter was the principal source of the funding of

BRT, he is deemed a grantor of BRT. See 26 C.F.R. § 1.671-

2(e)(1) (“[A] grantor includes any person to the extent

such person either creates a trust, or directly or indirectly

makes a gratuitous transfer . . . of property to a trust. . . .

If a person creates or funds a trust on behalf of another

person, both persons are treated as grantors of the trust.”).

Kanter argues that the Tax Court’s finding that he

was the grantor is directly contrary to an Illinois trial

court decision, in which the Cook County Circuit Court

determined that the Cablevision partnership interests

did not constitute property of Kanter’s law firm because

they did not result from payment of fees for legal services.

Statland v. Levenfeld, No. 84 CH 6494 (Ill. Cir. Ct., Ch. Jan.

28, 1988). Kanter argues that (a) the state court ruling stands for the proposition that the Cablevision partnership interests were not in payment for any services

(not just legal services) but were rather investments

and (b) the state court ruling is determinative and binding on the matter. Kanter overstates the holding of the

cited case. The case involved a former law partner of

Kanter, who alleged that the Cablevision partnership

interests were the property of the partnership because

they were provided in payment for legal services. The

Illinois court disagreed and held that the Cablevision

partnership interests were not the product of legal fees

paid to Kanter’s law firm. The court did not hold, however, that the Cablevision partnership interests were not
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 33

01-4321, 01-4322, & 02-1220

19 The new beneficiaries were all trusts—named and numbered

variations of “JSK Trust.” IRA, 78 T.C.M. (CCH) at 1094-95.

in payment of fees for services furnished by individual

law firm partners in securing financing and investors

for Cablevision, which is what the Commissioner alleges

here. The trial court did, at various times, refer to the

Cablevision partnership interests as individual investments, but it also spoke of the activities of Kanter and

his partners in working to obtain financing and investors

for Cablevision. None of these dicta contradicts the position of the Commissioner nor renders the factual findings

of the Tax Court clearly erroneous.

4. Kanter was the substantial owner of BRT

Generally, if a grantor of a trust has the power to dispose of the beneficial enjoyment of that trust through a

power of appointment, then the grantor is treated as the

owner of the trust and the income of the trust must

be included in the income of the grantor. 26 U.S.C. §§ 671,

674(a); 26 C.F.R. § 1.674(a)-1. Kanter argues that he three

times renounced his beneficial interest in BRT and, by

those renunciations, lost the power of appointment that

he had under the trust document. But the Tax Court notes

that, after the third of Kanter’s renunciations, sixty new

beneficiaries were added to BRT.19 Kanter was the only

person who ever had the power under the trust document

to appoint new beneficiaries. The most logical inference

(which the Tax Court drew) is that Kanter himself appointed the new beneficiaries and that his earlier renunciations were shams. Kanter fails to rebut this. Kanter’s only

argument directly on this issue appears in his reply brief,

in which he argues that the Tax Court improperly refused

to reopen the record to admit evidence that Kanter’s
34 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

20 A possible logical alternative argument not made by Kanter

(because, we must assume, it is not valid) is that the appointments were made by Weisgal under some power he possessed

as trustee. The Tax Court, the Commissioner and Kanter all

spend significant time arguing whether Weisgal is or is not an

independent and adverse trustee. An affirmative determination

of that question would be necessary if Weisgal were to have

appointed the sixty new beneficiaries or if Kanter were able to

prove that he (Kanter) did not appoint them. Because we find

that the Tax Court’s determination that Kanter exercised a

power of appointment was not clearly erroneous, we need not

consider whether or not Weisgal was an independent and adverse trustee of BRT.

children were the grantors of the various JSK Trusts that

had been added as beneficiaries of BRT.20 (Reply Br. at 18.)

This purported evidence would not be probative of the

issue whether Kanter had exercised the power of appointment under BRT. The Tax Court’s findings that Kanter

was the grantor of BRT and that he held a power of appointment of beneficiaries of BRT were not clearly erroneous. Therefore, the Tax Court’s finding that Kanter is

taxable on BRT’s income in 1986 (and 1987) is also not

clearly erroneous.

As an alternative, the Tax Court also found that Kanter’s

borrowing from BRT without repayment and without

adequate security subjected Kanter to liability for BRT’s

income. See 26 U.S.C. § 675(3) (“The grantor shall be

treated as the owner of any portion of a trust in respect of

which . . . . [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.”). It appears undisputed that

Kanter had borrowed money from BRT in a way that

subjects him to liability under § 675(3), and that at the

beginning of 1987 he still owed BRT $287,030. This would
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 35

01-4321, 01-4322, & 02-1220

21 The existence of these facts, however, would raise an additional

issue, which we will not attempt to resolve today. Would we, as

Kanter claims, need to analyze the amount of the loans in relation

to the trust’s income during the years the loans were made and

from that determine what portion of the trust income from 1987

is attributable to Kanter? See Bennett v. Comm’r, 79 T.C. 470,

484-85 (1982). Or can we, as the Commissioner urges, merely

consider the significant amount of the loans as indicative of

Kanter’s total control over BRT’s income and therefore attribute

all of the income for 1987 to Kanter? See Benson v. Comm’r, 76

T.C. 1040, 1047-48 (1981).

22 John Trumbull was a painter of scenes and individuals from the

time of the founding of the United States. He is, perhaps, most

well known to the general public as the painter of the famous

“Declaration of Independence” painting that dramatized (more

(continued...)

be sufficient for Kanter to incur liability for 1987.21 There

are, however, no findings by the Tax Court as to any

amount Kanter owed to BRT as of January 1, 1986. Therefore, there could be no tax liability for Kanter in 1986

based on § 675(3). In the end this conclusion does not

affect ultimate tax liability because under § 674 Kanter

remains liable for both 1986 and 1987.

In conclusion, we affirm the Tax Court’s determination

that Kanter was the grantor of BRT in 1986 and 1987 and

is taxable on BRT’s income for those years.

IV. George Washington Painting

A. Facts

In 1980, Kanter was approached by Richard Feigen, a

client, who wanted help in securing funding to buy a

painting of George Washington located in England that

Feigen believed to be by John Trumbull.22 Kanter put
36 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

22 (...continued)

accurately, fictionalized) the scene of the signing of the Declaration of Independence, and that is familiar to almost every

American schoolchild from its reprinting in countless American

History textbooks.

23 Neither the parties’ briefs nor the trial transcript reveal Mr.

Rappaport’s first name.

Feigen in touch with another client, Mr. Rappaport,23 in

Switzerland, who agreed to finance the purchase of the

painting. The transaction closed. After the purchase, the

painting was discovered not to be a Trumbull, and the

seller agreed to rescind the sale. As a result of exchange

rate and interest rate changes, Rappaport, who had advanced the funds, lost money. Rappaport wanted to be

made whole, and when rebuffed, threatened to sue Feigen

and Kanter for his claimed loss. Kanter, in convincing

Feigen to reimburse Rappaport, agreed to provide $94,231

of his own funds. Kanter also paid $10,000 in legal fees

incurred throughout the course of the transaction.

On his 1980 tax return, Kanter claimed the sum of

$104,231 as a deduction on Schedule C, stating that his

main business activity was “buying and selling paintings.”

The IRS disallowed the claimed loss. The Tax Court found,

based on Kanter’s testimony, that Kanter’s main occupation was as an attorney and that he did not hold himself

out as an art expert or art dealer. This made the claimed

deduction unrecognizable under 26 U.S.C. § 162 as an

ordinary and necessary business expense. Additionally,

the Tax Court did not allow this deduction as a § 212

expense for production of income “because Kanter received

no fees and no contract existed therefor, [and so] the

expenditure did not bear a reasonable and proximate

relationship to the production of income.” IRA, 78 T.C.M.

(CCH) at 1121. “[Kanter] merely served as an intermediary
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 37

01-4321, 01-4322, & 02-1220

to introduce Feigan to another friend, Rappaport. There

was no written contract between Feigan and Kanter for

the sharing of profits.” Id.

B. Analysis

The Commissioner’s determination that Kanter’s expenses associated with the failed sale of the Washington

painting were not legitimate deductions under 26 U.S.C.

§§ 162 and 212 is a finding of fact that we review for

clear error. Reynolds v. Comm’r, 296 F.3d 607, 615 (7th

Cir. 2002); Buelow v. Comm’r, 970 F.2d 412, 415 (7th Cir.

1992).

The Tax Court found, essentially, that Kanter could

not deduct the expenses under §§ 162 and 212 because

Kanter’s business was the practice of law, not art, and

there was no evidence that Kanter had an agreement

with Feigen to receive fees or share profits from the purchase and planned resale of the painting. The Tax Court

simply did not believe the “self-serving and uncorroborated”

testimony of Kanter. IRA, 78 T.C.M. (CCH) at 1121. Given

the totality of the Tax Court’s findings that Kanter systematically engaged in extensive (non-law related) business dealings whereby he “entered into arrangements pursuant to which he would use his . . . contacts . . . to assist

individuals . . . in obtaining business opportunities or

in raising capital for business ventures[,]” we find it

implausible for the Tax Court to conclude that Kanter

was not engaged in such dealings when he helped Feigen

secure financing from Rappaport. IRA, 78 T.C.M. (CCH)

at 970.

Without excessively detailing the transactions relating

to the Five that we summarized in Part II, we note that

the Tax Court’s opinion went to considerable lengths to

confirm deficiencies against Kanter based on a character-
38 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

ization of Kanter’s “business” as ranging far beyond the

simple practice of law. In each of the transactions involving the Five, the foundation for the Tax Court’s determination that Kanter consistently understated his income

was its findings that time after time Kanter provided nonlegal business services in facilitating business opportunities for the Five with Prudential, and that he was paid

handsomely for that facilitation. It is difficult for us to

read the first few hundred pages of the Tax Court’s opinion and not be left with the distinct impression that the

Tax Court believes Kanter was involved in this business

“activity with continuity and regularity and . . . [his]

primary purpose for engaging in the activity [was] for

income or profit.” Comm’r v. Groetzinger, 480 U.S. 23, 35

(1987). At the very least, Kanter has shown a distinct

proclivity to seek income and profit through activities

similar to the failed sale of the painting.

Determining whether an activity was engaged in for

profit requires an examination of the relevant factors

outlined in Treasury Regulation 1.183-2. See 26 C.F.R.

§ 1.183-2; Burger v. Comm’r, 809 F.2d 355, 358 (7th Cir.

1987). The nine factors for determining whether Kanter’s

involvement in the sale of the George Washington painting was carried on for profit include: (1) the manner in

which the taxpayer carries on the activity; (2) the expertise of the taxpayer; (3) the time and effort expended by

the taxpayer in carrying on the activity; (4) the expectation that assets used in the activity may appreciate in

value; (5) the success of the taxpayer in carrying on other

similar or dissimilar activities; (6) the taxpayer’s history

of income or losses with respect to the activity; (7) the

amount of occasional profits, if any, which are earned; (8)

the financial status of the taxpayer; and (9) elements of

personal recreation or pleasure in carrying on the activity.

26 C.F.R. 1.183-2(b).
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 39

01-4321, 01-4322, & 02-1220

We can, based on Kanter’s testimony and considering

the Tax Court’s other findings, construct a highly probable scenario under which Kanter was to find financing

for Feigen’s purchase in exchange for part of the anticipated profits. Under factor (1), this manner of doing business, while not well documented, is consistent with the

method pursued in other transactions detailed by the

Tax Court. Under factor (2), Kanter’s apparent expertise

in facilitating financing transactions and putting people

together for deals in order to generate income was so

evident to the Tax Court that it found him liable for large

underpayments of income tax. Additionally, Kanter has

indicated that the art project was attractive because of

Feigen’s expertise in generating sufficient publicity and

excitement about artwork to likely increase the resale

price, thus satisfying factor (4). (Tr. at 4416-30.) Regarding factor (5), Kanter’s obvious success in other facilitationof-business ventures was what landed him in trouble with

the Commissioner in the first place. An appealing tale

of the Washington painting scheme as a failed for-profit

venture emerges from this evidence. In fact, while there

is significant evidence that Kanter undertook similar,

though not identical, transactions as the failed painting

purchase for profit, there is no evidence that Kanter

facilitated any other deals of this kind for personal reasons

(i.e., gratuitously). And the Commissioner presents no

evidence contradicting Kanter’s version of events. In fact, by

asserting that, in all of his other disputed transactions

in which income was produced, Kanter had participated in

the manner alleged here and with the kind of profit motive he alleges here, but arguing that in this single transaction, where losses were generated, Kanter participated

for only personal reasons, the Commissioner appears to

want to have his cake and eat it too.

There are certain difficulties in reversing the Tax Court

here. We would have to reverse the Tax Court’s credibility
40 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

finding on the matter. In that connection, neither Feigen’s

testimony, nor Rappaport’s testimony, nor any piece of

specific evidence exists in the record to support Kanter’s

testimony. And we have found elsewhere that, while a

taxpayer’s uncontradicted testimony was sufficient to

demonstrate that the Commissioner’s determination was

erroneous, the Tax Court can disregard that testimony if

it is not credible. Lerch v. Comm’r, 877 F.2d 624, 631 (7th

Cir. 1989). The Tax Court did not here believe Kanter’s

claim of a profit motive. While finding Kanter not credible in this instance is consistent with the Tax Court’s

refusal to find him credible on other issues, it results in a

completely inconsistent and implausible factual scenario—

Kanter’s incurring more than $100,000 in expenses gratuitously to facilitate a business transaction where huge

potential profits lie. But without any indication why

this transaction is unique among all the other Kanter

activities, we think the Tax Court was clearly erroneous

in rejecting Kanter’s claim that he was pursuing commercial objectives here as elsewhere.

In conclusion, we find that there must have been a

profit motive in Kanter’s involvement in the aborted

purchase of the George Washington painting; the Tax

Court’s finding to the contrary is clearly erroneous and

we reverse. Kanter’s deduction for the $104,231 of expenses incurred in facilitating the failed sale of the George

Washington painting is allowed.

V. Bank Deposit Analysis

A. Facts

In examining Kanter’s 1982 tax return, the IRS determined that inadequately documented deposits into three

of Kanter’s bank accounts during that year greatly exceeded the income Kanter reported on his federal tax
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 41

01-4321, 01-4322, & 02-1220

24 THC was a Kanter entity incorporated in 1976. Its purpose, like

that of IRA, was the making of investments. One of the relevant

subsidiaries of THC was Zion Ventures, Inc. (Zion). See infra Part

VI. The stock of THC was substantially owned by the BRT and

Everglades Trusts 1-5 (Everglades Trusts), which were Kanter

trusts whose income was attributable to Kanter via the IRC’s

grantor trust provisions, 26 U.S.C. §§ 671 et seq.

25 The record does not indicate who holds legal or beneficial

ownership of CPS.

return. Based on a comparison of the deposit amounts

to Kanter’s tax return for 1982, the Commissioner determined that Kanter had unreported gross income that year

in an amount of $2,084,017, and issued an assessment

of deficiency. After Kanter produced sufficient records

documenting some of the deposits in question, the Commissioner reduced this deficiency to $1,303,207, which

comprised the sum of four specific deposits:

DEPOSIT AMOUNT PAYOR OR SOURCE

$787,129 The Holding Co. (THC)24

$40,000 Computer Placement

Services, Inc. (CPS) 25

$190,078 Administration Co.

(Special E Account)

$286,000 Administration Co.

(Special Account)

The Tax Court found that the Commissioner had produced sufficient evidence to create a presumption of

correctness in the indicated deficiency. The bank

deposit analysis method was a reasonable method of

reconstructing income, and deposits from THC, CPS and

the Administration Co. accounts often included taxable
42 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

income. Therefore it was proper, the Tax Court ruled, for

the Commissioner to determine gross income from an

analysis of total deposits to Kanter’s bank account minus

any deposits properly excluded from income and to assess a deficiency for the excess of that income over the

reported income. The Tax Court found that Kanter had

not adequately documented that the four deposits in

question were loans, and they were properly included in

his gross income under the deposit analysis. Moreover,

the Court did not find the testimony of Kanter’s accountant, Gallenberger, credible on the issue.

B. Analysis

The Tax Court’s determination that a taxpayer has

unreported income is a finding of fact that we review for

clear error. Reynolds, 296 F.3d at 612. The Commissioner’s assessment of a deficiency is presumed correct, but

can be overcome by rebuttal evidence presented by the

taxpayer. Pittman, 100 F.3d at 1313.

Kanter has three arguments with respect to the deficiency determined by the bank deposit analysis: first, the

change in the amount of the deficiency for 1982 under the

bank deposit analysis constituted a “new matter” under

Tax Court Rule 142 that required the burden of proof

to shift to the Commissioner, and with that burden the

Commissioner cannot prevail. Second, the lack of evidence on this issue made the deficiency a “naked assessment,” and it was, therefore, improper to give the Commissioner’s assessment of a deficiency the usual presumption of correctness. See Weimerskirch v. Comm’r, 596 F.2d

358, 360 (9th Cir. 1979) (finding no presumption of correctness when Commissioner’s assessed deficiency lacks

any reasonable foundation in the evidence). Finally, Kanter

argues that the Tax Court clearly erred in finding a defi-
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 43

01-4321, 01-4322, & 02-1220

ciency in light of the evidence presented. All of these

arguments fail.

First, there is no merit in Kanter’s contention that the

Commissioner’s reduction in the amount of deficiency

assessed in 1982 under the bank deposit analysis is a

new matter requiring a shift in the burden of proof. The

Commissioner’s concession that part of the original deficiency was properly excluded from Kanter’s income is not

a new theory, is not inconsistent with the original assessment of deficiency, does not require new or different

evidence from Kanter and does not increase the assessed

deficiency. See discussion supra Part III. The same theory

of bank deposit analysis was being applied before and

after the Commissioner’s concessions, and the resulting

deficiency was reduced, not increased, when Kanter produced documentation demonstrating to the Commissioner’s

satisfaction that certain deposits were not income. The

remaining, insufficiently documented deposits, therefore,

do not constitute a new matter.

Nor can Kanter escape the presumption of correctness

by relying on the “naked assessment” exception of

Weimerskirch. “The general rule is that a presumption of

correctness attaches to the Commissioner’s deficiency

determination; the taxpayer has the burden of disproving

it. A narrow exception exists where the determination is

arbitrary and erroneous or without rational foundation.”

Pfluger v. Comm’r, 840 F.2d 1379, 1382 (7th Cir. 1988)

(citations omitted). It is not disputed that “before the

Commissioner can rely on [the] presumption of correctness,

the Commissioner must offer some substantive evidence

showing that the taxpayer received income from the

charged activity.” Weimerskirch, 596 F.2d at 360. But the

threshold for properly invoking the presumption is not as

high as Kanter would have us believe, nor is the evi-
44 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

dence presented by the Commissioner as thin as that presented in Weimerskirch.

In Weimerskirch, the Commissioner assessed a deficiency based on more than $24,000 of unreported income from

the taxpayer’s alleged sale of heroin. Id. at 359. The

Commissioner, however, presented no evidence from which

one could even infer that Weimerskirch was involved in

heroin sales in any way. There were, for example, no

records of bank deposits, net worth, or cash expenditures.

Id. at 361-62. The deficiency was calculated based on

an IRS agent’s purely hypothetical calculation of what

income would be realized from a given level of heroin

sales each week over a given period of time. Id. at 359.

Not only was the deficiency calculation completely divorced from any evidence of actual or inferrable heroin

sales by Weimerskirch, but the entire method of calculation used was unsupported by evidence. Id. The Commissioner’s attempt to attach the presumption of correctness

to the assessed deficiency in Weimerskirch was, in every

sense of the word, naked.

In contrast, the presumption of correctness in the present case appears far more modestly appareled. The Commissioner’s use of bank deposits as circumstantial evidence of gross income is an accepted methodology. See, e.g.,

United States v. Ludwig, 897 F.2d 875, 878 (7th Cir. 1990).

The Tax Court found evidence that Kanter was engaged

in income producing businesses. And the court found that

actual deposits were made that had the appearance of

income. IRA, 78 T.C.M. (CCH) at 1104; see also United

States v. Esser, 520 F.2d 213, 217 (7th Cir. 1975) (describing

test for implementing deposit analysis method of reconstructing income). There is no dispute about the evidence

of deposits. Consequently, there was sufficient evidence

to support the presumption of correctness.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 45

01-4321, 01-4322, & 02-1220

Lastly, Kanter argues that the uncontradicted evidence

at trial shows that the four deposits in question were

loans and were not income. By uncontradicted, we can

only assume Kanter means uncontradicted by any evidence beyond the evidence we have outlined, establishing,

prima facie, that there was a deficiency during 1982.

Because we have found that the Tax Court properly gave

the Commissioner’s assessed deficiency a presumption of

correctness, we must interpret Kanter’s argument as

claiming that the evidence presented overcame the presumption. In that respect, Kanter’s argument also fails.

In considering whether Kanter met his burden of proof,

the Tax Court found Gallenberger’s summary and Kanter’s

assertions unconvincing. “No credible evidence was introduced to support Kanter’s assertion that the deposits

were loans. . . . We find the testimony of the accountant,

Gallenberger, unreliable and her analysis fatally

flawed. . . .” IRA, 78 T.C.M. (CCH) at 1104. The Tax Court

also recalled “Gallenberger’s regular practice of record

destruction” and the general lack of any documentation

other than her summary and testimony. Id. at 1104-05. The

evidence that Kanter asserts was “uncontradicted” was

considered by the Tax Court and found wanting. Exhibit

9172PK, which, according to Kanter, demonstrates that

the deposits from CPS, THC, and Administration Co.

were loans, reflects a summary analysis by Linda Gallenberger that the Tax Court found not credible. Nor is it

correct for Kanter to say that the Tax Court had determined previously that one of the deposits of money

from Administration Co. was money already found to belong to Kanter. (Pet. Br. at 58.) Kanter cites to a sentence

in the Tax Court’s opinion as to issue 21 (allowable capital gains and losses in 1987) wherein the court states, “As

indicated previously, funds from the Administration Co.

special E and PSAC special E accounts were Kanter’s
46 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

funds.” IRA, 78 T.C.M. (CCH) at 1126. This sentence, in

context, refers only to the specific funds from the accounts

cited and used in the specific transactions at issue (five

years after the deposits at issue here) in that section of

the Tax Court opinion. These specific funds were Kanter’s

own funds, and he was entitled, therefore, to the basis

he had claimed for the assets he had purchased with those

funds. But Kanter seeks to generalize this statement

about his ownership of specific money to mean that all the

money in the Special E accounts, at all times, already

belonged to Kanter. The Tax Court’s opinion does not

say this.

In conclusion, the Tax Court did not clearly err in its

findings regarding Kanter’s unreported income in 1982

as determined by bank deposit analysis. These findings

are therefore affirmed.

VI. Equitable Leasing’s Payments to THC & Zion

A. Facts

Equitable Leasing Co., Inc. (Equitable) was the wholly

owned company of Joel Mallin, a friend and former law

partner of Kanter. Mallin used Equitable (among other

companies) to promote and structure equipment leasing

transactions to make money for investors. The investors’

capital would be highly leveraged to purchase the equipment to be leased, and the residual value of the equipment at the end of the lease would provide the ostensible

paper profit on the investors’ capital. A principal motivation behind the investment in the leasing transactions,

however, was the opportunity for tax benefits associated

with the venture. Kanter acted as a middleman, introducing

Mallin to investors for his leasing transactions. In return,

Mallin paid commissions to Kanter entities. The Commissioner issued a notice of deficiency for 1983 that included
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 47

01-4321, 01-4322, & 02-1220

26 THC was a Kanter-controlled investment company and Zion

was a THC subsidiary. See supra note 24.

27 The Tax Court opinion and the Commissioner’s brief both

indicate that this transfer occurred on January 8, 1983. It is of no

significance to the disposition of the case, but the bank transfer

record (Ex. 9203PK) and the THC adjusting journal entry (Ex.

146, entry 32) both indicate that the transfer took place on

January 4, 1983.

a deficiency of $635,250 with respect to four payments

by Equitable to Kanter entities, Zion, and THC.26

DATE FORM OF

PAYMENT

PAYEE AMOUNT

Jan. 4,

198327

Bank

Transfer

Zion $317,250

Jan. 24,

1983

Check THC $9500

June 1,

1983

Check Zion $6500

June 30,

1983

Bank

Transfer

THC $302,000

Total $635,250

The Commissioner alleged that these payments

were commissions paid for Kanter’s procurement of investors in Mallin’s enterprises. Kanter argued that Zion

and THC were loaned money by Equitable that was then

turned around and invested in Equitable as an accommodation to Equitable to enable it to close certain transactions.

The Tax Court found that there was sufficient evidence

to indicate that Equitable had paid commissions to Zion
48 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

and THC for Kanter’s services in providing investors to

Mallin. Two of the four payments, for $9500 and for $6500,

were labeled (on the check in payment and in THC’s

adjusting journal entries, respectively) as commissions. The

Tax Court determined that this evidence was sufficient

to support the presumption that all of these payments to

Zion and THC were income to Kanter. In response to

this presumption, the Tax Court found that Kanter had

provided no evidence other than his “uncorroborated, selfserving testimony” concerning the “accommodation” arrangement with Equitable. IRA, 78 T.C.M. (CCH) at 1103.

The court found, as previously noted, that Kanter was

not credible and that the four payments were income attributable to Kanter.

B. Analysis

Whether or not monies are taxable income to a taxpayer is a finding of fact that we review for clear error.

Reynolds, 296 F.3d at 612. The Commissioner’s assessment

of a deficiency is presumed correct, but can be overcome

by rebuttal evidence presented by the taxpayer. Pittman,

100 F.3d at 1313.

Kanter argues first that the Commissioner’s assessment

of a deficiency should not be given the benefit of the

presumption of correctness because the Commissioner

“failed to provide any evidence connecting Kanter to this

income.” (Pet. Br. at 59.) This argument fares no better here

than it did when we considered it with respect to the

Bank Deposit issue. There was evidence that Mallin and

Kanter were partners in various investments, and that

Kanter’s law firm had procured investors for Mallin’s

Equitable Leasing transactions. (Tr. at 5213-15.) There

was also evidence that Mallin had paid commissions for

these services to Kanter entities. (Id.) Additionally, at
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 49

01-4321, 01-4322, & 02-1220

least two of the payments in question were documented

as commissions. This was sufficient evidence to provide

a rational foundation for the Commissioner’s assessment.

The Commissioner’s assessment appropriately received

its presumption of correctness. See Pittman, 100 F.3d

at 1313.

Kanter also argues that he has rebutted the Commissioner’s deficiency with evidence that only the $16,000

that was labeled as commissions (comprised of the $9500

and $6500 checks) should be considered commission

payments, and the remainder consisted of loans made as

an accommodation to Equitable. Even accepting Kanter’s

concession that the $9500 and $6500 checks from Equitable

Leasing to THC and Zion, respectively, were taxable commission income, we do not believe he has provided sufficient evidence to show that the two bank transfers of

$317,350 and $302,000 were loans.

Regarding the $317,250 transfer, there is clearly evidence supporting the Tax Court’s finding that the transfer

was a commission paid to Zion, and Kanter has provided

no evidence to rebut this finding despite his control of

the entities involved and his access to the records of those

entities. First, as noted, there was circumstantial evidence

that Equitable Leasing was making payments to THC

and Zion as commissions. Additionally, THC’s adjusting

journal for 1983 has an entry “32” indicating an amount

of $317,250 that was labeled, “Due from Zion—Commission

Income to adj. for commiss. from Eq. Leasing, loaned

to Zion on 1/4/83.” (Ex. 146, THC adjusting journal at 6.)

Finally, Kanter appears to concede in the facts section of

his brief that this amount was received as commission.

In his brief on appeal, Kanter breaks down the $635,250

as including “$317,250 as commission income from Equitable (see Ex. 146, THC adjusting journal, p. 6, adjusting

journal entry 32, reflecting commission income of $317,250
50 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

which was paid to THC’s subsidiary Zion as a loan from

THC . . .).” (Pet. Br. at 16.) The Tax Court’s finding

that this payment was commission income was not

clearly erroneous.

What about the June 30, 1983 transfer from Equitable

to THC for $302,000? Against the general circumstantial

evidence of commission payments to THC by Equitable

and the presumption of correctness of the Commissioner’s assessment of deficiency, there is an entry in

THC’s general ledger for June 30, 1983, for $302,000

labeled “Loan from Equitable Leasg.” (Ex. 148, THC general

ledger at 12.) Together with this entry there is an entry

indicating an $8000 transfer three days earlier also labeled “Loan from Equitable Leasg.” (Id.) This $8000

transfer is corroborated by a check from Equitable to THC

on June 24, 1983, for $8000 that has a memo line reading,

“loan.” (Ex. 9203PK, check #2391.) The corroboration of

the general ledger entry for the $8000 transfer is indirectly probative of the likelihood that the roughly contemporaneous and similarly labeled ledger entry for the

$302,000 transfer may also be correct. These circumstances make it more likely that the ledger is accurate in

its indication that the $302,000 transfer was a loan and

not a commission payment.

But there is one additional piece of evidence in the record that the Commissioner and Kanter have not mentioned. In the THC adjusting journal, entry 59 is a barely

legible entry for $310,000 that appears to read, “N/P—

Equitable Leasing, Commission Income, to reclassify

funds from Eq. Leasing.” (Ex. 146, entry 59.) This entry

is significant because we believe it may also represent

the $302,000 and $8000 transfers and show that those

transfers were commissions. These two transfers were

roughly contemporaneous, and Kanter himself aggregates

them and describes them as a cumulative amount in
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 51

01-4321, 01-4322, & 02-1220

his brief. (See Pet. Br. at 16 (“$310,000 as loans from

Equitable . . . reflecting a $302,000 loan and an $8,000

loan . . . .”).) The $310,000 in entry 59 would appear to be

the same as the $310,000 in the general ledger and as the

$310,000 described by Kanter, comprising the total of the

$8000 and $302,000 transfers. Entry 59 in the THC adjusting journal weighs against the general ledger’s notations

for both the $302,000 and the $8000 transfer and

weighs further in favor of the Tax Court’s finding that the

$302,000 was a commission payment. In any event, this

evidence does, at the very least, make the characterization of the $302,000 transfer unclear, and because Kanter

bears the burden of rebutting the Commissioner’s assessment of deficiency and controlled the entities whose records could have cleared this matter up definitively, we

cannot say that the Tax Court clearly erred in finding that

the $302,000 was a commission payment to THC for

Kanter’s services.

In conclusion, it was not clear error for the Tax Court

to find that the transfers from Equitable Leasing were

commissions and were taxable income.

VII. Cashmere Investment Assoc.’s transactions

A. Facts

During the 1970s, Kanter was involved in a series of

real estate developments with developer Sam Zell. The

development properties were owned by partnerships

(real estate partnerships). Kanter’s interests in the real

estate partnerships were held through a series of Kantercontrolled trusts, including the BWK Revocable Trust,

the Everglades Trusts 1-5, and the BWK Family Trusts

(referred to collectively as the grantor trusts). Each of

these trusts was a grantor trust whose income was attributable to Kanter personally. A detailed breakdown of the
52 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

real estate partnership interests and their associated

financial attributes is provided in the Tax Court’s opinion.

IRA, 78 T.C.M. (CCH) at 1107-11. The interests in these

real estate partnerships had, as of 1982-83, zero basis.

During 1982, Zell expressed his desire to purchase

all of the real estate partnership interests held by the

grantor trusts. Kanter was interested in selling to Zell, but

was concerned that significant gains would be triggered

by an unqualified sale of the real estate partnership

interests held by his grantor trusts. The Tax Court found

that twenty one of the real estate partnership interests

held by the grantor trusts had negative capital accounts;

that is, their liabilities exceeded their bases, by an amount,

in total, of $476,889. IRA, 78 T.C.M. (CCH) at 1108.

Therefore, the unqualified transfer of those interests

would involve the assumption of liabilities in excess of

the bases, and would trigger capital gains to the

seller—Kanter, who was the owner by virtue of the IRC’s

grantor trust provisions. See 26 U.S.C. §§ 671-677.

In 1983, a series of transactions took place that ultimately resulted in the transfer of the real estate partnership interests from the grantor trusts to a Zell-controlled

entity. The transfer took place in three stages.

1. Transfer of real estate partnership interests to

Cashmere

Cashmere Investment Associates, Inc. (Cashmere) was

an inactive “shelf” corporation incorporated in Delaware

in 1982 and controlled by Kanter. On or about May 15,

1983, Kanter directed the grantor trusts to transfer their

real estate partnership interests to Cashmere in what

was intended as a nontaxable exchange under 26 U.S.C.

§ 351 in return for Cashmere common and preferred stock.

Concurrently with the § 351 transfer, the grantor trusts
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 53

01-4321, 01-4322, & 02-1220

28 Section 357(c) provides in relevant part:

(c) Liabilities in excess of basis.—

(1) In general. In the case of an exchange—

(A) to which section 351 applies . . .

if the sum of the amount of the liabilities assumed exceeds

the total of the adjusted basis of the property transferred

pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset

or of property which is not a capital asset, as the case may be.

26 U.S.C. § 357(c).

also transferred to Cashmere eight promissory notes

payable to, and held by, the grantor trusts with a face

value, in total, of $498,500. The promissory notes were

all dated May 1, 1983, and were payable on August 1,

1983. These promissory notes, according to Kanter, had

a basis equal to face value and increased the total aggregate basis of the transferred property so as to eliminate

the gain that would otherwise have been realized under

26 U.S.C. § 357(c) through the assumption by Cashmere

of the negative capital accounts in the transfer of the real

estate partnership interests. See 26 U.S.C. § 357(c).28

2. Sale of Cashmere stock to Waco

On July 12, 1983, in the next stage of the transfers

to Zell-controlled entities, Kanter directed the grantor

trusts to sell their common and preferred stock in Cashmere to Waco Capital Corp. in return for promissory

installment notes totaling approximately $1.5 million. The

grantor trusts reported the income from this sale under

the installment method of 26 U.S.C. § 453.

Waco was a Delaware corporation whose sole shareholder was BRT. BRT’s beneficiaries were the members of
54 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

Kanter’s family, who were also the beneficiaries of the

grantor trusts. The Tax Court found that, under 26 U.S.C.

§ 453(f), Waco and the grantor trusts were “related persons.” See 26 U.S.C. § 318(a)(2), (3).

On August 31, 1983, the promissory notes held by

Cashmere were paid off by eight checks drawn on the

Administration Co.’s Special E account. As noted, the

Special E account contained the commingled funds of a

variety of entities, mostly (if not entirely) Kanter entities, and the Administration Co. accounted internally for

the specific source of a given disbursement. The Administration Co.’s general ledger, however, did not specify the

source of the eight checks paying the notes. The checks

themselves indicate, in part, what entity is the payor of

the notes. Three of the promissory notes were ostensibly

paid with funds from BRT, an entity that was not the

maker of the notes in question, and there was no documentary evidence that BRT was advancing the funds to

the makers of the promissory notes or had, in some

way, assumed the obligations on the notes. IRA, 78 T.C.M.

(CCH) at 1110-11.

As of September 1, Waco held all of the stock in Cashmere, and Cashmere’s assets included the real estate

partnership interests and $498,500 in cash (from the

note payments).

3. Sale of Cashmere stock from Waco to Zell

Kanter subsequently negotiated the sale of Waco’s

Cashmere stock to Equity Financial Management Co.

(Equity), an entity controlled by Zell. On September 2,

1983, Waco sold the Cashmere stock to Equity for
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 55

01-4321, 01-4322, & 02-1220

29 As noted, Cashmere’s assets included $498,500 in cash plus

the partnership interests. Therefore, the $1,647,500 purchase

price of Cashmere included a purchase price of $1,149,000 for

the real estate partnership interests.

$1,647,500 payable by check.29 Immediately after the

purchase, Zell liquidated Cashmere.

The Tax Court found that this convoluted series of

transactions taking place within a three-and-one-half

month period that ultimately resulted in the transfer of

the real estate partnership interests to Zell was arranged

principally to avoid immediate recognition of gain on the

transfer and otherwise lacked any bona fide business

purpose. IRA, 78 T.C.M. (CCH) at 1113; see 26 U.S.C.

§ 357(b)(1)(A), (B). Therefore, the assumption of liabilities by Cashmere was recognized as money received by

Kanter (through his grantor trusts), and he was required

to be taxed on his gain resulting from the transfer, up to

the full amount of the liabilities. 26 U.S.C. § 357(b).

Additionally, the Tax Court found that the transfer of

the notes with the real estate partnership interests

also lacked any bona fide business purpose and were

principally intended as a means to avoid income tax. The

Tax Court found that the notes represented mere transfers

between and among Kanter-controlled entities, and did

not represent true indebtedness. Therefore, Kanter had

no basis in the notes, and the notes did not, therefore,

increase the aggregate basis in the property transferred

to Cashmere. Under § 357(c), the excess of liabilities

over basis in the transferred property was therefore

recognized as capital gain to Kanter. Because the basis

in the partnership interests was zero, under both § 357(b)

and (c), the full amount of the transferred liabilities

was taxable to Kanter.
56 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

Additionally, the Tax Court found that the subsequent

sale to Waco using the installment method was a

“dispos[ition] of property to a related person.” 26 U.S.C.

§ 453(e)(1)(A). When Waco then subsequently transferred,

within two years, the Cashmere stock to Equity, the

installment method of reporting was no longer available.

26 U.S.C. § 453 (e)(1), (2). The entire amount realized by

Waco in the second disposition was treated as received

(at the time of the second disposition) by the seller-grantor

trusts in the first disposition. Id.

B. Analysis

Whether the transactions involving Cashmere had

economic substance for federal income tax purposes is a

factual question reviewed for clear error. N. Ind. Pub. Serv.

Co. v. Comm’r, 115 F.3d 506, 510 (7th Cir. 1997). Similarly,

whether the installment method of reporting is available

is a factual question that we review for clear error.

Applegate v. Comm’r, 980 F.2d 1125, 1128 (7th Cir. 1992).

1. The Attempted § 351 Transaction

The tax-free transfer of property to a controlled corporation solely in exchange for the transferee corporation’s

stock is permitted under 26 U.S.C. § 351. The IRC also

provides a means for preserving § 351 eligibility in circumstances where the transferee corporation assumes

liabilities of the transferor together with the property

transferred (an event that is economically equivalent to

a transfer of money (boot) from the transferee corporation to the property transferor). 26 U.S.C. § 357. There

are two limitations, however, to tax-free treatment under

§ 351. First, the taxpayer-transferor must prove by a preponderance of the evidence that the liabilities were
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 57

01-4321, 01-4322, & 02-1220

not transferred for the principal purpose of tax avoidance

and that the transfer had a bona fide business purpose.

§ 357(b). If the taxpayer fails to clear this hurdle, the

assumption of the liability is treated as money received

by the taxpayer, and the taxpayer recognizes any gain to

the full amount of the liability. 26 U.S.C. §§ 357(b)(1),

351(b)(1)(A). Second, if the amount of the liability transferred is greater than the basis of the property transferred,

then, in general, the transferor-taxpayer recognizes a

capital gain on the amount by which the liability exceeds the basis of the transferred property. 26 U.S.C.

§ 357(c)(1).

a. 26 U.S.C. § 357(b)

There can be little question that the Tax Court was

correct when it viewed the totality of the convoluted

Cashmere transactions and found that their only purpose was the avoidance of federal income tax. Kanter’s

argument that § 357(b)(1) does not reach this transaction

is meritless. Within a four-month period of time an inactive shelf corporation controlled by Kanter (Cashmere)

had its stock transferred three times, twice between

Kanter-controlled entities. Within that same time span,

promissory notes, virtually equal in total value to the

total negative capital account balances, were made by

entities controlled by Kanter, transferred (along with

the real estate partnership interests holding the negative balances) to entities controlled by Kanter and then

satisfied by entities controlled by Kanter. Both Cashmere and the promissory notes completed their entire

useful life-cycle within the span of the larger, intended

transaction—transferring the real estate partnership

interests to Zell. Yet neither the promissory notes nor

Cashmere functioned to facilitate the transfer of the real
58 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

estate partnership interests to Zell: the promissory

notes were created, transferred, and satisfied before the

consummation of the sale to Zell, and Cashmere was

liquidated as soon as its stock came into Zell’s possession

leaving Zell with only the desired asset—the real estate

partnership interests. The entire transaction was constructed to avoid the recognition of the gain realized on

the assumption of the real estate partnerships’ liabilities

(by, ultimately, Zell). Therefore, the assumption of those

liabilities by Cashmere in the initial stages of the process cannot be described as other than having as its principal purpose the avoidance of federal income tax. See 26

U.S.C. § 357(b).

Kanter’s remaining argument with respect to § 357(b)

appears to be that the intent of that statutory section

was to prevent taxpayers from creating additional liabilities

(like personal loans or debts) to be packaged with assets

contributed in a § 351 exchange in order to extract the

gains contained within the contributed property without

recognition for tax purposes. This kind of intent to avoid

taxes, argues Kanter, is far removed from the present case

where the liabilities were a substantial aspect of the real

estate partnership interests to be contributed. This argument fails as well. The fact that the liabilities being

contributed were “ordinary business liabilities of the

partnerships” does nothing to save this transaction. As

noted, the entire business of contributing the partnership interests and their associated liabilities to Cashmere was a transaction whose only function was the

avoidance of federal tax. Therefore, “taking into consideration the nature of the liability and the circumstances

in the light of which the arrangement for the assumption

was made,” it is clear that the principal purpose of the

assumption of liabilities was the avoidance of tax. 26 U.S.C.

§ 357(b)(1).
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 59

01-4321, 01-4322, & 02-1220

30 Section 357(c)(2)(A) gives priority to § 357(b)(1) when both

§ 357(c) and § 357(b)(1) apply. Therefore, the finding under

§ 357(c) is only relevant as the alternative to the previous finding under § 357(b)(1).

It was not clearly erroneous for the Tax Court to have

found that the assumption of the real estate partnership

interests’ liabilities by Cashmere had as its principal

purpose the avoidance of federal income tax.

b. 26 U.S.C. § 357(c)

The Tax Court also found, alternatively, that § 357(c)

would apply to the Cashmere transactions.30 Section

§ 357(c) is triggered when the amount of the liabilities

assumed exceeds the basis of the property contributed

in the § 351 exchange. The taxpayer is taxed on the amount

by which the liabilities exceed the basis. The Tax Court

found that the contributed promissory notes did not represent genuine indebtedness and had, therefore, a basis

of zero. Without any additional basis from the promissory

notes, the basis of the contributed real estate partnership interests was zero, and the amount of the liabilities

assumed (in the form of the oft-mentioned negative capital accounts) necessarily exceeded that zero basis. Therefore, the gain realized in the § 351 transfer must be recognized to the full extent of the assumed liabilities.

Kanter vigorously argues that the substance of the

promissory notes should be respected and not disregarded as mere form, and the notes should be given a basis

equal to their face value. For this argument Kanter

relies heavily on the Ninth Circuit’s determinations in

Peracchi v. Comm’r, 143 F.3d 487 (9th Cir. 1998), where a

taxpayer made and contributed notes to his closely held
60 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

corporation. The Ninth Circuit found substance in Peracchi’s promises to pay himself, and increased the basis of

property contributed (in a § 351 exchange) to a figure

greater than the liabilities assumed by the closely-held

transferee corporation. Id.; see also Lessinger v. Comm’r,

872 F.2d 519 (2d Cir. 1989) (finding also that personal

note had face-value basis in hands of transferee corporation). The hypothetical risk that this note might somehow

become the property of a creditor (through bankruptcy

of the corporation) and that a creditor might then be able

to enforce the note was sufficient to make the note more

than an empty promise. Peracchi, 143 F.3d at 493. The

Ninth Circuit panel realized the potential for abuse of

this holding, however, and cabined it.

We confine our holding to a case such as this where the

note is contributed to an operating business which is

subject to a non-trivial risk of bankruptcy or receivership. [The closely held company] is not, for example,

a shell corporation or a passive investment company.

Id. at 493 n.14.

Even if we were to accept Peracchi’s underlying premise that a taxpayer’s self-made obligations to his own

closely held corporation should be respected for tax purposes, in light of the language limiting Peracchi’s holding,

we would not extend that premise to the present case.

Cashmere was a passive investment company that, before

the transactions at issue, was a shelf corporation. And

after the transfer of the real estate partnership interests

to Zell, Cashmere was liquidated. Cashmere was not an

operating business, and, unlike Peracchi, where an insurance corporation needed more assets to meet a minimum

premium-to-asset ratio for regulatory purposes, there

was no underlying business purpose here for these transitory promissory notes. Nor did Cashmere face a “non-trivial
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 61

01-4321, 01-4322, & 02-1220

31 Section § 453(c) states:

For purposes of this section, the term “installment method”

means a method of payment under which the income recognized for any taxable year from a disposition is that proportion of the payments received in that year which the gross

profit (realized or to be realized when payment is completed)

bears to the total contract price.

26 U.S.C. § 453(c).

risk of bankruptcy.” Peracchi is, therefore, quite distinguishable from the present case. The promissory notes here

did not represent genuine indebtedness, and the Tax

Court did not clearly err in finding that the promissory

notes had no basis. Therefore, the Tax Court’s conclusion

that the liabilities assumed exceeded the basis of the

contributed property by the full amount of the liabilities

and were taxable to that extent was not clearly erroneous.

2. Disallowance of § 453 Installment Method

The next steps in the sale of the real estate partnership interests to Zell involved, first, the sale of the Cashmere stock from Kanter’s grantor trusts to Waco and,

second, the subsequent sale within two months of the

Cashmere stock from Waco to Equity (the Zell-controlled

entity). The grantor trusts reported their gains from the

sale to Waco under the installment method allowed by

26 U.S.C. § 453.31 But § 453(e) limits the use of the installment method in circumstances where there is a second

disposition of the property within two years that is effected by a person “related” to the original seller. In other

words, if A sells to B, and then B sells to C (within two

years), A cannot report the income from its sale under

the installment method if A and B are “related persons”

under 26 U.S.C. §§ 267(b) or 318(a). The Tax Court found
62 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

32 We note with some trepidation that there was no effort by the

Tax Court to identify the precise actuarial interests of the

(continued...)

that the grantor trusts and Waco were “related persons,”

and that the entire amount of income attributable to

the sale of the Cashmere stock to Waco must be recognized

in 1983. We affirm this finding as well.

Section § 453(f)(1) defines a “related person” for purposes

of determining the reach of § 453(e):

(A) a person whose stock would be attributed under

section 318(a) (other than paragraph (4) thereof)

to the person first disposing of the property, or

(B) a person who bears a relationship described in

section 267(b) to the person first disposing of

the property.

26 U.S.C. § 453(f)(1). Waco’s stock is owned entirely by

BRT, whose beneficiaries were undisputedly the members of Kanter’s family. Similarly, Kanter does not dispute that these same family members were the beneficiaries of the grantor trusts. Under 26 U.S.C. § 318(a)(2)

(B)(i), the stock owned by BRT is considered owned by its

beneficiaries. Therefore, the BRT beneficiaries are treated

as owning the Waco stock. Similarly, those same BRT

beneficiaries are also beneficiaries of the grantor trusts,

and their ownership of the Waco stock is imputed “upstream,” under § 318(a)(3)(B)(i), to the grantor trusts.

Therefore, the stock of Waco would be attributed to the

grantor trusts under § 318(a), making Waco a person

“related” to the grantor trusts under § 453(f)(1)(A). The

attribution, therefore, makes the sale of the Cashmere

stock to Waco ineligible for the installment method under

§ 453(e).32
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 63

01-4321, 01-4322, & 02-1220

32 (...continued)

beneficiaries of BRT nor how precisely those beneficiaries’

identities matched the beneficiaries of the grantor trusts. This

information would be relevant for determining the exact percentage of Waco stock owned by the BRT beneficiaries (who were

also grantor trust beneficiaries), which would then be imputed

to the grantor trusts. Because Kanter did not make this argument on this issue, however, we will not disturb the Tax Court’s

determination. United States v. Jones, 34 F.3d 495, 499 (7th

Cir. 1994) (finding argument not made before this court in

opening brief is waived).

33 There does not appear to be any obstacle in the statute,

legislative history, or regulations to the attribution of a grantor

trust’s stock ownership to the beneficiaries of a trust as well as

to the substantial owner of a trust under §§ 671 et seq. See The

Attribution Rules, 554-2d Tax Mgmt. Portfolio at A-11 (1996)

(“Apparently, attribution from the [grantor] trust to the beneficiaries and from the beneficiaries to the trust would still occur,

even if the grantor or another is deemed to be the ‘owner,’

although the statute and legislative history are ambiguous on

this point and the regulations are silent.”). Nor does any court

appear to have ruled on the issue. Our research unearthed

only one commentator who has suggested that attribution to a

grantor precludes attribution to the beneficiaries. See Shop Talk,

Is Stock Attributed to Beneficiaries of Grantor Trusts?, 65 J. TAX’N

207 (Burton W. Kanter & Sheldon I. Banoff ed., 1986) (“A common

sense interpretation of Section 318(a)(2)(B)(ii) should be that

its specific rule regarding attribution from grantor trusts should

preempt the general rule of trust attribution of Section 318(a)(2)

(B)(i).”). The financial interest in this matter of one of the edi-

(continued...)

Similarly, as noted in Part III, Kanter was the substantial owner of BRT under the grantor trust provisions of

26 U.S.C. §§ 671 et seq. Therefore, there is an alternative means by which the grantor trusts and Waco are

“related persons.”33 Under § 318(a)(2)(B)(ii), stock owned
64 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

33 (...continued)

tors of the article may diminish the persuasive value of the

proposed answer.

by a grantor trust is attributed to its grantor; BRT’s stock,

therefore, is attributed to Kanter. That is, Kanter himself is considered to own the Waco stock owned by BRT.

Following a similar statutory path as before, Kanter’s

status as the substantial owner of the grantor trusts

means that any stock he owns personally is attributed to

the grantor trusts under § 318(a)(3)(B)(ii). Therefore,

Kanter’s attributed ownership of the Waco stock means

that the grantor trusts also own the Waco stock. Because

the grantor trusts are attributed ownership of the Waco

stock under § 318(a), Waco and the grantor trusts are

“related persons” under § 453(f)(1)(A), and the sale of the

Cashmere stock from the grantor trusts to Waco is ineligible for reporting under the installment method by operation of § 453(e).

Whether one, the other, or both methods of analysis

are followed, the grantor trusts’ sale of Cashmere stock

to Waco was ineligible for the installment method of

reporting for federal income tax purposes. The Tax Court’s

findings on this issue were not clearly erroneous.

VIII. Naomi Kanter motions

A. Facts

On May 8, 2001, in the midst of the Tax Court’s posttrial Rule 155 computations, attorney Karen Hawkins

entered an appearance in the Tax Court on behalf of

Kanter’s wife, Naomi Kanter (Naomi), for the purpose of

claiming that Naomi should not be jointly and severally

liable for the Tax Court’s determined deficiencies
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 65

01-4321, 01-4322, & 02-1220

against Kanter. Shortly thereafter, Randall Dick, attorney of record for both Kanter and Naomi, moved to withdraw his representation of Naomi. By her new counsel,

Naomi first filed a series of objections to the Commissioner’s computations because they held Naomi liable for

fraud penalties. The Tax Court upheld these objections.

(Order, IRA, 6/20/01; App. at 0346.) Naomi then filed

seven motions asking the Tax Court to find that she had

not meaningfully participated in the litigation as provided in 26 U.S.C. § 6015(g)(2). In the alternative, Naomi

asked that the Tax Court reopen the record in order to

hear additional evidence that Naomi was an “innocent

spouse” under 26 U.S.C. § 6015(b) and § 6015(f), and not

jointly and severally liable with her husband. In response to Naomi’s motion, the Commissioner stated that

“respondent has no objection to petitioner’s first request

for relief [a finding that Naomi had not meaningfully

participated in the litigation].” (See App. at 0364.) Therefore, the Commissioner felt the alternative request to

reopen to hear additional evidence that Naomi was an

innocent spouse was moot.

In its September 20, 2001 Order, the Tax Court denied Naomi’s seven motions. (See App. at 0224.) The Tax

Court found that the language of § 6015(g)(2) required

that any finding that a spouse had not “meaningfully

participated” in the litigation must occur in a subsequent, separate proceeding that could properly consider

the matter now before us as a “prior proceeding.” 26 U.S.C.

§ 6015(g)(2). Therefore, the Tax Court ruled, Naomi

would have to wait for a separate proceeding before the

Tax Court to have the res judicata effect of the present

case adjudicated. Additionally, the Tax Court exercised

its discretion not to reopen the record and take additional evidence on the merits of Naomi’s claim that she

was an “innocent spouse.” The Tax Court found that, even
66 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

though the innocent-spouse provisions had been significantly amended in 1998, and clarified in 2000, the underlying availability of innocent-spouse relief had been unchanged since the origination of the present case in the

early 1990s. The court refused to reopen a case whose

trial had concluded more than five years earlier, especially

when there had been no mention of innocent-spouse

relief during the period since the trial. Given the possibility of later relief for Naomi in a subsequent proceeding,

the Tax Court did not feel the burden on the Commissioner to reopen the present case and litigate the issue

was justified.

B. Analysis

This court reviews the denial of motions to reopen the

Tax Court’s record for abuse of discretion. Coleman v.

Comm’r, 16 F.3d 821, 829 (7th Cir. 1994). Whether or not

§ 6015(g)(2) requires a subsequent proceeding to determine whether Naomi had “meaningfully participated” in

the matter now before us as a “prior proceeding” is a

question of statutory interpretation that we review de

novo. Eli Lilly & Co. v. Natural Answers, Inc., 233 F.3d 456,

467 (7th Cir. 2000).

The substance of current 26 U.S.C. § 6015 was enacted

as part of the Internal Revenue Service Restructuring

and Reform Act of 1998, Pub. L. No. 105-206, 112 Stat

685, § 3201 (IRRRA). Technical corrections to the IRRRA

were enacted in 2000, leaving us with the statute as

it presently appears. See Community Renewal Tax Relief

Act of 2000, Pub. L. No. 106-554, 114 Stat. 2763, App. G.

Section 6015 contains the so-called “innocent spouse”

provisions that allow a spouse to avoid joint and several liability for a tax deficiency assessed against both

husband and wife based on a joint tax return filing. To
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 67

01-4321, 01-4322, & 02-1220

avoid joint and several liability, the innocent spouse

must show, generally, that (1) a joint return was filed, (2)

the return understated the tax owed based on the “erroneous items” of the other joint filer, (3) she did not know,

and had no reason to know, that there was an understatement, (4) it is inequitable to hold her liable for the understatement and (5) she has applied for innocent-spouse

protection no later than two years after the Commissioner

begins “collection activities.” See 26 U.S.C. § 6015(b).

Section 6015 expanded previous innocent-spouse provisions by removing the requirement that the understatement be “substantial” and that the return be “grossly

erroneous” in order to receive protection. Additionally,

§ 6015 provided increased protection for divorced or separated spouses by holding such a spouse liable for only

those items on which she would have been liable had she

filed a separate return. Finally, the modifications to § 6015

provided for equitable relief for an innocent spouse. 26

U.S.C. § 6015; see also John B. Harper, Federal Tax Relief

for Innocent Spouses: New Opportunities Under the IRS

Restructuring and Reform Act of 1998, 61 ALA. LAW. 204

(2000).

Section 6015 also contemplates the possibility that a

court will adjudicate a joint tax liability to completion

before an innocent spouse invokes the section’s protection.

Under § 6015, res judicata will attach to the decision of

a court if the innocent spouse “participated meaningfully

in [the] prior proceeding,” even if the innocent-spouse

issue was never presented to the adjudicating court. 26

U.S.C. § 6015(g)(2).

Naomi first argues that the Tax Court should have

“determined,” under § 6015(g)(2), that she did not meaningfully participate in the Tax Court litigation and that

the Tax Court’s IRA decision against her husband would

have had no preclusive effect with respect to her potential
68 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

innocent-spouse defense to joint liability. Naomi argues

that the record and the Tax Court’s decision clearly

show that she was not involved in the present case. See

IRA, 78 T.C.M. (CCH) at 969 (“Petitioner Naomi R. Kanter,

Kanter’s wife, was not involved in any of the activities

giving rise to this litigation. However, she filed joint

Federal income tax returns with Kanter for the years at

issue.”). She further notes that there would likely not be

any delay in the course of the present case with such a

determination, that there would be no need to reopen the

record in order to make such a determination, and that

the Commissioner expressly noticed no objection to such

a determination.

Unfortunately for Naomi, the general principles of res

judicata and the language of the statute deny her this

relief at this time. Section 6015(g)(2) is only properly

invoked in a subsequent judicial proceeding to avoid the

preclusive effect of a prior judicial determination, and has

no application during the pendency of the initial judicial

proceeding whose preclusive effect she wishes to avoid.

First, we start with the plain language of the statute.

Lara-Ruiz v. INS, 241 F.3d 934, 940 (7th Cir. 2001). As the

Tax Court observed, the plain language of § 6015(g)(2),

which is labeled “Res judicata,” limits its effect to consideration of a “decision of a court in any prior proceeding,” to determine if an “individual participated meaningfully in such prior proceeding.” To us, this language is

clear: a decision from a prior proceeding means that this

statute is only applicable when the original court proceeding determining tax liability has concluded. We can only

conclude that this section is designed to assist innocent

spouses in avoiding the preclusive effect of the other

spouse’s prior, completely adjudicated court case, but

that the section has no application internal to the prior

judicial proceeding.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 69

01-4321, 01-4322, & 02-1220

This reading gains support from the general principle

of res judicata. Res judicata prevents parties from relitigating claims that have already been adjudicated by a

court to a final judgment on the merits. Of necessity, res

judicata requires two proceedings: an original proceeding

wherein a final judgment on the merits is rendered, and

a subsequent proceeding wherein a party seeks to litigate

again a claim decided in the original proceeding. See N.H.

v. Me., 532 U.S. 742, 748 (2001) (“Claim preclusion [res

judicata] generally refers to the effect of a prior judgment

in foreclosing successive litigation of the very same claim,

whether or not relitigation of the claim raises the same

issues as the earlier suit.”) (emphasis added); see also

BLACK’S LAW DICTIONARY 1305 (6th ed. 1990) (defining

res judicata as the “[r]ule that a final judgment rendered

by a court . . . constitutes an absolute bar to a subsequent action involving the same claim.”) (emphasis added).

Therefore, Naomi cannot have the level of her meaningful

participation (or lack thereof) in the present case determined until res judicata becomes relevant in a subsequent proceeding.

In the alternative, Naomi argues that, if she must

wait for a subsequent proceeding before § 6015(g)(2)

becomes relevant, she wants to have her innocent-spouse

defense to joint liability (under 26 U.S.C. § 6015(b) & (f))

adjudicated on the merits during the pendency of the

present case. This would require, she argues, reopening

the record and allowing her to introduce the necessary

evidence to support her innocent-spouse claim, and she

further claims that it was an abuse of discretion for the

Tax Court not to allow her to do so.

Naomi seeks support in prior Tax Court decisions that,

she claims, have “bifurcated proceedings” in order to

allow an innocent spouse to have issues of joint liability

tried proximately to the general issues of tax liability. (Pet.
70 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

Br. at 78.) Yet in none of the cases upon which Naomi

relies did the innocent spouse remain silent for the duration of the Tax Court proceedings (with over ten years

elapsing from Kanter’s petition to Naomi’s first motion

regarding this issue) and, only after the case was all

but closed, raise, for the first time, an innocent-spouse

defense to joint liability. In Vetrano v. Comm’r, 116 T.C. 272

(2001), the innocent-spouse defense was asserted in the

original petition to the Tax Court. Id. at 274. Likewise, both

spouses in Charlton v. Comm’r, 114 T.C. 333 (2000),

asserted in their original petitions that they qualified

for innocent-spouse relief. Id. at 338. In King v. Comm’r,

116 T.C. 198 (2001), the original petition was, in its entirety, an innocent-spouse defense, and the so-called notinnocent spouse was involved as an intervenor. The one

consistent thread running through all of these cases

relied upon by Naomi is that the request for innocentspouse relief was squarely before the Tax Court well before the resolution of the case. Naomi, for whatever reason, never put the Tax Court on notice that she had an

innocent-spouse defense to joint liability.

Naomi claims her silence was due, in part, to a conflict

of interest with respect to the joint representation by

counsel of her and her husband. This conflict of interest,

she alleges, is the kind of extraordinary circumstance

that makes refusing to reopen the record an abuse of

discretion. What Naomi fails to argue adequately, however,

is that there was an actual conflict of interest. Joint

representation, by itself, is not a conflict of interest; the

representation of one client must actually conflict with

the representation of the other. See United States v. Fox,

613 F.2d 99, 102 (5th Cir. 1980) (“However, an actual, not

merely hypothetical or speculative, conflict must be demonstrated before it can be said that an accused has

been deprived of effective assistance of counsel.”); cf.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 71

01-4321, 01-4322, & 02-1220

Dorchester Indus., Inc. v. Comm’r, 108 T.C. 320, 339 (1997)

(“Certainly, one spouse’s claim that she (he) is an innocent spouse can present a conflict of interest to counsel

trying to represent both spouses. If, indeed, the spouses

do have differing interests with respect to any issue in a

case, our rules provide that counsel must secure informed consent of the client, withdraw from the case, or

take whatever other steps are necessary to obviate the

conflict of interest.”). Naomi shows no actual conflict in the

joint representation of her and her husband during the

present case. If Naomi could point us to an innocentspouse defense that she had at any time during the trial,

before a decision by the Tax Court, that would have

relied upon arguments in conflict with Kanter’s defenses,

then she is correct that Tax Court Rule 24(g) may have

required separate representation. See Dorchester Indus.,

108 T.C. at 339. She has not yet alleged such an argument—in other words, she does not show us that she

ever had a viable innocent-spouse defense that she was

prevented from raising because it conflicted with Kanter’s

defense strategy. There does not appear to have ever

been a time when she could say that the joint representation faced conflicting interests between Naomi and Kanter.

Now, with the Tax Court’s having entered a final decision, Naomi would have us engage in hindsight and find

that she was inevitably prejudiced by the joint representation because she is now liable for deficiencies for which

she is the “innocent spouse.” Had Kanter’s arguments

succeeded in the Tax Court, she would not be facing joint

liability nor would she be alleging conflict of interest.

We cannot, and will not, automatically conclude that her

silence was helpless ignorance and not a strategic decision.

Naomi is not prejudiced by the Tax Court’s refusal to

reopen the record. The opportunity to assert innocentspouse defenses to joint and several liability remains
72 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

34 Collection activity is defined in Treasury Regulation 1.6015-

5(b)(2)(i) as

[A] section 6330 notice; an offset of an overpayment of the

[innocent] spouse against a liability under section 6402; the

filing of a suit by the United States against the [innocent]

spouse for the collection of the joint tax liability; or the

filing of a claim by the United States in a court proceeding

in which the [innocent] spouse is a party or which involves

property of the [innocent] spouse. Collection activity does

not include a notice of deficiency; the filing of a Notice of

Federal Tax Lien; or a demand for payment of tax.

26 C.F.R. § 1.6015-5(b)(2)(i).

35 We do not, obviously, determine on the merits as part of this

appeal whether Naomi “meaningfully participated” in the litigation in the present case so that res judicata would (or would

not) apply. We, however, note again the Tax Court’s finding

that Naomi was not involved in the activities underlying the

present case, IRA, 78 T.C.M. (CCH) at 969 (“Petitioner Naomi R.

Kanter, Kanter’s wife, was not involved in any of the activities

giving rise to this litigation.”), and the Commissioner’s response

in the record that he did not object to a finding that Naomi

had not meaningfully participated within the meaning of

§ 6015(g)(2), (App. at 0364 (“For the purposes of this case, respondent has no objection to petitioner’s first request for relief [finding that she had not meaningfully participated in the

litigation].”)), as indicia relevant to such a determination.

fully available to her for up to two years after the Commissioner’s first “collection activity.” 26 U.S.C.

§ 6015(b)(1)(E).34 She will have her asserted defense

administratively reviewed by the IRS, and, if necessary

and appropriate, judicially reviewed by the Tax Court.35

The Tax Court’s decision not to determine that Naomi

had not “participated meaningfully” in the present litigation was proper under § 6015(g)(2), and it was not an

abuse of discretion for the court to refuse to reopen the
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 73

01-4321, 01-4322, & 02-1220

record in order to receive evidence concerning an innocentspouse defense.

CONCLUSION

In summary:

Issue I—STJ Report. Because we take the Tax Court

at its word that in rendering its final opinion it agreed

with and adopted the opinion of Special Trial Judge

Couvillion, we find Kanter’s arguments challenging the

Tax Court’s refusal to disclose the STJ’s “original” report

moot. We AFFIRM the Tax Court’s denial of Kanter’s motions for access to the STJ’s report.

Issue II—Fraud. There is significant circumstantial

evidence of fraudulent intent. It was not clearly erroneous

for the Tax Court to find fraud. We AFFIRM the Tax Court’s

findings on this issue.

Issue III—BRT. It was not clearly erroneous for the

Tax Court to find that Kanter was the grantor of BRT

and to affirm deficiencies against him for BRT’s income

during the years at issue. We AFFIRM the Tax Court’s

findings on this issue.

Issue IV—Washington Painting. There can be no

question that Kanter sought to facilitate the sale of the

George Washington painting for profit. The Tax Court

found that, in every instance where the potential for

profit was involved, Kanter engaged in significant non-lawrelated business activities with the purpose of facilitating the business opportunities of others for his own profit.

Given the number of evidentiary indicators supporting

that this venture was also for profit, we believe it was

clearly erroneous to find otherwise. We REVERSE the

Tax Court’s findings on this issue.
74 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

Issue V—Bank Deposits. The Tax Court did not

clearly err in its findings regarding Kanter’s unreported

income in 1982 as determined by bank deposit analysis. We

AFFIRM the Tax Court’s findings on this issue.

Issue VI—Equitable. It was not clear error for the Tax

Court to find that the transfers from Equitable Leasing

were commissions and were taxable income. We AFFIRM the

Tax Court’s findings on this issue.

Issue VII—Cashmere. It was not clearly erroneous

for the Tax Court to have found that the assumption of

the real estate partnership interests’ liabilities by Cashmere had as its principal purpose the avoidance of federal

income tax. Alternatively, it was not clearly erroneous

for the Tax Court to conclude that the promissory notes

did not represent genuine indebtedness and had no basis,

and, therefore, that the liabilities assumed exceeded the

basis of the contributed property by the full amount of

the liabilities and were taxable to that extent. Finally, the

Tax Court did not clearly err in finding the grantor trusts’

sale of Cashmere stock to Waco ineligible for the installment method of reporting for federal income tax purposes.

We AFFIRM the Tax Court’s findings on this issue.

Issue VIII—Naomi Kanter. We believe the Tax Court’s

interpretation of § 6015(g) was correct, and that Naomi

must wait for a subsequent proceeding before she can have

the level of her participation in the present case determined. We also do not believe that it was an abuse of

discretion for the Tax Court to refuse to reopen the present case to allow Naomi to litigate her innocent-spouse

defense. We AFFIRM the Tax Court on this issue.

For the foregoing reasons we AFFIRM in part and REVERSE

in part the decision of the Tax Court.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 75

01-4321, 01-4322, & 02-1220

CUDAHY, Circuit Judge, concurring in part, dissenting

in part. I concur with the majority’s opinion as to Naomi

Kanter’s issues on appeal, but dissent otherwise. I write

separately to address Kanter’s threshold argument that

the Special Trial Judge’s (“STJ’s”) original report must be

made a part of the record on appeal so that this court

can determine whether its contents have been adequately

considered by the Tax Court judge, whose opinion is

before us.

Before I begin the legal analysis that, I believe, demonstrates why the withholding of the report is improper,

I want to take a few lines to address the policy concerns

that leap to mind when first encountering the suppression of the report. For the Tax Court is not merely “unusual;” it is, I believe, unique among all the institutions

in the law where one official conducts a trial (and thus

hears the witnesses) and prepares a report or other document containing her findings or recommendations based

on the trial, and another official or group of officials

subsequently makes the operative decision. Even the Commissioner, at oral argument, acknowledged that in every

milieu except that of the Tax Court, the document containing the findings or recommendations of the official

conducting the trial are available to a court reviewing

the operative decision. This includes, for example, the

report of a federal magistrate judge to a district court

responsible for a decision. This is also the practice under

the Administrative Procedure Act which governs practically all federal administrative proceedings and where

the hearing officer (usually an administrative law judge)

must file a recommended decision which is distributed

to both parties, any appellate court conducting a review

and to the public at large. Transparency is the universal

practice of agencies and courts employing these decisional

practices. The question then becomes, if there are policy
76 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

reasons that dictate transparency for everyone else, why

do these reasons not apply to the Tax Court?

The Tax Court has not denied that a document containing the original findings of the STJ exists, yet it refuses

to include this document in the record on appeal. It is no

answer at all to claim that the report of the STJ is like

a law clerk’s memorandum to a judge or the memorandum

of a fellow jurist on a panel—an internal privileged decisional document. The document here is of an official who

presided over the trial and heard the witnesses, and it is

directed towards an official who has no first hand knowledge of any aspect of that same trial. 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. If we approve the Tax Court’s practice

here, are we not suggesting to the whole administrative array of the federal government that it may seek

by available means when statutes permit to deny transparency when engaging in like decisional processes? I

believe that the legal analysis of the majority as well as

my own must be examined in the context of the larger

implications of allowing an administrative body (technically, an Article I court) like the Tax Court to flout the

otherwise ubiquitous principle of transparency in its

proceedings. That said, I believe there also exist sound

constitutional grounds demanding transparency in this

instance.

As a threshold matter, everyone agrees that Kanter’s

arguments are immaterial if the Tax Court’s opinion is

the verbatim reproduction of the STJ’s report, which the

majority and the Eleventh Circuit, Ballard v. Commissioner, 321 F.3d 1037 (11th Cir. 2003), appear to believe

is the case, and which the Tax Court’s opinion superficially
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 77

01-4321, 01-4322, & 02-1220

purports to be. The Tax Court’s opinion clearly states that

it adopts and agrees with the “opinion” of the STJ. If

that recital is to be interpreted as meaning that the

STJ’s initial report lies before us already, then there is

no issue of the Tax Court judge’s according due regard or

a presumption of correctness to the STJ’s findings. Deference would not be an issue if there has been outright

adoption of the STJ’s findings. This state of affairs

would also appear to moot Kanter’s due process argument

as well as his Rule 183 argument. Kanter relies on United

States v. Raddatz, 447 U.S. 667 (1980), to argue that an

STJ should be treated the same as a magistrate judge.

Using Raddatz, Kanter argues that when the Tax Court

reverses an STJ’s credibility findings without having

heard the witnesses personally, due process is violated.

However, the verbatim adoption of the STJ’s findings by

the Tax Court would fully comport with even Kanter’s

interpretation of Raddatz’s due process requirements.

But I agree with Kanter that when the Tax Court

“agrees with and adopts the opinion of the Special Trial

Judge,” it does not mean that the Tax Court opinion is

the verbatim reproduction of the original STJ’s report.

Kanter argues that the Tax Court routinely reviews

and alters STJ reports through an internal process that

is concealed in published Tax Court opinions by the language, “agrees with and adopts.” Kanter presented two

pieces of evidence to support his claim: 1) Kanter’s attorney allegedly was told informally by Tax Court Judge

Julian Jacobs and Chief Special Trial Judge Peter J.

Panuthos that the credibility findings of Special Trial Judge

Couvillion on fraud were reversed by Tax Court Judge
78 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

1 Kanter’s attorney revealed the names of the judges in question

when asked at oral argument. The original declaration of Kanter’s

attorney did not name the Tax Court judges who allegedly made

these statements concerning the alteration of the STJ’s report.

Declaration of Attorney Randall G. Dick, App. at 0250-52.

Dawson;1 and 2) there exists not a single Tax Court decision

since the adoption of current Rule 183 where a Tax Court

Judge has purported to modify or reverse a finding of a

Special Trial Judge.

What Kanter alleges happened in the present case,

and what commonly occurs in the Tax Court, is that a

Tax Court judge takes the STJ’s report (which had been

filed with the Chief Judge pursuant to Rule 183) and

works together with the STJ to edit it. From this process

emerges a final report that may or may not bear any

resemblance to the original report, but that still may be

called the STJ’s “opinion” (but not the STJ’s “report”) if

the STJ agrees to subscribe to it. This modified report is

then “adopted” by the Tax Court judge and filed as the

Tax Court opinion. This is the reason, Kanter argues, that,

in the 880-plus Tax Court decisions since 1983 that I

could find that involved an STJ report, the Tax Court

judge purported to agree with and adopt the opinion of

the STJ in every instance. Never, in any instance since

the adoption of the current Rule 183 that I could find, has

a Tax Court judge not agreed with and adopted the STJ’s

opinion.

I find this extraordinary unanimity telling. It is difficult

to believe that over the course of nineteen years (since

the amendments giving rise to current Rule 183), not a

single Tax Court judge (and there are 19 of them, 26 U.S.C.

§ 7443(a)) has ever disagreed with a single original finding of any STJ (and there are about 20 of them). I say
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 79

01-4321, 01-4322, & 02-1220

with confidence that this degree of unanimity is not

only unusual, but impossible in a system of arms-length

appellate style review involving 39 independent individuals. I believe that it is highly likely, therefore, that there

is some kind of collaborative process involved in the path

from STJ report to Tax Court decision. I draw support

in this conclusion from the fact that neither the Commissioner nor the Tax Court has ever settled this issue

by unambiguously stating otherwise, despite opportunities to do so. Notably, at oral arguments on the present case the Commissioner did not dispute Kanter’s contention that the STJ’s report undergoes some kind of revision during the process of “adoption” by the Tax Court. And

in his brief the Commissioner is very careful in stating

that the Tax Court adopted the “opinion of the [STJ].” Resp.

Br. at 111 (emphasis added). And the Commissioner is

just as careful in never stating that the Tax Court adopted

the STJ’s “report.” This care mirror’s the Tax Court’s

own language in its refusal to release the STJ’s report to

Kanter.

I believe that the record supports the notion that the

Tax Court engages in a quasi-collaborative process of

review of the STJ’s report from which a new and frequently

different STJ’s opinion emerges to be adopted and agreed

with by the Tax Court. If my understanding is correct, there

are two “STJ’s reports” in many, if not most (or even all),

Tax Court cases—the original “report” filed under Rule 183

with the Chief Judge of the Tax Court, which is solely

the work product of the STJ (and which represented the

STJ’s views at the end of trial) and the later “opinion” of the

STJ, which is a collaborative effort, but which the Tax

Court then “agrees with and adopts” as the opinion of the

Tax Court. In any event, I do not claim to know the

degree to which the STJ’s original filed report in the

present case was altered, and I do not take as determina-
80 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

tive of that fact the declaration of Kanter’s attorney regarding his conversations with Tax Court personnel. So,

given this interpretation of the Tax Court’s procedure, I

want to take a closer look at Kanter’s argument.

Kanter’s argument wraps a number of different issues

into one request for the STJ’s report. First, whether or not

the Tax Court’s procedure denying access to the STJ’s

report violates its own Rule 183. Second, whether the

Tax Court’s procedure violates other law, including the

Internal Revenue Code (“IRC”). Third, whether the Tax

Court’s procedure violates due process protections. Finally,

and most importantly, whether Kanter’s due process

rights on appellate review by this court are violated

when we undertake review of the Tax Court’s decision

without the context of the STJ’s original report with respect to credibility findings.

1. Does the Tax Court’s procedure violate Tax Court

Rule 183?

I agree with the majority’s determination that Rule

183 imposes no requirement of disclosure or of clearly

erroneous deference upon the Tax Court. However, I

think some additional discussion of the evolution of Rule

183 into its current form, and why the current rule does

not compel production of the STJ’s report nor require any

particular deference to the STJ’s report, would be very

informative. Kanter points us to Stone v. Commissioner, 865

F.2d 342 (D.C. Cir. 1989), where the Court of Appeals for

the District of Columbia Circuit found that an STJ’s

findings should be reviewed by the Tax Court under a

clearly erroneous standard. Id. at 347. Under a prior

version of the Tax Court’s rules (pre-1983 and which

governed the case before the Stone court), the STJ’s report

was served on each party and each party had an opportu-
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 81

01-4321, 01-4322, & 02-1220

nity to file objections to the report’s findings. See Tax Court

Rule 182(b), (c), 60 T.C. 1149 (1973). The Stone court’s

finding that the STJ’s report was owed deference followed from the Tax Court rules, Rule 182(d) at the time,

which stated that “[d]ue regard shall be given to the circumstance that the [STJ] had the opportunity to evaluate

the credibility of witnesses; and the findings of fact recommended by the [STJ] shall be presumed to be correct.” Tax

Court Rule 182(d), 60 T.C. 1150 (1973). The explanatory

notes to this rule prescribed that, in regard to the “special

weight” to be given the STJ’s findings, one should look

to Court of Claims Rule 147(b). Id. The Stone court found

this prescription particularly instructive because Rule

182(d)’s language was lifted practically verbatim from Court

of Claims Rule 147(b). Stone, 865 F.2d at 345. At the time

that the language of Court of Claims Rule 147(b) had been

adopted for the Tax Court’s rules, the Court of Claims

interpreted that language to require review of the findings of its version of an STJ’s report under a clearly erroneous standard. See, e.g., Elmers v. United States, 172 Ct. Cl.

226, 232 (1965). The Stone court found that the language

of the rule, the rule’s command to look to the Court of

Claims and the Court of Claims’ use of a clearly erroneous standard of review required the use of such a standard

in the Tax Court’s review of STJ findings. Stone, 865 F.2d

at 347. However, the Stone court went on to note that

The Tax Court is of course free to make its own rules

determining the relation between it and its Special

Trial Judges. Moreover, we assume that the Tax Court’s

construction of its own rules enjoys the deference, on

review in this court, enjoyed by an administrative

agency interpreting its own regulations.
82 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

2 I have been unable to discover what, if any, formal documented

procedure accompanies the adoption, amendment or repeal of a

Tax Court rule. There does not exist, I believe, any written

description of the process that is available in public records.

Informal conversations with a Deputy Clerk of the Tax Court and

the Tax Court’s library have indicated that some section of the

Tax Court comprises a rules committee that periodically issues

rules and rule changes. There is some indication from these

informal conversations and my research that proposed rules may

be circulated to members of the tax bar for comment. See, e.g.,

ABA Members Suggest Modifications To Proposed Amendments of

Tax Court Rules, 97 Tax Notes Today 167-25 (August 28, 1997).

But there is no such requirement within the IRC or the Tax

Court’s rules. Like the process by which an STJ’s report is

composed and then withheld, I find this rulemaking procedure

oddly out of sync with prevailing practices in other areas of the

law. Compare 28 U.S.C. § 2071(b) (“Any rule prescribed by a

court, other than the Supreme Court, under subsection (a) shall

be prescribed only after giving appropriate public notice and an

opportunity for comment.”) and Fed. R. App. P. 47(a)(1) (“Each

court of appeals acting by a majority of its judges in regular active

service may, after giving appropriate public notice and opportunity for comment, make and amend rules governing its practice.”)

with 26 U.S.C. § 7453 (“[T]he proceedings of the Tax Court and its

divisions shall be conducted in accordance with such rules of

practice and procedure (other than rules of evidence) as the Tax

Court may prescribe.”) and Tax Court Rule 1(a) (“Where in any

instance there is no applicable rule of procedure, the Court or the

Judge before whom the matter is pending may prescribe the

procedure, giving particular weight to the Federal Rules of Civil

Procedure to the extent that they are suitably adaptable to govern

the matter at hand.”).

Id. The Tax Court did exactly that—changed its rules.2

In 1983, the Tax Court amended and redesignated the
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 83

01-4321, 01-4322, & 02-1220

3 Current Tax Court Rule 183(c) provides:

Action on the Report: The Judge to whom or the Division to

which the case is assigned may adopt the Special Trial

Judge’s report or may modify it or may reject it in whole or in

part, or may direct the filing of additional briefs or may

receive further evidence or may direct oral argument, or may

recommit the report with instructions. Due 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.

4 One interesting detail involves the timing of the Stone decision

and the change in current Rule 183. Stone involved events in the

1960’s and a Tax Court trial in the 1970’s (all events before

the 1983 amendment of Rule 183), but the court of appeals

decision is from 1989, well after the amendment. So, although the

court was dealing with a case where the STJ’s report was part

of the record, it made the noted comment concerning the Tax

Court’s ability to amend the Tax Court rules at a time when

that court had already done so. But the court of appeals decision

made no mention of that amendment.

rule in question, adopting its current form as Rule 183,3 and

noted that “[t]he prior provisions for service of the [STJ]’s

report on each party and for the filing of exceptions to that

report have been deleted.”4

 81 T.C. 1070 (1983). The Tax

Court has never documented any explanation of why this

amendment was undertaken. The Tax Court’s power to

prescribe its own rules of procedure is undisputed. 26

U.S.C. § 7453. And although the Tax Court is no longer an

executive agency, see Freytag v. Commissioner, 501 U.S.

868, 887-88 (1991) (noting that in 1969 Congress removed

the Tax Court from the realm of executive agencies and

made it an Article I court), it is clear, and Kanter does not

dispute, that the Tax Court’s interpretation of its own rules

of procedure receives a great deal of deference. Therefore,
84 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

5 The Stone court, in fact, stated in its interpretation of the due

regard and presumed correct language, that “until the [tax] court

adopts new language, it must hew to the meaning of what it

has said.” Stone, 865 F.2d at 347.

the 1983 amendment to the Tax Court rules had the effect

of no longer requiring that parties (or the general public or

a reviewing court, for that matter) have access to the STJ’s

report.

Kanter notes, however, that the language of the earlier

rule that prompted the clearly erroneous standard in

Stone remains unchanged. The Tax Court judge still “shall”

give “[d]ue regard” to the fact that the STJ had the opportunity to hear and evaluate the credibility of the witnesses, and the STJ’s recommended findings of fact still

“shall be presumed to be correct.” Tax Court Rule 183(c).

This language, according to Kanter, still commands the

Tax Court judge to whom the STJ’s report is submitted

to adopt the STJ’s findings unless the findings are clearly

erroneous.5

 And there certainly appears to be some consensus in the literature that the Rule still embodies a

clear error standard. See, e.g., 35 Am. Jur. 2d Fed. Tax

Enforcement § 905 (2002) (“The Tax Court is required

to review a special trial judge’s factual findings according

to the clearly erroneous standard, and cannot overturn

a special trial judge’s ruling on the basis that the Tax

Court finds the testimony credited by the trial judge to

be unbelievable.”); 20A Federal Procedure, L. Ed., Internal

Revenue § 48:1274 (2000) (same); but see Tax Court Litigation, 630-2nd Tax Mgmt. Portfolio at A-49 n.599 (1997)

(“The D.C. Circuit (but not the Tax Court) has taken the

position that the level of deference is to review the Special

Trial Judge’s draft opinion on a ‘clearly erroneous’ standard.”). However, I agree with the majority’s conclusion
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 85

01-4321, 01-4322, & 02-1220

that this is no longer the case, and I have nothing additional to add to its reasoning on the matter.

Therefore, like the majority, I also do not believe that

Tax Court Rule 183 requires an STJ’s report to be reviewed under a clearly erroneous standard, nor that

Rule 183 is violated by a quasi-collaborative process of

revision of an STJ’s report, nor that the Rule requires the

production of the report. In spite of this I must again note

how remarkable it is that not only is the Tax Court unique

in the opacity of its process, but it has arrived at this

opaque process by abandoning a transparent process—

an evolution completely counter to the trend towards

transparency in analogous areas of the law. See, e.g., Elena

Kagan, Presidential Administration, 114 Harv. L. Rev.

2245, 2331-32 (2001) (describing new theory of administrative control in which author notes that transparency

is a core value of administrative procedure). There is no

public indication why the Tax Court rules and procedures were changed in 1983 to the current system that

disadvantages those appealing Tax Court decisions. And, of

course, an appellate-style procedure such as that typical

in all other areas of federal administrative adjudication

would facilitate challenges, whether made by the taxpayer

or by the Commissioner. The previous procedure may

well have been abrogated for exactly this reason.

2. Is the Tax Court’s procedure otherwise unlawful?

The majority quite ably and clearly outlines why existing rules and statutes do not appear to compel inclusion

of the STJ’s report in the record on appeal. In doing so, the

majority places significant weight on the Commissioner’s

argument analogizing the STJ-Tax Court judge relationship to the division-Tax Court relationship governed by

26 U.S.C. § 7460, in which a division’s preliminary report
86 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

is never made public if the Tax Court reviews the case

and issues its own opinion. Before moving on to the meatier

due process issues, I want to note that this analogy,

however, overlooks some important considerations. First,

a division whose report is reviewed by the Tax Court has

the opportunity to file a dissent from the Tax Court’s final

decision and place in that dissent any of its objections—

objections that could, in theory, include the division’s

overruled findings that were contained in its original

report. Thus, those original findings can be made public,

albeit in a roundabout manner, if the division wants

them to be. An STJ’s original report is never made public.

Second, § 7460 differs significantly from Rule 183 in that

it does not require “due regard” for the fact that the division has heard witnesses and evaluated credibility (perhaps because the division may not have been the adjudicator who heard the witnesses), nor does § 7460 require

any presumption that the division’s report is correct. In

contrast, Rule 183 requires both due regard and a presumption of correctness for the STJ’s report. Therefore, to

the extent that the Tax Court’s final opinion must, under

Rule 183, accord some kind of respect to the STJ’s original

findings, the STJ’s original report has some ongoing

significance, whereas the division’s report is of no consequence in the formulation (or appellate review) of the

Tax Court’s opinion.

Third, since the division may not have conducted the trial

nor heard the witnesses, a policy of deference to such an

adjudicator would not necessarily be appropriate. By

contrast, an STJ is always the person who hears witnesses and, for that reason, is an adjudicator entitled to

deference. Again, this raises the significance of the original

STJ’s report to the ultimate adjudication and review of

the case in a way not present with a division’s report.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 87

01-4321, 01-4322, & 02-1220

6 I am not suggesting that, in this case or in general, the judges

of the Tax Court coerce or exert undue influence over STJs. The

judicial independence of finders of fact, however, is a structural

principle. The statutes and Tax Court Rules establishing and

utilizing STJs lack the structure of judicial independence we

find in, for example, our Article III courts. One way of imposing

a structural modicum of judicial independence on the Tax

Court would be through transparency and judicial review—

providing access to the STJ’s original report would allow for

judicial independence without compromising the procedures of

(continued...)

And finally, the relationship between a division and the

Tax Court is far different from the relationship between an

STJ and the Tax Court. Tax Court judges are all, essentially, equal. They are presidentially appointed for statutorily mandated 15 year terms, and they each have an equal

vote in the business of the Tax Court. 26 U.S.C. §§ 7443,

7444. An STJ is appointed at the discretion of the Chief

Judge and has no statutorily mandated term of office. 26

U.S.C. § 7443A. Congress has authorized specific and

limited means for removing a Tax Court judge from office:

“Judges of the Tax Court may be removed by the President,

after notice and opportunity for public hearing, for inefficiency, neglect of duty, or malfeasance in office, but for no

other cause.” 26 U.S.C. § 7443(f). There is no such statutory

protection for STJs. Ultimately, keeping a division’s preliminary report secret appears less problematic given the

division’s almost unfettered ability to make its wishes

clearly known in the final opinion without concern for

job security or reprisal. However, an STJ serves at the

discretion of the Tax Court, and his or her judicial independence is therefore quite circumscribed. Only by allowing access to the original STJ’s report can the Tax Court

insulate itself from the perception that an STJ’s “findings”

are arbitrarily malleable at the discretion of the Tax Court.6
88 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

6 (...continued)

the Tax Court. This is the same procedure prescribed by the

Administrative Procedure Act, which requires the report of the

ALJ who heard the witnesses to be prepared and filed for public

enlightenment. To describe the STJ system and lament its lack

of structured judicial independence does not suggest that I

am impugning the integrity of the distinguished members of

the Tax Court. And this dissent should certainly not be interpreted in that way.

In addition, there are other provisions of the Internal

Revenue Code that, at the very least, show that Congress

did not demonstrate a clear intent to keep STJ reports

secret—unlike the clear intent to keep division reports

private that is shown in § 7460. 26 U.S.C. § 7459(b) states

that the “Tax Court shall report in writing all its findings of fact, opinions, and memorandum opinions.” Additionally, 26 U.S.C. § 7461(a) states that “all reports of the

Tax Court . . . shall be public records,” and 26 U.S.C. § 7462

states that the “Tax Court shall provide for the publication

of its reports at the Government Printing Office in such

form and manner as may be best adapted for public information and use. . . .” While the majority is correct that

there are no rules or statutory sections that specifically

require that the initial report of the STJ be made public,

there are, by the same token, no sections that forbid that

the report be made public—in contrast to § 7460’s clear

intent to keep private a division report that is reviewed

by the full Tax Court. And §§ 7459, 7461 and 7462 appear

to establish a strong presumption in the IRC in favor of

public dissemination of Tax Court documents that, apparently, could easily apply to the STJ’s report. Only a

formalistic interpretation by the Tax Court that the STJ’s

report is not a “report of the Tax Court” allows it to avoid

such a presumption.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 89

01-4321, 01-4322, & 02-1220

7 Kanter has separated these two oft intertwined concepts in

his arguments when he alleges that 1) the Tax Court owes the

(continued...)

3. Does the Tax Court’s procedure violate due process?

Due process requires that Kanter have been afforded

a fair hearing before he is deprived of property. Mathews

v. Eldridge, 424 U.S. 319, 333 (1976). Notice and an

opportunity to be heard are the hallmarks of a fair hearing. Mullane v. Central Hanover Bank & Trust Co., 339

U.S. 306, 313 (1950). The Supreme Court in Raddatz

reiterated the three part test announced in Mathews

for evaluating due process protections:

[T]hree factors should be considered in determining

whether the flexible concepts of due process have

been satisfied: (a) the private interests implicated; (b)

the risk of an erroneous determination by reason of

the process accorded and the probable value of added

procedural safeguards; and (c) the public interest

and administrative burdens, including costs that the

additional procedures would involve.

Raddatz, 447 U.S. at 677 (citing Mathews, 424 U.S. at 335).

In the context of the present case, one would need to

determine whether a quasi-collaborative process wherein

the ultimate finder of fact, who has not heard the witnesses herself, can amend, revise or reverse the preliminary findings of the person who actually heard the witnesses (and never reveal those preliminary findings)

without running afoul of the Fifth Amendment. This

comprises two separate questions: (1) must the Tax Court

review the STJ’s findings with a formal degree of deference (such as clear error); and (2) must the Tax Court itself hear witnesses to determine issues of credibility before reversing the STJ?7
90 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

7 (...continued)

STJ a formal degree of deference and 2) the Tax Court cannot

change the STJ’s findings without having heard the witnesses.

Once it is determined that, under the Fifth Amendment, the Tax

Court can act as an original fact finder and determine facts

de novo, then one must ask whether the method of conducting

that factual determination can be done based on a transcript

of witness testimony or only by actually hearing the witnesses

first hand. The first question may or may not be a pure procedural due process question, but its answer is clear and it

serves to frame the more difficult second question for analysis.

As Raddatz and Universal Camera make clear, at one

end of the due process spectrum—the general administrative law context—due process does not require that the

ultimate fact finder be constrained by a formal degree of

deference to the original hearing officer. Nor must that

fact finder rehear witnesses before making findings,

whether or not the fact finder reverses the original hearing

officer’s findings. See Id. at 680 (“Generally, the ultimate

factfinder in administrative proceedings is a commission

or board, and such trier has not heard the witnesses testify. . . . While the commission or board . . . may defer to the

findings of a hearing officer, that is not compelled.”);

Universal Camera Corp. v. NLRB, 340 U.S. 474, 492-94

(1951); see also 5 U.S.C. § 557(b) (“On appeal from or review of the initial decision, the agency has all the powers

which it would have in making the initial decision. . . .”);

Kenneth Culp Davis & Richard J. Pierce, Jr., Administrative Law § 8.6, at 396 (3d ed. 1994) (noting that the command of Morgan v. United States, 298 U.S. 468, 481 (1936),

that “the one who decides must hear,” “did not mean that

an agency head who decides must listen to the witnesses

testify”).

At the other end of the due process spectrum lies the

criminal procedure context, where due process protections
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 91

01-4321, 01-4322, & 02-1220

8 Footnote 7 in Raddatz states in relevant part:

“The issue is not before us, but we assume it is unlikely that

a district judge would reject a magistrate’s proposed findings on credibility when those findings are dispositive and

(continued...)

are the most demanding. First, regarding deference, the

Supreme Court in Raddatz did not directly address the

issue, but the Federal Magistrates Act under review

required the district court to conduct a de novo review

of the magistrate judge’s findings, and the Court took no

issue with that standard of review, even for credibility

findings. This parallels the administrative context, and

demonstrates, I believe, that along the full continuum

of due process concerns framed by Raddatz and Universal

Camera, there is no per se due process violation when

the ultimate finder of fact reviews preliminary findings

de novo. Therefore, I agree with the majority that the

Fifth Amendment does not require that the Tax Court

review STJ findings using any particular degree of deference. This means also that there is no constitutional

requirement that the Tax Court use an appellate-style

review of its STJs’ reports. In this respect, the quasicollaborative model adopted by the Tax Court is permissible.

Second, what about the rehearing of witnesses in a

criminal procedure context? While, under the Mathews

analysis, the interests of a criminal defendant in a suppression hearing are not as significant as they may be in

a full criminal trial, they are significant enough that

the Supreme Court issued a warning that “serious questions” existed in the situation wherein a district court

judge reversed a magistrate judge’s dispositive credibility

findings without hearing the witness herself. Raddatz,

447 U.S. at 681 n.7.8

 Several of our sister circuits have
92 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

8 (...continued)

substitute the judge’s own appraisal; to do so without seeing

and hearing the witness or witnesses whose credibility is

in question could well give rise to serious questions which

we do not reach.”

found that these “serious questions” have a single answer:

a district court judge cannot reverse a magistrate’s credibility findings without hearing the witness at issue. See, e.g.,

United States v. Cofield, 272 F.3d 1303, 1305-06 (11th

Cir. 2001); Hill v. Beyer, 62 F.3d 474, 482 (3d Cir. 1995);

United States v. Rosa, 11 F.3d 315, 328-29 (2d Cir. 1993);

In re Hipp, Inc., 895 F.2d 1503, 1519-21 (5th Cir. 1990); see

also United States v. Mejia, 69 F.3d 309, 316-20 (9th Cir.

1995) (finding that footnote 7 of Raddatz applied to a

suppression hearing where the judge making the ruling

received no findings on credibility from the judge who

heard the witnesses’ testimony; the court ruled it was a

due process violation to make such a ruling without having heard the witnesses).

However, as the Commissioner points out, the interests

in Raddatz were more significant because that case involved an aspect of a criminal trial, and the proceedings before the Tax Court are eminently civil. Under the

Mathews framework, the private concerns involved in a

civil proceeding are not entitled to the same level of due

process protection as the concerns in a criminal proceeding,

just as Raddatz notes that within a criminal proceeding

a suppression hearing embodies a lower interest than

other aspects of a criminal trial. See Bristol-Myers Squibb

Co. v. McNeil-P.P.C., Inc., 973 F.2d 1033, 1045 (2d Cir.

1992) (“Moreover, we have indicated that the Raddatz dicta

may be inapplicable outside the criminal context. . . .”).

While it is not an easy issue, I believe that the interests

at stake in a civil tax court proceeding do not rise to the
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 93

01-4321, 01-4322, & 02-1220

9 However, I reiterate that the judicial independence of the STJ,

who serves at the discretion of the Tax Court, is suspect. The

structure of the STJ process does nothing to expressly preserve

the voice or influence of an STJ in the formulation of the final

opinion. Therefore, I do not accord a great deal of weight to the

influence of the STJ over the Tax Court’s review of the STJ’s

report. In this way I differ not only from the majority, but

also from the conclusion of the Eleventh Circuit, which analogizes

a Tax Court judge’s conferring with an STJ to members of an

appellate panel conferring with one another. See Ballard, 321 F.3d

at 1043. In the Tax Court situation, only one of the conferees

(continued...)

level addressed in Raddatz, and are more analogous to the

interests involved in an administrative adjudication.

There certainly is some cause for concern that a finding

of credibility on a “cold record” as voluminous as the one

before us here increases the chance of an erroneous determination, but I do not believe that that possibility in this

kind of civil proceeding is as high, nor the costs as great,

as would be the case in a criminal milieu. Additionally,

I would note that the only fully responsive remedy would

be to require the Tax Court itself to rehear the witnesses

whose credibility was at issue. Under the third prong of

the Mathews test this added procedure would probably

be an enormous burden and impose a prohibitive cost. The

added value of such procedure under the second prong of

Mathews seems insubstantial, especially given that the

quasi-collaborative model can provide the Tax Court

with ongoing access to the thoughts and impressions of the

STJ who actually heard the witnesses. Additionally, I

believe that one possible advantage of the quasi-collaborative process (over standard appellate-style review) might

be an opportunity for the STJ to have additional input

into the decision making process beyond her original

report.9

 This opportunity should do something to mini-
94 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

9 (...continued)

has attended the trial and heard the witnesses and the conferees

are not of equal rank nor do they possess an equal degree of

judicial independence.

mize the risk of an erroneous determination.

Hence, the dictum in Raddatz’s does not persuade me

that the reversal of an STJ’s findings by the Tax Court

following a quasi-collaborative procedure violates due

process. In a real sense, my writing to this point has

been more concurrence than dissent. But I feel it very

important to navigate these areas of agreement in order

to properly prepare for the pivotal area of disagreement,

where I part ways with the majority.

4. Does appellate review of the Tax Court’s findings

without access to the STJ’s report violate due process?

There is another stage of procedure involved here (and

a key one from my perspective) that requires due process analysis—appellate review of the Tax Court’s decision.

Whether or not the STJ’s report is made available to the

parties for comment before the Tax Court issues its findings, and whether or not the Tax Court can reverse the

STJ’s purportedly dispositive credibility findings without having heard the relevant witnesses, the question

still remains whether or not the due process rights of

the parties before this court are violated when we have

no opportunity to review the Tax Court’s factual findings

for clear error in light of the STJ’s initial report. See Evitts

v. Lucey, 469 U.S. 387, 393 (1985) (there is no constitutional right to appeal, but once a right of appeal is created,

it must comport with due process to be meaningful and
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 95

01-4321, 01-4322, & 02-1220

10 This question does not depend upon the Tax Court’s being

required to give some level of formal deference to the STJ’s report.

Although the question before us would be much easier to answer

if such a requirement existed, I am asking the more fundamental

question whether our clear error review of the Tax Court’s

findings can be meaningful without the context of the STJ’s report

to inform that review.

effective). This question distinguishes the issue whether

the Tax Court’s procedures are intrinsically unfair (which

neither I nor the majority believe is true) from the issue

whether the Tax Court’s procedures are unreviewable

(on which the majority and I disagree).10 The essential

difference is that the Tax Court has the report; we do not.

Our review of the Tax Court is governed by the same

standards as those governing our review of a district court’s

civil bench trial; this means that legal conclusions are

reviewed de novo and findings of fact are reviewed for

clear error. See 26 U.S.C § 7482(a); Pittman v. Commissioner, 100 F.3d 1308, 1312-13 (1996). Obviously, we do

not need access to the STJ’s report to conduct meaningful de novo review of the Tax Court’s legal conclusions. But

clearly erroneous review involves deference to the conclusions of the fact finder—the Tax Court in the present

case. This is a deference that the Supreme Court has

attributed, in the case of credibility, to the fact finder’s firsthand observations of the witnesses in question.

[A] finding is “clearly erroneous” when although there

is evidence to support it, the reviewing court on the

entire evidence is left with the definite and firm conviction that a mistake has been committed.

. . . .

When findings are based on determinations regarding

the credibility of witnesses, [the clearly erroneous
96 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

11 Most review of administrative agency determinations or adjudications is done under the “substantial evidence” standard. The

clear error standard, which we apply to the review of district

court as well as Tax Court factual findings, is virtually indistinguishable from the substantial evidence standard. See School

District of Wisconsin Dells v. Z.S., 295 F.3d 671, 674 (7th Cir.

2002) (“ ‘[T]he difference [between clear error and substantial

evidence] is a subtle one—so fine that . . . we have failed to

(continued...)

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 v. City of Bessemer City, N.C., 470 U.S. 564, 573,

575 (1985) (citations omitted). Thus, it is integral to the

standard of clear error review that there be deference to

the credibility findings of the official who has actually

heard the witnesses. Although the Supreme Court in

Anderson was discussing the deference due a finder of fact

who has, himself, heard the witnesses, I think the Court’s

command is also instructive in two ways. First, on its face

Anderson instructs that on issues of credibility the opportunity to hear witnesses is significant in a clear error

context. Second, Anderson informs that context by impliedly undermining the reliability of findings that reverse the credibility determinations of an official who has

actually heard the witnesses. If we are to give “even

greater deference” to the findings of a judge who has

heard the witness whose credibility is at stake, we must

inevitably give less deference to the judge who subsequently reverses those findings.

I find major support for this line of thinking in the

administrative law arena.11 In the administrative context,
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 97

01-4321, 01-4322, & 02-1220

11 (...continued)

uncover a single instance in which a reviewing court conceded

that the use of one standard rather than the other would in

fact have produced a different outcome.’ ”), quoting Dickinson

v. Zurko, 527 U.S. 150, 162-63 (1999); see also Tripp v. Commissioner, 337 F.2d 432, 434 (7th Cir. 1964) (using both “clear error”

and “substantial evidence” in reference to review of Tax Court’s

findings of fact). Therefore, I look for guidance to the administrative law context, in which reviewing courts examine administrative agency determinations (including adjudications).

12 And again, in the administrative context an agency can make

factual findings de novo, regardless of any preliminary findings,

much as the Commissioner claims the Tax Court can do with

respect to an STJ’s report.

the Administrative Procedure Act requires that a reviewing court examine an agency determination based on a

record that includes any preliminary findings from the

hearing officer (like an Administrative Law Judge (ALJ)).12

5 U.S.C. §§ 557(b), 706. When a reviewing court reviews

agency findings on credibility for substantial evidence, it

is strongly influenced by the preliminary findings of

the ALJ who actually heard the witnesses—influence that

becomes even more significant when an agency has reversed those preliminary credibility findings. See Kopack v.

NLRB, 668 F.2d 946, 953 (7th Cir. 1982) (“One must attribute significant weight to an ALJ’s findings based on

demeanor because neither the [NLRB] nor the reviewing

court has the opportunity similarly to observe the testifying witnesses.”); Moore v. Ross, 687 F.2d 604, 609 (2d Cir.

1982) (“Accordingly, reviewing courts have often found

federal decisions unsupported by substantial evidence

when they hinge on assessments of credibility contrary

to those made by the ALJ who heard the witnesses.”); Ward

v. NLRB, 462 F.2d 8, 12 (5th Cir. 1972) (“The preeminence

of the Examiner’s conclusions regarding testimonial probity
98 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

does not amount to an inflexible rule that either the Board

or a reviewing court must invariably defer to his decision,

thereby effectively nullifying either administrative or

judicial review. But when the Board second-guesses the

Examiner and gives credence to testimony which he has

found—either expressly or by implication—to be inherently

untrustworthy, the substantiality of that evidence is

tenuous at best.”).

The Supreme Court in Universal Camera best summarized the philosophy behind this process: “We intend only

to recognize that evidence supporting a conclusion may

be less substantial when an impartial, experienced examiner who has observed the witnesses and lived with the

case has drawn conclusions different from the Board’s

than when he has reached the same conclusion.” 340 U.S.

at 496. This is never more the case than when the issue

is one of credibility. As the Supreme Court said in

Raddatz, it is within the context of credibility that findings based on a “cold record” are most suspect if they

differ from the findings of the one who actually heard the

witnesses in question.

To be sure, courts must always be sensitive to the

problems of making credibility determinations on the

cold record. More than 100 years ago, Lord Coleridge

stated the view of the Privy Counsel that a retrial

should not be conducted by reading the notes of the

witnesses’ prior testimony:

“The most careful note must often fail to convey the

evidence fully in some of its most important elements. . . . It cannot give the look or manner of the

witness: his hesitation, his doubts, his variations of

language, his confidence or precipitancy, his calmness

or consideration; . . . the dead body of the evidence,

without its spirit; which is supplied, when given openly
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 99

01-4321, 01-4322, & 02-1220

and orally, by the ear and eye of those who receive

it.” Queen v. Bertrand, 4 Moo.P.C.N.S. 460, 481, 16

Eng.Rep. 391, 399 (1867).

Raddatz, 447 U.S. at 679-80. And unlike Raddatz, in the

present case we are dealing with a full trial by a judge

on the merits, albeit a civil trial (on the “quasi-criminal”

issue of fraud), and not an ancillary motion to suppress.

Additionally, the present case was inordinately long

and complicated, and the resolution of issues required the

synthesis of multiple witnesses’ testimony that was separated by days or even weeks (and by hundreds or thousands of pages in the transcript). Whatever advantage is

to be gained by a first-hand observation of witnesses is

multiplied exponentially when the trial is so long and

the transcript so voluminous. The detailed interconnection of the credibility of different witnesses on different

factual issues makes the accumulated impressions of

the presiding officer irreplaceable. I can think of no

single item of more significance in evaluating a Tax Court’s

decision on fraud than the unfiltered findings of the

STJ who stood watch over the trial.

The difficulty comes in determining how and when

this concern rises to the constitutional level of due process.

No court of which I am aware has ever considered the

ramifications of an agency’s swallowing and refusing to

regurgitate a preliminary factual finding in the manner

done by the Tax Court here. The reason for this is clear: the

Administrative Procedure Act requires the publication of

such findings for executive agencies. And no court that

I could find has ever discussed the availability of preliminary findings as being related to due process protections.

Only Universal Camera’s dicta on the value of the preliminary findings comes close, and the Supreme Court

there clearly based its decision in the language of the

Administrative Procedure Act.
100 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

However, under the three-part test of Mathews and

Raddatz, I think it not unreasonable to invoke due process in this context at the appellate court level of review.

Under the first prong of Mathews, I note again that

the quasi-criminal nature of fraud is a more significant

private interest than a simple civil determination, but

not as weighty an interest as in the criminal suppression

hearing in Raddatz. Under the second prong, however,

I believe the risk of error here is greater and the value of

the added procedural safeguard (the STJ’s report) is

higher in this context. Without the STJ’s report we would

be reviewing deferentially a credibility finding made by

the Tax Court based on a cold record (albeit with the

theoretical collaboration of the STJ who actually heard

the witnesses) based on our own analysis of that same

cold record. The precedents noted in the administrative

context (as well as Universal Camera) clearly demonstrate how valuable preliminary findings are for review

in cases like the present one. Under the Mathews test’s

third prong, the added cost and administrative burden in

this instance is de minimis—publishing the STJ’s report.

On balance, I believe strongly that the absence of the

STJ’s report in the record for our consideration of the Tax

Court’s decision creates legitimate due process concerns

with respect to our review.

What throws a real analytical monkey wrench into all

of this is that the result of the collaborative process in the

Tax Court is an opinion that, allegedly, represents the

“opinion” of the STJ (but not, I repeat, the “report” of the

STJ). What this could mean is that the collaboration of

the Tax Court with the STJ has produced an opinion that

represents the revised and true legal opinions and findings of the STJ. The original report, by necessity therefore,

would no longer be a valid statement of the STJ’s findings

inasmuch as it differed from the final opinion. Therefore, to
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 101

01-4321, 01-4322, & 02-1220

the extent that due process is concerned with the changes

that the Tax Court makes to the findings contained in

the STJ’s report (which would represent points of disagreement between the Tax Court and the STJ), those

concerns are balanced by the fact that the STJ does not

actually disagree with those changes and, in fact, has

certified to their correctness by signing off on the opinion.

I could, in the best of all possible worlds, liken this to

a learning process whereby the original impressions of

the STJ are tempered through the collaborative process

with the Tax Court, and, I would assume, the Tax Court’s

opinions would be molded and informed by the first-hand

impressions of the STJ. Whatever limitations on review

this process entails would be balanced by the fact that

the STJ does not still hold opinions or findings in conflict with those represented in the opinion. In such a

world, it no longer seems so strange that every Tax Court

case involving an STJ resulted in an opinion that agreed

with and adopted the opinion of the STJ—the final opinion represents a compromise between the positions both

of the Tax Court judge and of the STJ. (This view of things

would still remain somewhat disingenuous because the

Tax Court opinion’s language clearly seeks to imply that

the opinion represents the original report of the STJ.)

I believe that this is, more or less, the position taken by

the majority.

The obvious rejoinder to this utopian view of the Tax

Court’s process is to point out what I have already noted:

the STJs are not equal to the Tax Court judges and it

might be naive to assume that the STJs have an equal

voice in the collaborative process that results in Tax Court

opinions. The result is a system whereby the Tax Court

maintains total discretionary control over the function of

STJs but expects a reviewing court to simply accept at

face value the declaration that the opinion is the opinion
102 Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,

01-4321, 01-4322, & 02-1220

of the STJ. On the one hand, I certainly do not believe

that the Tax Court is prevaricating and forcing STJs to

cooperate under the express threat of unemployment.

However, judicial independence in the context of due

process is not a principle to be taken lightly, and its absence has consequences. The fact is that this entire process of the Tax Court appears designed to extract the

efficiencies involved in designating cases to be heard by

STJs without having to bear any of the procedural costs

traditionally associated with this kind of adjunct decisionmaking (e.g., transparency). I do not believe that the

STJ’s ultimate assent to the final opinion of the Tax Court

is protection enough to the parties. The majority does.

Because I dissent, I do not have to articulate a final

outcome, but merely note that I find a due process violation. However, the solution is simple in theory. The due

process violation is avoided by interpreting 26 U.S.C.

§§ 7459, 7461 and 7462 so as to require publication of the

STJ’s original report as a report of the Tax Court. See

Edward J. DeBartolo Corp. v. Florida Gulf Coast Bldg. &

Const. Trades Council, 485 U.S. 568, 575 (1988). This

appeal would be stayed to allow the STJ’s original report

to be made part of the record. It is significant to summarize what I do not say here. I do not believe that due

process requires that the parties be allowed to file objections to the STJ’s report before the issuance of the Tax

Court’s opinion. Nor do I necessarily believe due process

requires that the STJ’s report be made public before

the Tax Court issues its ultimate opinion. But by eventually

making the STJ’s report public (and part of the available record of the Tax Court on appeal), this court will

have an opportunity to conduct meaningful appellate

review. Further, this is a procedural result that may

benefit all parties, including the Commissioner, not just

petitioners like Kanter—Tax Court decisions can very
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320, 103

01-4321, 01-4322, & 02-1220

13 Although, again, I concur as to the part of the opinion concerning the appeal of Naomi Kanter.

USCA-02-C-0072—7-24-03

easily reverse findings (credibility—related and otherwise) of STJs in a manner that is detrimental to the Commissioner as well as to a petitioner.

After all of these pages, what I find most interesting

is that I believe the majority and I are in complete agreement on the central issue here—that the views of the STJ

matter. When I say that, however, I look at the structure

of the process under which the STJ’s views can be discarded without leaving a trace and I find the glass halfempty. The majority sees the verbal formula (“agrees

with and adopts”) and finds the glass half-full. I do not

believe that the concealment of the Tax Court’s revision

process behind that verbal formula allows this court

to conduct meaningful appellate review. I appear, at the

moment at least, to be alone in that belief. Therefore,

I respectfully dissent.13

A true Copy:

Teste: 

 ________________________________

Clerk of the United States Court of

Appeals for the Seventh Circuit