Opinion ID: 782888
Heading Depth: 2
Heading Rank: 3

Heading: Bea Ritch Trusts

Text: 55 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. 56 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. 57 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 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. 58 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 proof to the Commissioner for having raised a new matter. See Tax Court Rule 142(a)(1). 59 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).
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61 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. 62 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 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. 63
64 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 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 WL 11333 (1981) (same). 65 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 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 WL 177471 (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.
66 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. 67 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. 68 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 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.). 69 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 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.
70 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 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. 71 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 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. 72 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.