Joshua Kanter v. CIR

In the

United States Court of Appeals

For the Seventh Circuit

Nos. 08-1036, 08-1037, 08-1038, 08-1039,

08-1040, 08-1041, 08-1042

JOSHUA S. K ANTER, E STATE OF

B URTON W. K ANTER, and

E STATE OF N AOMI R. K ANTER,

Petitioners-Appellants,

v.

C OMMISSIONER OF INTERNAL R EVENUE,

Respondent-Appellee.

Appeals from the Decisions of the United States Tax Court.

Nos. 712-86, 1350-87, 31301-87, 33557-87, 3456-88,

32103-88, 25251-90—Harry A. Haines, Judge.

A RGUED M AY 27, 2009—D ECIDED D ECEMBER 1, 2009

Before C UDAHY, R IPPLE, and W OOD , Circuit Judges.

W OOD , Circuit Judge. This case began in 1986, when

Burton W. Kanter, a well-known tax attorney and busi-

nessman, filed a petition seeking review of the Commis-

sioner of Internal Revenue’s determination that he

had not paid all his taxes. Since then, the case has taken a

2 Nos. 08-1036, 08-1037, et al.

yo-yo path through our judicial system, from the Tax

Court to the Supreme Court and back again. In this itera-

tion, Kanter’s Estate and related parties appeal from

an unfavorable Tax Court decision that rejected many of

the factual findings of the Special Trial Judge (“STJ”)

that presided over the trial. (We refer to the petitioners

collectively as “Kanter.”) The theme of Kanter’s argu-

ments on appeal is that the Tax Court did not defer, as

it should have, to the STJ’s original findings of fact. In

evaluating the issues Kanter raises, we review the STJ’s

original findings of fact for clear error.

Kanter raises five issues on appeal. The first includes

within it a number of challenges to the Tax Court’s finding

that Kanter and his associates orchestrated a kickback

scheme and then fraudulently concealed the resulting

income. Kanter argues that the Commissioner is pre-

cluded from litigating this point, as the Fifth and

Eleventh Circuits have already ruled against him in

cases dealing with the liability of Kanter’s associates for

the same underlying business arrangements. He also

argues that the Commissioner is barred by the statute

of limitations from seeking tax fraud penalties for 1983.

Kanter’s second issue concerns entities called the Bea

Ritch Trusts. The Tax Court found that he was the true

owner of these Trusts and thus should have paid certain

taxes on their economic gains. Kanter argues that he

was not the owner of these Trusts. Third, Kanter urges

that he should not be taxed for half of the earnings of

Century Industries, as the Tax Court lacked jurisdiction

over many of the years at issue and he owed taxes propor-

tional only to his stated ownership interest because all of

Nos. 08-1036, 08-1037, et al. 3

the partners were true partners. Fourth, he argues that

the Tax Court should not have counted as taxable

income over $1,000,000 that Kanter deposited in his bank

accounts in 1982, as those monies were nontaxable loans

or returns on investment. Finally, Kanter asserts that

the Tax Court violated his due process rights by over-

turning various credibility determinations made by the

STJ in his original report.

On the first issue, we reject Kanter’s preclusion argu-

ment, because nonmutual collateral estoppel does not

apply against the United States. On the merits, we con-

clude that the STJ’s factual findings are not clearly errone-

ous with respect to Kanter’s tax liability and tax fraud.

As a result, we do not reach Kanter’s argument based on

the statute of limitations. Next, we find no reversible

error in the STJ’s conclusion that Kanter was not the

owner of the Bea Ritch Trusts; this means that Kanter is

not liable for the tax deficiencies that the Commissioner

assessed. Third, with respect to Century Industries, we

hold that the Tax Court lacked jurisdiction over the 1983,

1984, and 1986 tax years; we further find that the STJ’s

conclusion that only the 1% interest that Kanter held

in Century Industries for the 1981 and 1982 tax years

was taxable is not clearly erroneous. We note that the

government has conceded the issue relating to the

$1,000,000, but for the sake of completeness we confirm

that the STJ did not clearly err in finding that this

deposit was nontaxable income. Finally, in light of our

other findings, we have no reason to reach Kanter’s due

process argument.

4 Nos. 08-1036, 08-1037, et al.

In summary, we conclude that the Tax Court did not

show the proper level of deference to the STJ’s factual

findings. We therefore reverse and remand with instruc-

tions to vacate the Tax Court’s judgment, to enter an order

adopting the STJ’s report as its opinion, and to enter

judgment consistent with that opinion.

I

Given the complexity of the arrangements before us,

we have chosen to set forth the facts pertinent to each

part of the appeal in the relevant section below. We begin,

however, with the procedural history that has brought

us to this point, since the earlier rulings in the case estab-

lish the standard of review that applies. In 1986, Kanter

sought review of the Commissioner’s assessed deficiencies

for various tax years between 1978 and 1986; the case

later expanded to include the 1987-1989 tax years as

well. Kanter passed away in 2001, and so since then, this

litigation has proceeded through his estate and that of

his wife, Naomi R. Kanter, who is a party only by virtue

of the joint tax returns she filed with Kanter for the years

at issue.

In 1994, the Tax Court referred Kanter’s case, along with

those of his associates Claude M. Ballard and Robert W.

Lisle, to Special Trial Judge Irvin D. Couvillion. See 26

U.S.C. § 7443A(b)(4). Judge Couvillion conducted a five-

week trial and compiled a sizable record. Then, between

May of 1996 and December of 1999, no entries appear

on the relevant dockets. At the end of that time,

Judge Couvillion produced a 303-page report setting forth

Nos. 08-1036, 08-1037, et al. 5

his factual findings and recommending legal conclusions.

The Tax Court then assigned Judge Howard A. Dawson

to review the STJ’s report, and on December 15, 1999,

the Tax Court released a decision, signed by Dawson and

Couvillion, that stated that it “agrees with and adopts the

opinion of the Special Trial Judge, which is set forth

below.” Investment Research Assocs. v. Comm’r, T.C.M. (RIA)

99,407, *1 (1999). The Tax Court decision was unfavorable

to Kanter, but two unnamed Tax Court judges informed

him that the Tax Court’s assertion that it had adopted the

STJ’s report was actually false. Kanter asked the Tax

Court to enter the STJ’s report into the record to verify

this information, but it refused.

On appeal to this court, Kanter argued that the Tax

Court was obligated to release the STJ’s decision, and he

further challenged several of the conclusions of the Tax

Court decision with respect to his taxes. Lisle and Ballard

pursued their own appeals in the Fifth and Eleventh

Circuits, respectively. See Estate of Lisle v. Comm’r, 341

F.3d 364 (5th Cir. 2003) (“Lisle I”); Ballard v. Comm’r, 321

F.3d 1037 (11th Cir. 2003) (“Ballard I”). Taking the STJ and

Tax Court at their word that the Tax Court decision was

the same as the STJ’s, we did not require the Tax Court

to release the STJ’s decision. Estate of Kanter v. Comm’r, 337

F.3d 833, 843-44 (7th Cir. 2003) (“Kanter I”). Instead, we

reviewed the Dawson opinion of December 15, 1999,

concluded that the findings of fact it set forth were not

clearly erroneous, and affirmed the judgment. Kanter

and his associates then appealed to the Supreme Court,

which held that the Tax Court was obliged to release the

STJ’s report. Ballard v. Comm’r, 544 U.S. 40, 52 (2005). We

6 Nos. 08-1036, 08-1037, et al.

remanded to the Tax Court for proceedings consistent

with the Supreme Court’s decision. See Estate of Kanter

v. Comm’r, 406 F.3d 933, 934 (7th Cir. 2005) (“Kanter II”).

The Fifth and Eleventh Circuits did the same for Lisle

and Ballard. See Estate of Lisle v. Comm’r, 431 F.3d 439 (5th

Cir. 2005) (“Lisle II”); Ballard v. Comm’r, 2006 WL 4386510

(11th Cir. July 10, 2006) (“Ballard II”). On remand, the Tax

Court assigned Kanter’s case to Judge Harry A. Haines.

The Tax Court then issued another decision, in which

it explicitly reversed several of the STJ’s factual findings

and conclusions of law. See Estate of Kanter v. Comm’r,

T.C.M. (RIA) 2007-021 (2007). Lisle and Ballard have

already appealed from that decision to their respective

circuits, which have reversed and remanded the case

with instructions to adopt the STJ’s decision as the

decision of the Tax Court. See Estate of Lisle v. Comm’r, 541

F.3d 595, 605 (5th Cir. 2008) (“Lisle III”); Ballard v. Comm’r,

522 F.3d 1229, 1255 (11th Cir. 2008) (“Ballard III”). It is

now our turn to confront the case, focusing on Kanter’s

role and responsibility.

II

Before we proceed to the merits of Kanter’s appeal, we

must clear up some issues about the proper standard of

review. We review factual findings for clear error. See

Cabintaxi Corp. v. Comm’r, 63 F.3d 614, 619 (7th Cir. 1995).

The parties dispute, however, whether we apply

this standard to the STJ’s report (Kanter’s position) or

to the Tax Court’s decision (the Commissioner’s posi-

tion). Sometimes the law requires the court of appeals to

Nos. 08-1036, 08-1037, et al. 7

look to the original fact findings. See, e.g., Old Ben Coal Co.

v. Prewitt, 755 F.2d 588, 589 (7th Cir. 1985) (reviewing

whether the Administrative Law Judge’s findings—not

the Benefits Review Board’s decision to reverse the Ad-

ministrative Law Judge—were supported by substantial

evidence under the Black Lung Benefits Act); In re Land

Investors, Inc., 544 F.2d 925, 933 (7th Cir. 1976) (applying

the clearly erroneous standard to the bankruptcy referee’s

findings of fact, rather than to the district court’s ap-

plication of that standard). At other times, the proper

point of reference for the court of appeals is the

reviewing body’s decision. See, e.g., Moab v. Gonzales, 500

F.3d 656, 659 (7th Cir. 2007) (reviewing the opinion of the

Board of Immigration Appeals, not the Immigration

Judge, when the Board issues a superceding opinion

under the Immigration and Nationality Act); Hall v.

Norfolk S. Ry. Co., 469 F.3d 590, 594 (7th Cir. 2006) (re-

viewing the decision of the district court, when the

district court itself was reviewing an order of the magis-

trate judge); Schwartz Mfg. Co. v. NLRB, 895 F.2d 415, 416

n.5 (7th Cir. 1990) (applying deference to the factual

findings of the Board—not the Administrative Law

Judge—as required by statute at 29 U.S.C. 160(e)). It is the

legal relationship between the entities that determines

which set of findings is entitled to deference.

To resolve the issue now before us, we start with the

text of Tax Court Rule 183, which governs the relation-

ship between the STJs and the Tax Court. It states that

[d]ue 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

8 Nos. 08-1036, 08-1037, et al.

recommended by the Special Trial Judge shall be

presumed to be correct.

U.S. T AX C T . R. 183(d). The plain language of this rule

mandates deference to the STJ: it identifies the STJ as the

key actor and says that his or her findings must be

given “due regard” and are entitled to a presumption of

correctness. Nothing in that rule suggests that the pre-

sumption evaporates after the Tax Court has acted and

the case has moved on to the court of appeals. If the

Supreme Court’s opinion in Ballard tells us anything, it

is that the STJ’s findings of fact play a significant role in

the appellate review of tax decisions. 544 U.S. at 53-64.

The history of the rule also supports this interpretation.

As the Supreme Court noted in Ballard, this Tax Court

rule derives from Rule 147(b) of the former Court of

Claims, which interpreted its own rule to require

deference to the trial judge’s findings of fact. See id., at 54-

55; Hebah v. United States, 456 F.2d 696, 698 (Ct. Cl.

1972) (“Under our rule, the commissioner’s findings of

fact are presumed to be correct because of his oppor-

tunity to hear the witnesses and to determine the weight

to be accorded to their testimony.”). Both the rule and its

history therefore support the proposition that we, too,

should ensure that the Tax Court deferred to the STJ’s

findings of fact (and in so doing, defer to those findings

ourselves).

Congress provided that the court of appeals must

review decisions of the Tax Court in the same manner as

it reviews decisions of the district court sitting without a

jury. 26 U.S.C. § 7482(a)(1). That standard is easy to

Nos. 08-1036, 08-1037, et al. 9

apply in cases where the Tax Court judge does not use

a special trial judge. In the latter group of cases, however,

we must find the best analogy to district court practice.

When a magistrate judge prepares a report and recom-

mendation for a district court, the governing statute

provides that the district court “shall make a de novo

determination” with respect to any contested matter. See

28 U.S.C. § 636(b). Rule 53, governing masters, is different.

It provides that the district court’s review of matters

that are the subject of an objection is de novo unless the

parties have stipulated (with the court’s approval) that

review will be for clear error. See F ED. R. C IV. P. 53(f)(3).

When a district court uses a special master, we typically

apply deferential review to the original fact-finder’s

report, ignoring the decision of the district court, al-

though this court at times has reviewed the district

court’s handling of the report for abuse of discretion.

See, e.g., Cook v. Niedert, 142 F.3d 1004, 1011 (7th Cir.

1998) (applying the abuse of discretion standard to the

district court decision to reject the master’s recom-

mended method for calculating attorneys’ fees).

The lesson that we draw from these statutes and rules,

as well as from the cases we noted earlier, is that each

area of the law must be evaluated on its own. The

National Labor Relations Act may call for deference

to the Board, the Black Lung Benefits Act may call for

deference to the underlying Administrative Law Judge

findings, the Magistrate Judges’ Act may require

deference to the district court, and Rule 53 may take a

middle approach for masters. Our problem is to deter-

mine what the correct rule is for the Tax Court. We are

10 Nos. 08-1036, 08-1037, et al.

satisfied, based on the language of Tax Court Rule 183, the

gist of the Supreme Court’s 2005 decision in Ballard, and

our sister circuits’ opinions in Lisle III, 541 F.3d at 600-01,

and Ballard III, 522 F.3d at 1235, that deference under this

regime is owed to the factual findings of the STJ. The Tax

Court’s application of those findings raises a mixed

question of law and fact, and it may be that we would owe

some deference to its decisions at that level. We review

legal decisions de novo, including the legal decision of the

Tax Court to review the STJ’s fact-findings with a free hand

rather than for clear error. See Johnson v. Orr, 551 F.3d 564,

567 (7th Cir. 2008).

The Eleventh Circuit picked up that last theme when it

identified one sense in which the court of appeals

applies clear error review to the Tax Court. As it noted,

a central question the appellate court is asking is

whether the Tax Court “committed clear error when [it]

failed to accord the original findings of fact, credibility of

witnesses and conclusions of Judge Couvillion the due

deference required under the law.” Ballard III, 522 F.3d

at 1235 n.6. This suggests that review in the court of

appeals should proceed through the lens of the question

whether the Tax Court gave proper deference to the

STJ’s findings. To that end, the Supreme Court in Ballard

noted that the publication of the STJ’s findings equipped

taxpayers “to argue to an appellate court that the Tax

Court failed to give the special trial judge’s findings the

measure of respect required by [the Rule].” 544 U.S. at 56.

In the final analysis, this approach takes us to the same

point: the STJ’s findings are the ones reviewed for clear

error, not those of the Tax Court.

Nos. 08-1036, 08-1037, et al. 11

This court’s role under clear error review is limited. We

must not reverse unless we are “left with the definite

and firm conviction that a mistake has been committed.”

United States v. United States Gypsum Co., 333 U.S. 364, 395

(1948). Thus, if the STJ’s account of the evidence is

plausible in light of the record viewed in its entirety,

the court of appeals may not reverse it even though

convinced that had it been sitting as the trier of fact,

it would have weighed the evidence differently. Where

there are two permissible views of the evidence, the

factfinder’s choice between them cannot be clearly

erroneous.

Anderson v. Bessemer City, 470 U.S. 564, 574 (1985); United

States v. Raibley, 243 F.3d 1069, 1076 (7th Cir. 2001). When

the STJ’s findings involve credibility determinations, the

clear error 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, 470 U.S. at 575;

Wells Fargo Bank, N.A. v. Siegel, 540 F.3d 657, 663 (7th Cir.

2008). This does not prevent us from finding clear error,

however; the “[d]ocuments or objective evidence may

contradict the witness’ story; or the story itself may be

so internally inconsistent or implausible on its face that a

reasonable factfinder would not credit it.” Anderson, 470

U.S. at 575. With these principles in mind, we turn to the

issues presented on appeal.

12 Nos. 08-1036, 08-1037, et al.

III

The Commissioner’s primary case against Kanter, Lisle,

and Ballard rests on his determination that they did not

report and in fact fraudulently concealed income

received for facilitating business transactions with five

people: J.D. Weaver, William Schaffel, Bruce Frey, Kenneth

Schnitzer, and John Eulich (“the Five”). The Commis-

sioner’s theory is as follows: Kanter and his associates

derived income in the form of “kickbacks” in exchange

for using their influence within Prudential Life Insur-

ance Company to channel business opportunities to the

Five. Kanter then allegedly diverted this income to

various entities under his control so that he and his

associates would not have to report the income on their

personal income tax returns. Instead, it appeared on the

tax returns of these entities. The Commissioner assessed

tax deficiencies and penalties for tax fraud based on

these alleged activities. For a lengthy discussion of the

factual background of the Five’s specific business trans-

actions, see Ballard III, 522 F.3d at 1235-49.

A tax deficiency arises when a taxpayer fails to report

taxable income on a personal income tax return. Kanter

bears the burden of demonstrating that the Commis-

sioner’s determination with respect to the deficiencies

he has identified is incorrect. See Welch v. Helvering, 290

U.S. 111, 115 (1933) (noting that the Commissioner’s

“ruling has the support of a presumption of correctness,

and the petitioner has the burden of proving it to be

wrong”). Tax fraud is a more serious charge, and so a

higher standard of proof applies. For fraud charges, the

Nos. 08-1036, 08-1037, et al. 13

government “must demonstrate by clear and convincing

evidence that the taxpayer intended to evade taxes that

he knew or believed he owed.” See Toushin v. Comm’r,

223 F.3d 642, 647 (7th Cir. 2000). As this suggests, it is the

government that bears the burden of proof on a fraud

charge. See 26 U.S.C. § 7454(a) (“In any proceeding in-

volving the issue whether the petitioner has been guilty

of fraud with intent to evade tax, the burden of proof

in respect of such issue shall be upon the Secretary.”).

In this case, the Commissioner alleges that Kanter

disguised personal income as income of entities that did

not in fact earn it. In order to determine whether the

entity reporting income is the true earner of that income,

this circuit examines the totality of the circumstances.

Schuster v. Comm’r, 800 F.2d 672, 678 (7th Cir. 1986) (reject-

ing the two-part test of Johnson v. Comm’r, 78 T.C. 882,

891 (1982), and noting that a “flexible test, allowing con-

sideration of all of those factors, better serves our

analysis in attempting to determine whether income is to

be taxed against the person or entity who actually earned

it or against someone else.”). Similarly, the question

whether fraud has been committed is one of fact that

requires an analysis of the entire record. See DiLeo v.

Comm’r, 96 T.C. 858, 874 (1991).

In reviewing the record produced at trial, the STJ found

that no kickback schemes existed. He based this finding

largely on the unanimous testimony of the witnesses at

trial. With that established, he then rejected the govern-

ment’s theory about Kanter’s assignment of income, since

the generation of income through something like the

14 Nos. 08-1036, 08-1037, et al.

alleged kickback scheme needs to be established before

it is appropriate to examine where that income goes. See

United States v. Basye, 410 U.S. 441, 448-49 (1973). The STJ

went on to find that the government had not met its

burden of proving fraud, as no kickback schemes existed

and all the income at issue had been reported by other

entities, as opposed to going totally unreported. The STJ

also found it significant that no examining agent had

recommended that a fraud penalty should be asserted

against Kanter and his associates.

The Tax Court rejected the STJ’s finding that there was

no kickback scheme; in the process of doing so, it over-

turned several of the STJ’s credibility determinations. It

rejected Kanter, Lisle, and Ballard’s testimony as self-

serving and contradictory to documentary evidence

showing the flow of funds. It dismissed the Five’s testi-

mony on the basis that it was irrelevant because they

did not know about the kickback scheme and thus could

not be expected to testify to its existence. The Tax Court

also overturned the STJ’s finding that there was no

fraud. It relied on evidence that it believed showed the

existence of a kickback scheme; it also inferred from the

complex array of financial mechanisms Kanter created

that he intended to commit fraud.

Kanter’s case overlaps with those of his associates

Ballard and Lisle with respect to these tax deficiency

and fraud issues. The Fifth and Eleventh Circuits have

already held that the STJ’s findings on these issues

are not clearly erroneous and that the Tax Court should not

have rejected them. See Ballard III, 522 F.3d at 1254-55;

Lisle III, 541 F.3d at 602. Kanter invokes the doctrine of

Nos. 08-1036, 08-1037, et al. 15

nonmutual defensive collateral estoppel to argue that

the government should be precluded from establishing

liability against him by relitigating that factual issue in

this court. See Parklane Hosiery Co. v. Shore, 439 U.S. 322

(1979). While acknowledging that nonmutual (offensive)

collateral estoppel against the government is prohibited

by United States v. Mendoza, 464 U.S. 154 (1984), Kanter

invites us to carve out an exception to the Mendoza princi-

ple for preclusion for factual issues. The government

believes that this possibility is foreclosed by Mendoza

itself, as well as this court’s more recent decision in

Harrell v. United States Postal Serv., 445 F.3d 913, 921 (7th

Cir. 2006).

The debate over the application of this preclusion

doctrine arises because the Supreme Court used some-

what ambiguous language in Mendoza:

We hold, therefore, that nonmutual offensive collateral

estoppel simply does not apply against the Govern-

ment in such a way as to preclude relitigation of

issues such as those involved in this case.

464 U.S. at 162 (emphasis added). We acknowledge that

the Mendoza Court was talking about offensive issue

preclusion (that is, the use of a finding of fact from an

earlier proceeding by a plaintiff, to establish part of its

case), not defensive issue preclusion (the use of an

earlier finding of fact to support a defense). The policy

reasons for treating the government differently, how-

ever, seem to us to be just as powerful when applied to

defensive preclusion. That said, we note as well that it is

not clear what the Court meant in Mendoza when it

referred to “issues such as those involved in this case.”

16 Nos. 08-1036, 08-1037, et al.

In Adkins v. Commissioner, 875 F.2d 137 (7th Cir. 1989), we

entertained the possibility that the Supreme Court

wanted to leave open the question whether purely

factual issues could be the subject of nonmutual issue

preclusion against the government. See Adkins, 875 F.2d

at 141 (“other passages in the [Mendoza] opinion

arguably leave open the possibility that estoppel may

apply against the government wit h respect to specific

fact determinations, not embracing policy choices and

legal issues”). We think it more likely, however, that the

Court intended to create a uniform rule precluding the

use of the doctrine against the government, and later

cases in this circuit support that approach. See Harrell,

445 F.3d at 921 (“the Supreme Court has established

that nonmutual offensive collateral estoppel does not

extend to litigation against the United States”); see also

18A W RIGHT, M ILLER & C OOPER, F EDERAL P RACTICE AND

P ROCEDURE § 4465.4 (2d ed. 2002) (“[A]t least three

factors must be counted in favor of finding in the

Mendoza opinion a broad uniform rule that prohibits any

nonmutual offensive preclusion against the govern-

ment. The court of appeals had looked for evidence of a

‘crucial need’ to permit relitigation; the Court rejected this

approach . . . . The Court also observed that its holding

did not in any way depend on the uncertain policies

against preclusion as to ‘ “unmixed questions of law” ’. . . .

And perhaps most important, there is a powerful fairness

argument [for preclusion in Mendoza as the] injury to the

public interest from [finding preclusion] is not great. To

deny preclusion in face of this argument may be to show

that other arguments for preclusion also will fail.”). Thus,

Nos. 08-1036, 08-1037, et al. 17

we reject Kanter’s argument that he is entitled to defend

this case based on the fact that the question whether he

participated in a kickback scheme and engaged in tax

fraud has already been determined against the Commis-

sioner.

Nevertheless, while the findings of the Fifth and Elev-

enth Circuits do not resolve the question before us, the

opinions of those courts are entitled to the same

respectful consideration that we would always accord

to sister circuits faced with an identical or similar case.

This court never lightly creates a conflict in the circuits,

see Seventh Circuit Local Rule 40(e), and we see no

reason to do so here with respect to the factual issues

that are common to Kanter’s case and those of Ballard

and Lisle. Like our colleagues, we conclude that the

Tax Court’s reasons for overturning the STJ’s credibil-

ity determinations do not reflect clear error review,

but instead amount to a de novo look at all of the evi-

dence. Moreover, the Commissioner’s reasoning that

the Five’s testimony should be discounted because they

were unknowingly engaged in a kickback scheme seems

odd at best. This is not to say that there is not plenty of

evidence in the record that supports the Commissioner’s

position and the Tax Court’s decision. There is. When we

last saw this case, we affirmed the Tax Court’s previous

decision that found that Kanter engaged in tax fraud with

respect to the Five’s transactions, finding that such a

conclusion could not be branded “clearly erroneous.” See

Kanter I, 337 F.3d at 849. But this does not mean that the

only possible view of the facts was the one that the Tax

Court had reached. Just as it is possible in the new trial

18 Nos. 08-1036, 08-1037, et al.

context “for two judges, confronted with the identical

record, to come to opposite conclusions and for the appellate

court to affirm both,” see United States v. Williams, 81 F.3d

1434, 1437 (7th Cir. 1996) (emphasis in original), it is

possible for two judges to review the same record and

reach different factual conclusions, each of which can

withstand clear error review. Critically, at the time we

decided Kanter I, we did not have before us the STJ’s

report, which is the one that is entitled to deferential

review and which contains the fact-finder’s original

credibility determinations.

The Commissioner argues that Kanter is liable for

transactions with the Five under two theories: fraud and

deficiency. With respect to the fraud theory, we are

satisfied that STJ Couvillion did not clearly err when he

found that no kickbacks were paid. The Commissioner

argues that the STJ erred because he did not further

investigate the flow of funds from these transactions. That

evidence, the Commissioner believes, establishes that

money flowed from the Five to Kanter, Lisle, and Ballard.

But the STJ was correct—as were the Eleventh and Fifth

Circuits—when he reasoned that this theory turns on the

existence (or nonexistence) of kickbacks. If there were

no kickbacks, then the flow-of-funds argument does

nothing to resurrect the fraud theory. See Ballard III, 522

F.3d at 1253; Lisle III, 541 F.3d at 603. Largely for the

reasons that the Fifth and Eleventh Circuits have

spelled out, we conclude that the STJ’s findings about

tax fraud are not clearly erroneous.

The deficiency issue is somewhat different. The flow-of-

funds argument could be evidence of a tax deficiency

Nos. 08-1036, 08-1037, et al. 19

even if the payments were not kickbacks and were not

the result of fraud. Merely identifying non-fraudulent

payments among corporate entities does not establish a

deficiency. Rather, the key question is whether the

income should be attributed to the individual rather than

the entity. The Fifth Circuit rejected these theories as

applied to Lisle, Lisle III, 541 F.3d at 603-04, and

the Eleventh Circuit rejected the argument that Ballard

personally earned the income in question, Ballard III, 522

F.3d at 1254. We come to the same conclusion for Kanter.

Contrary to the Commissioner’s assertions, the STJ ad-

dressed these arguments. The STJ rejected the applica-

tion of the assignment-of-income doctrine, holding that

it “is not applicable because there was no improper

shifting of income to a different tree from that on which . . .

[such income] grew.” The STJ also made a finding

rejecting the assertion of identity between Kanter and

the Kanter entities—in fact, the STJ held that the

Kanter entities exercised significant control over Kanter’s

activities. In short, the STJ held that “there was no under-

payment of taxes.” Given that corporate entities are

generally recognized for tax purposes, and that the STJ

was in the best position to find facts and make

credibility determinations, we see no reason to overturn

this finding. We recognize that the taxpayer must demon-

strate that the Commissioner has incorrectly identified

deficiencies. We also recognize that the STJ’s opinion

does not explicitly spell out that Kanter met this

burden with regard to income from transactions with the

Five. But, as we are stressing throughout, our review is

cabined by the clear error standard. And, despite the

20 Nos. 08-1036, 08-1037, et al.

fact that it strikes us as a close call, we have accepted the

STJ’s finding that there was no underpayment of taxes.

We therefore conclude that the STJ did not clearly err

with respect to liability based on his transactions with

the Five. This holding makes it unnecessary for us to

address Kanter’s argument based on the statute of limita-

tions governing the fraud penalty for 1983.

IV

The Bea Ritch Trusts (“BRTs”), named for Beatrice

Ritch (Kanter’s mother), are a series of 25 trusts estab-

lished for the benefit of members of the Kanter family.

Ritch, the alleged grantor, funded each of the trusts with

$100 in 1969. The trust instrument named Solomon

Weisgal as the trustee, and Kanter was named a beneficiary

of 24 of the 25 trusts (the exception being the Naomi Trust,

whose sole beneficiary was his wife, Naomi Kanter).

Kanter also possessed the power of appointment for the

trusts for which he was a beneficiary, but he testified at

trial that he had renounced all beneficial interests and

appointment powers in the trusts in the 1970s.

Despite the modest initial corpus, the BRTs acquired

substantial assets and net worth by 1987, primarily through

investments in various entities, many of which Kanter

brought to the attention of Weisgal in his capacity as

trustee. The most important for our purposes is the BRTs’

purchase in 1973 for $18,000 of an 18% interest in

Oyster Bay Associates (“OBA”), a partnership formed to

invest in the then-nascent cable television industry. The

investment must have exceeded the trustee’s fondest

Nos. 08-1036, 08-1037, et al. 21

dreams. The entities in which OBA had a stake sold their

interests in the cable television venture in 1987, generating

substantial capital gains of $2,033,368 that flowed back

to the BRTs. The BRTs also made loans to Kanter, $287,030

of which he had not paid back by 1987.

The key date is (or was) 1987 because that is when the

Commissioner determined that Kanter was the “true

settlor” of the BRTs and thus that at least some portion of

the BRTs’ gross receipts, interest income, dividend

income, passive activity partnership losses, and capital

gains income were actually attributable to Kanter for

tax purposes, rather than to the BRTs. On further exam-

ination, the Commissioner realized that much of the

BRTs’ capital gains income generated from its invest-

ment in OBA had accrued in the 1986 tax year, and the

Tax Court granted an oral motion to amend the

pleadings to this effect. Kanter does not appeal that

technical ruling here.

The default rule under sections 671 to 679 of the Internal

Revenue Code is that owners are taxed for trust income,

and generally the grantor is treated as the owner. The

grantor of a trust (also known as the settlor) is the person

who gratuitously transfers assets for the creation of the

trust. Normally, the grantor/settlor is the person who

established the trust (here, Bea Ritch), and that person’s

identity is noted in the trust document. It sometimes

happens, however, that a person is a settlor “in name

only.” When there is reason to be concerned about that

possibility, the court will conduct a more searching

inquiry, examining all the circumstances, to determine

22 Nos. 08-1036, 08-1037, et al.

who the true settlor might be. Stern v. Comm’r, 77 T.C. 614,

647 (1981). If a grantor is deemed an “owner” of a portion

of a trust, that portion attributable to the grantor must

be included in the true owner’s taxable income. 26 U.S.C.

§ 671. There are several ways, outlined at 26 U.S.C. §§ 672-

79, in which a grantor may be deemed an owner of a

trust, but only two of them are relevant for our analysis.

26 U.S.C. § 674(a) states that:

The grantor shall be treated as the owner of any

portion of a trust in respect of which the beneficial

enjoyment of the corpus or the income therefrom is

subject to a power of disposition, exercisable by the

grantor or a nonadverse party, or both, without the

approval or consent of any adverse party.

Alternatively, the grantor may be treated as the owner

of a portion of the trust if

[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. The preceding sentence shall not

apply to a loan which provides for adequate interest

and adequate security, if such loan is made by a

trustee other than the grantor and other than a

related or subordinate trustee subservient to the

grantor.

26 U.S.C. § 675(3).

The STJ considered whether Kanter should be con-

sidered the grantor of the BRTs, given that Bea Ritch was

named as the trust’s settlor. The judge rejected the Com-

Nos. 08-1036, 08-1037, et al. 23

missioner’s theory that Kanter funded the trusts by di-

recting income from various entities he controlled to the

BRTs. (This finding went hand-in-hand with the STJ’s

prior finding that Kanter was not funneling income

from his kickback scheme to the BRTs or other entities

with which he was associated.) The STJ concluded that

the BRTs’ substantial assets were the result of its wise

(or lucky?) investment choices, particularly in the

emerging field of cable television. Even if Kanter were the

grantor, the STJ already had found that Kanter had re-

nounced the assignment power, precluding a finding of

ownership under § 674(a). Because he had found that

Kanter was not a grantor, the STJ did not delve into

whether the loans the BRTs made to Kanter were of a

type that would trigger tax liability under § 675(3).

Again, the Tax Court rejected the STJ’s findings. It

found that Kanter—not Bea Ritch—was the true settlor of

the trusts. To support this finding, it noted that Kanter

failed to provide evidence beyond the trust document

of Ritch’s initial funding of the trusts. It also found im-

plausible that the BRTs had such investment success

without being aided by transfers of funds from Kanter’s

various entities, which were funded in turn by income

from his alleged kickback scheme with the Five. After

finding that Kanter was the true settlor, it also found

that Kanter had the power of disposition over the trusts’

assets, disbelieving Kanter’s assertion that he had re-

nounced that power. It found particularly meaningful

the fact that some 60 trusts were added as beneficiaries

after Kanter allegedly renounced his appointment power.

The Tax Court’s two findings that Kanter was the settlor

24 Nos. 08-1036, 08-1037, et al.

and possessed the power of disposition were enough

to make him the true owner of the BRTs under 26 U.S.C.

§ 674(a). Like the STJ, the Tax Court did not specifically

address the possible tax liability created by 26 U.S.C.

§ 675(3) for the loans the BRTs made to Kanter.

The critical issue for us is whether the STJ’s finding

that Kanter was not the grantor of the BRTs is clearly

erroneous. If he is not the grantor, then he cannot be

the true owner of the BRTs under either of the provi-

sions outlined above. In this connection, it is important

that we already have found no clear error in the STJ’s

finding that Kanter did not assign income from a sup-

posed kickback scheme to various entities in which the

BRTs owned an interest. That alleged device therefore

cannot be a basis for finding that he was the true

grantor. The Commissioner does not point to any evidence

in the record to establish that Kanter provided the

funds necessary for the $18,000 OBA investment. What

remains is the Commissioner’s speculation that the

growth of the BRTs’ investments (both prior to OBA and

afterwards) was so unusual that Kanter, and no one

else, must have funded them. It is true that the BRTs ex-

perienced strong growth from their inception, but the

combination of Kanter’s business advice to Weisgal and

the wise choice to invest in cable television at the dawn

of that industry can explain much if not all of the

growth. At the very least, it provides a strong enough

basis in the record, in the absence of anything but specula-

tion to the contrary, to support the STJ’s finding that

Kanter did not fund the BRTs. After the BRTs invested

in OBA, Kanter may have directed investors to OBA to

Nos. 08-1036, 08-1037, et al. 25

his ultimate benefit. But this does not require the STJ to

find that the BRT-OBA deal was predicated on Kanter’s

efforts (and was thus attributable to him).

Once again, we conclude that the STJ’s finding is not

clearly erroneous, even though we freely acknowledge

that a rational person could just as easily have come to

the opposite conclusion on this record. As a result, we

need not reach the question whether Kanter had indeed

given up his appointment power. We also need not

inquire into the nature of the BRTs’ loan to Kanter.

V

In 1979, the Century Industries (“CI”) partnership was

formed, and it was reconstituted in 1980. In this reconsti-

tuted form, CI had several claimed partners: Kanter,

Weisgal, the Bea Ritch Trusts, four Weisgal family trusts,

and a partnership composed of irrevocable trusts for

the benefit of the Weisgal family (later replaced with

another partnership of the same type in 1984). CI’s main

purpose was to discover attractive investment oppor-

tunities that needed capital, which would be supplied by

the trust partners. Although Kanter and Weisgal each had

only a 1% partnership interest in CI, they did the work of

evaluating potential investment opportunities. Various

entities paid CI “standby commitment fees” to consider

their projects, and these fees were CI’s primary source

of income during its early years, as it did not pursue

any investments until 1987. In 1998 or 1999, the CI partner-

ship was dissolved. For the tax years of 1981-1984 and

1986, the Commissioner determined that Kanter and

26 Nos. 08-1036, 08-1037, et al.

Weisgal were the only true partners in CI and thus attrib-

uted half of CI’s income during this period to Kanter.

Because Kanter did not report this income, the Commis-

sioner assessed a deficiency against him based on that

income.

Kanter raises the threshold question whether the Tax

Court had subject-matter jurisdiction over the 1983, 1984,

and 1986 tax years. We review this legal question de novo.

Johnson, 551 F.3d at 567. Here, jurisdiction depends on a

particular factual question: whether Kanter and Weisgal

were CI’s only real partners. We review the STJ’s findings

related to this jurisdictional fact, like his other factual

findings, for clear error.

The Tax Court’s jurisdiction depends on whether the

Tax Equity and Fiscal Responsibility Act of 1982

(“TEFRA”), 26 U.S.C. §§ 6221-33, applies to CI and the

relevant income. In enacting TEFRA, Congress

intended “administrative and judicial resolution of dis-

putes involving partnership items to be separate from

and independent of disputes involving nonpartnership

item s.” M axwell v. Comm’r, 87 T.C. 783, 788

(1986). Partnership items include “income, gain, loss,

deduction, or credit of the partnership.” 26 C.F.R.

§ 301.6231(a)(3)-1(a)(1)(i). The statute calls for dis-

putes regarding partnership items to be settled at

the partnership level, rather than at a partner-level pro-

ceeding in Tax Court. 26 U.S.C. § 6231(a)(3). In con-

trast, if the partnership in question is a “small partner-

ship,” defined as a partnership with fewer than 10 part-

ners, an individual partner-level proceeding may be

Nos. 08-1036, 08-1037, et al. 27

appropriate. 26 U.S.C. § 6231(a)(1)(B)(i). To determine

whether someone qualifies as a partner, this court consults

whether, considering all the facts—the agreement, the

conduct of the parties in execution of its provisions,

their statements, the testimony of disinterested per-

sons, the relationship of the parties, their respective

abilities and capital contributions, the actual control

of income and the purposes for which it is used, and

any other facts throwing light on their true intent—the

parties in good faith and acting with a business pur-

pose intended to join together in the present conduct

of the enterprise.

Comm’r v. Culbertson, 337 U.S. 733, 742 (1949).

There is no dispute that we are dealing with partnership

items, which ordinarily would receive partnership-level

treatment under the TEFRA. The question is whether the

small-partnership exception lifts this requirement. The STJ

found that the listed partners of CI were in fact its true

partners. This brought CI within the ambit of TEFRA (as

CI had more than 10 partners), and therefore deprived

the Tax Court of jurisdiction in this proceeding. The STJ

based his ruling on the fact that during the period in

question, CI entertained investment proposals from

several entities, including ones unrelated to Kanter and

Weisgal, and that the trust partners had sufficient re-

sources to commit capital to any investment project that

could have come down the line. The STJ did not base

his ruling on the fact that capital from the other partners

was a material income producing factor (a test derived

from Internal Revenue Code § 704(e)); instead, he found

28 Nos. 08-1036, 08-1037, et al.

that the partners had a good-faith intent to conduct a

business enterprise.

The Tax Court took a different view. It found that only

Kanter and Weisgal were partners in CI, and that CI’s

income was solely the result of personal consulting

services that Kanter and Weisgal rendered to the various

entities that paid CI. To arrive at this conclusion, the Tax

Court relied on the relative inactivity of CI during the

relevant period as well as letters in the record from

various entities that could be read as establishing a con-

sulting relationship with Kanter and Weisgal. In the Tax

Court’s eyes, CI fell within the small-partnership excep-

tion of TEFRA, the income was taxable at the partner

level (i.e. Kanter’s level), and thus the Tax Court retained

jurisdiction over the relevant years.

We find, applying the test outlined in Culbertson, that the

record adequately supports the STJ’s finding that all of the

claimed partners of CI were the actual partners. The Tax

Court attaches great importance to the letters in the

record from entities that paid CI to consider their propos-

als. For instance, it points to a letter from Satcorp, Inc., to

CI that notes that Kanter and Weisgal will serve as “finan-

cial engineers” whose involvement is “planning and

structuring transactions for financings for Satcorp.” While

one interpretation of this language (shared by the Tax

Court and the Commissioner) is that Kanter and Weisgal

were running an unrelated consulting firm disguised as

CI, that letter also can support the STJ’s view that Kanter

and Weisgal were screening various investment proposals

to see if CI might provide financing to these entities.

Nos. 08-1036, 08-1037, et al. 29

Perhaps an even more damaging piece of evidence (from

Kanter’s standpoint) is the City & Suburban Distributors

letter, in which Weisgal bills the company for the time

that he and Kanter spent on their projects. This letter

could be seen as describing a consulting business hiding

behind the façade of CI. If the Tax Court had been sitting

as the original fact-finder, then the Satcorp and City &

Suburban letters may have been sufficient to justify

holding that Kanter and Weisgal were the only true

partners. But, as we have now observed repeatedly, it

was not, and neither are we. Confronted with two inter-

pretations of the evidence, we defer to the original fact-

finder.

As CI had more than 10 partners, it fell within the

provisions of TEFRA. The Tax Court thus lacked jurisdic-

tion over the CI partnership item of partner compensation.

See Blonien v. Comm’r, 118 T.C. 541, *19-*20 (2002). The

remaining issue is whether half of CI’s income is attribut-

able to Kanter for the pre-TEFRA years of 1981 and 1982.

This question turns on the same factual determination

that governed the jurisdictional issue: whether Kanter

and Weisgal were the only true partners for CI. As we

have already explained, we do not find clearly erroneous

the STJ’s finding that CI’s other partners were bona fide.

Thus, there are no grounds on which to attribute half of

CI’s income to Kanter, and the Commissioner assessed

a deficiency against Kanter for these years in error.

VI

In 1982, Kanter deposited over $2.8 million in three bank

accounts at American National Bank in Chicago. Linda

30 Nos. 08-1036, 08-1037, et al.

Gallenberger, Kanter’s accountant, used Kanter’s check

register, which recorded the source and nature of these

deposits, to determine that $443,046.35 of the deposits

constituted taxable income. Kanter reported that income

on his 1982 tax return. The Commissioner maintains that

an additional $1,303,207 constituted taxable income and

assessed a deficiency against Kanter for the taxes attribut-

able to that amount. Kanter contests this, claiming that

those deposits were nontaxable loans and returns of

investment from other entities. While the Commissioner

has conceded this issue, we still must consider it to deter-

mine whether, or to what extent, the Tax Court erred in

its decision to reverse the STJ.

The Commissioner is empowered to use several

methods to reconstruct a taxpayer’s taxable income. See

Holland v. United States, 348 U.S. 121, 130-32 (1954) (“To

protect the revenue from those who do not render true

accounts, the Government must be free to use all legal

evidence available to it in determining whether the

story told by the taxpayer’s books accurately reflects his

financial history.”) (internal quotation marks omitted). One

permissible method is examining a taxpayer’s bank

deposits. See, e.g., Nicholas v. Comm’r, 70 T.C. 1057, 1063

(1978) (using the bank-deposits method). Evidence of

bank deposits constitutes prima facie evidence of income,

see Boyett v. Comm’r, 204 F.2d 205, 208 (5th Cir. 1953),

and the taxpayer bears the burden of proving that the

Commissioner’s determinations are erroneous. See

Welch, 290 U.S. at 115.

Noting that the Commissioner had failed to present any

evidence to the contrary, the STJ found that Kanter had

Nos. 08-1036, 08-1037, et al. 31

reported all his taxable income in 1982. In doing so, it

relied on Gallenberger’s testimony, which it found credi-

ble, and Kanter’s check register. The Tax Court reversed

the STJ, finding that Kanter had not produced enough

evidence at trial to satisfy his burden of proof. The

factors to which it pointed as support for its decision

were the large amount of money that was at issue, its

previous findings regarding the kickback scheme and

tax fraud, and Gallenberger’s initial recalcitrance in

producing certain documents, which became the subject

of summons proceedings.

Neither the Tax Court nor the Commissioner has pro-

vided a good reason to doubt the STJ’s findings. The size

of the deposits alone is not a basis for reversing the STJ;

it is not surprising that Kanter, a successful businessman,

dealt with large sums of money for investment and other

purposes. We already have rejected the Commissioner’s

and Tax Court’s arguments with respect to the Five and

have upheld the STJ’s findings on that issue, and so that

argument fails as well. Finally, Gallenberger’s behavior

cannot be a basis for reversal either, as she eventually

produced all the documents that were requested, and the

summons proceedings related to other tax years. See

United States v. Administrative Enters., 46 F.3d 670, 674

(7th Cir. 1995) (noting that the summons requested docu-

ments relating to tax years 1983-1988). We thus cannot

find the STJ’s factual findings on this issue to be clearly

erroneous.

32 Nos. 08-1036, 08-1037, et al.

VII

As we have found in Kanter’s favor on the other issues

in his appeal, we need not address his due process argu-

ments.

* * *

For these reasons, we R EVERSE the Tax Court’s judgment

and R EMAND with instructions for the Tax Court to

V ACATE its decision and enter an order adopting the

STJ’s report as the decision of the Tax Court.

12-1-09