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Openness is the rule and secrecy the exception in federal courts today. But secrecy is the rule in a key step in U.S. Tax Court — and is under attack in the nation’s top court. Two losing parties in a major civil tax fraud case are asking the Supreme Court, in separate petitions, to hear their claims that secret reports by special trial judges in the Tax Court violate due process and the federal laws governing it. The cases are Estate of Burton Kanter v. Commissioner of Internal Revenue, No. 03-1034; and Ballard v. Commissioner of Internal Revenue, No. 03-184. The petitions address a long-simmering controversy in the nation’s tax bar over whether the reports, which include findings of fact and opinion in some of the Tax Court’s most complex and serious cases, should be public — or at least available to federal appellate courts on review, as they were before 1983. “It’s just unimaginable that this happens in the United States today,” says Richard Pildes of New York University School of Law, counsel in the Kanter case. “The litigation has broad-ranging implications for the way the Tax Court and other legislative courts or administrative agencies go about the process of adjudicating matters with tremendous private interests at stake,” he says. The Bush administration has countered in the Ballard case that the reports merely recommend findings to the Tax Court judge who is assigned to review the special trial judge’s report and to issue a decision. “Under Tax Court Rule 183, as well as under the deliberative processes of courts generally, communications between judges (and special trial judges) to whom a case is assigned for disposition are not produced or disclosed to the parties,” the solicitor general argues. The stakes in what may seem to be an arcane dispute over a procedural rule can be enormous — and are in the Kanter case. FRAUD LIABILITY Burton Kanter, who died in 2001, was one of the country’s top estate tax lawyers. He was an adjunct professor of law for nearly 15 years at the University of Chicago. Claude Ballard was a senior vice president of Prudential Life Insurance Co. of America. Ballard and Kanter, along with another Prudential vice president, Robert Lisle, operated what the government called a kickback scheme with people wanting to do business with Prudential. Kanter funneled more than $3 million of the kickbacks to Ballard through a web of corporations, partnerships, and trusts. After discovering the kickbacks, which had not been reported as income, the Internal Revenue Service issued notices of deficiency that, with interest and penalties, totaled more than $30 million. Officials also alleged civil fraud. The three men sought review in the Tax Court, where the chief judge assigned the trial to a special trial judge. The 19 Tax Court judges are appointed to 15-year terms. The chief judge may appoint special trial judges, who serve at the pleasure of the court. In several classes of trials, generally involving small amounts of money, the special trial judges are authorized to issue the final decision. In cases where the claimed deficiency exceeds $50,000, the Internal Revenue Code authorizes the special trial judges to conduct proceedings, including a trial, but not to enter the decision. Under Rule 183, a special trial judge is to submit a report, including findings of fact and opinion, to the chief judge, who then assigns the case to a Tax Court judge or division. That judge can accept, reject, modify, or recommit the report. The rule requires that “due regard” 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.” Four years after the Kanter fraud trial (which took five weeks and generated 5,000 pages of trial transcripts and more than 4,600 pages of briefs), the special trial judge submitted his report. The case was assigned to a regular Tax Court judge. Nearly a year-and-a-half later, the reviewing judge issued a decision finding Kanter liable for tax fraud. But two Tax Court judges — one a regular judge and the other the chief special trial judge — subsequently informed Kanter’s trial counsel, Randall Dick of San Francisco, that the reviewing judge had reversed the special trial judge. The special judge had not found Kanter liable, they said. The record does not reflect that reversal, says Pildes, and does not explain “under any standard of review,” the reversal of the critical findings. The reviewing judge’s decision begins with what Pildes calls “the standard boilerplate statement” that he “agrees with and adopts the opinion of the special trial judge.” But that does not mean that the judge adopted the original Rule 183 report, only the final views of the trial judge as they were modified by whatever discussion the reviewing judge and trial judge had after the report was filed. OPEN, THEN SECRET Through 1983, the Tax Court required the reports to be given to the parties, who could file exceptions to them. The rule required special trial judges to “file” their reports, language that made it part of the case record on appeal. But by changing “file” to “submit,” the Tax Court apparently took the reports out of the scope of the Federal Rules of Appellate Procedure, says tax scholar Leandra Lederman of George Mason University School of Law. The reports aren’t disclosed to anyone outside of the Tax Court, says Lederman, who has written an article on the dispute for the March 22 issue of the publication Tax Notes. Lederman says the nondisclosure policy is particularly worrisome at the court of appeals level. Rule 183, she says, contains a standard that reviewing Tax Court judges must follow. They must give “due regard” to the fact that special trial judges are able to evaluate the credibility of witnesses, and they must respect the presumption of correctness given to the findings of fact, she said. If appellate courts don’t have the special trial judge’s report, Lederman asks, “How do we know that standard is being complied with? I guess we could rely on the Tax Court saying it is, but that’s not how appellate review works.” Pildes agrees, saying that, when as here “the Tax Court’s own rules require it to base its final decision, in part, on the trial judge’s original findings and to presume those findings correct, due process must then require that those findings be part of the record on review.” The government hasn’t yet replied to the Kanter petition. In Ballard, it said there is no due process violation in the Rule 183 practice. “While the procedures used in the Tax Court may be unique to that court, there is nothing unusual about judges conferring with one another about cases assigned to them,” the government argues. “These conferences are an essential part of the judicial process when, by statute, more than one judge is charged with the responsibility of deciding the case. And, as a result of such conferences, judges sometime change their original position or thoughts.” Tax litigator Allen Madison of Mountain View, Calif.’s Fenwick & West, an ex-Tax Court clerk, agrees. “These reports are part of the deliberative process of the Tax Court,” he says. “In fact, a regular Tax Court judge is the only judge that is permitted to actually issue a public opinion.” So far, the three appellate courts to consider the issue have agreed: the U.S. Court of Appeals for the 7th Circuit in Kanter; the 11th Circuit in Ballard; and the 5th Circuit in Estate of Lisle v. Commissioner of Internal Revenue (although the court reversed Lisle’s tax-fraud liability without having the special trial judge’s report). In the 7th Circuit, Judge Richard Cudahy issued a strong dissent, writing, “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 case.” The judge noted that the Tax Court was unique in the “opacity of its process” and in having got there by abandoning “a transparent process — an evolution completely counter to the trend” toward openness in other areas of the law. The Tax Court never publicly explained why the rule changed in 1983. Practitioners have speculated that it was unhappy with the controversy that erupted when a regular Tax Court judge, perhaps for the first time, overturned findings of fact by the special trial judge in a high-profile case. The rule was changed shortly after that. In 1989, the D.C. Circuit overruled the Tax Court in that case. “It doesn’t seem to me there is any special reason this report should be protected other than the possibility of embarrassment,” says George Mason’s Lederman. “But disagreements between judges are aired publicly all of the time.” Pildes notes how hard it is to predict whether the Supreme Court will take the case but says, “I think it’s hard to believe that judges who clearly understand this bizarre, off-the-record process of secret fact-finding will find it’s an acceptable way for a judicial institution of the United States to operate.” Marcia Coyle is Washington bureau chief of the National Law Journal, an American Lawyer Media newspaper, where this article first appeared.

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