Federal Taxation - Michael H. Plowgian, Svetoslav S. Minkov, and T. Wesley Brinkley

• Jurisdiction: United States,Federal
• Publication year: 2006
• Citation: Vol. 57 No. 4

Federal Taxationby Michael H. Plowgian^*

Svetoslav S. Minkov^** and T. Wesley Brinkley^***

I. Introduction

The courts in the Eleventh Circuit were involved in a number of relatively prominent tax related cases in 2005. Two cases that were previously highlighted in this publication were overturned on appeal.¹ The United States Supreme Court reversed and remanded the Eleventh Circuit in the tax procedure case of Ballard v. Commissioner.² In addition, the Eleventh Circuit reversed the United States District Court for the Southern District of Florida in American Bankers Insurance Group, Inc. v. United States,³ holding that the federal telecommunications excise tax did not apply to telecommunications services for which the charge varied by time, but not by distance.⁴ The Eleventh Circuit also partially affirmed and partially reversed the Tax Court in Estate of Blount v. Commissioner,⁵ holding that a decedent's stock in a company had to be valued for estate tax purposes at fair market value, but that insurance proceeds the company received from an insurance policy on the decedent's life should not be considered when determining the fair market value of the stock.⁶ Finally, the United States District Court for the Southern District of Florida held that medical residents employed by a teaching hospital did not qualify for the student exemption from social security taxes.⁷

II. Supreme Court Case—Original Special Trial Judge Report Must Be Included in Tax Court Record

In Ballard v. Commissioner,⁸ the Supreme Court ruled that Rule 183 of the Tax Court Rules of Practice and Procedure ("Rule 183")⁹ requires the Tax Court to include the original special trial judge's report in the appellate record when the Tax Court appoints a special trial judge to hear the case.¹⁰

The underlying case in Ballard concerned a scheme of alleged kickbacks to Claude Ballard, which he failed to report as income on his income tax returns. The Internal Revenue Service (the "Service") sent Ballard notices of deficiency alleging that he owed additional taxes, and subsequently alleged that Ballard's tax returns were fraudulent. Ballard filed a petition for redetermination of the deficiencies in the Tax Court.¹¹ The Tax Court chief judge assigned the case to Special Trial Judge D. Irvin Couvillion for trial. Under the rules governing the Tax Court, if the amount of taxes at issue exceeds $50,000, as it did in Ballard, a special trial judge may be assigned to preside over the trial and issue a report containing recommended fact findings and conclusions as to the taxpayer's liability, though the final decision rests with the Tax Court.¹²

On or before September 2, 1998, Judge Couvillion submitted to the chief judge a report containing his findings of fact and opinion. On September 2, 1998, the chief judge assigned the case to Tax Court Judge Howard A. Dawson, Jr., for review of the special trial judge's report.¹³ Judge Dawson's decision purported to have adopted the findings contained in the report submitted by Special Trial Judge Couvillion, and consisted entirely of a document labeled "opinion of the Special TrialJudge."¹⁴ That decision held that Ballard and his codefendants had acted with intent to deceive the government, and held them liable for underpaid taxes and substantial fraud penalties.¹⁵

Due to conversations that Randall Dick, the attorney for Burton Kanter (one of Ballard's copetitioners), claimed to have had with two other Tax Court judges, Ballard and his copetitioners came to believe that the document set forth in Judge Dawson's opinion was not the report submitted by Special Trial Judge Couvillion. According to Dick, the two Tax Court judges told him that Special Trial Judge Couvillion's original report concluded that the petitioners did not owe taxes with respect to certain payments and that the fraud penalty was not applicable. Moreover, Dick attested that the judges told him that Judge Dawson made changes to Special Trial Judge Couvillion's findings relating to credibility and fraud.¹⁶

The petitioners filed motions with the Tax Court seeking access to the original report of Special Trial Judge Couvillion. In response, the Tax Court, in a statement signed by the Tax Court chief judge, Judge Dawson, and Special Trial Judge Couvillion, maintained that Judge Dawson adopted the findings of fact and opinion of Special Trial Judge Couvillion. Further, the statement declared that to the extent that the petitioners sought any "preliminary drafts" of the special trial judge's report, such documents were not subject to production "because they relate to the internal deliberative processes of the Court."¹⁷

Ballard appealed the Tax Court's decision to the Eleventh Circuit, arguing that failure to produce the special trial judge's report constituted a denial of due process.¹⁸ The Eleventh Circuit rejected that argument, concluding that the Tax Court's final decision was, in fact, Special Trial Judge Couvillion's report.¹⁹ Moreover, the Eleventh Circuit determined that although the final report may have differed from the original draft after internal deliberations, that fact did not raise due process concerns.²⁰

The Supreme Court granted certiorari and reversed the Eleventh Circuit.²¹ Justice Ginsburg, writing for the majority, based the ruling on the language of Rule 183.²² Rule 183(b) provides that, after trial, the special trial judge "shall submit a report, including findings of fact and opinion, to the Chief Judge, and the Chief Judge will assign the case to a Judge . . . of the Court."²³ Rule 183(c) provides that the Tax Court judge to whom 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.²⁴ @@@

The Supreme Court reasoned that Judge Dawson did not take any action authorized by Rule 183(c) to supplement the record.²⁵ Thus, Judge Dawson's review could only have been predicated on Special Trial Judge Couvillion's original report, the trial transcript, and the other documents on file. Therefore, Judge Dawson, under Rule 183(c), should have given deference to the findings of Special Trial Judge Couvillion.²⁶ Instead, based on the affidavit by Dick and oral arguments before the Court, the majority concluded that Judge Dawson had treated Special Trial Judge Couvillion's report as an "in-house draft to be worked over collaboratively by the regular judge and the special trial judge."²⁷

This process, the majority concluded, was not authorized by Rule 183.²⁸ Rule 183, according to the majority, refers to only one report of the special trial judge, and as described in Rule 183(b), requires the special trial judge to submit this report to the chief judge before the case has been assigned to a regular Tax Court judge.²⁹ The "Special Trial Judge's report" referred to in Rule 183(c), the findings of which are presumed to be correct, therefore must be the original report of the special trial judge described in Rule 183(b), not some subsequent report created by collaboration between the special trial judge and the Tax Court judge to which the case has been assigned.³⁰ To further support the position that the special trial judge's report referred to in Rule 183(c) is the original report, rather than the collaborative report, the majority stated that it would be difficult to understand how a Tax Court judge could give "due regard" to and "presum[e] to be correct," an opinion the judge collaborated in producing.³¹ Moreover, the majority reasoned that the Tax Court's practice of not disclosing the special trial judge's original report impedes fully informed appellate review of the Tax Court's decision, and therefore, the report must be included in the appellate record.³² Basing its decision on the Tax Court's own rules, the majority did not address the taxpayers' due process and other arguments.³³

Justice Kennedy, joined by Justice Scalia, concurred in the opinion.³⁴ Chief Justice Rehnquist, joined by Justice Thomas, dissented from the opinion.³⁵ Justice Rehnquist's dissent essentially agreed with the reasoning of the Eleventh Circuit, stating that Special Trial Judge Couvillion's signature on the Tax Court's final decision presumptively establishes that any differences that might exist between the original report and the final opinion are the result of legitimate re-evaluation of the case.³⁶ The signature makes the report attributable to the special trial judge, and the Tax Court's interpretation of its own rules as not requiring the disclosure of initial drafts is not unreasonable.³⁷

In response to the Supreme Court's decision, the Tax Court amended its rules, which now require the original special trial judge's report to be disclosed.³⁸ on remand, the Eleventh Circuit obtained the original report of the special trial judge, which found that Ballard was not liable for the tax deficiencies asserted against him, concluded that there were no kickback schemes, and held that the government's allegations offraud did not rise even to the level of "suspicion of fraud."³⁹ The Eleventh Circuit remanded the case to the Tax Court, ordering that: (1) the collaborative report and opinion of the Tax Court be stricken; (2) the original report of the special trial judge be reinstated; (3) the chief judge of the Tax Court assign the matter to a regular Tax Court judge who had no involvement in the preparation of the collaborative report; (4) the Tax Court review the matter in accordance with the dictates of the SupremeCourt and give "due regard" to the credibility of the determinations of the special trial judge and...