I read an interesting article in the NY Times which I thought I'd pass along to all you tax minded legal types.
It is one of the most interesting stories that I have read about tax law recently and it reminds me in some ways of the story of how Al Capone was finally brought to justice. In this story however, the main character pushed at the limits of the tax laws and eventually changed the tax courts for posterity. Who is the main character in this drama?
Burton W. Kanter, one of the nation's most prominent tax lawyers, spent a career pushing the limits of the tax laws. He used creative tax planning to finance such movies as "One Flew Over the Cuckoo's Nest" and "The Rocky Horror Picture Show." He pioneered the use of foreign trusts to reduce taxes. He lectured for decades on his creative tax structures at the University of Chicago Law School and wrote a regular column in The Journal of Taxation.
This may seem boring to some of you, but eventually Mr. Kanter was charged with tax fraud, and that is where it begins to get interesting. Mr. Kanter is now dead, but the case lives on -- and man what a case. In fact, you might say that this is one of the most important cases in tax history. It didn't change the rules for the tax courts, but it sure did emphasize why they needed to be changed.
Last week, the tax court announced that it would end a 20-year-old practice of keeping secret reports prepared by its hearing judges, known as special trial judges. The court said it was making the change because of a Supreme Court ruling in March that criticized the tax court's secrecy and ordered the release of the report in Mr. Kanter's case.
"This is going to fundamentally change how these cases are heard by special trial judges," said Norman R. Williams, an assistant professor of administrative law at the Willamette University College of Law. "The Kanter case was obviously the precipitating and, I think, exclusive factor that generated this rule change."
What is so important about this rule change? Well, I think it comes down to the fact that the tax courts can no longer hide the opinions of the special trial judges' reports. (Special trial judges cannot make decisions in cases involving more than $50,000, so they give a recommendation to the senior judge.) Up to this point there was no way to determine what the findings were of the lower trial judge. Most interestingly, it seems that every opinion issued by the senior judge purported to agree with the trial judge's opinion. Even in Mr Kanter's case this was true. It only becomes interesting because:
The Kanter report was released at the end of May, and it caused a stir among tax lawyers. It was strikingly different from the final opinion in the Kanter case, even though the front page of the opinion stated that the court "agrees with and adopts the opinion of the special trial judge." In fact, the special trial judge's report found that there was not enough evidence that the three men had committed tax fraud; the final court opinion said they had.
Oops, maybe the senior judge meant disagree! Well, not really, in fact the tax courts claimed that Judge Dawson had "adopted" the opinion of the special trial judge and refused to release the opinion of the special trial judge.
For those of you who are thinking, "oh well, sometimes things go wrong", I want to make sure you understand this wasn't just a one-time problem:
An appeals court judge, writing in 2003 in the Kanter case, said he had reviewed "880-plus tax court decisions since 1983" involving special trial judge reports and in every one, he said, "the tax court judge purported to agree with and adopt the opinion of the S.T.J."
I think I'll have to quote from Judge Richard D. Cudahy of the Court of Appeals for the Seventh Circuit on this point:
"It is difficult to believe that over the course of 19 years," he wrote, "not a single tax court judge (and there are 19 of them) has ever disagreed with a single original finding" of any special trial judge.
Oops, not one disagreement, is anyone willing to buy that? In fact, we now have proof of at least one disagreement that the court tried to hide, right?
Anyhow, that is hopefully in the past, and any of you who are getting into this field may now have some protection from this abuse of discretion:
The proposed new rules say the special trial judge reports will be released for comment by the taxpayers and the I.R.S. before a final opinion is issued. The new rules, which are to take effect later this year, will apply to future cases, but not past closed cases. Many reports by the special trial judges may not exist anymore.
Hopefully these new rules will pass. If not, the tax courts can continue to use their discretion in a way that is harmful to justice.