Tax Court and three judges rebuked
on Nov 2, 2005 at 6:20 pm
(This is a followup to the Supreme Court 7-2 decision last March 7, denouncing as an “idiosyncratic procedure” the U.S. Tax Court’s practice of keeping secret and showing little respect for the preliminary rulings by its trial judges.)
In a public exhibition of strong displeasure, the Eleventh Circuit on Wednesday ordered three U.S. Tax Court judges to have nothing further to do with a pending case, demanded a new assignment of the case, and brusquely ordered the entire 19-judge Tax Court to “adhere strictly hereafter” to its own rules. The Tax Court had changed its rules on Sept. 20 to modify a secrecy procedure, but that did not deter the Eleventh Circuit from loosing a stinging rebuke.
This highly unusual public chastisement came as the Circuit Court reviewed again the case of Ballard v. Commissioner of Internal Revenue after the case was sent back by the Supreme Court. It is a tax deficiency case growing out of an Internal Revenue Service claim of an alleged “kickback” scheme involving the real estate department of Prudential Life Insurance Co. of America. As it returned to the Eleventh Circuit, it involves only Claude M. Ballard and his wife, Mary. Ballard, a senior Prudential executive, allegedly shared in fees that a Chicago tax attorney charged for influence with Ballard and another Prudential executive to persuade them to approve financing of clients’ projects.
The special trial judge who handled the case in its first phase at the Tax Court (somewhat as a magistrate does in a District Court) was D. Irvin Couvillion. It turns out that Couvillion had concluded in his initial report that there were no kickback schemes, there was no unreported income, and there was thus no underpayment of taxes. But Ballard and the others involved never knew about those conclusions, because of a Tax Court procedure of refusing to disclose such reports to taxpayers or their attorneys and because the Tax Court final ruling was directly contradictory to Couvillion’s report.
Now, as a result of the Eleventh Circuit’s decision Wednesday, that report gains new stature and potentially could spare Ballard from liability. The Tax Court, in a new review, must give deference to Couvillion’s conclusions.
According to the Eleventh Circuit, Trial Judge Couvillion’s initial report was assigned by the Tax Court’s then-Chief Judge Mary Ann Cohen to a colleague, Judge Howard A. Dawson, Jr., who disagreed with Couvillion’s conclusions. Cohen agreed with Dawson. As a result, the Eleventh Circuit noted, Cohen, Dawson and Couvillion then put together a new “collaborative” report, finding Ballard liable for the claimed tax deficiency. This new report was then filed as the final decision of the Tax Court. The case then went to the Eleventh Circuit, where it was upheld in 2003. It is the case that Ballard and others appealed to the Supreme Court.
In an opinion written by Justice Ruth Bader Ginsburg, the Supreme Court ruled that the Tax Court may not exclude from the record on appeal initial trial judge reports, and it told the Tax Court not to treat those as if they were mere drafts, but to give them deference, especially in their conclusions about the truthfulness of witnesses.
The Ballards then returned to the Eleventh Circuit, resulting in the new unsigned (Per Curiam) opinion. Although the Court noted that the Tax Court had changed its rules “to reflect the dictates of the Supreme Court’s opinion,” it went further. It lectured the Tax Court on the need for “great deference” to its trial judges, especially on credibility decisions. It also instructed the Tax Court to include in the public record what the trial judges had recommended, how the Tax Court reacted to those conclusions, and to produce a full record for an appeals court to review. The Court stressed “the need for transparency.”
Accusing the Tax Court of engaging in a “misleading” revision of Judge Couvillion’s initial report, the Circuit Court vacated the Tax Court ruling and ordered these specific steps on remand:
— Nullify the joint report of Cohen, Dawson and Couvillion.
— Reinstate Couvillion’s original report.
== Refer the case to a regular Tax Court judge “who had no involvement” in preparing the joint report.
— Give “due deference” to Couvillion’s credibility determinations.
— Presume that his fact findings are correct “unless manifestly unreasonable.”
— “Adhere strictly hereafter to the amended Tax Court rules in finalizing Tax Court opinions.”
In a final footnote, it stressed that Cohen, who is no longer Chief Judge, Dawson, who is a senior judge, and Couvillion, still a trial judge, “are not to be involved in this new review.”
