                            In the
 United States Court of Appeals
              For the Seventh Circuit
                         ____________

Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
     01-4321, 01-4322, & 02-1220
ESTATE OF BURTON W. KANTER, deceased,
JOSHUA S. KANTER, executor, and NAOMI KANTER,
                                        Petitioners-Appellants,
                               v.

COMMISSIONER OF INTERNAL REVENUE,
                                          Respondent-Appellee.
                         ____________
      Appeals from a Decision of the United States Tax Court
            Nos. 712-86, 1350-87, 31301-87, 33557-87,
                  3456-88, 32103-88, 26251-90.
                         ____________
    ARGUED SEPTEMBER 4, 2002—DECIDED JULY 24, 2003
                    ____________


 Before FLAUM, Chief Judge, CUDAHY and KANNE, Circuit
Judges.
  PER CURIAM. The Estate of Burton Kanter and Naomi
Kanter appeal a decision of the Tax Court. This con-
solidated appeal deals with six out of forty-one separate
issues decided by the Tax Court with respect to alleged
deficiencies of the late Burton W. Kanter, his wife, Naomi
Kanter, and related entities, as well as two additional post-
trial issues. We affirm in part and reverse in part.
2         Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                              01-4321, 01-4322, & 02-1220

                       INTRODUCTION
  The late Burton W. Kanter,1 and various family entities
associated with him, have been audited by the Inter-
nal Revenue Service virtually, if not literally, every year
since Richard Nixon was President. Kanter was a well-
known and accomplished tax and estate lawyer. He gradu-
ated from the University of Chicago Law School. He had a
very successful law practice beginning in 1956, founding
what would eventually become the law firm of Neal, Gerber
& Eisenberg. Among Kanter’s clients was the Pritzker
family of Hyatt Corporation fame. Kanter was also an
accomplished businessman, with “extensive exposure” to a
“good many public . . . . [and] private companies.” (Tr. at
5278.)2 Kanter wrote extensively on tax-related subjects
(originating a “Shop Talk” column in the Journal of Tax-
ation), and was an expert on the subject of trusts and
estate planning. See, e.g., Burton W. Kanter & Michael J.
Legamaro, The Grantor Trust: Handmaiden to the IRS and
Servant to the Taxpayer, 75 TAXES 706 (1997); Sheldon I.
Banoff & Burton W. Kanter, LLC Announcements: Damage
Control, 80 J. TAX’N 255 (1994); Burton W. Kanter &
Sheldon I. Banoff, Tax Planning for the Elderly, 70 J. TAX’N
191 (1989); Burton W. Kanter, AARP—Asset Accumulation,
Retention and Protection: Prelude to Transmission, 69
TAXES 717 (1991); Burton W. Kanter, Cash in a “B” Reorga-
nization: Effect of Cash Purchases on “Creeping” Reorgani-


1
   Burton W. Kanter died on October 31, 2001. His estate was
subsequently substituted as the principal party to this litigation.
In order to avoid semantic contortions, this opinion refers
interchangeably to the current Petitioners collectively, the Estate
of Burton W. Kanter individually and to the late Burton Kanter,
as “Kanter.”
2
  “Tr.” refers to the transcript for the Tax Court trial. “App.” will
refer to the appendix to Petitioners’ brief.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,            3
     01-4321, 01-4322, & 02-1220

zation, 19 TAX L. REV. 441 (1964). In the 1960s and 1970s,
Kanter helped Hollywood finance movies through tax
shelter arrangements, and was involved in the produc-
tion of many major Hollywood films, including “One Flew
Over the Cuckoo’s Nest.” The IRS’s extraordinary atten-
tion to Kanter is understandable given that from 1979 to
1989 Kanter, the highly successful tax attorney, who
hobnobbed with Pritzkers and Hollywood producers and
who participated in countless extremely large and lucrative
business ventures, reported a negative adjusted gross
income each year on his federal tax return and paid no
federal income taxes. (Tr. at 5290-91.)
  This consolidated appeal involves Kanter’s petitions for
review of deficiencies assessed during the years from 1978
to 1986, which is itself only a portion of the original con-
solidated case tried by the Tax Court in 1994—a trial that
generated almost 5500 pages of transcript, more than
4600 pages of briefs and thousands of exhibits consuming
hundreds of thousands of pages, and was eventually, five
years later, distilled into a 606 page opinion covering forty-
one separate issues. A thorough description of the entire
factual background to this case can be found in the Tax
Court’s opinion. Investment Research Associates, Ltd. v.
Comm’r, 78 T.C.M. (CCH) 951 (1999) [hereinafter IRA]. The
trial was conducted by Special Trial Judge Couvillion, to
whom the Tax Court had assigned the case under 26 U.S.C.
§ 7443A(b)(4). See also Tax Court Rule 180.3 Under the
Tax Court’s rules, the Special Trial Judge (STJ) then
submitted a report containing findings of fact and opinion
to the Tax Court’s Chief Judge, who then assigned the case
to Tax Court Judge Dawson. See Tax Court Rule 183(b).
Judge Dawson subsequently issued his opinion, which


3
  All Rule references are to the Rules of the United States Tax
Court (Tax Court Rules) unless otherwise indicated.
4        Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

stated that the Tax Court “agrees with and adopts the
opinion of the Special Trial Judge, which is set forth below.”
IRA, 78 T.C.M. (CCH) at 963. Of the forty-one issues
decided by the Tax Court, six were appealed to this court:4
  1. Fraud: The Tax Court determined that Kanter (and
two colleagues) helped individuals obtain business oppor-
tunities in exchange for payments that later were fraud-
ulently diverted through a series of Kanter-controlled
entities in order to disguise the payments’ origins and lower
the tax assessed on the income (by dividing it up and
assigning parts of it to various entities claiming losses).
Kanter concedes that there was an underpayment of taxes
but disputes that the Commissioner was able to prove
by clear and convincing evidence that the underpayment
was due to fraud.
  2. Bea Ritch Trusts: Kanter challenges the Tax Court’s
determination that capital gains reported in 1986 by the
Bea Ritch Trusts (BRT) were properly taxable to Kanter
under the grantor trust provisions of the Internal Reve-
nue Code (IRC).
  3. Washington Painting: Kanter challenges the Tax
Court’s refusal to allow him to deduct expenses he in-
curred during an aborted sale of a painting.


4
  The Tax Court trial consolidated the petitions of Kanter and
two other individuals (Lisle and Ballard) against whom the Com-
missioner assessed deficiencies. Under 26 U.S.C. § 7482(b)(1)(A),
appeals from Tax Court decisions are reviewed by the U.S. Court
of Appeals for the circuit in which the legal residence of the
petitioner lies. Of the three petitioners, only Kanter’s legal
residence lies within the Seventh Circuit. Parallel appeals for the
other petitioners are ongoing in the Fifth and Eleventh Cir-
cuits. During the pendency of this appeal the Eleventh Circuit
issued its opinion. Ballard v. Comm’r, 321 F.3d 1037 (11th Cir.
2003).
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,          5
     01-4321, 01-4322, & 02-1220

  4. 1982 Bank Deposits: Kanter challenges the Tax
Court’s determination of a deficiency for the year 1982
based upon an analysis of his bank deposits. He argues
that the Commissioner failed to meet his burden to prove
a deficiency, that the Tax Court erred in presuming the
Commissioner’s deficiency determination to be correct,
and that in any event the evidence Kanter presented
at trial was sufficient to overcome any presumption of
correctness.
  5. Equitable Leasing: Kanter challenges the Tax Court’s
determination that payments from Equitable Leasing
Company to Kanter entities were taxable commissions
and not loans.
  6. Cashmere: The Tax Court disregarded a series of
transactions involving (a) the contribution of certain
partnership interests to a shelf corporation (Cashmere)
and (b) the subsequent installment sale of Cashmere’s
stock, the result of which was an immediate recognition of
capital gain to Kanter on the partnership interests. Kanter
argues that the transactions had economic substance
and should not have been disregarded as an attempt to
avoid the payment of federal income tax.
  The remaining two issues in this appeal concern events
after the conclusion of the Tax Court’s trial. Beginning in
April 2000, Kanter sought repeatedly to have the orig-
inal report filed by the STJ placed in the record, or in the
alternative made available for this Court’s review in
camera. Kanter alleged that informal conversations with
two Tax Court judges had revealed that the issued opin-
ion had undergone significant alterations from the orig-
inal report filed by STJ Couvillion. The Tax Court denied
all of Kanter’s motions. Kanter appeals the Tax Court’s
refusal to produce the STJ’s original report. The final issue
concerns Kanter’s wife’s (Naomi’s) efforts to seek innocent-
6       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                            01-4321, 01-4322, & 02-1220

spouse relief from the deficiencies levied against her hus-
band’s estate.
  To make this very complex case easier to understand
we have placed a brief statement of facts relevant to each
issue immediately preceding that issue’s analysis. We be-
gin with the broadest (and least fact dependent) issue:
whether the STJ’s original report should have been made
part of the record on appeal. Then we address the six
transactional issues from the Tax Court’s decision. Finally,
we address Naomi Kanter’s post-trial motions.
  The United States Courts of Appeals have exclusive
jurisdiction to review decisions of the United States Tax
Court. 26 U.S.C. § 7482(a)(1); Seggerman Farms, Inc. v.
Comm’r, 308 F.3d 803, 805 (7th Cir. 2002).


I.   The STJ’s Report
   Kanter’s first argument is that the STJ’s original report
must be made a part of the record on appeal so that this
court can determine whether the appropriate degree of
deference had been paid to it by the Tax Court judge, whose
opinion is before us. Kanter claims that informal conver-
sations between his attorney and other Tax Court judges
revealed that the STJ who presided over the trial of this
case submitted a report that found Kanter credible and
recommended rejection of much of the Commissioner’s
assessed deficiencies, specifically the fraud deficiency.
Kanter argues that the STJ’s report cannot be rejected
by the Tax Court unless clearly erroneous, and that,
without the STJ’s report in the record, there is no way
for this court to determine if proper deference was accorded
it. Moreover, this secret and unaccountable process of
review allegedly violates Kanter’s due process rights.
Kanter, relying on a Supreme Court case examining the
relationship between U.S. district court judges and magis-
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,          7
     01-4321, 01-4322, & 02-1220

trate judges, argues that this quasi-collaborative process
affords a Tax Court the opportunity to reverse an STJ’s
credibility findings without first hearing or seeing the
witnesses itself—thus offending due process. See Raddatz
v. United States, 447 U.S. 667, 681 n.7 (1980) (observing
in dicta that in the criminal context a district court
judge’s reversal of a magistrate judge’s credibility findings
without the district judge hearing or seeing the witnesses
would raise “serious questions”). Kanter argues that in
addition, our review of the Tax Court’s decision is uncon-
stitutionally impaired by the omission of the STJ’s report
from the record. Kanter’s challenge of the Tax Court’s
refusal to include the “original” STJ report presents
questions of law that we review de novo. Pittman v.
Comm’r, 100 F.3d 1308, 1312 (7th Cir. 1996).
  Of course, Kanter’s arguments are immaterial if the
Tax Court’s final opinion is the STJ’s report. See Ballard,
321 F.3d at 1042-43. The Tax Court’s final opinion clearly
states that it “agrees with and adopts the opinion of the
Special Trial Judge.” IRA, 78 T.C.M. (CCH) at 963. The
Chief Judge of the Tax Court, Judge Dawson, and Spe-
cial Trial Judge Couvillion himself all signed that final
opinion, and we take their statement at face value. There-
fore, notwithstanding Kanter’s attorney’s declaration, we
accept as true the Tax Court’s statement that the under-
lying report adopted by the Tax Court was in fact Special
Trial Judge Couvillion’s. See Ballard, 321 F.3d at 1042-43.
This renders moot all of Kanter’s arguments.
  But even if, as the dissent suggests, the phrase “agrees
with and adopts” masks what is in fact a quasi-collabora-
tive judicial deliberation in which an STJ’s initial findings
are malleable, neither the Tax Court’s own rules of pro-
cedure, the Federal Rules of Appellate Procedure, nor
Congress’ scheme for appeals from Tax Court decisions
would require the Commissioner to include the STJ’s
8        Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

preliminary report as part of the appellate record. Further-
more, this purportedly quasi-collaborative process would
not offend our notions of fundamental fairness, nor would
due process require the inclusion of the report in the
appellate record to preserve the fairness of our review.
  First, it is clear that the Tax Court’s own rules do not
require the report to be disclosed to the parties or made
part of the appellate record. To the contrary, its rules
specifically preclude the report’s disclosure. That the Tax
Court has the power to prescribe its own rules of procedure
is undisputed. See 26 U.S.C. § 7453; Stone v. Comm’r, 865
F.2d 342, 347 (D.C. Cir. 1989) (“The Tax Court is of
course free to make its own rules determining the relation
between it and its Special Trial Judges.”). Having exercised
that rulemaking authority, the Tax Court no longer re-
quires an STJ’s report to be made available to the parties
and, by extension, no longer allows those parties to file
objections to it. Compare Tax Court Rule 182(b), (c), 60 T.C.
1149 (1973) (providing for service of the STJ’s report on
each party and allowing each party to file objections to the
report’s findings), with Tax Court Rule 183, 81 T.C. 1070
(adopted 1983) (noting that “[t]he prior provisions for
service of the [STJ’s] report on each party and for the fil-
ing of exceptions to that report have been deleted”).
  Neither do the Tax Court procedures prescribe any
particular level of deference due the STJ’s report. Under
the current rule, the Tax Court maintains sole authority
to decide cases assigned to an STJ. Tax Court Rule 183(c)
(“The Judge to whom or the Division to which the case
is assigned may adopt the [STJ’s report] or may modify it
or may reject it in whole or in part . . . .”); see also Freytag
v. Comm’r, 501 U.S. 868, 875 n.3 (1991) (“[A] special trial
judge has no authority to decide a case assigned under
[§ 7443(b)(4)].”). The Tax Court thus acts as the original
finder of fact. Conversely, the STJ’s inability to decide
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,            9
     01-4321, 01-4322, & 02-1220

cases limits the amount of deference that the Tax Court, as
the original factfinder, must pay to those preliminary
findings. Although the Rule requires that “due regard” be
given to the STJ’s opportunity to evaluate the credibility
of witnesses and that those findings be presumed correct,
see Tax Court Rule 183(c), to impose the further require-
ment that the Tax Court review an STJ’s findings for
clear error, as Kanter urges, would all but abdicate the
Tax Court’s original decisionmaking authority. Instead,
we believe Rule 183’s due-regard language merely in-
structs the Tax Court to be cognizant that the STJ had
the opportunity to evaluate the credibility of witnesses,
and allows the Tax Court to overcome the presumption of
correctness it prescribes should it find that the evidence
suggests those findings were incorrect. Consequently,
secreting the report does not offend any rule-mandated
check on the Tax Court’s power to decide cases assigned
to an STJ.
  Second, Congress has by statute precluded direct appel-
late review of STJ reports. We lack jurisdiction to re-
view anything but “decisions of the Tax Court.” 26 U.S.C.
§ 7482(a)(1). We have repeatedly held that the use of the
term “decisions” in § 7482 means that the appellate
courts can review only (i) dismissals (e.g., for lack of juris-
diction) or (ii) formal determinations of deficiency (or lack
thereof). See, e.g., Krieder v. Comm’r, 762 F.2d 580, 584 (7th
Cir. 1985). In other words, a “decision” of the Tax Court
is the final formal ruling of the Tax Court; a preliminary
“report” is not a decision. See 26 U.S.C. § 7459(a) (“A re-
port upon any proceeding instituted before the Tax Court
and a decision thereon shall be made as quickly as prac-
ticable. The decision shall be made by a judge in accord-
ance with the report of the Tax Court, and such decision
so made shall, when entered, be the decision of the Tax
Court.” (emphasis added)). An STJ report, therefore, is
10       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

not reviewable, see Estate of Smith v. Comm’r, 638 F.2d 665,
670 (3d Cir. 1981), which lends credence to the Commis-
sioner’s argument that Congress intended STJ reports to
be treated as preliminary findings comprising part of the
Tax Court’s internal deliberative process.
  Third, the Federal Rules of Appellate Procedure do not
require that STJ reports be made part of the statutorily
required record on appeal of a “decision” of the Tax Court.
Federal Rule of Appellate Procedure 14 excepts appeals
of Tax Court decisions from certain rules of appellate
procedure.5 Among those rules not applicable to Tax
Court review is Rule 16, which provides that the record on
review of an administrative order shall include “any
findings or report on which [the order] is based.” FED. R.
APP. P. 16(a)(2). Unlike other administrative actions, the
Federal Rules of Appellate Procedure thus do not require
that Tax Court decisions be reviewed in light of the pre-
liminary findings upon which the decision was based.
Instead, Rule 13 notes that Rule 10 governs the contents
of a Tax Court appellate record, and that rule does not
require the record to include any preliminary findings or
reports. FED. R. APP. P. 13 & 10(a)6


5
  Federal Rule of Appellate Procedure 14 states that “[a]ll
provisions of these rules, except Rule 4-9, 15-20, and 22-23, apply
to review of a Tax Court decision.” FED. R. APP. P. 14.
6
  Federal Rule of Appellate Procedure 13 provides in relevant
part:
     (d) The Record on Appeal; Forwarding; Filing.
         (1) An appeal from the Tax Court is governed by the
         parts of Rules 10, 11, and 12 regarding the record on
         appeal from a district court, the time and manner of
         forwarding and filing, and the docketing in the court of
         appeals. References in those rules and in Rule 3 to the
                                                   (continued...)
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,                  11
     01-4321, 01-4322, & 02-1220

  With these considerations in mind, we find that the
relationship between the preliminary reports of STJs and
the final, reviewable “decisions” of the Tax Court bears
striking resemblance to the relationship between reports
of “divisions” of the Tax Court and final decisions of the
Tax Court itself. A “division” is a subset of the Tax Court
(often a single judge) that is designated to hear a single
case and is empowered to make determinations with re-
spect to disputes before the Tax Court. 26 U.S.C. §§ 7444(c),
7460(a). Under § 7460, the division’s decision generally
becomes the decision of the Tax Court, but the Tax Court
retains the power to review the division’s decision and
render its own. Those preliminary recommendations of
the division which do not become part of the final decision
of the Tax Court also do not become part of the record for
any additional future review. Id. § 7460(b) (“The report
of a division shall not be a part of the record in any case in
which the chief judge directs that such report shall be
reviewed by the Tax Court.”).



6
    (...continued)
            district court and district clerk are to be read as refer-
            ring to the Tax Court and its clerk.
FED. R. APP. P. 13(d)(1). And Federal Rule of Appellate Procedure
10 provides in relevant part:
      (a) Composition of the Record on Appeal. The following items
          constitute the record on appeal:
          (1) the original papers and exhibits filed in the district
          court;
          (2) the transcript of proceedings, if any; and
          (3) a certified copy of the docket entries prepared by the
          district clerk.
FED. R. APP. P. 10(a).
12       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

  Thus, the two circuits to have interpreted § 7460 have
ruled that a division’s preliminary report is not part of the
appellate record and not available for review by a federal
appeals court once the Tax Court has undertaken an
internal review. See Estate of Varian v. Comm’r, 396 F.2d
753, 755 n.2 (9th Cir. 1968); Heim v. Comm’r, 251 F.2d 44,
48 (8th Cir. 1958). The Ninth Circuit noted a congres-
sional intent in § 7460 to preclude a two-tier appellate
relationship between the division and the full court
and determined that such a mandate did not offend the
court’s notions of fundamental fairness. Varian, 396 F.2d
at 755 n.2.
  Given the similarities between these two relationships,
we are led to the same conclusion that the Ninth Circuit
reached in Varian: there is no two-tier appellate rela-
tionship between STJs and the Tax Court. Instead, STJ
reports are treated by the Tax Court as preliminary
findings only and, in accordance with applicable rules
and statutes, are not required to be made part of the rec-
ord on appeal.
   The dissent takes issue with this comparison, noting
that divisions are comprised of one or more Tax Court
judges, who are all presidentially appointed and serve a
fifteen-year, statutorily mandated term of office from
which they can be removed only for “inefficiency, neglect
of duty, or malfeasance in office but for no other cause.” 26
U.S.C. § 7443(f). STJs, however, serve at the discretion of
the Chief Judge and have no statutorily mandated term of
office. Id. § 7443A. If Tax Court Rule 183 provides for a
quasi-collaborative process, the dissent fears this dis-
tinction between the participants impairs the judicial
independence of the STJ. As a result, the dissent ques-
tions whether an STJ can participate meaningfully in
this internal deliberative process. See post at 87.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,        13
     01-4321, 01-4322, & 02-1220

  We respectfully disagree. We are hesitant to suggest that
members of the Tax Court would either expressly coerce
or by nature of their office exert undue influence over an
STJ. Nor will we discredit an STJ’s express statement that
the final Tax Court opinion “agrees with” his own based
solely on this observed distinction.
   This procedure, while admittedly unusual vis a vis typi-
cal judicial procedure, does not offend our notions of
fundamental fairness. See Varian, 396 F.2d at 755. In this
respect, we agree with the dissent’s conclusion that
due process neither requires the Tax Court to be con-
strained by a formal degree of deference to the STJ nor
requires the Tax Court to rehear witnesses whether or not
it ultimately reverses the STJ’s findings. See post at 89-94
(discussing United States v. Raddatz, 447 U.S. 667 (1980)
and Universal Camera Corp. v. NLRB, 340 U.S. 474, 492-94
(1951)). Although dictum in the Supreme Court’s decision
in Raddatz suggests that “serious questions” may arise
from a district court’s reversal of a magistrate judge’s
credibility findings without the opportunity to personally
see or hear the witnesses, see 447 U.S. at 681 n.7, that
observation was made within the context of a criminal
appeal. In a civil tax proceeding, a party’s interests are
more akin to those at stake in a typical administra-
tive adjudication, and we agree with the dissent that
the risk of erroneous deprivation in a civil proceeding is
neither “as high, nor the costs as great, as would be the
case in a criminal milieu.” See post at 93 (discussing Tax
Court Rule 183 within the procedural-due-process frame-
work established by Matthews v. Eldridge, 424 U.S. 319,
333 (1976)). Moreover, we agree that the “only fully re-
sponsive remedy” to Kanter’s complaint would prove
unworkable, as it would require the enormous burden
and prohibitive cost of rehearing witnesses, which would
ultimately prove to add little value given the continued
14      Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                            01-4321, 01-4322, & 02-1220

input that the STJ retains under Tax Court Rule 183’s
purportedly quasi-collaborative process. See post at 93-94.
  But the recognition that little value would be added to
the process given the STJ’s continued involvement—
signified by his adoption of the statement that the final
Tax Court opinion reflects his own opinion—is ulti-
mately why we take issue with the dissent’s conclusion
that our review of the Tax Court’s opinion is unconstitu-
tionally impaired by this procedure. The conclusion rests
on the premise that STJs do not enjoy an equal voice in
this purportedly quasi-collaborative process. See post at
100-02. As discussed above, we reject this premise. In as
much as the final Tax Court opinion purports to agree with
and adopt the opinion of the STJ, we therefore believe that
the final opinion reflects the true legal opinions and
findings of the STJ. Any differing preliminary recommen-
dations—if they ever existed—would no longer be constitu-
tionally relevant because the STJ has abandoned them.
Should he feel otherwise, we would expect him—or the Tax
Court—to say so.
   As the Eleventh Circuit recently noted, “there is noth-
ing unusual about judges conferring with one another
about cases assigned to them.” Ballard, 321 F.3d at 1043.
If Tax Court Rule 183 in fact provides the opportunity for
STJs and Tax Court judges to conference regarding the
STJ’s preliminary findings, then we have every reason to
believe that Tax Court judges would duly regard the in-
put of the STJ and that he, in turn, would participate
meaningfully in the exchange. Like the Ninth and the
Eleventh Circuits, we too are loath to interfere with an-
other court’s deliberative process. See id.
  In any event, the issue is academic since the Tax Court’s
opinion in this case purports to “agree with and adopt”
Special Trial Judge Couvillion’s opinion. We will take the
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,               15
     01-4321, 01-4322, & 02-1220

Tax Court at its word and, thus, move on to a discussion on
the merits of Kanter’s appeal.


II. Fraud
    A. Facts
  The bulk of the Tax Court’s opinion involves its deter-
mination that certain income tax underpayments were
made with fraudulent intent. The facts surrounding the
fraud issue are the most complex of all and will be de-
scribed as succinctly as possible.
  The Tax Court’s decision tells a story of Kanter and
two business associates—Robert Lisle and Claude Ballard.
Lisle and Ballard worked in real estate, principally as
managers in the real estate division of Prudential Insur-
ance Company, where they had significant authority and
influence over the conduct of Prudential’s business. Kanter,
Lisle, and Ballard concocted a plan whereby they would
use Lisle and Ballard’s positions along with Kanter’s legal
skills to collect and hide payments from people who
wanted to do real estate business with Prudential.7



7
  As the Tax Court opinion notes, there were additional sets
of transactions that involved only Lisle and Kanter during
Lisle’s post-Prudential career at Traveler’s Insurance Company
as well as transactions involving Kanter alone. IRA, 78 T.C.M.
(CCH) at 970-71. These transactions followed the same pattern
detailed here where Kanter used his influence to secure busi-
ness opportunities for individuals in return for compensation
that was then diverted through a series of entities in order to
disguise the origin of the funds and avoid income tax liability. For
the sake of simplicity we will refer only to the transactions
involving Prudential and the Five as representative of all of the
transactions detailed by the Tax Court.
16       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

  The Tax Court focused on five individuals (referred to
collectively as the Five) who paid Kanter, Lisle, and Bal-
lard for their influence.8 For the Five, Lisle and Ballard
would help secure business opportunities with Prudential,
and in return the Five made payments, including cash
and partnership interests, to Kanter.
  It was at this point that the IRS became interested.
According to the Commissioner these payments were
diverted (the Commissioner and Tax Court use the more
highly charged word “laundered”) to entities created
by Kanter or someone acting at Kanter’s direction. The
dominant method was to divert payments to a Kanter-
controlled corporation called Investment Research Associ-
ates, Ltd (IRA).9
  The payments to IRA were deposited in the accounts
IRA kept with another Kanter-controlled entity called the
Administration Company. The Administration Co. was
exactly what its name indicates: a company that admin-
istered the records and funds of its clients. It main-
tained books and records for its clients, and often prepared
client tax returns. Additionally, it administered client
funds, collecting receivables and paying bills. Money for
clients was kept in pooled bank accounts listed under


8
   The Five were J.D. Weaver, Bruce Frey, William Schaffel,
Kenneth Schnitzer, and John Eulich. The details of the transac-
tions involving the Five are in the Tax Court opinion at 78 T.C.M.
(CCH) at 976-1019.
9
  IRA was originally incorporated in 1974 in Delaware as Cedilla
Co. It was intended as a vehicle for making investments. Cedilla
changed its name to Investment Research Associates in 1979.
IRA owned as relevant subsidiaries, at various times, Carlco, TMT
and BWK, Inc. IRA conducted no business and had no em-
ployees other than bookkeepers and paid virtually no amount
in salaries.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,           17
     01-4321, 01-4322, & 02-1220

Administration Co.’s name. Two of these accounts were
called the Special E account and the TACI Special Account.
Client funds were pooled in order to get the higher rate
of return on aggregated funds and to avoid a multiplicity
of account maintenance charges on many, smaller client
bank accounts kept in the clients’ individual names.
Administration Co. itself (and not the bank where the
accounts were kept) tracked individual client balances
within the pooled accounts on its internal records for
each client. IRA and many of its subsidiaries were clients
of Administration Co.10 In fact, it does not appear that
Administration Co. had any significant clients not di-
rectly associated with (or controlled by) Kanter.
  The payments by the Five to IRA that were deposited
in the accounts of the Administration Co. were com-
mingled with other non-Five-related funds of IRA as well
as the funds of other Administration Co. clients. This
commingling and the inadequate record keeping of Admin-
istration Co. made it difficult to track or account for the
payments from the Five.
  It was IRA—and not Kanter, Lisle, or Ballard—that
reported the income from the Five’s payments on its tax
return (where it was off-set by aggregated losses). Sub-
sequently, IRA distributed the income into subsidiary
“sham” corporations, BWK, Carlco, and TMT, controlled
by Kanter, Lisle, and Ballard, respectively, in a 10/45/45
ratio, respectively, that represented the division of
the payments allegedly agreed to by Kanter, Lisle, and



10
  In 1988, the Administration Co. filed for bankruptcy. Concur-
rently, a company called Principal Services was organized, and
took over many of Administration Co.’s clients, operating with
the same purposes and in the same way as had Administration
Co.
18        Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                              01-4321, 01-4322, & 02-1220

Ballard.11 These sham corporations were used, in effect, as
the personal bank accounts of Kanter, Lisle, and Ballard,
and these men could withdraw or use the funds con-
tained in them at their leisure.12 The funds withdrawn
were never repaid and were eventually written off as bad
debts. Alternatively, the controlled corporations’ funds
were used to fund the personal expenditures of Kanter,
Lisle, and Ballard, as well as their families.
  Kanter, on the other hand, argues that the payments
to the corporations were merely investments by the enti-
ties, “ceded” to them by Kanter. The underlying scheme
of securing business opportunities for the Five interested
individuals in return for payments to Kanter (through
Kanter entities) is disputed in its entirety by Kanter.
  The Commissioner argued, and the Tax Court agreed,
that this income was properly taxable to the individuals,
and a deficiency was assessed. The Tax Court held that
the diversion of these funds from the individuals to the
sham corporations was undertaken with the fraudulent
intent to evade the payment of taxes. According to the
Tax Court, this arrangement not only disguised income


11
   Carlco, TMT, and BWK were “shelf ” corporations formed by
Kanter in 1982. In 1983, they became active, and IRA acquired
100% of the common stock of each. In 1984, each corporation
issued shares of preferred stock. Carlco issued its preferred shares
to the Christie Trust, a trust established by Kanter for the benefit
of Lisle’s family. TMT’s preferred shares were issued to the
Orient Trust, established by Kanter for the benefit of Ballard’s
family. BWK’s preferred shares were issued to the BK Children’s
Trust, established for the benefit of Kanter’s family. As part of
the scheme, Lisle controlled Carlco’s investment decisions, Bal-
lard controlled TMT’s and Kanter controlled BWK’s.
12
 The actions summarized in these few sentences took place over
many years.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,          19
     01-4321, 01-4322, & 02-1220

earned by the individuals, but also hid their activities
from Prudential.
  In the Tax Court, Kanter presented an impressive list
of witnesses associated with Kanter, Lisle, Ballard, the
Five, and the various relevant entities—all of whom
expressly denied that the Five paid “kickbacks” to Kanter
for steering business the Five’s way. But the Tax Court
found that these witnesses had testified that the Five had,
in fact, entered into payment arrangements with Kanter,
Lisle, and Ballard in exchange for their influence in
obtaining business. IRA, 78 T.C.M. (CCH) at 1065. This
testimony established that Kanter had not reported in-
come on which he was taxable and had therefore under-
paid his federal-income-tax obligations. The Tax Court
found that these underpayments were undertaken with
intent to evade taxes based on, inter alia, the following
factors: the lack of credibility of Kanter’s testimony;
Kanter’s legal education and experience indicating an
awareness of his obligation to report income accurately
and pay taxes; Kanter’s substantial underreporting of
income for many years; Kanter’s creation of a complex
laundering network of sham corporations and other enti-
ties that made it difficult to trace the flow of funds;
Kanter’s lack of cooperation with the IRS—namely, the
withholding of documents and the destruction of docu-
ments subject to summonses; Kanter’s commingling of
“kickback” monies with other monies in the Administration
Co.’s accounts; Kanter’s movement of monies through
conduits that had no legitimate business purpose show-
ing an intent to disguise sources of funds; Kanter’s re-
porting of his personal income on the tax returns of IRA
in order to create the appearance that income was earned
by IRA; and Kanter’s use of phony loans to disguise dis-
tributions to himself, later written off as bad debts. IRA, 78
T.C.M. (CCH) at 1083-85.
20       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

     B. Analysis
  A finding of fraud by the Tax Court is a factual finding
that we review for clear error. Toushin v. Comm’r, 223 F.3d
642, 647 (7th Cir. 2000). As with all findings of fact of
the Tax Court, we must view the evidence in the light
most favorable to the Tax Court’s findings and reverse
only if we are left with the definite and firm conviction
that a mistake has been made. Pittman, 100 F.3d at 1312-
13.
  To establish fraud, the Commissioner must prove by
clear and convincing evidence that Kanter’s underpayment
of taxes was done with intent to evade taxes that he
knew or believed were owed. Toushin, 223 F.3d at 647;
Pittman, 100 F.3d at 1319. Fraud may be proven through
circumstantial evidence. Pittman, 100 F.3d at 1319. There
are a variety of commonly recognized indicia of fraud, “such
as keeping a double set of books, making false entries
or alterations, [using] false invoices or documents, [destroy-
ing] books or records, [concealing] assets or covering up
sources of income, handling . . . one’s affairs to avoid
making the records usual in transactions of the kind, and
[undertaking] any conduct, the likely effect of which
would be to mislead or to conceal.” Spies v. United States,
317 U.S. 492, 499 (1943). Additionally, fraud can be shown
by significant and repeated understatement of income,
Pittman, 100 F.3d at 1320, by a lack of cooperation with
investigating agents, Korecky v. Comm’r, 781 F.2d 1566,
1568-69 (11th Cir. 1986); Zell v. Comm’r, 763 F.2d 1139,
1146 (10th Cir. 1985), by destruction of records, Powell v.
Granquist, 252 F.2d 56, 59 (9th Cir. 1958), or by consider-
ing the legal experience and education of the taxpayer,
Plunkett v. Comm’r, 465 F.2d 299, 303 (7th Cir. 1972).
  Kanter’s principal argument is based on the representa-
tion he makes above concerning the STJ’s report: Kanter
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,      21
     01-4321, 01-4322, & 02-1220

and his witnesses were found credible, and his story was
believed by the STJ. Therefore, there can be no finding
of intent to defraud. It was, Kanter alleges, only the
rejection of the STJ’s findings by the Tax Court judge
that led to the finding that Kanter was not credible and
that the underpayment of taxes was accomplished with
fraudulent intent. As discussed above, we refuse to credit
Kanter’s allegations in light of the Tax Court’s statement
that it “agrees with and adopts” the opinion of the STJ.
Therefore, Kanter’s principal argument is without merit.
The Tax Court found that Kanter’s testimony was not
credible and also found significant circumstantial indicia
of fraud. Kanter’s arguments now do not demonstrate
that this is clearly erroneous.
  Kanter’s remaining arguments are also meritless. He
argues that it is a common estate planning technique to
cede personal investments to family trusts and corpora-
tions. But he does nothing to undermine the consid-
erable evidence cited by the Tax Court that demonstrates
that the Five paid for Kanter, Lisle, and Ballard’s help
in securing business opportunities, and that those pay-
ments went through IRA to Carlco, TMT, and BWK for
division of the proceeds in a 10/45/45 split. And inas-
much as this argument seeks to show a lack of fraudulent
intent by attacking the existence of a deficiency, this
argument was expressly waived by Kanter.
  Additionally, Kanter argues that fraud was raised by
the respondent late in the process by the Commis-
sioner’s amendment to his Answer, that none of the Com-
missioner’s notices of deficiency indicated fraud and that
IRS agents’ reports had found no intent to defraud. While
the Tax Court might have found this persuasive when, as
the trier of fact, it considered the issue of fraud, this
argument is unpersuasive at this stage. Kanter does not
argue that the Commissioner’s amendment was improp-
22      Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                            01-4321, 01-4322, & 02-1220

erly allowed or otherwise defective. Nor is the Commis-
sioner’s delayed amendment particularly probative of
the sufficiency of the fraud evidence, given the diffi-
culties facing the Commissioner in unraveling the rele-
vant transactions during the time leading up to (and
during) the trial.
  Finally, Kanter’s attacks on the circumstantial indicia
of fraud are little more than efforts to recharacterize the
evidence in a manner favorable to Kanter’s version of
events. But a review of the record in the light most fa-
vorable to the Tax Court’s findings makes clear that it
was not clear error to find significant indicia of fraud.
  To review just a few of the relevant indicia: first and
foremost, even Kanter concedes that he significantly
underreported his income from the transactions with
the Five over many years. (Pet. Br. at 33.)
  Second, the money earned by Kanter through the transac-
tions with the Five was diverted to IRA and commingled
with other monies, where the funds were reported as
income earned by IRA, before ultimately becoming avail-
able to Kanter personally—a complicated money trail
that made it difficult to trace the flow of the funds and
gave the appearance that the money had been earned by
IRA.
  Third, there was evidence that Kanter and those acting
at his behest did not cooperate with investigating agents
and even destroyed records that the IRS had requested
formally through its summons power. See 26 U.S.C. § 7602.
James Lunk, an IRS Case Manager, was asked during
his testimony at trial what records Kanter and his repre-
sentatives had provided voluntarily, to which he re-
sponded, “Generally they were records that really wouldn’t
do us a lot of good in the examination in terms of really
getting at the type of information we needed to examine
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,               23
     01-4321, 01-4322, & 02-1220

the transactions that we were most interested in.” (Tr. at
1055-56.) IRS Agent Paul Dion testified similarly:
     I have some very direct recollection[s] of the meeting,
     because it was the first time I met Mr. Kanter. And at
     the very beginning of the meeting, we discussed some—
     had a very nice conversation relating to very general
     type[s] of topics. I remember art was one of them, and
     a few other generalities. And as soon as we started
     discussing the required documentation, it was almost
     as if a different person appeared. And that person
     became, I guess, very demonstrative in terms of not
     wanting to provide us with the information that we
     asked for; basically saying that he was going to frame
     the issue and not us.
(Tr. at 831-32.) The Commissioner had to seek the as-
sistance of the district court in order to enforce sum-
monses against Kanter seeking documents relevant to
the present case. The district court, in two separate rul-
ings, indicated that Kanter had not cooperated and that
documents had been destroyed even after the IRS sum-
monses for those documents had been issued.13 The court
stated that
     [Solomon] Weisgal testified that since [receiving a
     summons to compel production of documents], some of


13
  Kanter’s argument that the documents were destroyed accord-
ing to a standard document retention policy is unpersuasive. The
existence of a document retention policy, which appears to have
been enforced inconsistently, cannot justify the destruction of
documents that were already subject to an IRS summons.
Further, we agree with the Tax Court and believe that it is
clear from the record that Linda Gallenberger (Kanter’s ac-
countant and Administration Co. employee) and Solomon Weisgal
(Kanter’s associate and trustee/officer for various Kanter entities)
acted at the direction of Kanter.
24       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

     the BK documents, including summoned documents
     relating to the Kanters, had been turned over to the
     Administration Company and that some have been
     discarded as part of a three-year record retention and
     discard policy. . . . [Linda] Gallenberger testified that
     she disposed of some documents [related to Kanter]
     after receipt of the IRS summons.
United States v. Administration Co., 74 A.F.T.R.2d 94-5252,
1994 WL 240518, at *2 (N.D. Ill. May 31, 1994). The dis-
trict court went on to note that
     The facts are that the Kanters first promised to pro-
     duce the documents sought from [entities involved
     in the present case] and then, in early February 1994,
     notified government counsel that the Entities were
     third-parties over whom they had no control. The
     eleventh-hour change of position by the Kanters is
     indicative of bad faith on the part of the Kanters.
Id. at *3. Less than a month later, the same judge held
Gallenberger in contempt for a continuing failure to com-
ply fully with IRS summonses. United States v. Admin-
istration Co., 74 A.F.T.R.2d 94-5256, 1994 WL 285064, at *2
(N.D. Ill. June 23, 1994) (“Gallenberger misconceives her
duty to use all reasonable efforts to comply with the
summonses. A half-hearted request and cursory further
search are insufficient.”) (internal quotations and cita-
tions omitted).
   These and the other indicia cited by the Tax Court, when
considered in a light favorable to the Tax Court’s find-
ings, paint a clear and convincing picture of an intent by
Kanter to evade the payment of taxes he knew or be-
lieved that he owed. It was not clearly erroneous for the
Tax Court to find that Kanter’s underpayment of taxes
involved fraud.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,       25
     01-4321, 01-4322, & 02-1220

III.   Bea Ritch Trusts
       A. Facts
  The Bea Ritch Trusts (BRT) are a group of twenty-five
trusts established in 1969 under one trust document. The
trust document named Beatrice Ritch, Kanter’s mother,
as the grantor of BRT, Kanter’s friend and business as-
sociate Solomon Weisgal as the trustee and the members
of Kanter’s family as the beneficiaries. According to the
trust document, Beatrice Ritch funded each of the sep-
arate BRT trusts with a $100 check. No evidence (be-
yond the trust document itself) was presented to sub-
stantiate that this actually happened. Kanter himself
was originally named as a beneficiary of twenty-four of
the twenty-five trusts and he alone was granted a power
of appointment over the beneficial interest of BRT. Kanter
allegedly renounced his interest in BRT in 1971, 1977, and
1978, thereby purportedly eliminating his power of ap-
pointment over BRT. At sometime during or before 1987,
however, sixty new beneficiaries were added to BRT.
  Before 1987, Kanter borrowed money from BRT, and as
of January 1, 1987, Kanter still owed the trust $287,030.
This debt does not appear to have been secured, nor is
there any indication in the record that a reasonable inter-
est rate (if any) was charged on the loans.
  In the early 1970s Kanter participated in business
ventures in Long Island, New York, involving the then
nascent cable television industry. He and other members
of his law firm helped an entity that eventually became
Cablevision Co. raise funds, secure financing and find
investors for its cable business. In return, Kanter (along
with others) was to receive interests in partnerships that
26       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

themselves owned interests in Cablevision.14 Kanter
arranged to have BRT receive the Cablevision partnership
interests to which he was entitled—in essence he con-
tributed the Cablevision partnership interests to BRT. The
Tax Court found that the contribution of Kanter’s Cable-
vision partnership interests (along with other income
and assets) to BRT was the principal source of funding
for BRT. Kanter, therefore, was the true grantor of BRT.
IRA, 78 T.C.M. (CCH) at 1098-99.
   In 1987, BRT reported capital gains of $2,033,368 for the
fiscal year ending September 30, 1987, from the sale of
the Cablevision partnership interests owned by BRT.15
Because Kanter was the true grantor of BRT and because
he had a power of appointment to name beneficiaries of
BRT, the Commissioner assessed a deficiency for the
year 1987 against Kanter with respect to BRT’s income
from the Cablevision sale. At trial, the evidence made
clear that the income at issue had been earned during the
calender year 1986, and the Commissioner sought to
amend his pleadings and reallocate the BRT deficiency
from 1987 to 1986. The Tax Court allowed the amend-
ment, and denied Kanter’s request to shift the burden of


14
  We speak in generalities in order to avoid further confusing
the situation by expanding the alphabet soup of partnership and
trust abbreviations, whose exact identities are not necessary to
explain the factual background of this issue. The Tax Court’s
opinion fully identifies all the relevant entities. See IRA, 78
T.C.M. (CCH) at 1093-1100. We will simply refer to the partner-
ship interests transferred to IRA for Kanter’s services to
Cablevision as the Cablevision partnership interests.
15
  The partnerships in which BRT was a partner sold their
respective interests in Cablevision itself, triggering a capital
gain to the partnerships that then flowed-through to BRT. See
IRA, 78 T.C.M. (CCH) at 1093.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,       27
     01-4321, 01-4322, & 02-1220

proof to the Commissioner for having raised a “new matter.”
See Tax Court Rule 142(a)(1).
  The Tax Court found that Kanter had failed to prove
that he did not fund BRT and, despite his three renuncia-
tions of any beneficial interest in BRT, that he had not
appointed the 60 new beneficiaries. As a result, the Tax
Court held Kanter liable for tax on BRT’s income for 1986
and 1987 under the IRC’s grantor trust provisions. 26
U.S.C. §§ 671, 674. The Tax Court also found that, in the
alternative, Kanter’s borrowing of trust funds made him
taxable on BRT’s income. See 26 U.S.C. § 675(3).


   B. Analysis
       1. Was the allowance of the amendment proper?
  Kanter’s first argument concerns the Tax Court’s al-
lowance of an amendment of the pleadings to conform to
the proof that the alleged deficiency relating to BRT ap-
plied to 1986 rather than to 1987. Kanter argues that it
was error to allow this amendment at all, and that, once
allowed, the Tax Court further erred by not treating this
as a “new matter” under Tax Court Rule 142(a), which
would have shifted the burden of proof on the issue to
the Commissioner.
  The decision to allow or deny an amendment of the
pleadings under Tax Court Rule 41 is reviewed for abuse
of discretion. See Estate of Ashman v. Comm’r, 231 F.3d
541, 542 n.2 (9th Cir. 2000); LeFever v. Comm’r, 100 F.3d
778, 786 (10th Cir. 1996); Braude v. Comm’r, 808 F.2d 1037,
1039 (4th Cir. 1986). It was not an abuse of discretion
for the Tax Court to allow the amendment of the Com-
missioner’s pleadings to reallocate the BRT deficiency
to 1986. Kanter was on notice as to the specific partner-
ship income of BRT that was the subject of the assessed
28       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

deficiency. (Tr. at 4483-86.) There was no prejudice to
Kanter in the adjustment of the date, and he had a fair
opportunity to defend with respect to the amended claim.
In fact, it was Kanter, and not the government, who elic-
ited the testimony (from Kanter’s accountant, Gallen-
berger) that revealed the timing error and prompted the
government’s request for amendment.16 The govern-
ment apparently did not realize its error until Kanter
pointed it out at trial. Further, Kanter points to no ad-
ditional evidence that he was prevented from introducing
by virtue of the late amendment. The amendment of the
pleadings to conform to the evidence was proper.


        2. Should the amendment have shifted the burden
           of proof?
  Kanter argues next that the amendment to the plead-
ings was a new matter that shifted the burden of proof
on this issue to the Commissioner. See Tax Court Rule
142(a)(1) (“The burden of proof shall be upon the petitioner,
except . . . that, in respect of any new matter, . . . it shall
be upon the respondent.”). The distribution of burdens is
a question of law that we review de novo. This argument


16
   A fair reading of the trial transcript is that Kanter’s strategy
regarding the BRT income was from the beginning to demonstrate
that the income in question had been earned in 1986, not 1987,
and to try to shift the burden of proof to the Commissioner
in precisely the manner argued here. (Tr. at 4455-4501.) With
Kanter’s clear advance knowledge of the calender mistake and
his apparent strategic decision regarding that mistake, we find
it hard to believe Kanter when he says this “was not an issue
that Kanter was prepared to defend at trial”—except inasmuch
as this statement may reflect Kanter’s belief at trial that a
shifting of the burden of proof to the Commissioner would ob-
viate any need to mount a substantive rebuttal defense.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,             29
     01-4321, 01-4322, & 02-1220

fails as well. The Commissioner is allowed the latitude
to amend his pleadings and even adopt entirely new
theories supporting assessed deficiencies without trigger-
ing Rule 142’s shift in burden, so long as the new theory
is not inconsistent with the original allegation, does not
require new evidence in its support, nor increases the
amount of the deficiency. See, e.g., Friedman v. Comm’r, 216
F.3d 537, 543 (6th Cir. 2000) (“A new position taken by
Commissioner is not necessarily a ‘new matter’ if it mere-
ly clarifies or develops Commissioner’s original deter-
mination without requiring the presentation of different
evidence, being inconsistent with Commissioner’s original
determination, or increasing the amount of the deficiency.”);
Abatti v. Comm’r, 644 F.2d 1385, 1390 (9th Cir. 1981)
(same); Achiro v. Comm’r, 77 T.C. 881, 890 (1981) (same).
  The problem for Kanter is that the Commissioner’s
amendment did not offer a new theory for the alleged
deficiency. The theory under which the Commissioner
proceeded at all times was that specific transactions
produced taxable income that was reported by BRT but
which was properly taxable to Kanter by virtue of the
grantor trust provisions of the tax code.17 The case relied
upon by Kanter here supports our conclusion. Achiro



17
  The Commissioner appears to be offering to split the baby
with respect to the burden of proof issue by conceding that he
bears the burden to prove that BRT actually had taxable income
in the form of capital gains in 1986, but claiming he has met
that burden. There can be no serious dispute that the monies
in question were reported as earned in 1986 by BRT. It was
Kanter’s own accountant, Gallenberger, who, on redirect by
Kanter, provided the testimony with respect to this fact. (Tr. at
4455-4501.) The only substantive issue in dispute is Kanter’s
status as grantor and owner of BRT under the IRC’s grantor
trust provisions, a theory unaffected by the amendment.
30       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

involved an amendment under which the Commissioner
alleged for the first time that a deduction was improper
under a section of the tax code completely different from
the section originally argued. 77 T.C. at 889-90; see also
Shea v. Comm’r, 112 T.C. 183, 190-92 (1999). The Com-
missioner’s amendment here presented a much more mod-
est change, more akin to a clarification of the orig-
inal allegation. Nor is Kanter correct when he alleges
that the amendment increased the assessed deficiency.
The stated deficiency remained constant, and involved
the same income from the same transactions, but was
re-allocated from one disputed year to another disputed
year to correct a calender error that did not prejudice
Kanter’s case.18 The Commissioner did not propose addi-
tional income nor require Kanter to defend against a
larger deficiency than had been assessed before the amend-
ment. Therefore, it is incorrect to claim that the amend-
ment resulted in “an entirely new and increased defi-
ciency in a different year.” (Pet. Br. at 46 (emphasis in orig-
inal).) The Tax Court was correct in determining that the
amendment did not shift the burden of proof to the Com-
missioner.




18
  This should obviously not be read to preclude the possibility
that an amendment of the Commissioner’s pleadings to shift
an assessed deficiency from one year to another would result in
a shifting of the burden under Rule 142(a)(1). But where, as here,
the amendment results from a good faith error in the timing
of when specific income was earned from specific transactions
and does not involve any change in the underlying theory of the
deficiency, there is no shifting of the burden of proof to the
Commissioner.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,         31
     01-4321, 01-4322, & 02-1220

        3. Kanter was the grantor of BRT
  Although Kanter argues principally that the Commis-
sioner should have borne the burden of proving that Kanter
was the grantor and owner of BRT, and that the Com-
missioner could not meet that burden, Kanter maintains
that, regardless of burden, he is not taxable on BRT’s
income under the IRC’s grantor trust provisions. A finding
of grantor status is a factual finding that we review for
clear error. Scott v. Comm’r, 226 F.3d 871, 874 (7th Cir.
2000). Kanter has failed to show that the Tax Court’s
decision was clearly erroneous.
  Despite the trust document’s showing that Beatrice
Ritch was the grantor of BRT, the familiar principle of
substance over form views as the true grantor the one
who principally funded the trusts. Schulz v. Comm’r, 686
F.2d 490, 496 (7th Cir. 1982); United States v. Buttorff, 761
F.2d 1056, 1060-61 (5th Cir. 1985). In Schulz, for ex-
ample, the petitioner’s wife was considered the grantor of
a family trust because both the Commissioner and this
court disregarded the conveyance of the wife’s assets,
which were subsequently used to fund the trust in ques-
tion, to the petitioner. 686 F.2d at 496. The wife, in sub-
stance, provided the funds for the trust, and the form of
the funding, by routing the funds through the petitioner,
was ignored. Similarly, although Kanter was not listed
in the trust document as a grantor, and, even if Beatrice
Ritch actually did contribute $100 towards the funding
of each BRT trust, there is evidence that Kanter contrib-
uted to BRT income and assets he earned, to substantially
fund the twenty-five trusts.
  The Tax Court found that Kanter transferred to BRT
income and assets associated with his services in the
Cablevision transactions as well as others. IRA, 78 T.C.M.
(CCH) at 1098. Kanter provided no evidence (other than
32       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

the trust document itself) to show that Beatrice Ritch
actually funded the trusts nor any evidence to show from
whence the substantial assets owned by BRT originated.
Kanter’s assertion that he merely ceded investment op-
portunities in Cablevision to BRT does nothing to under-
mine the Tax Court’s findings and, further, depends on
his credibility, which the court found to be lacking. Be-
cause Kanter was the principal source of the funding of
BRT, he is deemed a grantor of BRT. See 26 C.F.R. § 1.671-
2(e)(1) (“[A] grantor includes any person to the extent
such person either creates a trust, or directly or indirectly
makes a gratuitous transfer . . . of property to a trust. . . .
If a person creates or funds a trust on behalf of another
person, both persons are treated as grantors of the trust.”).
   Kanter argues that the Tax Court’s finding that he
was the grantor is directly contrary to an Illinois trial
court decision, in which the Cook County Circuit Court
determined that the Cablevision partnership interests
did not constitute property of Kanter’s law firm because
they did not result from payment of fees for legal services.
Statland v. Levenfeld, No. 84 CH 6494 (Ill. Cir. Ct., Ch. Jan.
28, 1988). Kanter argues that (a) the state court rul-
ing stands for the proposition that the Cablevision part-
nership interests were not in payment for any services
(not just legal services) but were rather investments
and (b) the state court ruling is determinative and bind-
ing on the matter. Kanter overstates the holding of the
cited case. The case involved a former law partner of
Kanter, who alleged that the Cablevision partnership
interests were the property of the partnership because
they were provided in payment for legal services. The
Illinois court disagreed and held that the Cablevision
partnership interests were not the product of legal fees
paid to Kanter’s law firm. The court did not hold, how-
ever, that the Cablevision partnership interests were not
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,        33
     01-4321, 01-4322, & 02-1220

in payment of fees for services furnished by individual
law firm partners in securing financing and investors
for Cablevision, which is what the Commissioner alleges
here. The trial court did, at various times, refer to the
Cablevision partnership interests as individual invest-
ments, but it also spoke of the activities of Kanter and
his partners in working to obtain financing and investors
for Cablevision. None of these dicta contradicts the posi-
tion of the Commissioner nor renders the factual findings
of the Tax Court clearly erroneous.


        4. Kanter was the substantial owner of BRT
  Generally, if a grantor of a trust has the power to dis-
pose of the beneficial enjoyment of that trust through a
power of appointment, then the grantor is treated as the
owner of the trust and the income of the trust must
be included in the income of the grantor. 26 U.S.C. §§ 671,
674(a); 26 C.F.R. § 1.674(a)-1. Kanter argues that he three
times renounced his beneficial interest in BRT and, by
those renunciations, lost the power of appointment that
he had under the trust document. But the Tax Court notes
that, after the third of Kanter’s renunciations, sixty new
beneficiaries were added to BRT.19 Kanter was the only
person who ever had the power under the trust document
to appoint new beneficiaries. The most logical inference
(which the Tax Court drew) is that Kanter himself ap-
pointed the new beneficiaries and that his earlier renuncia-
tions were shams. Kanter fails to rebut this. Kanter’s only
argument directly on this issue appears in his reply brief,
in which he argues that the Tax Court improperly refused
to reopen the record to admit evidence that Kanter’s


19
  The new beneficiaries were all trusts—named and numbered
variations of “JSK Trust.” IRA, 78 T.C.M. (CCH) at 1094-95.
34       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

children were the grantors of the various JSK Trusts that
had been added as beneficiaries of BRT.20 (Reply Br. at 18.)
This purported evidence would not be probative of the
issue whether Kanter had exercised the power of appoint-
ment under BRT. The Tax Court’s findings that Kanter
was the grantor of BRT and that he held a power of ap-
pointment of beneficiaries of BRT were not clearly errone-
ous. Therefore, the Tax Court’s finding that Kanter is
taxable on BRT’s income in 1986 (and 1987) is also not
clearly erroneous.
  As an alternative, the Tax Court also found that Kanter’s
borrowing from BRT without repayment and without
adequate security subjected Kanter to liability for BRT’s
income. See 26 U.S.C. § 675(3) (“The grantor shall be
treated as the owner of any portion of a trust in respect of
which . . . . [t]he grantor has directly or indirectly bor-
rowed the corpus or income and has not completely
repaid the loan, including any interest, before the begin-
ning of the taxable year.”). It appears undisputed that
Kanter had borrowed money from BRT in a way that
subjects him to liability under § 675(3), and that at the
beginning of 1987 he still owed BRT $287,030. This would


20
  A possible logical alternative argument not made by Kanter
(because, we must assume, it is not valid) is that the appoint-
ments were made by Weisgal under some power he possessed
as trustee. The Tax Court, the Commissioner and Kanter all
spend significant time arguing whether Weisgal is or is not an
independent and adverse trustee. An affirmative determination
of that question would be necessary if Weisgal were to have
appointed the sixty new beneficiaries or if Kanter were able to
prove that he (Kanter) did not appoint them. Because we find
that the Tax Court’s determination that Kanter exercised a
power of appointment was not clearly erroneous, we need not
consider whether or not Weisgal was an independent and ad-
verse trustee of BRT.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,              35
     01-4321, 01-4322, & 02-1220

be sufficient for Kanter to incur liability for 1987.21 There
are, however, no findings by the Tax Court as to any
amount Kanter owed to BRT as of January 1, 1986. There-
fore, there could be no tax liability for Kanter in 1986
based on § 675(3). In the end this conclusion does not
affect ultimate tax liability because under § 674 Kanter
remains liable for both 1986 and 1987.
  In conclusion, we affirm the Tax Court’s determination
that Kanter was the grantor of BRT in 1986 and 1987 and
is taxable on BRT’s income for those years.


IV. George Washington Painting
     A. Facts
  In 1980, Kanter was approached by Richard Feigen, a
client, who wanted help in securing funding to buy a
painting of George Washington located in England that
Feigen believed to be by John Trumbull.22 Kanter put


21
   The existence of these facts, however, would raise an additional
issue, which we will not attempt to resolve today. Would we, as
Kanter claims, need to analyze the amount of the loans in relation
to the trust’s income during the years the loans were made and
from that determine what portion of the trust income from 1987
is attributable to Kanter? See Bennett v. Comm’r, 79 T.C. 470,
484-85 (1982). Or can we, as the Commissioner urges, merely
consider the significant amount of the loans as indicative of
Kanter’s total control over BRT’s income and therefore attribute
all of the income for 1987 to Kanter? See Benson v. Comm’r, 76
T.C. 1040, 1047-48 (1981).
22
  John Trumbull was a painter of scenes and individuals from the
time of the founding of the United States. He is, perhaps, most
well known to the general public as the painter of the famous
“Declaration of Independence” painting that dramatized (more
                                                   (continued...)
36       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

Feigen in touch with another client, Mr. Rappaport,23 in
Switzerland, who agreed to finance the purchase of the
painting. The transaction closed. After the purchase, the
painting was discovered not to be a Trumbull, and the
seller agreed to rescind the sale. As a result of exchange
rate and interest rate changes, Rappaport, who had ad-
vanced the funds, lost money. Rappaport wanted to be
made whole, and when rebuffed, threatened to sue Feigen
and Kanter for his claimed loss. Kanter, in convincing
Feigen to reimburse Rappaport, agreed to provide $94,231
of his own funds. Kanter also paid $10,000 in legal fees
incurred throughout the course of the transaction.
  On his 1980 tax return, Kanter claimed the sum of
$104,231 as a deduction on Schedule C, stating that his
main business activity was “buying and selling paintings.”
The IRS disallowed the claimed loss. The Tax Court found,
based on Kanter’s testimony, that Kanter’s main occupa-
tion was as an attorney and that he did not hold himself
out as an art expert or art dealer. This made the claimed
deduction unrecognizable under 26 U.S.C. § 162 as an
ordinary and necessary business expense. Additionally,
the Tax Court did not allow this deduction as a § 212
expense for production of income “because Kanter received
no fees and no contract existed therefor, [and so] the
expenditure did not bear a reasonable and proximate
relationship to the production of income.” IRA, 78 T.C.M.
(CCH) at 1121. “[Kanter] merely served as an intermediary


22
   (...continued)
accurately, fictionalized) the scene of the signing of the Declara-
tion of Independence, and that is familiar to almost every
American schoolchild from its reprinting in countless American
History textbooks.
23
  Neither the parties’ briefs nor the trial transcript reveal Mr.
Rappaport’s first name.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,         37
     01-4321, 01-4322, & 02-1220

to introduce Feigan to another friend, Rappaport. There
was no written contract between Feigan and Kanter for
the sharing of profits.” Id.


    B. Analysis
  The Commissioner’s determination that Kanter’s ex-
penses associated with the failed sale of the Washington
painting were not legitimate deductions under 26 U.S.C.
§§ 162 and 212 is a finding of fact that we review for
clear error. Reynolds v. Comm’r, 296 F.3d 607, 615 (7th
Cir. 2002); Buelow v. Comm’r, 970 F.2d 412, 415 (7th Cir.
1992).
  The Tax Court found, essentially, that Kanter could
not deduct the expenses under §§ 162 and 212 because
Kanter’s business was the practice of law, not art, and
there was no evidence that Kanter had an agreement
with Feigen to receive fees or share profits from the pur-
chase and planned resale of the painting. The Tax Court
simply did not believe the “self-serving and uncorroborated”
testimony of Kanter. IRA, 78 T.C.M. (CCH) at 1121. Given
the totality of the Tax Court’s findings that Kanter sys-
tematically engaged in extensive (non-law related) busi-
ness dealings whereby he “entered into arrangements pur-
suant to which he would use his . . . contacts . . . to assist
individuals . . . in obtaining business opportunities or
in raising capital for business ventures[,]” we find it
implausible for the Tax Court to conclude that Kanter
was not engaged in such dealings when he helped Feigen
secure financing from Rappaport. IRA, 78 T.C.M. (CCH)
at 970.
  Without excessively detailing the transactions relating
to the Five that we summarized in Part II, we note that
the Tax Court’s opinion went to considerable lengths to
confirm deficiencies against Kanter based on a character-
38      Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                            01-4321, 01-4322, & 02-1220

ization of Kanter’s “business” as ranging far beyond the
simple practice of law. In each of the transactions involv-
ing the Five, the foundation for the Tax Court’s determina-
tion that Kanter consistently understated his income
was its findings that time after time Kanter provided non-
legal business services in facilitating business opportuni-
ties for the Five with Prudential, and that he was paid
handsomely for that facilitation. It is difficult for us to
read the first few hundred pages of the Tax Court’s opin-
ion and not be left with the distinct impression that the
Tax Court believes Kanter was involved in this business
“activity with continuity and regularity and . . . [his]
primary purpose for engaging in the activity [was] for
income or profit.” Comm’r v. Groetzinger, 480 U.S. 23, 35
(1987). At the very least, Kanter has shown a distinct
proclivity to seek income and profit through activities
similar to the failed sale of the painting.
  Determining whether an activity was engaged in for
profit requires an examination of the relevant factors
outlined in Treasury Regulation 1.183-2. See 26 C.F.R.
§ 1.183-2; Burger v. Comm’r, 809 F.2d 355, 358 (7th Cir.
1987). The nine factors for determining whether Kanter’s
involvement in the sale of the George Washington paint-
ing was carried on for profit include: (1) the manner in
which the taxpayer carries on the activity; (2) the exper-
tise of the taxpayer; (3) the time and effort expended by
the taxpayer in carrying on the activity; (4) the expecta-
tion that assets used in the activity may appreciate in
value; (5) the success of the taxpayer in carrying on other
similar or dissimilar activities; (6) the taxpayer’s history
of income or losses with respect to the activity; (7) the
amount of occasional profits, if any, which are earned; (8)
the financial status of the taxpayer; and (9) elements of
personal recreation or pleasure in carrying on the activity.
26 C.F.R. 1.183-2(b).
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,           39
     01-4321, 01-4322, & 02-1220

   We can, based on Kanter’s testimony and considering
the Tax Court’s other findings, construct a highly prob-
able scenario under which Kanter was to find financing
for Feigen’s purchase in exchange for part of the antici-
pated profits. Under factor (1), this manner of doing busi-
ness, while not well documented, is consistent with the
method pursued in other transactions detailed by the
Tax Court. Under factor (2), Kanter’s apparent expertise
in facilitating financing transactions and putting people
together for deals in order to generate income was so
evident to the Tax Court that it found him liable for large
underpayments of income tax. Additionally, Kanter has
indicated that the art project was attractive because of
Feigen’s expertise in generating sufficient publicity and
excitement about artwork to likely increase the resale
price, thus satisfying factor (4). (Tr. at 4416-30.) Regard-
ing factor (5), Kanter’s obvious success in other facilitation-
of-business ventures was what landed him in trouble with
the Commissioner in the first place. An appealing tale
of the Washington painting scheme as a failed for-profit
venture emerges from this evidence. In fact, while there
is significant evidence that Kanter undertook similar,
though not identical, transactions as the failed painting
purchase for profit, there is no evidence that Kanter
facilitated any other deals of this kind for personal reasons
(i.e., gratuitously). And the Commissioner presents no
evidence contradicting Kanter’s version of events. In fact, by
asserting that, in all of his other disputed transactions
in which income was produced, Kanter had participated in
the manner alleged here and with the kind of profit mo-
tive he alleges here, but arguing that in this single trans-
action, where losses were generated, Kanter participated
for only personal reasons, the Commissioner appears to
want to have his cake and eat it too.
  There are certain difficulties in reversing the Tax Court
here. We would have to reverse the Tax Court’s credibility
40       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

finding on the matter. In that connection, neither Feigen’s
testimony, nor Rappaport’s testimony, nor any piece of
specific evidence exists in the record to support Kanter’s
testimony. And we have found elsewhere that, while a
taxpayer’s uncontradicted testimony was sufficient to
demonstrate that the Commissioner’s determination was
erroneous, the Tax Court can disregard that testimony if
it is not credible. Lerch v. Comm’r, 877 F.2d 624, 631 (7th
Cir. 1989). The Tax Court did not here believe Kanter’s
claim of a profit motive. While finding Kanter not cred-
ible in this instance is consistent with the Tax Court’s
refusal to find him credible on other issues, it results in a
completely inconsistent and implausible factual scenario—
Kanter’s incurring more than $100,000 in expenses gratu-
itously to facilitate a business transaction where huge
potential profits lie. But without any indication why
this transaction is unique among all the other Kanter
activities, we think the Tax Court was clearly erroneous
in rejecting Kanter’s claim that he was pursuing commer-
cial objectives here as elsewhere.
  In conclusion, we find that there must have been a
profit motive in Kanter’s involvement in the aborted
purchase of the George Washington painting; the Tax
Court’s finding to the contrary is clearly erroneous and
we reverse. Kanter’s deduction for the $104,231 of ex-
penses incurred in facilitating the failed sale of the George
Washington painting is allowed.


V. Bank Deposit Analysis
     A. Facts
  In examining Kanter’s 1982 tax return, the IRS deter-
mined that inadequately documented deposits into three
of Kanter’s bank accounts during that year greatly ex-
ceeded the income Kanter reported on his federal tax
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,              41
     01-4321, 01-4322, & 02-1220

return. Based on a comparison of the deposit amounts
to Kanter’s tax return for 1982, the Commissioner deter-
mined that Kanter had unreported gross income that year
in an amount of $2,084,017, and issued an assessment
of deficiency. After Kanter produced sufficient records
documenting some of the deposits in question, the Com-
missioner reduced this deficiency to $1,303,207, which
comprised the sum of four specific deposits:

      DEPOSIT AMOUNT                  PAYOR OR SOURCE
        $787,129                   The Holding Co. (THC)24
        $40,000                      Computer Placement
                                     Services, Inc. (CPS) 25
        $190,078                      Administration Co.
                                      (Special E Account)
        $286,000                      Administration Co.
                                       (Special Account)

  The Tax Court found that the Commissioner had pro-
duced sufficient evidence to create a presumption of
correctness in the indicated deficiency. The bank
deposit analysis method was a reasonable method of
reconstructing income, and deposits from THC, CPS and
the Administration Co. accounts often included taxable


24
  THC was a Kanter entity incorporated in 1976. Its purpose, like
that of IRA, was the making of investments. One of the relevant
subsidiaries of THC was Zion Ventures, Inc. (Zion). See infra Part
VI. The stock of THC was substantially owned by the BRT and
Everglades Trusts 1-5 (Everglades Trusts), which were Kanter
trusts whose income was attributable to Kanter via the IRC’s
grantor trust provisions, 26 U.S.C. §§ 671 et seq.
25
  The record does not indicate who holds legal or beneficial
ownership of CPS.
42       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

income. Therefore it was proper, the Tax Court ruled, for
the Commissioner to determine gross income from an
analysis of total deposits to Kanter’s bank account minus
any deposits properly excluded from income and to as-
sess a deficiency for the excess of that income over the
reported income. The Tax Court found that Kanter had
not adequately documented that the four deposits in
question were loans, and they were properly included in
his gross income under the deposit analysis. Moreover,
the Court did not find the testimony of Kanter’s account-
ant, Gallenberger, credible on the issue.


     B. Analysis
  The Tax Court’s determination that a taxpayer has
unreported income is a finding of fact that we review for
clear error. Reynolds, 296 F.3d at 612. The Commis-
sioner’s assessment of a deficiency is presumed correct, but
can be overcome by rebuttal evidence presented by the
taxpayer. Pittman, 100 F.3d at 1313.
  Kanter has three arguments with respect to the defi-
ciency determined by the bank deposit analysis: first, the
change in the amount of the deficiency for 1982 under the
bank deposit analysis constituted a “new matter” under
Tax Court Rule 142 that required the burden of proof
to shift to the Commissioner, and with that burden the
Commissioner cannot prevail. Second, the lack of evi-
dence on this issue made the deficiency a “naked assess-
ment,” and it was, therefore, improper to give the Com-
missioner’s assessment of a deficiency the usual presump-
tion of correctness. See Weimerskirch v. Comm’r, 596 F.2d
358, 360 (9th Cir. 1979) (finding no presumption of cor-
rectness when Commissioner’s assessed deficiency lacks
any reasonable foundation in the evidence). Finally, Kanter
argues that the Tax Court clearly erred in finding a defi-
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,      43
     01-4321, 01-4322, & 02-1220

ciency in light of the evidence presented. All of these
arguments fail.
  First, there is no merit in Kanter’s contention that the
Commissioner’s reduction in the amount of deficiency
assessed in 1982 under the bank deposit analysis is a
new matter requiring a shift in the burden of proof. The
Commissioner’s concession that part of the original defi-
ciency was properly excluded from Kanter’s income is not
a new theory, is not inconsistent with the original as-
sessment of deficiency, does not require new or different
evidence from Kanter and does not increase the assessed
deficiency. See discussion supra Part III. The same theory
of bank deposit analysis was being applied before and
after the Commissioner’s concessions, and the resulting
deficiency was reduced, not increased, when Kanter pro-
duced documentation demonstrating to the Commissioner’s
satisfaction that certain deposits were not income. The
remaining, insufficiently documented deposits, therefore,
do not constitute a new matter.
   Nor can Kanter escape the presumption of correctness
by relying on the “naked assessment” exception of
Weimerskirch. “The general rule is that a presumption of
correctness attaches to the Commissioner’s deficiency
determination; the taxpayer has the burden of disproving
it. A narrow exception exists where the determination is
arbitrary and erroneous or without rational foundation.”
Pfluger v. Comm’r, 840 F.2d 1379, 1382 (7th Cir. 1988)
(citations omitted). It is not disputed that “before the
Commissioner can rely on [the] presumption of correctness,
the Commissioner must offer some substantive evidence
showing that the taxpayer received income from the
charged activity.” Weimerskirch, 596 F.2d at 360. But the
threshold for properly invoking the presumption is not as
high as Kanter would have us believe, nor is the evi-
44       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

dence presented by the Commissioner as thin as that pre-
sented in Weimerskirch.
  In Weimerskirch, the Commissioner assessed a deficien-
cy based on more than $24,000 of unreported income from
the taxpayer’s alleged sale of heroin. Id. at 359. The
Commissioner, however, presented no evidence from which
one could even infer that Weimerskirch was involved in
heroin sales in any way. There were, for example, no
records of bank deposits, net worth, or cash expenditures.
Id. at 361-62. The deficiency was calculated based on
an IRS agent’s purely hypothetical calculation of what
income would be realized from a given level of heroin
sales each week over a given period of time. Id. at 359.
Not only was the deficiency calculation completely di-
vorced from any evidence of actual or inferrable heroin
sales by Weimerskirch, but the entire method of calcula-
tion used was unsupported by evidence. Id. The Commis-
sioner’s attempt to attach the presumption of correctness
to the assessed deficiency in Weimerskirch was, in every
sense of the word, naked.
  In contrast, the presumption of correctness in the pre-
sent case appears far more modestly appareled. The Com-
missioner’s use of bank deposits as circumstantial evi-
dence of gross income is an accepted methodology. See, e.g.,
United States v. Ludwig, 897 F.2d 875, 878 (7th Cir. 1990).
The Tax Court found evidence that Kanter was engaged
in income producing businesses. And the court found that
actual deposits were made that had the appearance of
income. IRA, 78 T.C.M. (CCH) at 1104; see also United
States v. Esser, 520 F.2d 213, 217 (7th Cir. 1975) (describing
test for implementing deposit analysis method of recon-
structing income). There is no dispute about the evidence
of deposits. Consequently, there was sufficient evidence
to support the presumption of correctness.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,        45
     01-4321, 01-4322, & 02-1220

  Lastly, Kanter argues that the uncontradicted evidence
at trial shows that the four deposits in question were
loans and were not income. By uncontradicted, we can
only assume Kanter means uncontradicted by any evi-
dence beyond the evidence we have outlined, establishing,
prima facie, that there was a deficiency during 1982.
Because we have found that the Tax Court properly gave
the Commissioner’s assessed deficiency a presumption of
correctness, we must interpret Kanter’s argument as
claiming that the evidence presented overcame the pre-
sumption. In that respect, Kanter’s argument also fails.
  In considering whether Kanter met his burden of proof,
the Tax Court found Gallenberger’s summary and Kanter’s
assertions unconvincing. “No credible evidence was intro-
duced to support Kanter’s assertion that the deposits
were loans. . . . We find the testimony of the accountant,
Gallenberger, unreliable and her analysis fatally
flawed. . . .” IRA, 78 T.C.M. (CCH) at 1104. The Tax Court
also recalled “Gallenberger’s regular practice of record
destruction” and the general lack of any documentation
other than her summary and testimony. Id. at 1104-05. The
evidence that Kanter asserts was “uncontradicted” was
considered by the Tax Court and found wanting. Exhibit
9172PK, which, according to Kanter, demonstrates that
the deposits from CPS, THC, and Administration Co.
were loans, reflects a summary analysis by Linda Gallen-
berger that the Tax Court found not credible. Nor is it
correct for Kanter to say that the Tax Court had deter-
mined previously that one of the deposits of money
from Administration Co. was money already found to be-
long to Kanter. (Pet. Br. at 58.) Kanter cites to a sentence
in the Tax Court’s opinion as to issue 21 (allowable cap-
ital gains and losses in 1987) wherein the court states, “As
indicated previously, funds from the Administration Co.
special E and PSAC special E accounts were Kanter’s
46       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

funds.” IRA, 78 T.C.M. (CCH) at 1126. This sentence, in
context, refers only to the specific funds from the accounts
cited and used in the specific transactions at issue (five
years after the deposits at issue here) in that section of
the Tax Court opinion. These specific funds were Kanter’s
own funds, and he was entitled, therefore, to the basis
he had claimed for the assets he had purchased with those
funds. But Kanter seeks to generalize this statement
about his ownership of specific money to mean that all the
money in the Special E accounts, at all times, already
belonged to Kanter. The Tax Court’s opinion does not
say this.
  In conclusion, the Tax Court did not clearly err in its
findings regarding Kanter’s unreported income in 1982
as determined by bank deposit analysis. These findings
are therefore affirmed.


VI. Equitable Leasing’s Payments to THC & Zion
     A. Facts
  Equitable Leasing Co., Inc. (Equitable) was the wholly
owned company of Joel Mallin, a friend and former law
partner of Kanter. Mallin used Equitable (among other
companies) to promote and structure equipment leasing
transactions to make money for investors. The investors’
capital would be highly leveraged to purchase the equip-
ment to be leased, and the residual value of the equip-
ment at the end of the lease would provide the ostensible
paper profit on the investors’ capital. A principal motiva-
tion behind the investment in the leasing transactions,
however, was the opportunity for tax benefits associated
with the venture. Kanter acted as a middleman, introducing
Mallin to investors for his leasing transactions. In return,
Mallin paid commissions to Kanter entities. The Commis-
sioner issued a notice of deficiency for 1983 that included
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,                47
     01-4321, 01-4322, & 02-1220

a deficiency of $635,250 with respect to four payments
by Equitable to Kanter entities, Zion, and THC.26

      DATE      FORM OF                PAYEE           AMOUNT
                PAYMENT
     Jan. 4,      Bank                  Zion           $317,250
     198327      Transfer

     Jan. 24,     Check                 THC              $9500
      1983

     June 1,      Check                 Zion             $6500
      1983

     June 30,     Bank                  THC            $302,000
      1983       Transfer

      Total                                            $635,250

  The Commissioner alleged that these payments
were commissions paid for Kanter’s procurement of inves-
tors in Mallin’s enterprises. Kanter argued that Zion
and THC were loaned money by Equitable that was then
turned around and invested in Equitable as an accom-
modation to Equitable to enable it to close certain trans-
actions.
  The Tax Court found that there was sufficient evidence
to indicate that Equitable had paid commissions to Zion


26
 THC was a Kanter-controlled investment company and Zion
was a THC subsidiary. See supra note 24.
27
  The Tax Court opinion and the Commissioner’s brief both
indicate that this transfer occurred on January 8, 1983. It is of no
significance to the disposition of the case, but the bank transfer
record (Ex. 9203PK) and the THC adjusting journal entry (Ex.
146, entry 32) both indicate that the transfer took place on
January 4, 1983.
48       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

and THC for Kanter’s services in providing investors to
Mallin. Two of the four payments, for $9500 and for $6500,
were labeled (on the check in payment and in THC’s
adjusting journal entries, respectively) as commissions. The
Tax Court determined that this evidence was sufficient
to support the presumption that all of these payments to
Zion and THC were income to Kanter. In response to
this presumption, the Tax Court found that Kanter had
provided no evidence other than his “uncorroborated, self-
serving testimony” concerning the “accommodation” ar-
rangement with Equitable. IRA, 78 T.C.M. (CCH) at 1103.
The court found, as previously noted, that Kanter was
not credible and that the four payments were income at-
tributable to Kanter.


     B. Analysis
  Whether or not monies are taxable income to a tax-
payer is a finding of fact that we review for clear error.
Reynolds, 296 F.3d at 612. The Commissioner’s assessment
of a deficiency is presumed correct, but can be overcome
by rebuttal evidence presented by the taxpayer. Pittman,
100 F.3d at 1313.
  Kanter argues first that the Commissioner’s assessment
of a deficiency should not be given the benefit of the
presumption of correctness because the Commissioner
“failed to provide any evidence connecting Kanter to this
income.” (Pet. Br. at 59.) This argument fares no better here
than it did when we considered it with respect to the
Bank Deposit issue. There was evidence that Mallin and
Kanter were partners in various investments, and that
Kanter’s law firm had procured investors for Mallin’s
Equitable Leasing transactions. (Tr. at 5213-15.) There
was also evidence that Mallin had paid commissions for
these services to Kanter entities. (Id.) Additionally, at
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,        49
     01-4321, 01-4322, & 02-1220

least two of the payments in question were documented
as commissions. This was sufficient evidence to provide
a rational foundation for the Commissioner’s assessment.
The Commissioner’s assessment appropriately received
its presumption of correctness. See Pittman, 100 F.3d
at 1313.
  Kanter also argues that he has rebutted the Commis-
sioner’s deficiency with evidence that only the $16,000
that was labeled as commissions (comprised of the $9500
and $6500 checks) should be considered commission
payments, and the remainder consisted of loans made as
an accommodation to Equitable. Even accepting Kanter’s
concession that the $9500 and $6500 checks from Equitable
Leasing to THC and Zion, respectively, were taxable com-
mission income, we do not believe he has provided suffi-
cient evidence to show that the two bank transfers of
$317,350 and $302,000 were loans.
  Regarding the $317,250 transfer, there is clearly evi-
dence supporting the Tax Court’s finding that the transfer
was a commission paid to Zion, and Kanter has provided
no evidence to rebut this finding despite his control of
the entities involved and his access to the records of those
entities. First, as noted, there was circumstantial evidence
that Equitable Leasing was making payments to THC
and Zion as commissions. Additionally, THC’s adjusting
journal for 1983 has an entry “32” indicating an amount
of $317,250 that was labeled, “Due from Zion—Commission
Income to adj. for commiss. from Eq. Leasing, loaned
to Zion on 1/4/83.” (Ex. 146, THC adjusting journal at 6.)
Finally, Kanter appears to concede in the facts section of
his brief that this amount was received as commission.
In his brief on appeal, Kanter breaks down the $635,250
as including “$317,250 as commission income from Equi-
table (see Ex. 146, THC adjusting journal, p. 6, adjusting
journal entry 32, reflecting commission income of $317,250
50      Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                            01-4321, 01-4322, & 02-1220

which was paid to THC’s subsidiary Zion as a loan from
THC . . .).” (Pet. Br. at 16.) The Tax Court’s finding
that this payment was commission income was not
clearly erroneous.
  What about the June 30, 1983 transfer from Equitable
to THC for $302,000? Against the general circumstantial
evidence of commission payments to THC by Equitable
and the presumption of correctness of the Commis-
sioner’s assessment of deficiency, there is an entry in
THC’s general ledger for June 30, 1983, for $302,000
labeled “Loan from Equitable Leasg.” (Ex. 148, THC general
ledger at 12.) Together with this entry there is an entry
indicating an $8000 transfer three days earlier also la-
beled “Loan from Equitable Leasg.” (Id.) This $8000
transfer is corroborated by a check from Equitable to THC
on June 24, 1983, for $8000 that has a memo line reading,
“loan.” (Ex. 9203PK, check #2391.) The corroboration of
the general ledger entry for the $8000 transfer is indi-
rectly probative of the likelihood that the roughly con-
temporaneous and similarly labeled ledger entry for the
$302,000 transfer may also be correct. These circum-
stances make it more likely that the ledger is accurate in
its indication that the $302,000 transfer was a loan and
not a commission payment.
  But there is one additional piece of evidence in the rec-
ord that the Commissioner and Kanter have not men-
tioned. In the THC adjusting journal, entry 59 is a barely
legible entry for $310,000 that appears to read, “N/P—
Equitable Leasing, Commission Income, to reclassify
funds from Eq. Leasing.” (Ex. 146, entry 59.) This entry
is significant because we believe it may also represent
the $302,000 and $8000 transfers and show that those
transfers were commissions. These two transfers were
roughly contemporaneous, and Kanter himself aggregates
them and describes them as a cumulative amount in
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,        51
     01-4321, 01-4322, & 02-1220

his brief. (See Pet. Br. at 16 (“$310,000 as loans from
Equitable . . . reflecting a $302,000 loan and an $8,000
loan . . . .”).) The $310,000 in entry 59 would appear to be
the same as the $310,000 in the general ledger and as the
$310,000 described by Kanter, comprising the total of the
$8000 and $302,000 transfers. Entry 59 in the THC adjust-
ing journal weighs against the general ledger’s notations
for both the $302,000 and the $8000 transfer and
weighs further in favor of the Tax Court’s finding that the
$302,000 was a commission payment. In any event, this
evidence does, at the very least, make the characteriza-
tion of the $302,000 transfer unclear, and because Kanter
bears the burden of rebutting the Commissioner’s assess-
ment of deficiency and controlled the entities whose rec-
ords could have cleared this matter up definitively, we
cannot say that the Tax Court clearly erred in finding that
the $302,000 was a commission payment to THC for
Kanter’s services.
  In conclusion, it was not clear error for the Tax Court
to find that the transfers from Equitable Leasing were
commissions and were taxable income.


VII. Cashmere Investment Assoc.’s transactions
      A. Facts
  During the 1970s, Kanter was involved in a series of
real estate developments with developer Sam Zell. The
development properties were owned by partnerships
(real estate partnerships). Kanter’s interests in the real
estate partnerships were held through a series of Kanter-
controlled trusts, including the BWK Revocable Trust,
the Everglades Trusts 1-5, and the BWK Family Trusts
(referred to collectively as the grantor trusts). Each of
these trusts was a grantor trust whose income was attrib-
utable to Kanter personally. A detailed breakdown of the
52       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

real estate partnership interests and their associated
financial attributes is provided in the Tax Court’s opinion.
IRA, 78 T.C.M. (CCH) at 1107-11. The interests in these
real estate partnerships had, as of 1982-83, zero basis.
  During 1982, Zell expressed his desire to purchase
all of the real estate partnership interests held by the
grantor trusts. Kanter was interested in selling to Zell, but
was concerned that significant gains would be triggered
by an unqualified sale of the real estate partnership
interests held by his grantor trusts. The Tax Court found
that twenty one of the real estate partnership interests
held by the grantor trusts had negative capital accounts;
that is, their liabilities exceeded their bases, by an amount,
in total, of $476,889. IRA, 78 T.C.M. (CCH) at 1108.
Therefore, the unqualified transfer of those interests
would involve the assumption of liabilities in excess of
the bases, and would trigger capital gains to the
seller—Kanter, who was the owner by virtue of the IRC’s
grantor trust provisions. See 26 U.S.C. §§ 671-677.
  In 1983, a series of transactions took place that ulti-
mately resulted in the transfer of the real estate partner-
ship interests from the grantor trusts to a Zell-controlled
entity. The transfer took place in three stages.


        1. Transfer of real estate partnership interests to
           Cashmere
  Cashmere Investment Associates, Inc. (Cashmere) was
an inactive “shelf” corporation incorporated in Delaware
in 1982 and controlled by Kanter. On or about May 15,
1983, Kanter directed the grantor trusts to transfer their
real estate partnership interests to Cashmere in what
was intended as a nontaxable exchange under 26 U.S.C.
§ 351 in return for Cashmere common and preferred stock.
Concurrently with the § 351 transfer, the grantor trusts
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,                  53
     01-4321, 01-4322, & 02-1220

also transferred to Cashmere eight promissory notes
payable to, and held by, the grantor trusts with a face
value, in total, of $498,500. The promissory notes were
all dated May 1, 1983, and were payable on August 1,
1983. These promissory notes, according to Kanter, had
a basis equal to face value and increased the total aggre-
gate basis of the transferred property so as to eliminate
the gain that would otherwise have been realized under
26 U.S.C. § 357(c) through the assumption by Cashmere
of the negative capital accounts in the transfer of the real
estate partnership interests. See 26 U.S.C. § 357(c).28


           2. Sale of Cashmere stock to Waco
  On July 12, 1983, in the next stage of the transfers
to Zell-controlled entities, Kanter directed the grantor
trusts to sell their common and preferred stock in Cash-
mere to Waco Capital Corp. in return for promissory
installment notes totaling approximately $1.5 million. The
grantor trusts reported the income from this sale under
the installment method of 26 U.S.C. § 453.
  Waco was a Delaware corporation whose sole share-
holder was BRT. BRT’s beneficiaries were the members of


28
     Section 357(c) provides in relevant part:
       (c) Liabilities in excess of basis.—
           (1) In general. In the case of an exchange—
                (A) to which section 351 applies . . .
       if the sum of the amount of the liabilities assumed exceeds
       the total of the adjusted basis of the property transferred
       pursuant to such exchange, then such excess shall be con-
       sidered as a gain from the sale or exchange of a capital asset
       or of property which is not a capital asset, as the case may be.
26 U.S.C. § 357(c).
54      Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                            01-4321, 01-4322, & 02-1220

Kanter’s family, who were also the beneficiaries of the
grantor trusts. The Tax Court found that, under 26 U.S.C.
§ 453(f), Waco and the grantor trusts were “related per-
sons.” See 26 U.S.C. § 318(a)(2), (3).
  On August 31, 1983, the promissory notes held by
Cashmere were paid off by eight checks drawn on the
Administration Co.’s Special E account. As noted, the
Special E account contained the commingled funds of a
variety of entities, mostly (if not entirely) Kanter enti-
ties, and the Administration Co. accounted internally for
the specific source of a given disbursement. The Adminis-
tration Co.’s general ledger, however, did not specify the
source of the eight checks paying the notes. The checks
themselves indicate, in part, what entity is the payor of
the notes. Three of the promissory notes were ostensibly
paid with funds from BRT, an entity that was not the
maker of the notes in question, and there was no docu-
mentary evidence that BRT was advancing the funds to
the makers of the promissory notes or had, in some
way, assumed the obligations on the notes. IRA, 78 T.C.M.
(CCH) at 1110-11.
  As of September 1, Waco held all of the stock in Cash-
mere, and Cashmere’s assets included the real estate
partnership interests and $498,500 in cash (from the
note payments).


       3. Sale of Cashmere stock from Waco to Zell
  Kanter subsequently negotiated the sale of Waco’s
Cashmere stock to Equity Financial Management Co.
(Equity), an entity controlled by Zell. On September 2,
1983, Waco sold the Cashmere stock to Equity for
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,         55
     01-4321, 01-4322, & 02-1220

$1,647,500 payable by check.29 Immediately after the
purchase, Zell liquidated Cashmere.
   The Tax Court found that this convoluted series of
transactions taking place within a three-and-one-half
month period that ultimately resulted in the transfer of
the real estate partnership interests to Zell was arranged
principally to avoid immediate recognition of gain on the
transfer and otherwise lacked any bona fide business
purpose. IRA, 78 T.C.M. (CCH) at 1113; see 26 U.S.C.
§ 357(b)(1)(A), (B). Therefore, the assumption of liabil-
ities by Cashmere was recognized as money received by
Kanter (through his grantor trusts), and he was required
to be taxed on his gain resulting from the transfer, up to
the full amount of the liabilities. 26 U.S.C. § 357(b).
Additionally, the Tax Court found that the transfer of
the notes with the real estate partnership interests
also lacked any bona fide business purpose and were
principally intended as a means to avoid income tax. The
Tax Court found that the notes represented mere transfers
between and among Kanter-controlled entities, and did
not represent true indebtedness. Therefore, Kanter had
no basis in the notes, and the notes did not, therefore,
increase the aggregate basis in the property transferred
to Cashmere. Under § 357(c), the excess of liabilities
over basis in the transferred property was therefore
recognized as capital gain to Kanter. Because the basis
in the partnership interests was zero, under both § 357(b)
and (c), the full amount of the transferred liabilities
was taxable to Kanter.



29
  As noted, Cashmere’s assets included $498,500 in cash plus
the partnership interests. Therefore, the $1,647,500 purchase
price of Cashmere included a purchase price of $1,149,000 for
the real estate partnership interests.
56       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

  Additionally, the Tax Court found that the subsequent
sale to Waco using the installment method was a
“dispos[ition] of property to a related person.” 26 U.S.C.
§ 453(e)(1)(A). When Waco then subsequently transferred,
within two years, the Cashmere stock to Equity, the
installment method of reporting was no longer available.
26 U.S.C. § 453 (e)(1), (2). The entire amount realized by
Waco in the second disposition was treated as received
(at the time of the second disposition) by the seller-grantor
trusts in the first disposition. Id.


     B. Analysis
  Whether the transactions involving Cashmere had
economic substance for federal income tax purposes is a
factual question reviewed for clear error. N. Ind. Pub. Serv.
Co. v. Comm’r, 115 F.3d 506, 510 (7th Cir. 1997). Similarly,
whether the installment method of reporting is available
is a factual question that we review for clear error.
Applegate v. Comm’r, 980 F.2d 1125, 1128 (7th Cir. 1992).


        1. The Attempted § 351 Transaction
  The tax-free transfer of property to a controlled corpora-
tion solely in exchange for the transferee corporation’s
stock is permitted under 26 U.S.C. § 351. The IRC also
provides a means for preserving § 351 eligibility in cir-
cumstances where the transferee corporation assumes
liabilities of the transferor together with the property
transferred (an event that is economically equivalent to
a transfer of money (boot) from the transferee corpora-
tion to the property transferor). 26 U.S.C. § 357. There
are two limitations, however, to tax-free treatment under
§ 351. First, the taxpayer-transferor must prove by a pre-
ponderance of the evidence that the liabilities were
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,         57
     01-4321, 01-4322, & 02-1220

not transferred for the principal purpose of tax avoidance
and that the transfer had a bona fide business purpose.
§ 357(b). If the taxpayer fails to clear this hurdle, the
assumption of the liability is treated as money received
by the taxpayer, and the taxpayer recognizes any gain to
the full amount of the liability. 26 U.S.C. §§ 357(b)(1),
351(b)(1)(A). Second, if the amount of the liability trans-
ferred is greater than the basis of the property transferred,
then, in general, the transferor-taxpayer recognizes a
capital gain on the amount by which the liability ex-
ceeds the basis of the transferred property. 26 U.S.C.
§ 357(c)(1).


            a. 26 U.S.C. § 357(b)
  There can be little question that the Tax Court was
correct when it viewed the totality of the convoluted
Cashmere transactions and found that their only pur-
pose was the avoidance of federal income tax. Kanter’s
argument that § 357(b)(1) does not reach this transaction
is meritless. Within a four-month period of time an inac-
tive shelf corporation controlled by Kanter (Cashmere)
had its stock transferred three times, twice between
Kanter-controlled entities. Within that same time span,
promissory notes, virtually equal in total value to the
total negative capital account balances, were made by
entities controlled by Kanter, transferred (along with
the real estate partnership interests holding the nega-
tive balances) to entities controlled by Kanter and then
satisfied by entities controlled by Kanter. Both Cash-
mere and the promissory notes completed their entire
useful life-cycle within the span of the larger, intended
transaction—transferring the real estate partnership
interests to Zell. Yet neither the promissory notes nor
Cashmere functioned to facilitate the transfer of the real
58      Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                            01-4321, 01-4322, & 02-1220

estate partnership interests to Zell: the promissory
notes were created, transferred, and satisfied before the
consummation of the sale to Zell, and Cashmere was
liquidated as soon as its stock came into Zell’s possession
leaving Zell with only the desired asset—the real estate
partnership interests. The entire transaction was con-
structed to avoid the recognition of the gain realized on
the assumption of the real estate partnerships’ liabilities
(by, ultimately, Zell). Therefore, the assumption of those
liabilities by Cashmere in the initial stages of the proc-
ess cannot be described as other than having as its princi-
pal purpose the avoidance of federal income tax. See 26
U.S.C. § 357(b).
   Kanter’s remaining argument with respect to § 357(b)
appears to be that the intent of that statutory section
was to prevent taxpayers from creating additional liabilities
(like personal loans or debts) to be packaged with assets
contributed in a § 351 exchange in order to extract the
gains contained within the contributed property without
recognition for tax purposes. This kind of intent to avoid
taxes, argues Kanter, is far removed from the present case
where the liabilities were a substantial aspect of the real
estate partnership interests to be contributed. This ar-
gument fails as well. The fact that the liabilities being
contributed were “ordinary business liabilities of the
partnerships” does nothing to save this transaction. As
noted, the entire business of contributing the partner-
ship interests and their associated liabilities to Cash-
mere was a transaction whose only function was the
avoidance of federal tax. Therefore, “taking into consider-
ation the nature of the liability and the circumstances
in the light of which the arrangement for the assumption
was made,” it is clear that the principal purpose of the
assumption of liabilities was the avoidance of tax. 26 U.S.C.
§ 357(b)(1).
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,              59
     01-4321, 01-4322, & 02-1220

  It was not clearly erroneous for the Tax Court to have
found that the assumption of the real estate partnership
interests’ liabilities by Cashmere had as its principal
purpose the avoidance of federal income tax.


             b. 26 U.S.C. § 357(c)
  The Tax Court also found, alternatively, that § 357(c)
would apply to the Cashmere transactions.30 Section
§ 357(c) is triggered when the amount of the liabilities
assumed exceeds the basis of the property contributed
in the § 351 exchange. The taxpayer is taxed on the amount
by which the liabilities exceed the basis. The Tax Court
found that the contributed promissory notes did not rep-
resent genuine indebtedness and had, therefore, a basis
of zero. Without any additional basis from the promissory
notes, the basis of the contributed real estate partner-
ship interests was zero, and the amount of the liabilities
assumed (in the form of the oft-mentioned negative cap-
ital accounts) necessarily exceeded that zero basis. There-
fore, the gain realized in the § 351 transfer must be recog-
nized to the full extent of the assumed liabilities.
  Kanter vigorously argues that the substance of the
promissory notes should be respected and not disre-
garded as mere form, and the notes should be given a basis
equal to their face value. For this argument Kanter
relies heavily on the Ninth Circuit’s determinations in
Peracchi v. Comm’r, 143 F.3d 487 (9th Cir. 1998), where a
taxpayer made and contributed notes to his closely held



30
  Section 357(c)(2)(A) gives priority to § 357(b)(1) when both
§ 357(c) and § 357(b)(1) apply. Therefore, the finding under
§ 357(c) is only relevant as the alternative to the previous find-
ing under § 357(b)(1).
60       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

corporation. The Ninth Circuit found substance in Perac-
chi’s promises to pay himself, and increased the basis of
property contributed (in a § 351 exchange) to a figure
greater than the liabilities assumed by the closely-held
transferee corporation. Id.; see also Lessinger v. Comm’r,
872 F.2d 519 (2d Cir. 1989) (finding also that personal
note had face-value basis in hands of transferee corpora-
tion). The hypothetical risk that this note might somehow
become the property of a creditor (through bankruptcy
of the corporation) and that a creditor might then be able
to enforce the note was sufficient to make the note more
than an empty promise. Peracchi, 143 F.3d at 493. The
Ninth Circuit panel realized the potential for abuse of
this holding, however, and cabined it.
     We confine our holding to a case such as this where the
     note is contributed to an operating business which is
     subject to a non-trivial risk of bankruptcy or receiver-
     ship. [The closely held company] is not, for example,
     a shell corporation or a passive investment company.
Id. at 493 n.14.
  Even if we were to accept Peracchi’s underlying prem-
ise that a taxpayer’s self-made obligations to his own
closely held corporation should be respected for tax pur-
poses, in light of the language limiting Peracchi’s holding,
we would not extend that premise to the present case.
Cashmere was a passive investment company that, before
the transactions at issue, was a shelf corporation. And
after the transfer of the real estate partnership interests
to Zell, Cashmere was liquidated. Cashmere was not an
operating business, and, unlike Peracchi, where an insur-
ance corporation needed more assets to meet a minimum
premium-to-asset ratio for regulatory purposes, there
was no underlying business purpose here for these transi-
tory promissory notes. Nor did Cashmere face a “non-trivial
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,                61
     01-4321, 01-4322, & 02-1220

risk of bankruptcy.” Peracchi is, therefore, quite distin-
guishable from the present case. The promissory notes here
did not represent genuine indebtedness, and the Tax
Court did not clearly err in finding that the promissory
notes had no basis. Therefore, the Tax Court’s conclusion
that the liabilities assumed exceeded the basis of the
contributed property by the full amount of the liabilities
and were taxable to that extent was not clearly erroneous.


           2. Disallowance of § 453 Installment Method
  The next steps in the sale of the real estate partner-
ship interests to Zell involved, first, the sale of the Cash-
mere stock from Kanter’s grantor trusts to Waco and,
second, the subsequent sale within two months of the
Cashmere stock from Waco to Equity (the Zell-controlled
entity). The grantor trusts reported their gains from the
sale to Waco under the installment method allowed by
26 U.S.C. § 453.31 But § 453(e) limits the use of the install-
ment method in circumstances where there is a second
disposition of the property within two years that is ef-
fected by a person “related” to the original seller. In other
words, if A sells to B, and then B sells to C (within two
years), A cannot report the income from its sale under
the installment method if A and B are “related persons”
under 26 U.S.C. §§ 267(b) or 318(a). The Tax Court found


31
     Section § 453(c) states:
       For purposes of this section, the term “installment method”
       means a method of payment under which the income recog-
       nized for any taxable year from a disposition is that propor-
       tion of the payments received in that year which the gross
       profit (realized or to be realized when payment is completed)
       bears to the total contract price.
26 U.S.C. § 453(c).
62         Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                               01-4321, 01-4322, & 02-1220

that the grantor trusts and Waco were “related persons,”
and that the entire amount of income attributable to
the sale of the Cashmere stock to Waco must be recognized
in 1983. We affirm this finding as well.
  Section § 453(f)(1) defines a “related person” for purposes
of determining the reach of § 453(e):
     (A)    a person whose stock would be attributed under
            section 318(a) (other than paragraph (4) thereof)
            to the person first disposing of the property, or
     (B)    a person who bears a relationship described in
            section 267(b) to the person first disposing of
            the property.
26 U.S.C. § 453(f)(1). Waco’s stock is owned entirely by
BRT, whose beneficiaries were undisputedly the mem-
bers of Kanter’s family. Similarly, Kanter does not dis-
pute that these same family members were the bene-
ficiaries of the grantor trusts. Under 26 U.S.C. § 318(a)(2)
(B)(i), the stock owned by BRT is considered owned by its
beneficiaries. Therefore, the BRT beneficiaries are treated
as owning the Waco stock. Similarly, those same BRT
beneficiaries are also beneficiaries of the grantor trusts,
and their ownership of the Waco stock is imputed “up-
stream,” under § 318(a)(3)(B)(i), to the grantor trusts.
Therefore, the stock of Waco would be attributed to the
grantor trusts under § 318(a), making Waco a person
“related” to the grantor trusts under § 453(f)(1)(A). The
attribution, therefore, makes the sale of the Cashmere
stock to Waco ineligible for the installment method under
§ 453(e).32



32
  We note with some trepidation that there was no effort by the
Tax Court to identify the precise actuarial interests of the
                                                 (continued...)
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,               63
     01-4321, 01-4322, & 02-1220

  Similarly, as noted in Part III, Kanter was the substan-
tial owner of BRT under the grantor trust provisions of
26 U.S.C. §§ 671 et seq. Therefore, there is an alterna-
tive means by which the grantor trusts and Waco are
“related persons.”33 Under § 318(a)(2)(B)(ii), stock owned


32
  (...continued)
beneficiaries of BRT nor how precisely those beneficiaries’
identities matched the beneficiaries of the grantor trusts. This
information would be relevant for determining the exact percent-
age of Waco stock owned by the BRT beneficiaries (who were
also grantor trust beneficiaries), which would then be imputed
to the grantor trusts. Because Kanter did not make this argu-
ment on this issue, however, we will not disturb the Tax Court’s
determination. United States v. Jones, 34 F.3d 495, 499 (7th
Cir. 1994) (finding argument not made before this court in
opening brief is waived).
33
   There does not appear to be any obstacle in the statute,
legislative history, or regulations to the attribution of a grantor
trust’s stock ownership to the beneficiaries of a trust as well as
to the substantial owner of a trust under §§ 671 et seq. See The
Attribution Rules, 554-2d Tax Mgmt. Portfolio at A-11 (1996)
(“Apparently, attribution from the [grantor] trust to the beneficia-
ries and from the beneficiaries to the trust would still occur,
even if the grantor or another is deemed to be the ‘owner,’
although the statute and legislative history are ambiguous on
this point and the regulations are silent.”). Nor does any court
appear to have ruled on the issue. Our research unearthed
only one commentator who has suggested that attribution to a
grantor precludes attribution to the beneficiaries. See Shop Talk,
Is Stock Attributed to Beneficiaries of Grantor Trusts?, 65 J. TAX’N
207 (Burton W. Kanter & Sheldon I. Banoff ed., 1986) (“A common
sense interpretation of Section 318(a)(2)(B)(ii) should be that
its specific rule regarding attribution from grantor trusts should
preempt the general rule of trust attribution of Section 318(a)(2)
(B)(i).”). The financial interest in this matter of one of the edi-
                                                      (continued...)
64       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

by a grantor trust is attributed to its grantor; BRT’s stock,
therefore, is attributed to Kanter. That is, Kanter him-
self is considered to own the Waco stock owned by BRT.
Following a similar statutory path as before, Kanter’s
status as the substantial owner of the grantor trusts
means that any stock he owns personally is attributed to
the grantor trusts under § 318(a)(3)(B)(ii). Therefore,
Kanter’s attributed ownership of the Waco stock means
that the grantor trusts also own the Waco stock. Because
the grantor trusts are attributed ownership of the Waco
stock under § 318(a), Waco and the grantor trusts are
“related persons” under § 453(f)(1)(A), and the sale of the
Cashmere stock from the grantor trusts to Waco is ineligi-
ble for reporting under the installment method by opera-
tion of § 453(e).
  Whether one, the other, or both methods of analysis
are followed, the grantor trusts’ sale of Cashmere stock
to Waco was ineligible for the installment method of
reporting for federal income tax purposes. The Tax Court’s
findings on this issue were not clearly erroneous.


VIII. Naomi Kanter motions
      A. Facts
  On May 8, 2001, in the midst of the Tax Court’s post-
trial Rule 155 computations, attorney Karen Hawkins
entered an appearance in the Tax Court on behalf of
Kanter’s wife, Naomi Kanter (Naomi), for the purpose of
claiming that Naomi should not be jointly and severally
liable for the Tax Court’s determined deficiencies


33
  (...continued)
tors of the article may diminish the persuasive value of the
proposed answer.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,        65
     01-4321, 01-4322, & 02-1220

against Kanter. Shortly thereafter, Randall Dick, attor-
ney of record for both Kanter and Naomi, moved to with-
draw his representation of Naomi. By her new counsel,
Naomi first filed a series of objections to the Commis-
sioner’s computations because they held Naomi liable for
fraud penalties. The Tax Court upheld these objections.
(Order, IRA, 6/20/01; App. at 0346.) Naomi then filed
seven motions asking the Tax Court to find that she had
not meaningfully participated in the litigation as pro-
vided in 26 U.S.C. § 6015(g)(2). In the alternative, Naomi
asked that the Tax Court reopen the record in order to
hear additional evidence that Naomi was an “innocent
spouse” under 26 U.S.C. § 6015(b) and § 6015(f), and not
jointly and severally liable with her husband. In re-
sponse to Naomi’s motion, the Commissioner stated that
“respondent has no objection to petitioner’s first request
for relief [a finding that Naomi had not meaningfully
participated in the litigation].” (See App. at 0364.) There-
fore, the Commissioner felt the alternative request to
reopen to hear additional evidence that Naomi was an
innocent spouse was moot.
  In its September 20, 2001 Order, the Tax Court de-
nied Naomi’s seven motions. (See App. at 0224.) The Tax
Court found that the language of § 6015(g)(2) required
that any finding that a spouse had not “meaningfully
participated” in the litigation must occur in a subse-
quent, separate proceeding that could properly consider
the matter now before us as a “prior proceeding.” 26 U.S.C.
§ 6015(g)(2). Therefore, the Tax Court ruled, Naomi
would have to wait for a separate proceeding before the
Tax Court to have the res judicata effect of the present
case adjudicated. Additionally, the Tax Court exercised
its discretion not to reopen the record and take addi-
tional evidence on the merits of Naomi’s claim that she
was an “innocent spouse.” The Tax Court found that, even
66       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

though the innocent-spouse provisions had been signifi-
cantly amended in 1998, and clarified in 2000, the under-
lying availability of innocent-spouse relief had been un-
changed since the origination of the present case in the
early 1990s. The court refused to reopen a case whose
trial had concluded more than five years earlier, especially
when there had been no mention of innocent-spouse
relief during the period since the trial. Given the possibil-
ity of later relief for Naomi in a subsequent proceeding,
the Tax Court did not feel the burden on the Commis-
sioner to reopen the present case and litigate the issue
was justified.


     B. Analysis
  This court reviews the denial of motions to reopen the
Tax Court’s record for abuse of discretion. Coleman v.
Comm’r, 16 F.3d 821, 829 (7th Cir. 1994). Whether or not
§ 6015(g)(2) requires a subsequent proceeding to deter-
mine whether Naomi had “meaningfully participated” in
the matter now before us as a “prior proceeding” is a
question of statutory interpretation that we review de
novo. Eli Lilly & Co. v. Natural Answers, Inc., 233 F.3d 456,
467 (7th Cir. 2000).
   The substance of current 26 U.S.C. § 6015 was enacted
as part of the Internal Revenue Service Restructuring
and Reform Act of 1998, Pub. L. No. 105-206, 112 Stat
685, § 3201 (IRRRA). Technical corrections to the IRRRA
were enacted in 2000, leaving us with the statute as
it presently appears. See Community Renewal Tax Relief
Act of 2000, Pub. L. No. 106-554, 114 Stat. 2763, App. G.
Section 6015 contains the so-called “innocent spouse”
provisions that allow a spouse to avoid joint and sev-
eral liability for a tax deficiency assessed against both
husband and wife based on a joint tax return filing. To
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,         67
     01-4321, 01-4322, & 02-1220

avoid joint and several liability, the innocent spouse
must show, generally, that (1) a joint return was filed, (2)
the return understated the tax owed based on the “errone-
ous items” of the other joint filer, (3) she did not know,
and had no reason to know, that there was an understate-
ment, (4) it is inequitable to hold her liable for the under-
statement and (5) she has applied for innocent-spouse
protection no later than two years after the Commissioner
begins “collection activities.” See 26 U.S.C. § 6015(b).
Section 6015 expanded previous innocent-spouse provi-
sions by removing the requirement that the understate-
ment be “substantial” and that the return be “grossly
erroneous” in order to receive protection. Additionally,
§ 6015 provided increased protection for divorced or sepa-
rated spouses by holding such a spouse liable for only
those items on which she would have been liable had she
filed a separate return. Finally, the modifications to § 6015
provided for equitable relief for an innocent spouse. 26
U.S.C. § 6015; see also John B. Harper, Federal Tax Relief
for Innocent Spouses: New Opportunities Under the IRS
Restructuring and Reform Act of 1998, 61 ALA. LAW. 204
(2000).
  Section 6015 also contemplates the possibility that a
court will adjudicate a joint tax liability to completion
before an innocent spouse invokes the section’s protection.
Under § 6015, res judicata will attach to the decision of
a court if the innocent spouse “participated meaningfully
in [the] prior proceeding,” even if the innocent-spouse
issue was never presented to the adjudicating court. 26
U.S.C. § 6015(g)(2).
  Naomi first argues that the Tax Court should have
“determined,” under § 6015(g)(2), that she did not mean-
ingfully participate in the Tax Court litigation and that
the Tax Court’s IRA decision against her husband would
have had no preclusive effect with respect to her potential
68      Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                            01-4321, 01-4322, & 02-1220

innocent-spouse defense to joint liability. Naomi argues
that the record and the Tax Court’s decision clearly
show that she was not involved in the present case. See
IRA, 78 T.C.M. (CCH) at 969 (“Petitioner Naomi R. Kanter,
Kanter’s wife, was not involved in any of the activities
giving rise to this litigation. However, she filed joint
Federal income tax returns with Kanter for the years at
issue.”). She further notes that there would likely not be
any delay in the course of the present case with such a
determination, that there would be no need to reopen the
record in order to make such a determination, and that
the Commissioner expressly noticed no objection to such
a determination.
  Unfortunately for Naomi, the general principles of res
judicata and the language of the statute deny her this
relief at this time. Section 6015(g)(2) is only properly
invoked in a subsequent judicial proceeding to avoid the
preclusive effect of a prior judicial determination, and has
no application during the pendency of the initial judicial
proceeding whose preclusive effect she wishes to avoid.
First, we start with the plain language of the statute.
Lara-Ruiz v. INS, 241 F.3d 934, 940 (7th Cir. 2001). As the
Tax Court observed, the plain language of § 6015(g)(2),
which is labeled “Res judicata,” limits its effect to con-
sideration of a “decision of a court in any prior proceed-
ing,” to determine if an “individual participated meaning-
fully in such prior proceeding.” To us, this language is
clear: a decision from a prior proceeding means that this
statute is only applicable when the original court proceed-
ing determining tax liability has concluded. We can only
conclude that this section is designed to assist innocent
spouses in avoiding the preclusive effect of the other
spouse’s prior, completely adjudicated court case, but
that the section has no application internal to the prior
judicial proceeding.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,           69
     01-4321, 01-4322, & 02-1220

  This reading gains support from the general principle
of res judicata. Res judicata prevents parties from relitigat-
ing claims that have already been adjudicated by a
court to a final judgment on the merits. Of necessity, res
judicata requires two proceedings: an original proceeding
wherein a final judgment on the merits is rendered, and
a subsequent proceeding wherein a party seeks to litigate
again a claim decided in the original proceeding. See N.H.
v. Me., 532 U.S. 742, 748 (2001) (“Claim preclusion [res
judicata] generally refers to the effect of a prior judgment
in foreclosing successive litigation of the very same claim,
whether or not relitigation of the claim raises the same
issues as the earlier suit.”) (emphasis added); see also
BLACK’S LAW DICTIONARY 1305 (6th ed. 1990) (defining
res judicata as the “[r]ule that a final judgment rendered
by a court . . . constitutes an absolute bar to a subse-
quent action involving the same claim.”) (emphasis added).
Therefore, Naomi cannot have the level of her meaningful
participation (or lack thereof) in the present case deter-
mined until res judicata becomes relevant in a subse-
quent proceeding.
  In the alternative, Naomi argues that, if she must
wait for a subsequent proceeding before § 6015(g)(2)
becomes relevant, she wants to have her innocent-spouse
defense to joint liability (under 26 U.S.C. § 6015(b) & (f))
adjudicated on the merits during the pendency of the
present case. This would require, she argues, reopening
the record and allowing her to introduce the necessary
evidence to support her innocent-spouse claim, and she
further claims that it was an abuse of discretion for the
Tax Court not to allow her to do so.
  Naomi seeks support in prior Tax Court decisions that,
she claims, have “bifurcated proceedings” in order to
allow an innocent spouse to have issues of joint liability
tried proximately to the general issues of tax liability. (Pet.
70       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

Br. at 78.) Yet in none of the cases upon which Naomi
relies did the innocent spouse remain silent for the dura-
tion of the Tax Court proceedings (with over ten years
elapsing from Kanter’s petition to Naomi’s first motion
regarding this issue) and, only after the case was all
but closed, raise, for the first time, an innocent-spouse
defense to joint liability. In Vetrano v. Comm’r, 116 T.C. 272
(2001), the innocent-spouse defense was asserted in the
original petition to the Tax Court. Id. at 274. Likewise, both
spouses in Charlton v. Comm’r, 114 T.C. 333 (2000),
asserted in their original petitions that they qualified
for innocent-spouse relief. Id. at 338. In King v. Comm’r,
116 T.C. 198 (2001), the original petition was, in its en-
tirety, an innocent-spouse defense, and the so-called not-
innocent spouse was involved as an intervenor. The one
consistent thread running through all of these cases
relied upon by Naomi is that the request for innocent-
spouse relief was squarely before the Tax Court well be-
fore the resolution of the case. Naomi, for whatever rea-
son, never put the Tax Court on notice that she had an
innocent-spouse defense to joint liability.
  Naomi claims her silence was due, in part, to a conflict
of interest with respect to the joint representation by
counsel of her and her husband. This conflict of interest,
she alleges, is the kind of extraordinary circumstance
that makes refusing to reopen the record an abuse of
discretion. What Naomi fails to argue adequately, however,
is that there was an actual conflict of interest. Joint
representation, by itself, is not a conflict of interest; the
representation of one client must actually conflict with
the representation of the other. See United States v. Fox,
613 F.2d 99, 102 (5th Cir. 1980) (“However, an actual, not
merely hypothetical or speculative, conflict must be dem-
onstrated before it can be said that an accused has
been deprived of effective assistance of counsel.”); cf.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,          71
     01-4321, 01-4322, & 02-1220

Dorchester Indus., Inc. v. Comm’r, 108 T.C. 320, 339 (1997)
(“Certainly, one spouse’s claim that she (he) is an inno-
cent spouse can present a conflict of interest to counsel
trying to represent both spouses. If, indeed, the spouses
do have differing interests with respect to any issue in a
case, our rules provide that counsel must secure in-
formed consent of the client, withdraw from the case, or
take whatever other steps are necessary to obviate the
conflict of interest.”). Naomi shows no actual conflict in the
joint representation of her and her husband during the
present case. If Naomi could point us to an innocent-
spouse defense that she had at any time during the trial,
before a decision by the Tax Court, that would have
relied upon arguments in conflict with Kanter’s defenses,
then she is correct that Tax Court Rule 24(g) may have
required separate representation. See Dorchester Indus.,
108 T.C. at 339. She has not yet alleged such an argu-
ment—in other words, she does not show us that she
ever had a viable innocent-spouse defense that she was
prevented from raising because it conflicted with Kanter’s
defense strategy. There does not appear to have ever
been a time when she could say that the joint representa-
tion faced conflicting interests between Naomi and Kanter.
Now, with the Tax Court’s having entered a final deci-
sion, Naomi would have us engage in hindsight and find
that she was inevitably prejudiced by the joint representa-
tion because she is now liable for deficiencies for which
she is the “innocent spouse.” Had Kanter’s arguments
succeeded in the Tax Court, she would not be facing joint
liability nor would she be alleging conflict of interest.
We cannot, and will not, automatically conclude that her
silence was helpless ignorance and not a strategic decision.
  Naomi is not prejudiced by the Tax Court’s refusal to
reopen the record. The opportunity to assert innocent-
spouse defenses to joint and several liability remains
72        Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                              01-4321, 01-4322, & 02-1220

fully available to her for up to two years after the Com-
missioner’s first “collection activity.” 26 U.S.C.
§ 6015(b)(1)(E).34 She will have her asserted defense
administratively reviewed by the IRS, and, if necessary
and appropriate, judicially reviewed by the Tax Court.35
  The Tax Court’s decision not to determine that Naomi
had not “participated meaningfully” in the present litiga-
tion was proper under § 6015(g)(2), and it was not an
abuse of discretion for the court to refuse to reopen the


34
  Collection activity is defined in Treasury Regulation 1.6015-
5(b)(2)(i) as
     [A] section 6330 notice; an offset of an overpayment of the
     [innocent] spouse against a liability under section 6402; the
     filing of a suit by the United States against the [innocent]
     spouse for the collection of the joint tax liability; or the
     filing of a claim by the United States in a court proceeding
     in which the [innocent] spouse is a party or which involves
     property of the [innocent] spouse. Collection activity does
     not include a notice of deficiency; the filing of a Notice of
     Federal Tax Lien; or a demand for payment of tax.
26 C.F.R. § 1.6015-5(b)(2)(i).
35
   We do not, obviously, determine on the merits as part of this
appeal whether Naomi “meaningfully participated” in the liti-
gation in the present case so that res judicata would (or would
not) apply. We, however, note again the Tax Court’s finding
that Naomi was not involved in the activities underlying the
present case, IRA, 78 T.C.M. (CCH) at 969 (“Petitioner Naomi R.
Kanter, Kanter’s wife, was not involved in any of the activities
giving rise to this litigation.”), and the Commissioner’s response
in the record that he did not object to a finding that Naomi
had not meaningfully participated within the meaning of
§ 6015(g)(2), (App. at 0364 (“For the purposes of this case, re-
spondent has no objection to petitioner’s first request for re-
lief [finding that she had not meaningfully participated in the
litigation].”)), as indicia relevant to such a determination.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,        73
     01-4321, 01-4322, & 02-1220

record in order to receive evidence concerning an innocent-
spouse defense.


                     CONCLUSION
  In summary:
  Issue I—STJ Report. Because we take the Tax Court
at its word that in rendering its final opinion it agreed
with and adopted the opinion of Special Trial Judge
Couvillion, we find Kanter’s arguments challenging the
Tax Court’s refusal to disclose the STJ’s “original” report
moot. We AFFIRM the Tax Court’s denial of Kanter’s mo-
tions for access to the STJ’s report.
  Issue II—Fraud. There is significant circumstantial
evidence of fraudulent intent. It was not clearly erroneous
for the Tax Court to find fraud. We AFFIRM the Tax Court’s
findings on this issue.
  Issue III—BRT. It was not clearly erroneous       for the
Tax Court to find that Kanter was the grantor       of BRT
and to affirm deficiencies against him for BRT’s    income
during the years at issue. We AFFIRM the Tax        Court’s
findings on this issue.
  Issue IV—Washington Painting. There can be no
question that Kanter sought to facilitate the sale of the
George Washington painting for profit. The Tax Court
found that, in every instance where the potential for
profit was involved, Kanter engaged in significant non-law-
related business activities with the purpose of facilitat-
ing the business opportunities of others for his own profit.
Given the number of evidentiary indicators supporting
that this venture was also for profit, we believe it was
clearly erroneous to find otherwise. We REVERSE the
Tax Court’s findings on this issue.
74      Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                            01-4321, 01-4322, & 02-1220

  Issue V—Bank Deposits. The Tax Court did not
clearly err in its findings regarding Kanter’s unreported
income in 1982 as determined by bank deposit analysis. We
AFFIRM the Tax Court’s findings on this issue.
 Issue VI—Equitable. It was not clear error for the Tax
Court to find that the transfers from Equitable Leasing
were commissions and were taxable income. We AFFIRM the
Tax Court’s findings on this issue.
  Issue VII—Cashmere. It was not clearly erroneous
for the Tax Court to have found that the assumption of
the real estate partnership interests’ liabilities by Cash-
mere had as its principal purpose the avoidance of federal
income tax. Alternatively, it was not clearly erroneous
for the Tax Court to conclude that the promissory notes
did not represent genuine indebtedness and had no basis,
and, therefore, that the liabilities assumed exceeded the
basis of the contributed property by the full amount of
the liabilities and were taxable to that extent. Finally, the
Tax Court did not clearly err in finding the grantor trusts’
sale of Cashmere stock to Waco ineligible for the install-
ment method of reporting for federal income tax purposes.
We AFFIRM the Tax Court’s findings on this issue.
  Issue VIII—Naomi Kanter. We believe the Tax Court’s
interpretation of § 6015(g) was correct, and that Naomi
must wait for a subsequent proceeding before she can have
the level of her participation in the present case deter-
mined. We also do not believe that it was an abuse of
discretion for the Tax Court to refuse to reopen the pres-
ent case to allow Naomi to litigate her innocent-spouse
defense. We AFFIRM the Tax Court on this issue.
  For the foregoing reasons we AFFIRM in part and REVERSE
in part the decision of the Tax Court.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,       75
     01-4321, 01-4322, & 02-1220

  CUDAHY, Circuit Judge, concurring in part, dissenting
in part. I concur with the majority’s opinion as to Naomi
Kanter’s issues on appeal, but dissent otherwise. I write
separately to address Kanter’s threshold argument that
the Special Trial Judge’s (“STJ’s”) original report must be
made a part of the record on appeal so that this court
can determine whether its contents have been adequately
considered by the Tax Court judge, whose opinion is
before us.
  Before I begin the legal analysis that, I believe, demon-
strates why the withholding of the report is improper,
I want to take a few lines to address the policy concerns
that leap to mind when first encountering the suppres-
sion of the report. For the Tax Court is not merely “un-
usual;” it is, I believe, unique among all the institutions
in the law where one official conducts a trial (and thus
hears the witnesses) and prepares a report or other docu-
ment containing her findings or recommendations based
on the trial, and another official or group of officials
subsequently makes the operative decision. Even the Com-
missioner, at oral argument, acknowledged that in every
milieu except that of the Tax Court, the document con-
taining the findings or recommendations of the official
conducting the trial are available to a court reviewing
the operative decision. This includes, for example, the
report of a federal magistrate judge to a district court
responsible for a decision. This is also the practice under
the Administrative Procedure Act which governs prac-
tically all federal administrative proceedings and where
the hearing officer (usually an administrative law judge)
must file a recommended decision which is distributed
to both parties, any appellate court conducting a review
and to the public at large. Transparency is the universal
practice of agencies and courts employing these decisional
practices. The question then becomes, if there are policy
76      Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                            01-4321, 01-4322, & 02-1220

reasons that dictate transparency for everyone else, why
do these reasons not apply to the Tax Court?
  The Tax Court has not denied that a document contain-
ing the original findings of the STJ exists, yet it refuses
to include this document in the record on appeal. It is no
answer at all to claim that the report of the STJ is like
a law clerk’s memorandum to a judge or the memorandum
of a fellow jurist on a panel—an internal privileged deci-
sional document. The document here is of an official who
presided over the trial and heard the witnesses, and it is
directed towards an official who has no first hand knowl-
edge of any aspect of that same trial. I am not impugning
the integrity of the Tax Court judges here, or at any
point in this dissent; I am merely questioning the propri-
ety of their denial of procedural transparency in a cir-
cumstance where every other like process known to the
law is transparent. If we approve the Tax Court’s practice
here, are we not suggesting to the whole administra-
tive array of the federal government that it may seek
by available means when statutes permit to deny trans-
parency when engaging in like decisional processes? I
believe that the legal analysis of the majority as well as
my own must be examined in the context of the larger
implications of allowing an administrative body (techni-
cally, an Article I court) like the Tax Court to flout the
otherwise ubiquitous principle of transparency in its
proceedings. That said, I believe there also exist sound
constitutional grounds demanding transparency in this
instance.
  As a threshold matter, everyone agrees that Kanter’s
arguments are immaterial if the Tax Court’s opinion is
the verbatim reproduction of the STJ’s report, which the
majority and the Eleventh Circuit, Ballard v. Commis-
sioner, 321 F.3d 1037 (11th Cir. 2003), appear to believe
is the case, and which the Tax Court’s opinion superficially
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,         77
     01-4321, 01-4322, & 02-1220

purports to be. The Tax Court’s opinion clearly states that
it adopts and agrees with the “opinion” of the STJ. If
that recital is to be interpreted as meaning that the
STJ’s initial report lies before us already, then there is
no issue of the Tax Court judge’s according due regard or
a presumption of correctness to the STJ’s findings. Defer-
ence would not be an issue if there has been outright
adoption of the STJ’s findings. This state of affairs
would also appear to moot Kanter’s due process argument
as well as his Rule 183 argument. Kanter relies on United
States v. Raddatz, 447 U.S. 667 (1980), to argue that an
STJ should be treated the same as a magistrate judge.
Using Raddatz, Kanter argues that when the Tax Court
reverses an STJ’s credibility findings without having
heard the witnesses personally, due process is violated.
However, the verbatim adoption of the STJ’s findings by
the Tax Court would fully comport with even Kanter’s
interpretation of Raddatz’s due process requirements.
  But I agree with Kanter that when the Tax Court
“agrees with and adopts the opinion of the Special Trial
Judge,” it does not mean that the Tax Court opinion is
the verbatim reproduction of the original STJ’s report.
Kanter argues that the Tax Court routinely reviews
and alters STJ reports through an internal process that
is concealed in published Tax Court opinions by the lan-
guage, “agrees with and adopts.” Kanter presented two
pieces of evidence to support his claim: 1) Kanter’s attor-
ney allegedly was told informally by Tax Court Judge
Julian Jacobs and Chief Special Trial Judge Peter J.
Panuthos that the credibility findings of Special Trial Judge
Couvillion on fraud were reversed by Tax Court Judge
78       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

Dawson;1 and 2) there exists not a single Tax Court decision
since the adoption of current Rule 183 where a Tax Court
Judge has purported to modify or reverse a finding of a
Special Trial Judge.
   What Kanter alleges happened in the present case,
and what commonly occurs in the Tax Court, is that a
Tax Court judge takes the STJ’s report (which had been
filed with the Chief Judge pursuant to Rule 183) and
works together with the STJ to edit it. From this process
emerges a final report that may or may not bear any
resemblance to the original report, but that still may be
called the STJ’s “opinion” (but not the STJ’s “report”) if
the STJ agrees to subscribe to it. This modified report is
then “adopted” by the Tax Court judge and filed as the
Tax Court opinion. This is the reason, Kanter argues, that,
in the 880-plus Tax Court decisions since 1983 that I
could find that involved an STJ report, the Tax Court
judge purported to agree with and adopt the opinion of
the STJ in every instance. Never, in any instance since
the adoption of the current Rule 183 that I could find, has
a Tax Court judge not agreed with and adopted the STJ’s
opinion.
  I find this extraordinary unanimity telling. It is difficult
to believe that over the course of nineteen years (since
the amendments giving rise to current Rule 183), not a
single Tax Court judge (and there are 19 of them, 26 U.S.C.
§ 7443(a)) has ever disagreed with a single original find-
ing of any STJ (and there are about 20 of them). I say



1
  Kanter’s attorney revealed the names of the judges in question
when asked at oral argument. The original declaration of Kanter’s
attorney did not name the Tax Court judges who allegedly made
these statements concerning the alteration of the STJ’s report.
Declaration of Attorney Randall G. Dick, App. at 0250-52.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,           79
     01-4321, 01-4322, & 02-1220

with confidence that this degree of unanimity is not
only unusual, but impossible in a system of arms-length
appellate style review involving 39 independent individ-
uals. I believe that it is highly likely, therefore, that there
is some kind of collaborative process involved in the path
from STJ report to Tax Court decision. I draw support
in this conclusion from the fact that neither the Com-
missioner nor the Tax Court has ever settled this issue
by unambiguously stating otherwise, despite oppor-
tunities to do so. Notably, at oral arguments on the pres-
ent case the Commissioner did not dispute Kanter’s conten-
tion that the STJ’s report undergoes some kind of revi-
sion during the process of “adoption” by the Tax Court. And
in his brief the Commissioner is very careful in stating
that the Tax Court adopted the “opinion of the [STJ].” Resp.
Br. at 111 (emphasis added). And the Commissioner is
just as careful in never stating that the Tax Court adopted
the STJ’s “report.” This care mirror’s the Tax Court’s
own language in its refusal to release the STJ’s report to
Kanter.
  I believe that the record supports the notion that the
Tax Court engages in a quasi-collaborative process of
review of the STJ’s report from which a new and frequently
different STJ’s opinion emerges to be adopted and agreed
with by the Tax Court. If my understanding is correct, there
are two “STJ’s reports” in many, if not most (or even all),
Tax Court cases—the original “report” filed under Rule 183
with the Chief Judge of the Tax Court, which is solely
the work product of the STJ (and which represented the
STJ’s views at the end of trial) and the later “opinion” of the
STJ, which is a collaborative effort, but which the Tax
Court then “agrees with and adopts” as the opinion of the
Tax Court. In any event, I do not claim to know the
degree to which the STJ’s original filed report in the
present case was altered, and I do not take as determina-
80      Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                            01-4321, 01-4322, & 02-1220

tive of that fact the declaration of Kanter’s attorney re-
garding his conversations with Tax Court personnel. So,
given this interpretation of the Tax Court’s procedure, I
want to take a closer look at Kanter’s argument.
  Kanter’s argument wraps a number of different issues
into one request for the STJ’s report. First, whether or not
the Tax Court’s procedure denying access to the STJ’s
report violates its own Rule 183. Second, whether the
Tax Court’s procedure violates other law, including the
Internal Revenue Code (“IRC”). Third, whether the Tax
Court’s procedure violates due process protections. Finally,
and most importantly, whether Kanter’s due process
rights on appellate review by this court are violated
when we undertake review of the Tax Court’s decision
without the context of the STJ’s original report with re-
spect to credibility findings.


  1. Does the Tax Court’s procedure violate Tax Court
     Rule 183?
  I agree with the majority’s determination that Rule
183 imposes no requirement of disclosure or of clearly
erroneous deference upon the Tax Court. However, I
think some additional discussion of the evolution of Rule
183 into its current form, and why the current rule does
not compel production of the STJ’s report nor require any
particular deference to the STJ’s report, would be very
informative. Kanter points us to Stone v. Commissioner, 865
F.2d 342 (D.C. Cir. 1989), where the Court of Appeals for
the District of Columbia Circuit found that an STJ’s
findings should be reviewed by the Tax Court under a
clearly erroneous standard. Id. at 347. Under a prior
version of the Tax Court’s rules (pre-1983 and which
governed the case before the Stone court), the STJ’s report
was served on each party and each party had an opportu-
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,           81
     01-4321, 01-4322, & 02-1220

nity to file objections to the report’s findings. See Tax Court
Rule 182(b), (c), 60 T.C. 1149 (1973). The Stone court’s
finding that the STJ’s report was owed deference fol-
lowed from the Tax Court rules, Rule 182(d) at the time,
which stated that “[d]ue regard shall be given to the cir-
cumstance that the [STJ] had the opportunity to evaluate
the credibility of witnesses; and the findings of fact recom-
mended by the [STJ] shall be presumed to be correct.” Tax
Court Rule 182(d), 60 T.C. 1150 (1973). The explanatory
notes to this rule prescribed that, in regard to the “special
weight” to be given the STJ’s findings, one should look
to Court of Claims Rule 147(b). Id. The Stone court found
this prescription particularly instructive because Rule
182(d)’s language was lifted practically verbatim from Court
of Claims Rule 147(b). Stone, 865 F.2d at 345. At the time
that the language of Court of Claims Rule 147(b) had been
adopted for the Tax Court’s rules, the Court of Claims
interpreted that language to require review of the find-
ings of its version of an STJ’s report under a clearly errone-
ous standard. See, e.g., Elmers v. United States, 172 Ct. Cl.
226, 232 (1965). The Stone court found that the language
of the rule, the rule’s command to look to the Court of
Claims and the Court of Claims’ use of a clearly errone-
ous standard of review required the use of such a standard
in the Tax Court’s review of STJ findings. Stone, 865 F.2d
at 347. However, the Stone court went on to note that
    The Tax Court is of course free to make its own rules
    determining the relation between it and its Special
    Trial Judges. Moreover, we assume that the Tax Court’s
    construction of its own rules enjoys the deference, on
    review in this court, enjoyed by an administrative
    agency interpreting its own regulations.
82        Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                              01-4321, 01-4322, & 02-1220

Id. The Tax Court did exactly that—changed its rules.2
In 1983, the Tax Court amended and redesignated the




2
  I have been unable to discover what, if any, formal documented
procedure accompanies the adoption, amendment or repeal of a
Tax Court rule. There does not exist, I believe, any written
description of the process that is available in public records.
Informal conversations with a Deputy Clerk of the Tax Court and
the Tax Court’s library have indicated that some section of the
Tax Court comprises a rules committee that periodically issues
rules and rule changes. There is some indication from these
informal conversations and my research that proposed rules may
be circulated to members of the tax bar for comment. See, e.g.,
ABA Members Suggest Modifications To Proposed Amendments of
Tax Court Rules, 97 Tax Notes Today 167-25 (August 28, 1997).
But there is no such requirement within the IRC or the Tax
Court’s rules. Like the process by which an STJ’s report is
composed and then withheld, I find this rulemaking procedure
oddly out of sync with prevailing practices in other areas of the
law. Compare 28 U.S.C. § 2071(b) (“Any rule prescribed by a
court, other than the Supreme Court, under subsection (a) shall
be prescribed only after giving appropriate public notice and an
opportunity for comment.”) and Fed. R. App. P. 47(a)(1) (“Each
court of appeals acting by a majority of its judges in regular active
service may, after giving appropriate public notice and opportu-
nity for comment, make and amend rules governing its practice.”)
with 26 U.S.C. § 7453 (“[T]he proceedings of the Tax Court and its
divisions shall be conducted in accordance with such rules of
practice and procedure (other than rules of evidence) as the Tax
Court may prescribe.”) and Tax Court Rule 1(a) (“Where in any
instance there is no applicable rule of procedure, the Court or the
Judge before whom the matter is pending may prescribe the
procedure, giving particular weight to the Federal Rules of Civil
Procedure to the extent that they are suitably adaptable to govern
the matter at hand.”).
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,                83
     01-4321, 01-4322, & 02-1220

rule in question, adopting its current form as Rule 183,3 and
noted that “[t]he prior provisions for service of the [STJ]’s
report on each party and for the filing of exceptions to that
report have been deleted.”4 81 T.C. 1070 (1983). The Tax
Court has never documented any explanation of why this
amendment was undertaken. The Tax Court’s power to
prescribe its own rules of procedure is undisputed. 26
U.S.C. § 7453. And although the Tax Court is no longer an
executive agency, see Freytag v. Commissioner, 501 U.S.
868, 887-88 (1991) (noting that in 1969 Congress removed
the Tax Court from the realm of executive agencies and
made it an Article I court), it is clear, and Kanter does not
dispute, that the Tax Court’s interpretation of its own rules
of procedure receives a great deal of deference. Therefore,


3
    Current Tax Court Rule 183(c) provides:
      Action on the Report: The Judge to whom or the Division to
      which 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.
4
  One interesting detail involves the timing of the Stone decision
and the change in current Rule 183. Stone involved events in the
1960’s and a Tax Court trial in the 1970’s (all events before
the 1983 amendment of Rule 183), but the court of appeals
decision is from 1989, well after the amendment. So, although the
court was dealing with a case where the STJ’s report was part
of the record, it made the noted comment concerning the Tax
Court’s ability to amend the Tax Court rules at a time when
that court had already done so. But the court of appeals decision
made no mention of that amendment.
84       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

the 1983 amendment to the Tax Court rules had the effect
of no longer requiring that parties (or the general public or
a reviewing court, for that matter) have access to the STJ’s
report.
  Kanter notes, however, that the language of the earlier
rule that prompted the clearly erroneous standard in
Stone remains unchanged. The Tax Court judge still “shall”
give “[d]ue regard” to the fact that the STJ had the op-
portunity to hear and evaluate the credibility of the wit-
nesses, and the STJ’s recommended findings of fact still
“shall be presumed to be correct.” Tax Court Rule 183(c).
This language, according to Kanter, still commands the
Tax Court judge to whom the STJ’s report is submitted
to adopt the STJ’s findings unless the findings are clearly
erroneous.5 And there certainly appears to be some con-
sensus in the literature that the Rule still embodies a
clear error standard. See, e.g., 35 Am. Jur. 2d Fed. Tax
Enforcement § 905 (2002) (“The Tax Court is required
to review a special trial judge’s factual findings according
to the clearly erroneous standard, and cannot overturn
a special trial judge’s ruling on the basis that the Tax
Court finds the testimony credited by the trial judge to
be unbelievable.”); 20A Federal Procedure, L. Ed., Internal
Revenue § 48:1274 (2000) (same); but see Tax Court Litiga-
tion, 630-2nd Tax Mgmt. Portfolio at A-49 n.599 (1997)
(“The D.C. Circuit (but not the Tax Court) has taken the
position that the level of deference is to review the Special
Trial Judge’s draft opinion on a ‘clearly erroneous’ stan-
dard.”). However, I agree with the majority’s conclusion


5
  The Stone court, in fact, stated in its interpretation of the due
regard and presumed correct language, that “until the [tax] court
adopts new language, it must hew to the meaning of what it
has said.” Stone, 865 F.2d at 347.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,         85
     01-4321, 01-4322, & 02-1220

that this is no longer the case, and I have nothing addi-
tional to add to its reasoning on the matter.
  Therefore, like the majority, I also do not believe that
Tax Court Rule 183 requires an STJ’s report to be re-
viewed under a clearly erroneous standard, nor that
Rule 183 is violated by a quasi-collaborative process of
revision of an STJ’s report, nor that the Rule requires the
production of the report. In spite of this I must again note
how remarkable it is that not only is the Tax Court unique
in the opacity of its process, but it has arrived at this
opaque process by abandoning a transparent process—
an evolution completely counter to the trend towards
transparency in analogous areas of the law. See, e.g., Elena
Kagan, Presidential Administration, 114 Harv. L. Rev.
2245, 2331-32 (2001) (describing new theory of admin-
istrative control in which author notes that transparency
is a core value of administrative procedure). There is no
public indication why the Tax Court rules and proce-
dures were changed in 1983 to the current system that
disadvantages those appealing Tax Court decisions. And, of
course, an appellate-style procedure such as that typical
in all other areas of federal administrative adjudication
would facilitate challenges, whether made by the taxpayer
or by the Commissioner. The previous procedure may
well have been abrogated for exactly this reason.


  2. Is the Tax Court’s procedure otherwise unlawful?
  The majority quite ably and clearly outlines why exist-
ing rules and statutes do not appear to compel inclusion
of the STJ’s report in the record on appeal. In doing so, the
majority places significant weight on the Commissioner’s
argument analogizing the STJ-Tax Court judge relation-
ship to the division-Tax Court relationship governed by
26 U.S.C. § 7460, in which a division’s preliminary report
86       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

is never made public if the Tax Court reviews the case
and issues its own opinion. Before moving on to the meatier
due process issues, I want to note that this analogy,
however, overlooks some important considerations. First,
a division whose report is reviewed by the Tax Court has
the opportunity to file a dissent from the Tax Court’s final
decision and place in that dissent any of its objections—
objections that could, in theory, include the division’s
overruled findings that were contained in its original
report. Thus, those original findings can be made public,
albeit in a roundabout manner, if the division wants
them to be. An STJ’s original report is never made public.
   Second, § 7460 differs significantly from Rule 183 in that
it does not require “due regard” for the fact that the divi-
sion has heard witnesses and evaluated credibility (per-
haps because the division may not have been the adjudica-
tor who heard the witnesses), nor does § 7460 require
any presumption that the division’s report is correct. In
contrast, Rule 183 requires both due regard and a pre-
sumption of correctness for the STJ’s report. Therefore, to
the extent that the Tax Court’s final opinion must, under
Rule 183, accord some kind of respect to the STJ’s original
findings, the STJ’s original report has some ongoing
significance, whereas the division’s report is of no conse-
quence in the formulation (or appellate review) of the
Tax Court’s opinion.
  Third, since the division may not have conducted the trial
nor heard the witnesses, a policy of deference to such an
adjudicator would not necessarily be appropriate. By
contrast, an STJ is always the person who hears wit-
nesses and, for that reason, is an adjudicator entitled to
deference. Again, this raises the significance of the original
STJ’s report to the ultimate adjudication and review of
the case in a way not present with a division’s report.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,              87
     01-4321, 01-4322, & 02-1220

  And finally, the relationship between a division and the
Tax Court is far different from the relationship between an
STJ and the Tax Court. Tax Court judges are all, essen-
tially, equal. They are presidentially appointed for statuto-
rily mandated 15 year terms, and they each have an equal
vote in the business of the Tax Court. 26 U.S.C. §§ 7443,
7444. An STJ is appointed at the discretion of the Chief
Judge and has no statutorily mandated term of office. 26
U.S.C. § 7443A. Congress has authorized specific and
limited means for removing a Tax Court judge from office:
“Judges of the Tax Court may be removed by the President,
after notice and opportunity for public hearing, for ineffi-
ciency, neglect of duty, or malfeasance in office, but for no
other cause.” 26 U.S.C. § 7443(f). There is no such statutory
protection for STJs. Ultimately, keeping a division’s pre-
liminary report secret appears less problematic given the
division’s almost unfettered ability to make its wishes
clearly known in the final opinion without concern for
job security or reprisal. However, an STJ serves at the
discretion of the Tax Court, and his or her judicial inde-
pendence is therefore quite circumscribed. Only by allow-
ing access to the original STJ’s report can the Tax Court
insulate itself from the perception that an STJ’s “findings”
are arbitrarily malleable at the discretion of the Tax Court.6


6
   I am not suggesting that, in this case or in general, the judges
of the Tax Court coerce or exert undue influence over STJs. The
judicial independence of finders of fact, however, is a structural
principle. The statutes and Tax Court Rules establishing and
utilizing STJs lack the structure of judicial independence we
find in, for example, our Article III courts. One way of imposing
a structural modicum of judicial independence on the Tax
Court would be through transparency and judicial review—
providing access to the STJ’s original report would allow for
judicial independence without compromising the procedures of
                                                     (continued...)
88       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

  In addition, there are other provisions of the Internal
Revenue Code that, at the very least, show that Congress
did not demonstrate a clear intent to keep STJ reports
secret—unlike the clear intent to keep division reports
private that is shown in § 7460. 26 U.S.C. § 7459(b) states
that the “Tax Court shall report in writing all its find-
ings of fact, opinions, and memorandum opinions.” Addi-
tionally, 26 U.S.C. § 7461(a) states that “all reports of the
Tax Court . . . shall be public records,” and 26 U.S.C. § 7462
states that the “Tax Court shall provide for the publication
of its reports at the Government Printing Office in such
form and manner as may be best adapted for public infor-
mation and use. . . .” While the majority is correct that
there are no rules or statutory sections that specifically
require that the initial report of the STJ be made public,
there are, by the same token, no sections that forbid that
the report be made public—in contrast to § 7460’s clear
intent to keep private a division report that is reviewed
by the full Tax Court. And §§ 7459, 7461 and 7462 appear
to establish a strong presumption in the IRC in favor of
public dissemination of Tax Court documents that, appar-
ently, could easily apply to the STJ’s report. Only a
formalistic interpretation by the Tax Court that the STJ’s
report is not a “report of the Tax Court” allows it to avoid
such a presumption.



6
  (...continued)
the Tax Court. This is the same procedure prescribed by the
Administrative Procedure Act, which requires the report of the
ALJ who heard the witnesses to be prepared and filed for public
enlightenment. To describe the STJ system and lament its lack
of structured judicial independence does not suggest that I
am impugning the integrity of the distinguished members of
the Tax Court. And this dissent should certainly not be inter-
preted in that way.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,          89
     01-4321, 01-4322, & 02-1220

    3. Does the Tax Court’s procedure violate due process?
  Due process requires that Kanter have been afforded
a fair hearing before he is deprived of property. Mathews
v. Eldridge, 424 U.S. 319, 333 (1976). Notice and an
opportunity to be heard are the hallmarks of a fair hear-
ing. Mullane v. Central Hanover Bank & Trust Co., 339
U.S. 306, 313 (1950). The Supreme Court in Raddatz
reiterated the three part test announced in Mathews
for evaluating due process protections:
     [T]hree factors should be considered in determining
     whether the flexible concepts of due process have
     been satisfied: (a) the private interests implicated; (b)
     the risk of an erroneous determination by reason of
     the process accorded and the probable value of added
     procedural safeguards; and (c) the public interest
     and administrative burdens, including costs that the
     additional procedures would involve.
Raddatz, 447 U.S. at 677 (citing Mathews, 424 U.S. at 335).
In the context of the present case, one would need to
determine whether a quasi-collaborative process wherein
the ultimate finder of fact, who has not heard the wit-
nesses herself, can amend, revise or reverse the prelimi-
nary findings of the person who actually heard the wit-
nesses (and never reveal those preliminary findings)
without running afoul of the Fifth Amendment. This
comprises two separate questions: (1) must the Tax Court
review the STJ’s findings with a formal degree of defer-
ence (such as clear error); and (2) must the Tax Court it-
self hear witnesses to determine issues of credibility be-
fore reversing the STJ?7


7
  Kanter has separated these two oft intertwined concepts in
his arguments when he alleges that 1) the Tax Court owes the
                                                (continued...)
90       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

   As Raddatz and Universal Camera make clear, at one
end of the due process spectrum—the general administra-
tive law context—due process does not require that the
ultimate fact finder be constrained by a formal degree of
deference to the original hearing officer. Nor must that
fact finder rehear witnesses before making findings,
whether or not the fact finder reverses the original hearing
officer’s findings. See Id. at 680 (“Generally, the ultimate
factfinder in administrative proceedings is a commission
or board, and such trier has not heard the witnesses tes-
tify. . . . While the commission or board . . . may defer to the
findings of a hearing officer, that is not compelled.”);
Universal Camera Corp. v. NLRB, 340 U.S. 474, 492-94
(1951); see also 5 U.S.C. § 557(b) (“On appeal from or re-
view of the initial decision, the agency has all the powers
which it would have in making the initial decision. . . .”);
Kenneth Culp Davis & Richard J. Pierce, Jr., Administra-
tive Law § 8.6, at 396 (3d ed. 1994) (noting that the com-
mand of Morgan v. United States, 298 U.S. 468, 481 (1936),
that “the one who decides must hear,” “did not mean that
an agency head who decides must listen to the witnesses
testify”).
  At the other end of the due process spectrum lies the
criminal procedure context, where due process protections


7
   (...continued)
STJ a formal degree of deference and 2) the Tax Court cannot
change the STJ’s findings without having heard the witnesses.
Once it is determined that, under the Fifth Amendment, the Tax
Court can act as an original fact finder and determine facts
de novo, then one must ask whether the method of conducting
that factual determination can be done based on a transcript
of witness testimony or only by actually hearing the witnesses
first hand. The first question may or may not be a pure pro-
cedural due process question, but its answer is clear and it
serves to frame the more difficult second question for analysis.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,               91
     01-4321, 01-4322, & 02-1220

are the most demanding. First, regarding deference, the
Supreme Court in Raddatz did not directly address the
issue, but the Federal Magistrates Act under review
required the district court to conduct a de novo review
of the magistrate judge’s findings, and the Court took no
issue with that standard of review, even for credibility
findings. This parallels the administrative context, and
demonstrates, I believe, that along the full continuum
of due process concerns framed by Raddatz and Universal
Camera, there is no per se due process violation when
the ultimate finder of fact reviews preliminary findings
de novo. Therefore, I agree with the majority that the
Fifth Amendment does not require that the Tax Court
review STJ findings using any particular degree of defer-
ence. This means also that there is no constitutional
requirement that the Tax Court use an appellate-style
review of its STJs’ reports. In this respect, the quasi-
collaborative model adopted by the Tax Court is permis-
sible.
  Second, what about the rehearing of witnesses in a
criminal procedure context? While, under the Mathews
analysis, the interests of a criminal defendant in a sup-
pression hearing are not as significant as they may be in
a full criminal trial, they are significant enough that
the Supreme Court issued a warning that “serious ques-
tions” existed in the situation wherein a district court
judge reversed a magistrate judge’s dispositive credibility
findings without hearing the witness herself. Raddatz,
447 U.S. at 681 n.7.8 Several of our sister circuits have


8
    Footnote 7 in Raddatz states in relevant part:
      “The issue is not before us, but we assume it is unlikely that
      a district judge would reject a magistrate’s proposed find-
      ings on credibility when those findings are dispositive and
                                                      (continued...)
92         Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                               01-4321, 01-4322, & 02-1220

found that these “serious questions” have a single answer:
a district court judge cannot reverse a magistrate’s credibil-
ity findings without hearing the witness at issue. See, e.g.,
United States v. Cofield, 272 F.3d 1303, 1305-06 (11th
Cir. 2001); Hill v. Beyer, 62 F.3d 474, 482 (3d Cir. 1995);
United States v. Rosa, 11 F.3d 315, 328-29 (2d Cir. 1993);
In re Hipp, Inc., 895 F.2d 1503, 1519-21 (5th Cir. 1990); see
also United States v. Mejia, 69 F.3d 309, 316-20 (9th Cir.
1995) (finding that footnote 7 of Raddatz applied to a
suppression hearing where the judge making the ruling
received no findings on credibility from the judge who
heard the witnesses’ testimony; the court ruled it was a
due process violation to make such a ruling without hav-
ing heard the witnesses).
  However, as the Commissioner points out, the interests
in Raddatz were more significant because that case in-
volved an aspect of a criminal trial, and the proceed-
ings before the Tax Court are eminently civil. Under the
Mathews framework, the private concerns involved in a
civil proceeding are not entitled to the same level of due
process protection as the concerns in a criminal proceeding,
just as Raddatz notes that within a criminal proceeding
a suppression hearing embodies a lower interest than
other aspects of a criminal trial. See Bristol-Myers Squibb
Co. v. McNeil-P.P.C., Inc., 973 F.2d 1033, 1045 (2d Cir.
1992) (“Moreover, we have indicated that the Raddatz dicta
may be inapplicable outside the criminal context. . . .”).
  While it is not an easy issue, I believe that the interests
at stake in a civil tax court proceeding do not rise to the


8
    (...continued)
       substitute the judge’s own appraisal; to do so without seeing
       and hearing the witness or witnesses whose credibility is
       in question could well give rise to serious questions which
       we do not reach.”
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,              93
     01-4321, 01-4322, & 02-1220

level addressed in Raddatz, and are more analogous to the
interests involved in an administrative adjudication.
There certainly is some cause for concern that a finding
of credibility on a “cold record” as voluminous as the one
before us here increases the chance of an erroneous deter-
mination, but I do not believe that that possibility in this
kind of civil proceeding is as high, nor the costs as great,
as would be the case in a criminal milieu. Additionally,
I would note that the only fully responsive remedy would
be to require the Tax Court itself to rehear the witnesses
whose credibility was at issue. Under the third prong of
the Mathews test this added procedure would probably
be an enormous burden and impose a prohibitive cost. The
added value of such procedure under the second prong of
Mathews seems insubstantial, especially given that the
quasi-collaborative model can provide the Tax Court
with ongoing access to the thoughts and impressions of the
STJ who actually heard the witnesses. Additionally, I
believe that one possible advantage of the quasi-collabora-
tive process (over standard appellate-style review) might
be an opportunity for the STJ to have additional input
into the decision making process beyond her original
report.9 This opportunity should do something to mini-


9
  However, I reiterate that the judicial independence of the STJ,
who serves at the discretion of the Tax Court, is suspect. The
structure of the STJ process does nothing to expressly preserve
the voice or influence of an STJ in the formulation of the final
opinion. Therefore, I do not accord a great deal of weight to the
influence of the STJ over the Tax Court’s review of the STJ’s
report. In this way I differ not only from the majority, but
also from the conclusion of the Eleventh Circuit, which analogizes
a Tax Court judge’s conferring with an STJ to members of an
appellate panel conferring with one another. See Ballard, 321 F.3d
at 1043. In the Tax Court situation, only one of the conferees
                                                     (continued...)
94        Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                              01-4321, 01-4322, & 02-1220

mize the risk of an erroneous determination.
  Hence, the dictum in Raddatz’s does not persuade me
that the reversal of an STJ’s findings by the Tax Court
following a quasi-collaborative procedure violates due
process. In a real sense, my writing to this point has
been more concurrence than dissent. But I feel it very
important to navigate these areas of agreement in order
to properly prepare for the pivotal area of disagreement,
where I part ways with the majority.


    4. Does appellate review of the Tax Court’s findings
       without access to the STJ’s report violate due pro-
       cess?
  There is another stage of procedure involved here (and
a key one from my perspective) that requires due proc-
ess analysis—appellate review of the Tax Court’s decision.
Whether or not the STJ’s report is made available to the
parties for comment before the Tax Court issues its find-
ings, and whether or not the Tax Court can reverse the
STJ’s purportedly dispositive credibility findings with-
out having heard the relevant witnesses, the question
still remains whether or not the due process rights of
the parties before this court are violated when we have
no opportunity to review the Tax Court’s factual findings
for clear error in light of the STJ’s initial report. See Evitts
v. Lucey, 469 U.S. 387, 393 (1985) (there is no constitu-
tional right to appeal, but once a right of appeal is created,
it must comport with due process to be meaningful and



9
  (...continued)
has attended the trial and heard the witnesses and the conferees
are not of equal rank nor do they possess an equal degree of
judicial independence.
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,               95
     01-4321, 01-4322, & 02-1220

effective). This question distinguishes the issue whether
the Tax Court’s procedures are intrinsically unfair (which
neither I nor the majority believe is true) from the issue
whether the Tax Court’s procedures are unreviewable
(on which the majority and I disagree).10 The essential
difference is that the Tax Court has the report; we do not.
  Our review of the Tax Court is governed by the same
standards as those governing our review of a district court’s
civil bench trial; this means that legal conclusions are
reviewed de novo and findings of fact are reviewed for
clear error. See 26 U.S.C § 7482(a); Pittman v. Commis-
sioner, 100 F.3d 1308, 1312-13 (1996). Obviously, we do
not need access to the STJ’s report to conduct meaning-
ful de novo review of the Tax Court’s legal conclusions. But
clearly erroneous review involves deference to the con-
clusions of the fact finder—the Tax Court in the present
case. This is a deference that the Supreme Court has
attributed, in the case of credibility, to the fact finder’s first-
hand observations of the witnesses in question.
     [A] finding is “clearly erroneous” when although there
     is evidence to support it, the reviewing court on the
     entire evidence is left with the definite and firm con-
     viction that a mistake has been committed.
     ....
       When findings are based on determinations regarding
     the credibility of witnesses, [the clearly erroneous


10
   This question does not depend upon the Tax Court’s being
required to give some level of formal deference to the STJ’s report.
Although the question before us would be much easier to answer
if such a requirement existed, I am asking the more fundamental
question whether our clear error review of the Tax Court’s
findings can be meaningful without the context of the STJ’s report
to inform that review.
96        Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                              01-4321, 01-4322, & 02-1220

     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 v. City of Bessemer City, N.C., 470 U.S. 564, 573,
575 (1985) (citations omitted). Thus, it is integral to the
standard of clear error review that there be deference to
the credibility findings of the official who has actually
heard the witnesses. Although the Supreme Court in
Anderson was discussing the deference due a finder of fact
who has, himself, heard the witnesses, I think the Court’s
command is also instructive in two ways. First, on its face
Anderson instructs that on issues of credibility the op-
portunity to hear witnesses is significant in a clear error
context. Second, Anderson informs that context by im-
pliedly undermining the reliability of findings that re-
verse the credibility determinations of an official who has
actually heard the witnesses. If we are to give “even
greater deference” to the findings of a judge who has
heard the witness whose credibility is at stake, we must
inevitably give less deference to the judge who subse-
quently reverses those findings.
  I find major support for this line of thinking in the
administrative law arena.11 In the administrative context,


11
  Most review of administrative agency determinations or ad-
judications is done under the “substantial evidence” standard. The
clear error standard, which we apply to the review of district
court as well as Tax Court factual findings, is virtually indis-
tinguishable from the substantial evidence standard. See School
District of Wisconsin Dells v. Z.S., 295 F.3d 671, 674 (7th Cir.
2002) (“ ‘[T]he difference [between clear error and substantial
evidence] is a subtle one—so fine that . . . we have failed to
                                                      (continued...)
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,               97
     01-4321, 01-4322, & 02-1220

the Administrative Procedure Act requires that a review-
ing court examine an agency determination based on a
record that includes any preliminary findings from the
hearing officer (like an Administrative Law Judge (ALJ)).12
5 U.S.C. §§ 557(b), 706. When a reviewing court reviews
agency findings on credibility for substantial evidence, it
is strongly influenced by the preliminary findings of
the ALJ who actually heard the witnesses—influence that
becomes even more significant when an agency has re-
versed those preliminary credibility findings. See Kopack v.
NLRB, 668 F.2d 946, 953 (7th Cir. 1982) (“One must at-
tribute significant weight to an ALJ’s findings based on
demeanor because neither the [NLRB] nor the reviewing
court has the opportunity similarly to observe the testify-
ing witnesses.”); Moore v. Ross, 687 F.2d 604, 609 (2d Cir.
1982) (“Accordingly, reviewing courts have often found
federal decisions unsupported by substantial evidence
when they hinge on assessments of credibility contrary
to those made by the ALJ who heard the witnesses.”); Ward
v. NLRB, 462 F.2d 8, 12 (5th Cir. 1972) (“The preeminence
of the Examiner’s conclusions regarding testimonial probity


11
   (...continued)
uncover a single instance in which a reviewing court conceded
that the use of one standard rather than the other would in
fact have produced a different outcome.’ ”), quoting Dickinson
v. Zurko, 527 U.S. 150, 162-63 (1999); see also Tripp v. Commis-
sioner, 337 F.2d 432, 434 (7th Cir. 1964) (using both “clear error”
and “substantial evidence” in reference to review of Tax Court’s
findings of fact). Therefore, I look for guidance to the admin-
istrative law context, in which reviewing courts examine admin-
istrative agency determinations (including adjudications).
12
  And again, in the administrative context an agency can make
factual findings de novo, regardless of any preliminary findings,
much as the Commissioner claims the Tax Court can do with
respect to an STJ’s report.
98       Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

does not amount to an inflexible rule that either the Board
or a reviewing court must invariably defer to his decision,
thereby effectively nullifying either administrative or
judicial review. But when the Board second-guesses the
Examiner and gives credence to testimony which he has
found—either expressly or by implication—to be inherently
untrustworthy, the substantiality of that evidence is
tenuous at best.”).
  The Supreme Court in Universal Camera best summa-
rized the philosophy behind this process: “We intend only
to recognize that evidence supporting a conclusion may
be less substantial when an impartial, experienced exam-
iner who has observed the witnesses and lived with the
case has drawn conclusions different from the Board’s
than when he has reached the same conclusion.” 340 U.S.
at 496. This is never more the case than when the issue
is one of credibility. As the Supreme Court said in
Raddatz, it is within the context of credibility that find-
ings based on a “cold record” are most suspect if they
differ from the findings of the one who actually heard the
witnesses in question.
       To be sure, courts must always be sensitive to the
     problems of making credibility determinations on the
     cold record. More than 100 years ago, Lord Coleridge
     stated the view of the Privy Counsel that a retrial
     should not be conducted by reading the notes of the
     witnesses’ prior testimony:
     “The most careful note must often fail to convey the
     evidence fully in some of its most important ele-
     ments. . . . It cannot give the look or manner of the
     witness: his hesitation, his doubts, his variations of
     language, his confidence or precipitancy, his calmness
     or consideration; . . . the dead body of the evidence,
     without its spirit; which is supplied, when given openly
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,          99
     01-4321, 01-4322, & 02-1220

    and orally, by the ear and eye of those who receive
    it.” Queen v. Bertrand, 4 Moo.P.C.N.S. 460, 481, 16
    Eng.Rep. 391, 399 (1867).
Raddatz, 447 U.S. at 679-80. And unlike Raddatz, in the
present case we are dealing with a full trial by a judge
on the merits, albeit a civil trial (on the “quasi-criminal”
issue of fraud), and not an ancillary motion to suppress.
Additionally, the present case was inordinately long
and complicated, and the resolution of issues required the
synthesis of multiple witnesses’ testimony that was sepa-
rated by days or even weeks (and by hundreds or thou-
sands of pages in the transcript). Whatever advantage is
to be gained by a first-hand observation of witnesses is
multiplied exponentially when the trial is so long and
the transcript so voluminous. The detailed interconnec-
tion of the credibility of different witnesses on different
factual issues makes the accumulated impressions of
the presiding officer irreplaceable. 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 trial.
  The difficulty comes in determining how and when
this concern rises to the constitutional level of due process.
No court of which I am aware has ever considered the
ramifications of an agency’s swallowing and refusing to
regurgitate a preliminary factual finding in the manner
done by the Tax Court here. The reason for this is clear: the
Administrative Procedure Act requires the publication of
such findings for executive agencies. And no court that
I could find has ever discussed the availability of prelimi-
nary findings as being related to due process protections.
Only Universal Camera’s dicta on the value of the pre-
liminary findings comes close, and the Supreme Court
there clearly based its decision in the language of the
Administrative Procedure Act.
100      Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                             01-4321, 01-4322, & 02-1220

  However, under the three-part test of Mathews and
Raddatz, I think it not unreasonable to invoke due proc-
ess in this context at the appellate court level of review.
Under the first prong of Mathews, I note again that
the quasi-criminal nature of fraud is a more significant
private interest than a simple civil determination, but
not as weighty an interest as in the criminal suppression
hearing in Raddatz. Under the second prong, however,
I believe the risk of error here is greater and the value of
the added procedural safeguard (the STJ’s report) is
higher in this context. Without the STJ’s report we would
be reviewing deferentially a credibility finding made by
the Tax Court based on a cold record (albeit with the
theoretical collaboration of the STJ who actually heard
the witnesses) based on our own analysis of that same
cold record. The precedents noted in the administrative
context (as well as Universal Camera) clearly demon-
strate how valuable preliminary findings are for review
in cases like the present one. Under the Mathews test’s
third prong, the added cost and administrative burden in
this instance is de minimis—publishing the STJ’s report.
On balance, I believe strongly that the absence of the
STJ’s report in the record for our consideration of the Tax
Court’s decision creates legitimate due process concerns
with respect to our review.
  What throws a real analytical monkey wrench into all
of this is that the result of the collaborative process in the
Tax Court is an opinion that, allegedly, represents the
“opinion” of the STJ (but not, I repeat, the “report” of the
STJ). What this could mean is that the collaboration of
the Tax Court with the STJ has produced an opinion that
represents the revised and true legal opinions and find-
ings of the STJ. The original report, by necessity therefore,
would no longer be a valid statement of the STJ’s findings
inasmuch as it differed from the final opinion. Therefore, to
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,       101
     01-4321, 01-4322, & 02-1220

the extent that due process is concerned with the changes
that the Tax Court makes to the findings contained in
the STJ’s report (which would represent points of dis-
agreement between the Tax Court and the STJ), those
concerns are balanced by the fact that the STJ does not
actually disagree with those changes and, in fact, has
certified to their correctness by signing off on the opinion.
I could, in the best of all possible worlds, liken this to
a learning process whereby the original impressions of
the STJ are tempered through the collaborative process
with the Tax Court, and, I would assume, the Tax Court’s
opinions would be molded and informed by the first-hand
impressions of the STJ. Whatever limitations on review
this process entails would be balanced by the fact that
the STJ does not still hold opinions or findings in con-
flict with those represented in the opinion. In such a
world, it no longer seems so strange that every Tax Court
case involving an STJ resulted in an opinion that agreed
with and adopted the opinion of the STJ—the final opin-
ion represents a compromise between the positions both
of the Tax Court judge and of the STJ. (This view of things
would still remain somewhat disingenuous because the
Tax Court opinion’s language clearly seeks to imply that
the opinion represents the original report of the STJ.)
I believe that this is, more or less, the position taken by
the majority.
  The obvious rejoinder to this utopian view of the Tax
Court’s process is to point out what I have already noted:
the STJs are not equal to the Tax Court judges and it
might be naive to assume that the STJs have an equal
voice in the collaborative process that results in Tax Court
opinions. The result is a system whereby the Tax Court
maintains total discretionary control over the function of
STJs but expects a reviewing court to simply accept at
face value the declaration that the opinion is the opinion
102     Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,
                            01-4321, 01-4322, & 02-1220

of the STJ. On the one hand, I certainly do not believe
that the Tax Court is prevaricating and forcing STJs to
cooperate under the express threat of unemployment.
However, judicial independence in the context of due
process is not a principle to be taken lightly, and its ab-
sence has consequences. The fact is that this entire proc-
ess of the Tax Court appears designed to extract the
efficiencies involved in designating cases to be heard by
STJs without having to bear any of the procedural costs
traditionally associated with this kind of adjunct decision-
making (e.g., transparency). I do not believe that the
STJ’s ultimate assent to the final opinion of the Tax Court
is protection enough to the parties. The majority does.
  Because I dissent, I do not have to articulate a final
outcome, but merely note that I find a due process viola-
tion. However, the solution is simple in theory. The due
process violation is avoided by interpreting 26 U.S.C.
§§ 7459, 7461 and 7462 so as to require publication of the
STJ’s original report as a report of the Tax Court. See
Edward J. DeBartolo Corp. v. Florida Gulf Coast Bldg. &
Const. Trades Council, 485 U.S. 568, 575 (1988). This
appeal would be stayed to allow the STJ’s original report
to be made part of the record. It is significant to sum-
marize what I do not say here. I do not believe that due
process requires that the parties be allowed to file objec-
tions to the STJ’s report before the issuance of the Tax
Court’s opinion. Nor do I necessarily believe due process
requires that the STJ’s report be made public before
the Tax Court issues its ultimate opinion. But by eventually
making the STJ’s report public (and part of the avail-
able record of the Tax Court on appeal), this court will
have an opportunity to conduct meaningful appellate
review. Further, this is a procedural result that may
benefit all parties, including the Commissioner, not just
petitioners like Kanter—Tax Court decisions can very
Nos. 01-4316, 01-4317, 01-4318, 01-4319, 01-4320,        103
     01-4321, 01-4322, & 02-1220

easily reverse findings (credibility—related and other-
wise) of STJs in a manner that is detrimental to the Com-
missioner as well as to a petitioner.
  After all of these pages, what I find most interesting
is that I believe the majority and I are in complete agree-
ment on the central issue here—that the views of the STJ
matter. When I say that, however, I look at the structure
of the process under which the STJ’s views can be dis-
carded without leaving a trace and I find the glass half-
empty. The majority sees the verbal formula (“agrees
with and adopts”) and finds the glass half-full. I do not
believe that the concealment of the Tax Court’s revision
process behind that verbal formula allows this court
to conduct meaningful appellate review. I appear, at the
moment at least, to be alone in that belief. Therefore,
I respectfully dissent.13

A true Copy:
       Teste:

                        ________________________________
                        Clerk of the United States Court of
                          Appeals for the Seventh Circuit




13
  Although, again, I concur as to the part of the opinion con-
cerning the appeal of Naomi Kanter.


                   USCA-02-C-0072—7-24-03
