                                                         United States Court of Appeals
                                                                  Fifth Circuit
                                                                 F I L E D
              IN THE UNITED STATES COURT OF APPEALS
                                                                   July 30, 2003
                      FOR THE FIFTH CIRCUIT
                                                              Charles R. Fulbruge III
                                                                      Clerk

                           No. 01-60639


                              CONS/W
                        Case No. 01-60640
                        Case No. 01-60641
                        Case No. 01-60642


ESTATE OF ROBERT W. LISLE, Deceased; ESTATE OF DONNA M. LISLE,
Deceased,
                                      Petitioners-Appellants,

THOMAS W. LISLE, Independent        Co-Executor;   AMY   L.     ALBRECHT,
Independent Co-Executor,
                                           Appellants,

                               versus

COMMISSIONER OF INTERNAL REVENUE,
                                           Respondent-Appellee.




                  Appeals from a Decision of the
                     United States Tax Court




Before HIGGINBOTHAM, DUHÉ and DeMOSS, Circuit Judges.

HIGGINBOTHAM, Circuit Judge:

     Taxpayers appeal the judgment of the United States Tax Court

which found that they fraudulently failed to declare and pay tax on

approximately $1,280,000 of income.1      The court determined that

     1
       Donna M. Lisle was a participant in this dispute solely as
a result of having filed joint tax returns with Robert W. Lisle.
Both Robert and Donna Lisle’s estates were found liable for the
Robert W. Lisle, along with Claude M. Ballard and Burton W. Kanter,

earned the unreported income through an elaborate scheme involving

the sale of influence by Lisle and Ballard at Prudential Life

Insurance Co. of America, whereby Lisle and Ballard would direct

business to those persons who agreed to pay a commission on the

business   to     Kanter.   Through    numerous      transactions   involving

various    sham     corporations   and     trusts,     the   kickbacks   were

distributed among Lisle, Ballard, and Kanter in a 45-45-10 percent

split.

     The Lisles assert that the evidence does not support the

finding of fraud or the assessed deficiencies.               They also allege

that their due process rights were violated by the application of

Tax Court Rule 183, whereby the Tax Court Judge reviewed the

findings of the Special Trial Judge without making the findings of

the Special Trial Judge available to them or this court.             After an

exhaustive review of the record, we find that the Tax Court clearly

erred in determining that the government proved a deficiency due to

fraud by clear and convincing evidence.               However, the evidence

supports the assessment of a deficiency under the less strenuous

standard of a preponderance of the evidence, and we therefore

affirm the deficiencies for those years not barred by the statute

of limitations.      Finally, we decide that the application of Rule

183 did not violate the Lisles’ right to due process.

                                      I.


income tax deficiencies, while only Robert Lisle’s estate was found
liable for the fraud penalties and penalty interest.
       It is well settled that “the courts afford IRS determinations

of deficiency a presumption of correctness.”2                                To rebut this

presumption,       “the       taxpayer      bears    the    burden      of   proving      by a

preponderance of the evidence that the determination is arbitrary

and erroneous.”3              Once the taxpayer has established that the

assessment is arbitrary and erroneous, “the burden shifts to the

government to prove the correct amount of any taxes owed.”4                                 In

addition,        when    the       Commissioner     in     his    Tax    Court     pleadings

increases the deficiency asserted against the taxpayer, he bears

the burden of proof for the increase by a preponderance of the

evidence.5          We       review     the    Tax       Court’s        approval    of     the

Commissioner’s determination of taxable income for clear error.6

To    reverse      the       Tax    Court’s    approval      of    the       Commissioner’s

deficiency, we must find that the Tax Court clearly erred when it

determined        that       Lisle    failed    to       rebut    the     presumption       of

correctness of the Commissioner’s deficiency by a preponderance of

the   evidence,         or    that    the   Commissioner         failed      to   prove    the

additional deficiencies by a preponderance of the evidence.


       2
           Yoon v. Comm’r, 135 F.3d 1007, 1012 (5th Cir. 1998).
       3
           Id.
       4
           Portillo v. Comm’r, 932 F.2d 1128, 1133 (5th Cir. 1991).
       5
       See Tax Court Rule 142(a)(1) (which reads in part, “in
respect of any ... increases in deficiency ... pleaded in the
answer, [the burden of proof] shall be upon the respondent”);
Merino v. Comm’r, 196 F.3d 147, 151 (3d Cir. 1999) (stating that
any new matter must be proved by a preponderance of the evidence).
       6
           See Yoon, 135 F.3d at 1012.
     In addition to the deficiency, the Tax Court found that Lisle

was liable for a fraud penalty.     Pursuant to I.R.C. § 7454(a) and

Tax Court Rule 142(b), the Commissioner bears the burden of proof

with respect to the deficiencies in tax and penalties for fraud by

clear and convincing evidence.7     To sustain a fraud penalty Rule

142(b) requires proof by clear and convincing evidence both that an

underpayment exists, and that some portion of the underpayment is

attributable to fraud.8     In proving an underpayment by clear and

convincing evidence, “the Commissioner may not rely on a taxpayer's

failure to carry his or her burden of proof with respect to the

underlying deficiency.”9

     While we have observed that fraud must be proved by clear and

convincing evidence,10 we have never addressed the Tax Court’s rule

creating two elements, each of which must be proved by clear and


     7
       See I.R.C. § 7454(a) (“In any proceeding involving the issue
whether the petitioner has been guilty of fraud with intent to
evade tax, the burden of proof in respect of such issue shall be
upon the Secretary”); Tax Court Rule 142(b) (“In any case involving
the issue of fraud with intent to evade tax, the burden of proof in
respect of that issue is on the respondent, and that burden of
proof is to be carried by clear and convincing evidence”); Patton
v. Comm’r, 799 F.2d 166, 171 (5th Cir. 1986) (stating that “[t]he
Commissioner bears the burden of proving fraud, which must be
established by clear and convincing evidence”).
     8
       See Duncan & Assocs. v. Comm’r, 85 T.C.M. (CCH) 1428 (T.C.
2003) (stating that the Commissioner must prove both that an
underpayment exists and that some portion is attributable to
fraud); Aston v. Comm’r, 85 T.C.M. (CCH) 1260 (T.C. 2003) (same).
     9
          Duncan, 85 T.C.M. (CCH) 1428.
     10
       See, e.g., Patton, 799 F.2d at 171 (“The Commissioner bears
the burden of proving fraud, which must be established by clear and
convincing evidence.”).
convincing evidence.         Without challenge by the Commissioner of the

Tax Court’s reading of Rule 142(b), we assume that both the

underpayment and the fraud must be proved by clear and convincing

evidence to sustain the penalty.                Here there is a significant

functional overlap of the two elements, as the effort to prove

underpayment and fraud is sustained by much the same evidence -

establishing a kickback scheme to hide income proves both an

underpayment and points toward fraud, on our facts.

       We     review   the   Tax   Court’s   finding     that   there   was   an

underpayment of tax and that a portion of that underpayment was due

to fraud for clear error.11         We will sustain the penalty for fraud

unless we find that the Tax Court clearly erred when it determined

that        the   Commissioner,    by   clear    and    convincing   evidence,

established an underpayment by Lisle and that a portion of the

underpayment was attributable to fraud.

       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 conviction that a mistake has

been committed.”12       Whether a finding is clearly erroneous must be

viewed in light of the burden of proof.13              If the burden of proof


       11
        See Payne v. Comm’r, 224 F.3d 415, 421 (5th Cir. 2000)
(applying clearly erroneous standard to Tax Court’s finding of
fraud).
       12
       Anderson v. City of Bessemer City, 470 U.S. 564, 573 (1985)
(citation omitted).
       13
        See Concrete Pipe and Prods. of Cal., Inc. v. Constr.
Laborers Pension Trust, 508 U.S. 602, 623 (1993) (discussing the
is by the preponderance of the evidence, the Tax Court’s conclusion

that a deficiency was proved would not be clearly erroneous if the

Tax Court chose between competing inferences from the facts.14            The

same evidence may fail, however, to meet the requirement that proof

be clear and convincing.15

                                   II.

                                   A.

     The IRS mailed notices of deficiency for tax years 1984, 1987,

1988, and 1989 to Lisle and his wife on August 15, 1991, July 24,

1991, July 2, 1992, and April 5, 1993, respectively. In connection

with the   notices    of   deficiency,   the   Lisles   filed   actions    on

September 9, 1991, September 23, 1991, July 16, 1992, and April 16,

1993. The Tax Court consolidated the Lisles’ suit with twenty-four

additional Tax Court actions involving the other participants in

the alleged scheme.    After a five week trial, the Tax Court filed

a 600 plus page opinion and then entered final judgment in the four

cases concerning Lisle and his wife on July 24, 2001.           The Lisles

timely appealed.     Lisle and his wife died during the pendency of

the actions, and their estates were substituted as parties.               The



relationship between standards of review and burdens of proof).
     14
       Anderson, 470 U.S. at 574 (stating that “[w]here there are
two permissible views of the evidence, the factfinder's choice
between them cannot be clearly erroneous”).
     15
       See Marsellus v. Comm’r, 544 F.2d 883, 885 (5th Cir. 1977)
(stating that while the clearly erroneous standard applies to the
Tax Court’s finding of fraud, “we must judge the Tax Court’s
findings in light of the government’s burden of proving fraud by
‘clear and convincing’ evidence”).
following narrative is stated in the light most favorable to the

government.

                                          B.

     The income deficiencies stem from an elaborate scheme of

alleged influence selling, kickbacks, and money laundering through

sham corporations        and    trusts.        The    case       centers    around    five

business arrangements whereby Lisle, Ballard, and Kanter assisted

individuals in obtaining business opportunities or venture capital

from the Prudential Life Insurance Company of America.                               Lisle

worked for Prudential in real estate development and mortgage

financing from 1950 to 1982, and Ballard worked there from 1948 to

1982.    Between 1968 and 1970, they worked together in a regional

office   in    Houston,    Texas.      At      the        request   of     Donald    Knab,

Prudential’s     senior    vice-president            in    charge    of     real    estate

investments, both Lisle and Ballard moved to Prudential’s corporate

headquarter in Newark, New Jersey, in the early 1970s.

     As the head of real estate development from about 1975 to

1982, Ballard      had    the   ability     to    influence         the    selection    of

contractors and builders on projects.                      Ballard’s staff bought,

leased, and sold Prudential’s real estate and supervised the

property      managers    and    leasing       agents       of    that     real    estate.

Ultimately, Ballard became senior vice-president in real estate

operations – the highest position in Prudential’s real estate

operation – placing him in charge of all operations, acquisitions,
sales and portfolio management of the equity investments in real

estate.

      At   the   same     time,    Lisle   headed    Prudential’s    mortgage

operations and was responsible for lending money and buying and

developing real estate.         Lisle had authority to commit any loan up

to $20 million and to award construction contracts.              He conducted

his work through a subsidiary corporation of Prudential called PIC

Realty Corp. (PIC Realty), of which he was president.

      Kanter began practicing law in Chicago, Illinois, in 1956. At

the time of the trial and for the previous ten years, Kanter taught

courses in estate and gift taxation and estate planning at the

University of Chicago Law School.            He has written and lectured

extensively in the area of federal tax law.             As a result of his

expertise, Kanter had a highly successful law practice and was

involved in consultation, development, and investments in a number

of   business    fields   and     enterprises.      Kanter   represented   the

Pritzker family, who owned the majority of stock in the Hyatt

Corporation.     While at the opening of the Houston Hyatt Regency in

the early 1970s, Kanter met Lisle and Ballard.               Kanter and Lisle

invested in partnerships together, and Kanter’s law firm did estate

work and established insurance trusts for Lisle.

      Kanter established a number of corporations, partnerships, and

trusts allegedly to receive, distribute, and disguise illegal

kickbacks from five business arrangements at issue here.                These
five transactions and their principal participants are referred to

by the parties and the Tax Court as “the Five.”

       Most of the payments in this case initially were made through

Investment    Research     Associates,    Inc.    (IRA),    which     Kanter

incorporated in Delaware.      Solomon Weisgal, trustee of Kanter’s

family’s Bea Ritch Trusts, owned fifty percent of the company's

voting stock.    Mildred Schott, a legal secretary and real estate

broker, owned the remaining 50 percent of the voting stock.             Bea

Ritch Trusts owned 1,000 shares of common stock, and Schott owned

1,000 shares of class A preferred voting stock.            No individual,

business, estate, or trust owned more than fifty percent of the

corporation's total voting stock.        Delores Keating, a real estate

sales person, served as IRA’s president until 1975.            Schott was

president from 1975 to 1980.     Lawrence Freeman served as president

from 1980 to 1989.    Other officers of IRA included Sharon Meyers,

who was the company's secretary, and Patricia Grogan, who served as

a director.     It was Kanter, however, who controlled IRA at all

times,   directing   the   activities    of   Weisgal,   Schott,    Keating,

Freeman, Meyers, and Grogan.

       IRA employed only bookkeepers and paid no salaries in any year

other than 1981 and 1982, when it paid salaries of $9,969 and

$26,079, respectively.     It owned controlling interests in several

subsidiary corporations including Carlco, Inc., TMT, Inc., and BWK,

Inc.     As we will discuss, in 1983, IRA distributed all of its

assets to Carlco, TMT, and BWK in a 45-45-10 percent split, which
were thereafter managed respectively by Lisle, Ballard, and Kanter.

The government asserts that forty-five percent of the payments from

the Five to Kanter corporations were distributed to Lisle based on

this arrangement.

                                    C.

                                  - 1 -

      The first of the Five arrangements involves J.D. Weaver and

Hyatt’s contract to manage the Embarcadero Hotel in San Francisco.

Lisle and Ballard met Weaver, an officer of a Tenneco Corp.

subsidiary, in the late 1960s.     The Tenneco Corp. was working with

Prudential to build the Houston Hyatt during this time.              In the

early 1970s, Prudential participated in a joint venture to build

the San Francisco Embarcadero Hotel. Lisle supervised the building

of   the   Embarcadero   and   participated   in   the   selection    of   a

management company to operate it.

      Intercontinental Co., Del Webb Co., and the Hyatt Corporation

expressed interest in the contract.       A.N. Pritzker, who controlled

the Hyatt Corp., hoped to manage the Embarcadero because the hotel

would become the third or fourth Hyatt-operated hotel in the United

States at which major conventions would be held.         But Lisle was not

interested in a bid from Hyatt as Hyatt was simultaneously planning

a hotel to compete with the Embarcadero.           As a result, Pritzker

offered Weaver a share of the management fees if he assisted Hyatt.

Weaver then convinced Lisle to allow Hyatt to bid on the contract.
     Hyatt submitted the only bid and was awarded the Embarcadero

management    contract.     On   February     25,    1971,    Hyatt    agreed   to

compensate Weaver’s corporation, K.W.J. Corp., for Weaver’s help in

obtaining the contract.      Under the agreement, Hyatt was obligated

to pay KWJ ten percent of its net cash profits from the Embarcadero

management contract.      Pursuant to the agreement, Hyatt paid KWJ a

total of $2,589,710 for the 1976 through 1993 operating years.

     In 1976, Weaver and Kanter agreed that IRA would buy all of

KWJ’s outstanding stock for $150,000, plus annual payments of

thirty percent of KWJ’s commissions from the Embarcadero management

contract.     This agreement was framed as a four-year option to buy

KWJ’s stock. In a letter dated September 27, 1979, Kanter informed

Weaver   of   IRA’s   election   to    acquire      KWJ’s    shares,   effective

retroactively to November 1, 1978.            The purchase resulted in IRA

obtaining seventy percent of Hyatt’s commissions to KWJ, and

allowed IRA to control KWJ’s net worth, which was $115,084 as of

January 1, 1979.      As agreed, Weaver received thirty percent of the

commissions.

                                      - 2 -

     The second of the Five involved Bruce Frey, a certified

property manager, real estate broker, and insurance broker.                 Frey

did business through his company BJF Development, Inc., which

engaged in real estate development and management.                Frey was the

sole shareholder.      In the late 1970s, Kanter introduced Frey to

Ballard.      From that point on, Frey began doing business with
Prudential.      Frey's first condominium conversion project with

Prudential was the Village of Kings Creek, a 1,000 unit complex in

Miami, Florida, which was owned by a Prudential pension fund that

Ballard managed.       Prudential and BJF participated in five other

joint ventures:      Calais, Chatham, Old Forge, Valleybrook, and the

Greens. Prudential owned the properties and BJF converted them and

marketed and sold the units.

       Zeus Ventures, Inc., one of IRA’s wholly-owned subsidiaries,

was a limited partner in the Prudential and BJF partnership.                     Zeus

was to receive five percent of BJF’s developer’s fees and twenty

percent of its profits on all prior and subsequent condominium

conversions of Prudential properties.              Under this agreement, BJF

paid Zeus over $1,000,000 between 1980 and 1985.

                                        - 3 -

       The   third   arrangement    began       when   Kanter   invited    William

Schaffel, a real estate broker, to have dinner with Lisle and

Ballard in New York City in 1979.                Schaffel had previously met

Lisle briefly but had not done business with him.                 He had not met

Kanter or Ballard before the dinner.             At the meeting, Kanter asked

Schaffel if he wanted to arrange the financing for a casino hotel

to be built in Atlantic City, a deal which did not involve

Prudential.      Kanter   said     he    would    introduce     Schaffel    to   the

appropriate people in return for fifty percent of Schaffel’s fees

from   the   deal.     Schaffel     agreed,      but   the    transaction    never

materialized.
     Later, Schaffel agreed to give Kanter fifty percent of any

fees earned by doing business with Prudential. This agreement also

applied to finders fees that Schaffel obtained for procuring

business from Prudential for real estate developer Bill Walters and

for Torcon,     Inc.     Schaffel’s       first   deal    with   Prudential     was

negotiating    the     sale    of   the   IBM   headquarters        in   Lexington,

Kentucky, to Prudential.            Schaffel dealt with Ballard in its

initial stages, but as usual, the deal went through the local

Prudential office.       As agreed, Schaffel paid fifty percent of his

broker’s fee to IRA.

     In late 1979 or early 1980, Schaffel introduced Benedict

Torcivia, Torcon's sole shareholder and chairman of the board, to

Ballard.     Before this introduction, Torcon had done no business

with Prudential.        However, after the introduction, Torcon did

"quite a bit" of business with Prudential, also first approved by

the local Prudential office.           Schaffel also introduced Walters to

Prudential    executives       including     Ballard.         Schaffel     assisted

Walters’ companies in obtaining financing from Prudential for two

buildings located in Aurora, Colorado.                   Prudential agreed to

contribute about $30 million in financing to the Ramada Renaissance

Hotel project, and about $15.6 million to the Cherry Creek Place II

project.     In written agreements, Walters’ companies acknowledged

that Prudential participated in the ventures primarily as a result

of   Schaffel’s      efforts    and,      therefore,     he   was    entitled   to

compensation.
      Between 1979 and 1983, Schaffel paid IRA a total of $1,184,876

as a result of his business dealings with Prudential, which ended

when Ballard and Lisle left that company.             He then began doing

business     with   Travelers    Insurance   Co.,   Lisle’s   new   employer.

Although he initially paid IRA a portion of his fees for these

deals, he stopped making the payments.          Schaffel told Kanter that

the deals were not with Prudential, and were therefore not covered

by   their   agreement.     Kanter    persuaded     him   that,   because   he

continued to get business as a result of Kanter’s introduction of

Schaffel to Lisle, their agreement applied.                Schaffel resumed

making the payments, only now they were made to a different Kanter

corporation, Holding Co.

                                    - 4 -

      The fourth involves Kenneth Schnitzer.          During the 1960s and

1970s,   Kenneth     Schnitzer    conducted    business    through    Century

Development Corp. and was engaged in real estate development in

Houston, Texas.       In 1974, CDC acquired Fletcher Emerson Co., a

property management and cleaning company, for $1.3 million.             After

its purchase, Fletcher Emerson was renamed Property Management

Systems, Inc., and Schnitzer became the company's chairman of the

board and chief executive officer.

      In 1974, Schnitzer arranged a meeting with Ballard, whom he

first met when Ballard was working in Prudential's regional office

in Houston, and offered Prudential a fifty percent interest in some

PMS management contracts in return for more business opportunities
with Prudential.       Prudential declined because it managed pension

plans that owned some of the properties, and owning both the

property   and   the   property   management    company    would   create   a

conflict   of    interest.     Prudential      did    thereafter   give   PMS

additional business.

     Schnitzer then offered PMS stock to Kanter.             On November 7,

1977, three years after initially meeting with Ballard, and after

talking to Ballard about Kanter’s ability to send business to PMS,

particularly through Kanter’s contacts with Pritzker and Hyatt, CDC

agreed to sell forty-seven and a half percent of the PMS common

stock to IRA’s predecessor for $150,000.             The sale took place on

February 14, 1978.

     Eventually, Prudential became PMS’s largest customer.                  In

March 1979, Schnitzer informed Kanter that he wanted to repurchase

the PMS stock because its business with Pritzker had not increased

as Schnitzer had anticipated. On November 30, 1979, CDC reacquired

IRA’s PMS stock for $3.1 million payable in installments over ten

years.   IRA received a total of $4,590,388 in connection with the

stock repurchase.      The increase in value was due in large part to

the increase in PMS’s business with Prudential, which began after

Schnitzer’s initial meeting with Ballard in 1974.

                                   - 5 -

     The final transaction in the Five involved John Eulich, a real

estate developer.      Eulich met Lisle and Ballard in the mid-1960s

through his transactions with Prudential, and Kanter in the late
1960s      or   early   1970s   through    Pritzker.         In    1975,      Eulich

participated in the formation of Motor Hotel Management, Inc., a

hotel      management    business.        Eulich    became       MHM’s     majority

shareholder and chairman of its Board of Directors.                 His role was

to find management contracts and financing for the company. During

that year, MHM obtained seventeen management contracts, each part

of   a    joint    venture   with   Prudential     as   lender     and    a   Eulich

corporation as developer.

         John Connolly owned the Gateway Hotel Management Co., which

managed     the    Gateway   Hilton   Hotel   in    Newark,       New    Jersey,   a

management contract obtained through Prudential.                   Connolly also

obtained a contract to manage the Midland Hilton Hotel in Texas,

which Prudential owned.

         Eulich, Kanter, and Connolly formed a partnership called the

Essex Hotel Management Co.            Essex’s partners were MHM (47.5%

interest), Connolly (5% interest), and Kanter’s entities, IRA

(26.125% interest) and Holding Co. (21.375% interest).                         Essex

entered into representation and marketing agreements with GHM and

MHM, effective January 1, 1982, requiring Essex to perform liaison

functions.        In return, Essex was to receive a large part of GHM’s

and MHM’s management fees. Of Essex’s partners, only MHM performed

any consulting or liaison services.           IRA and Holding Co. did not

contribute money or services to the partnership but received a

total of forty-seven and a half percent of its distributions.
       From 1982 to 1988, Essex reported $1,334,601 in commission fee

payments    from   GHM.     During   the   same   period,    Essex   reported

$1,563,412 in commission fee payments from MHM. In addition, Essex

made the following distributions from 1982 to 1989: $788,452 to

IRA; $645,028 to Holding Co.; $150,899 to Connolly, and $1,433,551

to MHM.    The distributions to all of Essex's partners from 1982 to

1989 totaled $3,017,930.

                                      D.

       In 1982, three corporations were formed:             Carlco, TMT, and

BWK.    At the end of 1983, IRA acquired the common stock of these

three companies and listed them as its subsidiaries on its 1983

federal income tax return. Also in 1983, IRA liquidated KWJ, which

it had purchased from Weaver.        KWJ's assets and Zeus's accumulated

funds were distributed to IRA.             By the end of 1983, IRA had

accumulated    $4,771,445    from    payments     flowing    from    the   Five

arragements.

       In 1984, Kanter directed IRA’s president to distribute funds

it had received in those transactions in the following ratios:

forty-five percent to Carlco, forty-five percent to TMT, and ten

percent to BWK.       It was then agreed that Lisle would manage

Carlco’s assets, Ballard would manage TMT’s assets, and Kanter

would manage BWK.    Notably, Carlco, TMT, and BWK were not listed as

subsidiaries on IRA's federal income tax return for 1984.

       On December 31, 1984, IRA transferred its partnership interest

in Essex to Carlco, TMT, and BWK in the 45-45-10 ratio.              IRA never
informed Essex of this transfer, and therefore continued to receive

payments from Essex, which IRA then transferred to Carlco, TMT, and

BWK.   After 1984, IRA also distributed the payments it received in

connection with the PMS stock repurchase to Carlco, TMT, and BWK in

the 45-45-10 ratio.        Likewise, in 1984, after the corporation

called KWJ had been liquidated, the KWJ partnership was formed.

Carlco and TMT each had a forty-five percent interest and BWK had

a ten percent interest in the KWJ partnership.              Weaver forwarded

the Hyatt commission checks to the KWJ partnership which paid

Weaver his thirty percent share, and the balance was distributed to

Carlco,   TMT,   and   BWK.    Weaver     never      informed   Hyatt   of     the

liquidation    of   KWJ   corporation     or   the    formation   of    the    KWJ

partnership.

       From 1982 to 1989, first the KWJ corporation and then the KWJ

partnership paid “consulting fees” of $1000 per month to each of

two of Lisle’s and two of Ballard’s adult children.               The payments

were allegedly for their submission of proposed real estate deals.

Lisle’s   children     testified   that   they    spent   very    little      time

reviewing properties and that none of the deals they proposed were

consummated by the KWJ partnership.            In February 1990, after the

IRS began checking Lisle’s, Ballard’s, and Kanter’s tax returns,

Kanter terminated the fee arrangement on behalf of IRA.                       In a

letter, Kanter indicated that it appeared as though no services had

been performed by the children for a number of years but that IRA

did not intend to seek reimbursement for payments made.
     At trial, Lisle admitted that he had complete control over

Carlco. He claimed his function in Carlco was to invest its assets

in municipal bonds.         However, he never obtained a fee for his

services.    Lisle and his family members were Carlco’s officers and

directors, having signatory authority over the Company’s accounts.

In 1989, when Lisle and his wife Donna moved from Connecticut to

Texas, Carlco’s money was deposited into an account at the North

Dallas Bank.       Lisle maintained signatory authority over that

account.    The Christie Trust, which Kanter created in 1983 for the

benefit of Lisle’s wife and children, owned all 300 shares of

Carlco’s issued preferred stock.          IRA owned all 1000 shares of

Carlco’s common stock.

     In addition, between 1973 and 1980, Lisle established three

grantor trusts:     RWL Cinema Trust, RWL Cinema Trust II, and the

Basking    Ridge   Trust.      Lisle’s    wife   and   children   were   the

beneficiaries of these trusts.            Kanter’s companies made loans

totaling $220,000 to Lisle and the three trusts from 1974 to 1990.

Neither Lisle nor the trusts paid any interest on these loans.           IRA

wrote off some of these loans as worthless in 1987.           Lisle never

reported the discharge of this indebtedness as income on his 1987

return or any other subsequent return.

                                    III

                                    A.

     As there is no evidence of payments from the Five directly to

Lisle, the Tax Court’s opinion as well as the Commissioner’s
argument hinge on Lisle receiving money paid to the various Kanter

corporations.       The linchpin of the government’s theory that there

was an     arrangement    among    Lisle,   Ballard,   and   Kanter   to   sell

influence in return for kickbacks is Lisle’s actual receipt of

monies equal to forty-five percent of the payments from the Five -

the government’s theory simply cannot stand if Lisle did not

receive the money.       We ask then whether any of the money paid to

the Kanter corporations can be attributed to Lisle, first in light

of the clear and convincing evidence standard required for a

finding of fraud, then under the more lenient preponderance of the

evidence standard.

     The Tax Court relied on three rationales for attributing

payments by the Five to the Kanter corporations to Lisle: (1)

Carlco was the alter ego of Lisle; (2) by the assignment of income

doctrine, under which Lisle, the person who earned the income, is

responsible for the tax on the income regardless of an assignment

of that income to the Kanter corporations; and (3) the Commissioner

could reallocate the income paid to the Kanter corporations to

Lisle pursuant to § 482.

                                      B.

     The    first    theory   is   that     the   Kanter   corporations    were

incorporated pocketbooks, and that Carlco was the alter ego of

Lisle.   Where a corporation is the alter ego of an individual, the

government ignores the corporate identity and assigns the income to

the controlling individual.         Here, the source of the payments to
Carlco is largely irrelevant in determining whether Carlco was the

alter ego of Lisle, since the question of alter ego turns on

control and use.

     We have established a non-exhaustive list of factors to

consider in determining whether a subsidiary is the alter ego of a

parent corporation, but the question is ultimately determined by

examining the totality of the circumstances.16   Although this list

was developed in the context of a parent corporation and its

subsidiary, it has been adapted and applied to the relationship

between an individual and a corporation.17    Additional factors we

have considered in the context of a corporation as alter ego of an


     16
       See Oxford Capital Corp. v. United States, 211 F.3d 280, 284
n.2 (5th Cir. 2000); United States v. Jon-T Chem., Inc., 768 F.2d
686, 691-92, 694 (5th Cir. 1985). The factors include:

     (1) the parent and subsidiary have common stock
     ownership; (2) the parent and subsidiary have common
     directors or officers; (3) the parent and subsidiary
     have common business departments; (4) the parent and
     subsidiary file consolidated financial statements; (5)
     the parent finances the subsidiary;       (6) the parent
     caused the incorporation of the subsidiary; (7) the
     subsidiary operated with grossly inadequate capital; (8)
     the parent pays salaries and other expenses of
     subsidiary;    (9) the subsidiary receives no business
     except that given by the parent; (10) the parent uses
     the subsidiary's property as its own; (11) the daily
     operations of the two corporations are not kept separate;
     (12)   the   subsidiary   does  not   observe   corporate
     formalities.

Oxford Capital Corp., 211 F.3d at 284 n. 2.
     17
       See Century Hotels v. United States, 952 F.2d 107, 110 (5th
Cir. 1992). In applying this list, we have recognized that there
is no need to distinguish between state and federal law, as the
test for alter ego is indistinguishable. Id. at 110 n.4; Jon-T
Chem., Inc., 768 F.2d at 690 n.6.
individual include: “the total dealings of the corporation and the

individual, the amount of financial interest the individual has in

the corporation, the ownership and the control that the individual

maintains over the corporation, and whether the corporation has

been used for personal purposes.”18

     The Tax Court relied on several pieces of evidence to conclude

that Carlco was a sham corporation and the alter ego of Lisle.

First, the court concluded that contrary to the position of the

petitioners, Lisle, Ballard and Kanter were far more than mere

managers of Carlco, TMT and BWK, respectively.     The court noted

that “[p]etitioners used the funds for their personal benefit.”

This conclusion, as it applies to Ballard and Kanter, is well

supported by the evidence - specifically, the findings that both

diverted hundreds of thousands of dollars from their respective

corporations for personal use.

     With Lisle, the government’s case quickly thins; it can only

cite two incidents where Lisle potentially diverted Carlco’s funds

for personal use.   First, Lisle used $3,000 of Carlco’s funds to

pay a receivable on the books of Administration Co., ostensibly for

his grantor trust, RWL Cinema Trust.   The government contends that

this payment was for personal purposes.      The only evidence to

support this conclusion is that the notation on the check stated

“Payment for Loan,” and while Lisle and the Lisle family trusts

owed money to Kanter and his corporations, the government offered

     18
       Gundle Lining Constr. Corp. v. Adams County Asphalt, Inc.,
85 F.3d 201, 209 (5th Cir. 1996).
no   evidence   that   Carlco    owed   Kanter   any   money.    The   court

concluded, without additional evidence, that the payment was for

the loan to RWL Cinema Trust.

       The other alleged personal use of Carlco funds was the KWJ

partnership’s payment of consulting fees to Lisle’s and Ballard’s

adult children.    KWJ paid two of Lisle’s children $1,000 a month

each between 1982 and 1988.       The total paid to Lisle’s children was

$158,000, all of which was reported by the children as income.

Prior to 1984, IRA owned and controlled KWJ, which it purchased

from Weaver.    After IRA distributed its assets to Carlco, TMT, and

BWK,   Carlco   received   a    forty-five   percent    share   of   the   KWJ

partnership which continued to pay Lisle’s and Ballard’s children

the consulting fees.       Although both children had backgrounds in

real estate and were paid to submit proposed real estate deals to

KWJ, which they did, none of these deals were ever pursued and the

children received the payments regardless of how many potential

deals they submitted.

       It is not clear how this is evidence of an abuse of Carlco for

personal gain by Lisle.        IRA, undeniably controlled by Kanter, was

the sole owner of KWJ before the formation of the partnership when

KWJ first started paying the consulting fees. Kanter or one of his

employees at IRA was responsible for initiating the consulting fees

to Lisle’s children.       Neither the court nor the government cites

any evidence that Lisle used Carlco to cause the KWJ partnership to

continue to make the payments once the partnership was formed.
There is no evidence that Lisle exercised any power over Carlco to

that end, since IRA retained majority ownership of Carlco, TMT, and

BWK after the partnership was formed, and it was Kanter, on behalf

of IRA, who eventually terminated the payments.               There is no

evidence that Lisle used his position at Carlco to ensure that

payments to his children continued.        This speculation, combined

with the possible payment of a $3,000 personal loan, will not

support the finding of alter ego.

     The court pointed to Lisle’s admissions that as manager of

Carlco’s assets, he had “complete authority” over Carlco and “full

discretion” over the use of its funds; that Lisle maintained

possession of Carlco’s records at his home; that the address for

Carlco was the same as Lisle’s personal residence and when Lisle

moved to   Texas,   Carlco’s   address   was   changed   to   Lisle’s   new

residence. In addition, Lisle, his wife, and brother had signatory

authority over Carlco’s corporate accounts.          From 1984 through

1988, Lisle’s brother was Carlco’s president, and Lisle’s wife was

its vice-president.    In 1989, Lisle was Carlco’s president, his

wife was its secretary, and their son was its vice-president.

Although the government        has not cited to any abuse of these

positions or the signatory authority held by Lisle and his family,

aside from the $3,000 payment already discussed, it argues that the

mere fact that they could have accessed Carlco’s accounts means

that it was their alter ego – the fact that they chose not to does
not diminish the control they had over Carlco, and thus negate a

finding of alter ego.

       Again, this speculation cannot sustain a finding of alter ego.

It was undisputed that Lisle was managing the assets of Carlco for

the purpose of investing in municipal bonds.               That he used his

personal residence as the address for Carlco and that he had

signatory authority over its assets then means little.             That said,

this is evidence that Lisle exercised a great deal of control over

Carlco.

       The government also relies on the fact that in a letter from

Administration Co.19 distributing money to Carlco, Lisle and Carlco

were referred to interchangeably.             The letter stated that a check

payable to Carlco, Inc. was enclosed and that “your 45% comes to

$63,000.”       The letter also states that another check represents

interest earned “through the time that we sent the various monies

to you as a transfer of funds.”               The government contends this

indicates that Lisle was the true owner of Carlco’s funds.              While

this    is    suggestive   of   a   failure    to   distinguish   between   the

corporation and the individual, it provides little support for

finding an alter ego.

       The court’s final piece of evidence is that a trust created by

Kanter for the benefit of Lisle’s wife and children purchased 300

preferred shares of Carlco.         According to Kanter, this was done to

disperse IRA’s ownership of Carlco so that Carlco was no longer


       19
            A Kanter-controlled recordkeeping entity.
included in IRA’s consolidated group for tax purposes.                 Kanter

testified that this was necessary so that Carlco could maximize the

tax benefits of its investments in municipal bonds. He stated that

the family trusts were sold the shares so that Lisle’s investment

decisions would not be second-guessed by a minority owner. The Tax

Court rejected this argument, noting that IRA still controlled 100%

of the 1000 shares of common stock and thus its ability to second-

guess Lisle remained unimpeded.               The court reasoned that the

preferred stock was issued to give Lisle an effective ownership

interest in Carlco through his family trust, thereby facilitating

Lisle’s use of Carlco as an incorporated pocketbook.

       The court found that the restrictions on the preferred stock

were ambiguous and speculated that it could have been worth much

more than the $1650 the trust paid for it.                 The certificates

authorizing the preferred shares granted the board of directors

authority to fix the preferences of the preferred shares, but the

record does not contain any evidence of resolutions passed by the

board. The stock certificates contain several restrictions, two of

which were important to the court: “Redemption by company at any

time   upon   10   days   notice   at   105    percent,”   and   “Priority   on

liquidation equal to original purchase price per share.” The court

speculated that “105 percent” could refer to retained earnings

rather than “par value” as Lisle asserted.             Likewise, “original

purchase price” could include not only the purchase price, but a

share of the remaining assets or a value for the uncompensated
services of Lisle.      This inference is too tenuous and taxes the

plain meaning of the restrictions.

     Considering the evidence in light of the factors we have

articulated in the past and the totality of the circumstances, the

court erred when it concluded that clear and convincing evidence

established that Carlco was Lisle’s alter ego.     Lisle personally

had no interest in Carlco.      Although his wife and children were

beneficiaries of a trust which owned some preferred stock, the

government failed to prove that the value of that stock was not

minimal in comparison to the total assets of Carlco.    While Lisle

did exercise complete control over Carlco’s assets in his role as

manager, there is only the slimmest evidence that he used Carlco’s

assets for personal purposes.     Control alone will not support a

finding of an alter ego relationship.

     That is not to say that there is no evidence to support a

finding of alter ego.    That Kanter and Ballard both used BWK’s and

TMT’s assets for their personal benefit suggests Lisle owned

Carlco’s assets and could have done the same.       But it is also

plausible that Lisle took his position as manager of Carlco’s

assets seriously, and honestly managed the money entrusted to him.

The potential for a manager who has control over a company’s assets

to abuse his position cannot alone be the basis for abandoning the

corporate form. As we have explained, the other evidence relied on

by the court is also insufficient.    In sum, there is no clear and
convincing evidence to warrant the conclusion that Carlco was the

alter ego of Lisle.

                                      C.

     In addition to the alter ego theory, the court alternatively

relied on the assignment of income doctrine to attribute forty-five

percent of the income from the Five to Lisle.          The basic principle

of the assigned income doctrine is that the person who earns the

income is responsible for the tax on that income, regardless of

whether the individual assigns that income to another person or

corporation.20    “[I]t is a well established rule that income is

taxed to the person who earns it, regardless of any ‘anticipatory

arrangements and contracts however skillfully devised to prevent

the salary when paid from vesting even for a second in the man who

earned it.’”21    The government argues, and the court found, that

Lisle was the actual earner of forty-five percent of the income

from the Five that was paid to the Kanter corporations, and thus

Lisle is liable for the taxes on his share of that income.

     The   Tax   Court’s   opinion,    as   complete   as   it   is   in   most

respects, does little to distinguish among the actions of Lisle,

Ballard, and Kanter. Rather, the court refers to them collectively

as the “petitioners.”      This common brush of the individual actions


     20
       See Srivastava v. Comm’r, 220 F.3d 353, 358-59 (5th Cir.
2000); Caruth Corp. v. United States, 865 F.2d 644, 648 (5th Cir.
1989); United States v. Buttorff, 761 F.2d 1056, 1060-61 (5th Cir.
1985).
     21
       Buttorff, 761 F.2d at 1060-61 (quoting Lucas v. Earl, 281
U.S. 111, 115 (1930)) (citation omitted).
of the taxpayers bleeds the court’s analysis, as it presupposes the

question to be answered in charging that the actions of Kanter and

Ballard are attributable to Lisle.                On this record, it is not

sufficiently clear that Lisle, rather than Kanter, earned the

income from the Five.

     The Tax Court begins its discussion of the assignment of

income doctrine by stating that:

     The record shows that Kanter was in control of
     negotiations concerning the amount of commissions and
     that he earned those commissions by performing the work
     for them. He directed members of the Five where to make
     payments. The various entities were entirely subject to
     Kanter’s control: he set up the entities, and managed
     the entities in that Meyers, Schott, Weisgal, and Freeman
     were subject to his control. There is no evidence that
     IRA, Holding Co., or any of the other entities earned
     these funds.22

These findings point to Kanter, not Lisle, as the earner of the

payments from the Five.

     The court continues by stating that “[p]etitioners handled the

accounts as if they were their own, moving funds around from

location to     location      and   using   the   funds    for    their   personal

benefit.”23     As we discussed, there is little evidence to support

the claim that Lisle used Carlco funds for his personal benefit.

As it did in its discussion of the alter ego doctrine, the court

attributed behavior to Lisle for which Ballard and Kanter are

responsible     -   it   is   they,   and   not   Lisle,    who    used   the   IRA


     22
       Inv. Research Assocs., Ltd. v. Comm’r, 78 T.C.M. (CCH) 951
(T.C. 1999) (emphasis added).
     23
          Id.
subsidiaries they managed for personal gain.                    This clustering of

the “petitioners,” as opposed to Kanter as the mover of the funds

from location to location is contrary to the evidence and the

court’s own findings:

      Kanter did virtually all of the planning and implementing
      of the transactions.      The officers, directors, and
      trustees signed documents and entered transactions as
      Kanter directed including issuing and redeeming stock,
      liquidating corporations, purchasing and selling stock,
      distributing   funds,   and   executing   contracts   and
      agreements. There is very little evidence that IRA or
      the other entities had anything to do with these
      transactions other than to be the named recipients of the
      checks.24

There is little evidence that Lisle had anything to do with the

shuffling        of    money    from   the   Five    between   the    various   Kanter

entities.

      Other findings by the court also point to Kanter as the true

earner of the income, not Lisle.                    The court noted that “[e]ven

though the payments were made to various corporations, it is clear

that the other parties to the transactions viewed IRA, Holding Co.,

their subsidiaries, and Kanter as one and the same.”                    Schaffel paid

IRA   half       of    all     commissions    he     earned    on    deals   involving

Prudential.           The court found that all payments to IRA, including

those from Schaffel, were split 45-45-10 among Ballard, Lisle, and

Kanter.      Yet when Lisle moved to Travelers, Schaffel initially

refused to continue the payments on business he was now receiving

from Travelers.              Kanter protested, arguing that he was still

getting business as a result of Kanter’s introduction of Schaffel

      24
           Id.
to Lisle.       Schaffel acquiesced, and resumed making the payments;

however, they were now directed to Holding Co. rather than IRA.

The court found that none of the payments to Holding Co. were ever

distributed to Lisle.       In arguing that IRA and Holding Co. were

sham corporations, the court noted that “[i]f IRA, rather than

Kanter, had been the true party in interest ... the payments for

the Travelers deals would have been paid to IRA.”25        The court

failed to explain why, if Lisle was selling his influence, he would

receive forty-five percent of the commissions while at Prudential,

but none when he moved to Travelers even though Schaffel was now

receiving business from Travelers.     This suggests that Kanter, and

not Lisle, was the true earner of the commissions from Schaffel.

Similarly, in discussing the purchase of the Schnitzer-PMS stock,

the court stated that Schnitzer “sold it at a bargain price for

Kanter’s services.”26

     The conclusion that Kanter was the true earner of the payments

is consistent with the testimony of those members of the Five who

testified.       As the court noted, at trial, all of the witnesses

associated with the Five explicitly denied that the payments were

“kickbacks” or “payoffs” for Ballard’s and/or Lisle’s help in

steering business to them.        These same witnesses did confirm,

however, “that they entered into these arrangements in exchange for




     25
          Id.
     26
          Id. (emphasis added).
Kanter’s influence in obtaining business.”27             It is clear that the

Five sought the assistance of Kanter in obtaining business, not

only through his contacts with Lisle and Ballard, but also through

his numerous other business contacts, such as the Pritzker family.

Thus, the evidence is far from clear and convincing that payments

were for the services of Lisle, rather than Kanter.

     The government argues that Kanter could not have assisted the

Five without the help of Ballard and Lisle, and that Lisle and

Ballard    needed   Kanter’s      assistance     in   laundering   the   money.

Therefore, they agreed to the 45-45-10 split, regardless of whether

Ballard or Lisle was most responsible for securing the business for

Kanter’s acquaintances.          Thus, while Kanter negotiated the deals

and directed the payments from the Five to the various Kanter

corporations, Lisle and Ballard earned a portion of those payments

and are responsible for taxes on their portion.

     While    it    is   true    that   Kanter   could    not   have   procured

additional    business     for    the   Five   without    the   assistance   of

influential friends such as Ballard, Lisle, and Pritzker, it does

not follow that Ballard, Lisle or Pritzker therefore earned a

portion of the commissions paid by the Five to Kanter.             At the same

time, if Kanter, Ballard, and Lisle did in fact agree to work

together and split the income, they would each be liable for taxes

on their share of that income.           The court concluded that “it is

clear from the record that Kanter, Ballard, and Lisle agreed to


     27
          Id. (emphasis added).
share and did share the money from the Prudential transactions in

a 45-45-10 split.”28       We cannot agree.

     The assertion that Lisle was the true earner of forty-five

percent of the payments because he received forty-five percent of

the proceeds, and therefore we will assign forty-five percent of

the proceeds to Lisle because he earned them is circular.               Yet both

the Tax Court and the government walk close to this line of

reasoning.       For example, while trying to prove that Lisle was

selling his influence, the government relies in part on the “fact”

that he eventually received forty-five percent of the payments.

Later, when trying to prove that Lisle received forty-five percent

of the payments as income, the government argues that he earned it

by selling his influence.        The question is what is the evidence of

Lisle actually receiving any of the payments which the Five made to

Kanter, without simply assuming that he earned them and therefore

the funds were his.        The government relies on several pieces of

evidence, the three most substantial being Lisle’s control of the

assets of       Carlco,   the   payment   of   consulting   fees   to   Lisle’s

children, and the loans to Lisle and the trusts which benefitted

Lisle’s family.

     We have discussed Lisle’s control over Carlco and concluded

that the evidence does not support the application of the alter ego

doctrine.       For the same reasons, we cannot agree with the court’s

conclusion that Lisle received forty-five percent of the payments


     28
          Id.
by managing Carlco’s assets.   While the counter proposition is not

without purchase, as with the alter ego doctrine, we simply cannot

agree that there is clear and convincing evidence that the funds in

Carlco belonged to Lisle.   At most, Lisle used $3000 of Carlco’s

millions of dollars in assets for personal gain.

     The government argues that in light of the other payments to

Lisle from IRA which we will discuss, we can assume that Lisle

owned the funds in Carlco, but unlike Ballard and Kanter with

respect to TMT and BWK, simply chose not to use them.          The

government analogizes the situation to a bank account which an

individual owns but from which he chooses not to withdraw any

money.    While it is true that failure to use the funds in the

account is not proof that the individual is not the owner of those

funds, the analogy fails when the evidence of ownership of the

account is lacking in the first place.   Here, we do not find clear

and convincing evidence that Lisle was the true owner of Carlco’s

assets.

     The government and the court also rely on the payments to

Lisle’s children and the trusts which benefitted Lisle’s family as

evidence that a portion of the money paid to IRA was in fact earned

by Lisle.   We have discussed the payments to Lisle’s children, and

as we noted, there is no evidence of Lisle’s involvement in

authorizing them. It is true that Kanter, Ballard, and Lisle could

have had an arrangement to split the funds from the Weaver deal,

and accomplished this by funneling some of the money through KWJ to
Lisle and Ballard’s children.         Alternatively, it is also possible

that Kanter hired the children of a close family friend who both

had some real estate experience to bring potential real estate

investments to his attention. In fact, one of Lisle’s children was

otherwise employed full-time by Kanter.             The question is whether

the evidence supports the conclusion that Lisle was funneling money

from the Weaver deal to his children.

       When the Weaver transaction is examined closely, the evidence

is far from clear that Lisle and Ballard were receiving kickbacks

laundered through Kanter to their children. First, one must assume

that Ballard and Lisle agreed with Weaver to split the commission,

and that after meeting Kanter, decided to use him to help launder

the money years later. Weaver received a commission from Hyatt for

his help in getting Hyatt the Embarcadero contract in 1970 or 1971.

Ballard and Lisle did not meet Kanter until 1972.                 The agreement

between Kanter and Weaver for the purchase of the Hyatt commission

payments through the purchase of KWJ corporation was not reached

until 1976, and the purchase did not take place until 1979.                   The

funds from commission payments were not disbursed to Carlco, TMT,

and    BWK   until   1983,   although   small     payments   to    Lisle’s    and

Ballard’s children began in 1982.        If Lisle had agreed to sell his

influence to Weaver for a cut of the commission Weaver received

from Hyatt, it is not credible that he would rely on a deal

formulated years later by Kanter, a man he did not even know at the

time   he    allegedly   sold   his   influence    to   Weaver.    And   if   the
commission paid to KWJ belonged to Lisle, Ballard, and Kanter in a

45-45-10 split, there is no explanation for why KWJ made payments

to the children which were not in proportion to this split.    There

may be some overarching rationalization for these inconsistencies,

but we have not discerned it.

       Nor does the government explain how Lisle was able to get the

other partners in the Embarcadero deal to give the contract to

Hyatt.    Lisle represented Prudential, only one of the prominent

partners involved in the deal.    Speculation that he threatened to

block the deal unless Hyatt paid the commission is not supported by

the record.     The government offered no evidence to refute the

testimony that Hyatt got the deal because it submitted the only

bid.

       Finally, the government attempts to rely on the court’s

finding that a letter from Weaver to Kanter forwarding a commission

check from Hyatt which instructs Kanter to “deposit and issue

appropriate checks to the participants” refers to Kanter, Ballard,

and Lisle.    Pursuant to the sale of KWJ to Kanter, Weaver was to

receive thirty percent of the commission, and KWJ, now owned by a

Kanter corporation, was to receive the remainder.        There is no

support in the record for the conclusion that “participants” refers

to Lisle, Ballard, Kanter, and Weaver, as opposed to just Kanter

and Weaver.

       We conclude that while the government’s theory of Lisle’s role

in this elaborate scheme is plausible, it is not proved by clear
and convincing evidence.        We cannot agree that because Lisle’s

children received $1,000 a month in questionable commissions from

KWJ, Lisle was the true earner of forty-five percent of all the

payments from the Five.

     Finally,   the    government      argues     that    Lisle      and   trusts

established for the benefit of Lisle’s wife and children borrowed

money from Kanter corporations and did not repay it.              Unpaid loans

to Lisle and these trusts total more than $220,000 between 1974 and

1990.   As no interest was ever paid to the Kanter entities for

these loans, and a large portion of the amount was written off as

worthless in 1987, the court determined that these were never

legitimate   loans,    but   were    part   of   the   scheme   to     distribute

kickbacks to Lisle and Ballard.

     Once again, we cannot agree that clear and convincing evidence

supports this conclusion.           The government does not explain how

these loans can be characterized as kickbacks when they began

before the Five ever made any payments to Kanter’s corporations.

In fact, many of the largest loans to the Ballard and Lisle family

trusts occurred before the first payment by a member of the Five in

1977. Of the $220,000 loaned to Lisle and his family’s trusts over

the sixteen years cited by the court, $68,000 was loaned before

1977.   While   this    does   not    mean   that      later   loans    were   not

distributions of income from the Five, it casts serious doubt on

that conclusion.
       We are left with the definite and firm conviction that a

mistake has been committed.          We cannot agree that the government

has established by clear and convincing evidence that Lisle earned

forty-five percent of the payments from the Five, and therefore the

assignment of income doctrine cannot be applied.                   As we will

explain, these findings are not without evidentiary support. It is

rather that to support a penalty for fraud, the government bore the

burden of proving a deficiency in income by clear and convincing

evidence and we cannot agree with the Tax Court that this burden

has been met.

                                      D.

       We now turn to the court’s final theory for attributing forty-

five    percent    of   the   payments   from   the    Five   to    Lisle,   the

application of 26 U.S.C. § 482.29               The court applied § 482,

reasoning      that   the   petitioners,   Lisle,     Ballard,     and   Kanter,

distributed income among the various Kanter corporations in order

       29
            26 U.S.C. § 482 reads:

       In any case of two or more organizations, trades, or
       businesses (whether or not incorporated, whether or not
       organized in the United States, and whether or not
       affiliated) owned or controlled directly or indirectly by
       the same interests, the Secretary may distribute,
       apportion, or allocate gross income, deductions, credits,
       or allowances between or among such organizations,
       trades, or businesses, if he determines that such
       distribution, apportionment, or allocation is necessary
       in order to prevent evasion of taxes or clearly to
       reflect the income of any of such organizations, trades,
       or businesses. In the case of any transfer (or license)
       of intangible property (within the meaning of section
       936(h)(3)(B)), the income with respect to such transfer
       or license shall be commensurate with the income
       attributable to the intangible.
to avoid paying taxes on the income.   Thus, the court reasoned that

under § 482, that income could be reallocated from the Kanter

corporations to the petitioners.   Even if § 482 can be applied to

individuals, the absence of clear and convincing proof that Lisle

was the earner of forty-five percent of the payments from the Five

makes § 482 inapplicable.

                               IV.

     We next turn to the court’s findings regarding the deficiency,

independent of fraud. Here, the government enjoys a presumption of

correctness for the deficiencies stated in the original notices,

and must prove any additional deficiencies asserted before the Tax

Court only by a preponderance of the evidence.30

     We have already discussed the government’s case at length.

From our review of the record, we cannot say that the court clearly

erred in finding that the government established the deficiencies

by a preponderance of the evidence.    Thus, even if Lisle shifted

the burden of proof to the government on all deficiencies as

appellants argue, the government has met its burden.31   While much

of the evidence is equivocal, when the burden of proof is by a


     30
       See Payne v. Comm’r, 224 F.3d 415, 420 (5th Cir. 2000); Tax
Court Rule 142(a)(1) (providing that, “in respect of any ...
increases in deficiency ... pleaded in the answer, [the burden of
proof] shall be upon the respondent”); Merino v. Comm’r, 196 F.3d
147, 151 (3d Cir. 1999) (stating that any new matter must be proved
by a preponderance of the evidence).
     31
       Once the taxpayer has established that the assessment is
arbitrary and erroneous, “the burden shifts to the government to
prove the correct amount of any taxes owed.” Portillo v. Comm’r,
932 F.2d 1128, 1133 (5th Cir. 1991).
preponderance of the evidence, we will not find clear error if the

evidence supports either of two theories.

     We affirm the Tax Court’s finding that Lisle owes additional

taxes for the years 1987, 1988, and 1989.             However, without a

finding of fraud, the assessment of taxes for 1984 is barred by the

statute    of   limitations.32    The    court   relied   on   26   U.S.C.   §

6501(c)(1), which provides that the tax may be assessed at any time

in the case of fraud.33     With no finding of fraud the limitations

period is three years.34

     The    government   argues   that   appellants   waived    this   issue

because they failed to renew the argument in their opening brief.

While we may in our discretion decline to consider issues not

raised in an initial brief, we choose to address the issue here.35

     32
          26 U.S.C. § 6501(a) reads in relevant part:

     Except as otherwise provided in this section, the amount
     of any tax imposed by this title shall be assessed within
     3 years after the return was filed (whether or not such
     return was filed on or after the date prescribed) ... and
     no proceeding in court without assessment for the
     collection of such tax shall be begun after the
     expiration of such period.
     33
          26 U.S.C. § 6501(c)(1) reads:

     In the case of a false or fraudulent return with the
     intent to evade tax, the tax may be assessed, or a
     proceeding in court for collection of such tax may be
     begun without assessment, at any time.
     34
          The government began pursuing Lisle for tax deficiencies in
1991.
     35
       See Cousin v. Trans Union Corp., 246 F.3d 359, 373 n.22 (5th
Cir. 2001) (noting that although issues not raised in initial brief
are normally waived, court has discretion to decide issue); see
also Bridges v. City of Bossier, 92 F.3d 329, 335 n.8 (5th Cir.
The appellants raised the issue of statute of limitations in the

Tax Court and renewed their argument that the court’s finding of

fraud was erroneous before this court.    The government suffers no

prejudice by the absence of the issue in the opening brief.

                                  V.

     Appellants also raise a due process challenge to the Tax

Court’s application of Tax Court Rule 183.36           Briefly stated,

appellants argue that it is a violation of their due process rights

for the Tax Court to not make the Special Trial Judge’s initial

report available to the parties. This issue was recently addressed



1996) (electing to examine purely legal issue not raised by party
in opening brief, but raised by amicus curiae in its initial
brief); United Paperworkers Intern. Union AFL-CIO, CLC v. Champion
Intern. Corp., 908 F.2d 1252, 1255 (5th Cir. 1990) (finding that
argument indirectly raised in opening brief was not waived).
     36
          Tax Court Rule 183 reads in relevant part:

     [T]he following procedure shall be observed in cases
     tried before a Special Trial Judge:

     (b) Special Trial Judge's Report: After all the briefs
     have been filed by all the parties ... the Special Trial
     Judge shall submit a report, including findings of fact
     and opinion, to the Chief Judge, and the Chief Judge will
     assign the case to a Judge or Division of the Court.

     (c) 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.
by the Seventh Circuit in Kanter v. Commissioner of Internal

Revenue,37 and by the Eleventh Circuit in Ballard v. Commissioner

of Internal Revenue,38 the companion cases to this one.          We find the

reasoning    of   the   Seventh    and     Eleventh   Circuits   direct   and

persuasive, and adopt it here.           We hold that the application of

Rule 183 in this case did not violate Appellants’ due process

rights.

                                     VI.

     In conclusion, we find that the Tax Court clearly erred when

it concluded that the government had proved by clear and convincing

evidence that Lisle had earned forty-five percent of the payments

from the Five and therefore owed taxes on that income.              Without

clear and convincing evidence of a deficiency, the element of

fraudulent intent is not reached, although in this case the two are

nearly indistinguishable.         We therefore reverse the Tax Court’s

finding of fraud.39     As a result of our reversal of the Tax Court’s

finding of fraud, we also reverse its conclusion that § 6501(c)(1)

applies and that the three-year statute of limitations does not bar

the assessment of taxes for 1984.        We affirm the Tax Court’s ruling



     37
          -- F.3d --, 2003 WL 21710242, at *3-*7 (7th Cir. July 24,
2003).
     38
          321 F.3d 1037, 1042-43 (11th Cir. 2003).
     39
        We note that the evidence of fraud on the part of both
Kanter and Ballard was far more substantial than for Lisle,
explaining the Seventh and Eleventh Circuits’ affirmance of the Tax
Court’s finding of fraud with respect to each of them. See Kanter,
2003 WL 21710242 at *7-*11; Ballard, 321 F.3d at 1043-46.
sustaining the assessment of a deficiency for years 1987, 1988, and

1989.   We remand the case to the Tax Court for the limited purpose

of recalculating the deficiencies and additions to tax, consistent

with this opinion.     REVERSED in part, AFFIRMED in part, and

REMANDED.
