This case returns to this court for the second time for review of the Tax Court’s judgment that taxpayers Robert W. Lisle and his wife Donna M. Lisle
1
failed to declare and pay income tax on approximately $1,280,000 in revenue earned as a result of Robert Lisle’s relationship with a series of real estate deals and related transactions.
See Estate of Robert W. Lisle v. Comm’r,
In this appeal,
unlike
the first, we have the benefit of the fact findings and conclusions of the Special Trial Judge that were rejected by the Tax Court and obscured in the first appeal. With the benefit of a complete record, our equivocal findings in the first appeal, and the findings of the Eleventh Circuit in the appeal of the related case affecting taxpayer Ballard,
Ballard v. Comm’r,
I.
•The cases for income tax deficiencies against Lisle, Ballard and Kanter were consolidated in the Tax Court. In the Lisle case that proceeded through this circuit, the Tax Court ruled that the taxpayers fraudulently failed to declare and pay income tax on approximately $1,280,000 of income. In
Lisle I,
this court reversed the Tax Court’s finding of fraud, affirmed the Tax Court’s ruling sustaining the assessment of a deficiency for years 1987, 1988 and 1989, and remanded the case to the Tax Court for the limited purposes of re
In the Tax Court, prior to the first appeal to this circuit, the Chief Judge of the Tax Court had assigned the consolidated case to Special Trial Judge D. Irwin Couvillion for trial. Judge Couvillion presided over a five-week trial in the summer of 1994. Around September 1998, Judge Couvillion submitted a 303 page written report containing his findings of facts and opinions to the Chief Judge for subsequent review by a Tax Court Judge. The parties were not provided a copy of Judge Couvil-lion’s report. The Chief Judge assigned the case to Tax Court Judge H.A. Dawson, Jr. for his review and final disposition. On December 15, 1999, Judge Dawson issued the opinion of the Tax Court. (T.C. Memo 1999^407;
see Investment Research Assocs. Ltd. v. Commissioner,
As stated by the Eleventh Circuit:
We now know, based on new documents filed with this Court, that the following events occurred in the Tax Court:
1. Judge Couvillion’s original report initially recommended that Ballard [nor Kanter or Lisle] was not liable for the deficiencies in tax asserted against him. Specifically, Judge Couvillion concluded that “there were no ‘kickback schemes,’ and none of the alleged ‘kickback schemes’ payments by ‘The Five’ represented unreported income of Kanter, Ballard, and Lisle. There wаs, therefore, no underpayment of tax.” In fact, Judge Couvillion’s original report did not consider the government’s allegation of fraud “as even rising to the level of suspicion of fraud.”
2. After Judge Dawson was assigned to the case, he reviewed Judge Couvillion’s original report and advised the Chief Judge that he disagreed with it. Approximately one week later, on or about August 27, 1998, then Chief Judge Cohen advised Judge Dawson that she also disagreed with Judge Couvillion’s original report.
3. A conference was scheduled between Chief Judge Cоhen, Judge Dawson, and Judge Couvillion. It appears that shortly before this conference was to take place, Judge Couvillion was aware that both Chief Judge Cohen and Judge Dawson disagreed with his report.
4. On September 1, 1998, Judge Cou-villion withdrew his original report.
5. Chief Judge Cohen assigned Judge Dawson and Judge Couvillion to write a “collaborative report.” This “collaborative report” stood in stark contrast to Judge Couvillion’s original report. In fact, the collaborative report now concluded that Ballard [as well as Kanter and Lisle] should be liable for the deficiencies in tax asserted against him.
6. On October 25, 1999, Judge Dawson adopted the “new collaborative report.”
7. On November 4, 1999, Chief Judge Cohen adopted the “new collaborative report” with some minor modifications.
8. On December 15, 1999, Chief Judge Cohen formally assigned the case to Judge Dawson, and the “new collaborative report” was filed as the decision of the Tax Court.
Ballard v. Comrn’r,
The taxpayers suspected that the document labeled Opinion of the Speсial Trial Judge was not in fact Judge Couvillion’s original ruling. They filed motions in the Tax Court seeking access to Judge Couvil-lion’s original ruling, which motions were denied. The taxpayers appealed to their respective circuit courts, including this court, all of which treated Judge Dawson’s opinion as the Opinion of the Special Trial Judge. Kanter and Ballard appealed to the Supreme Court which granted certio-rari to resolve the question whether the Tax Court may exclude from the record on appeal Rule 183(b) reports submitted by special trial judges.
The Supreme Court held that Tax Court Rule 183 did not describe or authorize the collaborative effort with regard to the trial judge’s opinion and the Tax Court was not authorized to exclude from the record on appeal reports by special trial judges pursuant to Rule 183(b). Rule 183 further requires the Tax Court Judge to give due regard “to the circumstance that the Special Trial Judge had the opportunity to evaluate the credibility of witnesses, and the findings of fact recommended by thе Special Trial Judge shall be presumed to be correct.” Tax Court Rule 183(c)(2000 ed.), as cited in
Ballard,
In response to the Supreme Court’s opinion, this court recalled its mandatе and remanded the case to the Tax Court with orders to:
(1) Strike the “collaborative report” that formed the basis of the Tax Court’s ultimate decision; (2) reinstate Judge Couvillion’s original report; (3) refer this case to a regular Tax Court judge who had no involvement in the preparation of the aforementioned “collaborative report” and who shall give “due regard” to the credibility determinations of Judge Couvillion, presuming that his fact findings are correct unless manifestly unreasonable[, in dealing with the remaining issues of tаx deficiency]; and (4) Adhere strictly hereafter to the amended Tax Court Rule in finalizing Tax Court opinions.
Estate of Robert W. Lisle v. Comm’r,
On remand, the Tax Court assigned the case to Judge Haines. He adopted some of the Special Trial Judge’s findings, rejected other recommended findings and credibility determinations as manifestly unreasonable and supplemented other recommended findings because he viewed them as incomplete. Judge Haines concluded that Lisle was liable for income tax deficiencies. Our remand in
Lisle II
did not disturb this court’s decision to reverse the imposition of fraud penalties against Lisle, so the fraud issue is no longer part of this case. Lisle now appeals the Tax
II.
Lisle argues first that the Tax Court failed to give appropriate deference to the findings of the Special Trial Judge. The Tax Court’s review of the opinion of the Special Trial Judge is restricted by Rule 183. In reviewing the report “Due regard shall be given to the circumstance that the Special Trial Judge had the opportunity to evaluate the credibility of witnesses, аnd the findings of fact recommended by the Special Trial Judge shall be presumed to be correct.”
Ballard,
Lisle argues that our focus should be on whether the findings of the Special Trial Judge are supported by the record. We agree. As stated by the Eleventh Circuit in its opinion in the parallel case affecting taxpayer Ballard,
After the Tax Court Judge has conducted his review and issued a final opinion, we generally review this opinion for clear error. See Stone,865 F.2d at 344 ; 26 U.S.C. § 7482(a)(1) (instructing Courts of Appeals to review Tax Court decisions in the same manner as district court decisions on civil cases tried without a jury); Fed.R.Civ.P. 52(a)(6) (instructing that Courts of Appеals can set aside the district court’s findings on cases tried without a jury if they are clearly erroneous). However, when the Tax Court Judge rejects the Special Trial Judge’s findings and we are faced with a conflicting report and opinion, we determine whether the Tax Court Judge committed clear error by rejecting the Special Trial Judge’s findings as clearly erroneous by reviewing the Special Trial Judge’s report to determine if his findings were, indeed, without record support. Matter of Multiponics, Inc.,622 F.2d 709 , 712-13, 722 (5th Cir.1980) (applying Rule 52(a) to bankruptcy proceedings, wherein the district court rejected the Special Master’s findings, and holding that “we must review the findings of the Special Master and may affirm the [district [cjourt’s reversal only if we also deem the Master’s findings clearly erroneous”).
Ballard III,
This court adopted the position of the Eleventh Circuit that the Tax Court Judge may disturb the Special Trial Judge’s findings of fact and credibility determinations only if they are “manifestly unreasonable.”
Lisle II,
According to the Supreme Court, [The clear error] standard plainly does not entitle a reviewing court to reverse the finding of the trier of fact simply because it is convinced that it would have decided the case differently. The reviewing court oversteps the bounds of its duty ... if it undertakes to duplicate the role of the lower court. In applying the clearly erroneous standard to the findings of a district court sitting without a jury, appellate courts must constantly have in mind that their function is not to decide factual issues de novo. If the district court’s account of the evidence is plausible in light of the record viewed in its entirety, the court of appeals may not reverse it even though convinced that had it been sitting as the trier of fact, it would have weighed the evidence differently. Where there are twо permissible views- of the evidence,
- the factfinder’s choice between them cannot be clearly erroneous.
Anderson v. Bessemer City,
when a trial judge’s finding is based on his decision to credit the testimony of one of two or more witnesses, each of whom has told a coherent and facially plausible story that is not contradicted by extrinsic evidence, that finding, if not internally inconsistent, can virtually never be clear error.
Id.
at 575,
III.
We are aided at this stage by this court’s prior decision in this case and by the decision of the Eleventh Circuit reviewing the same and findings with resрect to a different taxpayer, Ballard, who like Lisle whs an executive at Prudential. At the outset, it is important to. note that when this court affirmed the original decision of the Tax Court and found that Lisle was liable for the tax deficiencies, we found that “much of the evidence is equivocal” and concluded that “when the burden of proof is by a preponderance of the evidence, we will not find clear error if the evidence supports either of two theories.”
Lisle,
The Special Trial Judge’s findings have also been upheld by the Eleventh Circuit in the related case against taxpayer Ballard.
Ballard v. Comm’r,
that Judge Couvillion’s findings of fact and credibility determinations were supported by the record and that his finding that Ballard was not responsible for a dеficiency and had not committed fraud were not manifestly unreasonable. We conclude that, in finding otherwise, Judge Haines did not presume Judge Couvillion’s findings to be correct or give Judge Couvillion’s credibility determinations their due deference. See Tax Court Rule 183. Rather Judge Haines conducted a nearly de novo review of the facts. This review violated Rule 183’s and our instructions. See Anderson,470 U.S. at 573-74 ,105 S.Ct. at 1511-12 . It is clear that this case is a “close call.” Had Judge Haines been the original trial judge, his rulings would probably be entitled to affirmance. However, he was not the trial judge and did not see or hear the witnesses. Judge Couvillion did and fоund them credible. It is no surprise that a knowledgeable tax attorney would use numerous legal entities to accomplish different objectives. This does not make them illegitimate. Unfortunately such “maneuvering” is apparently encouraged by our present tax laws and code. Judge Couvillion heard the witnesses and reviewed the exhibits and concluded the government simply failed to prove such by clear and convincing evidence. The record fully supports his findings of fact and conclusions. Accordingly, we remand to thе Tax Court with instructions to vacate Judge Haines’ opinion and enter an order approving and adopting Judge Cou-villion’s original report as the opinion of the Tax Court.
Id. at 1254-55. Following our own independent review of the record, we agree with the conclusion of the Eleventh Circuit in Ballard with respect to taxpayer Lisle.
IV.
We will address one additional argument raised by the Commissioner. The Commissioner faults the Special Trial Judge and the Eleventh Circuit for glossing over its flow of funds argument, particularly for their conclusion that once it was determined that no kickbаcks occurred in connection with the transactions, the flow of funds need not be examined. The Commissioner argues that the transactions cannot be properly analyzed without taking the money flow into account. The Commissioner also argues that the documentary evidence of the flow of funds supports the Tax Court’s rejection of the Special Trial Judge’s credibility determinations in favor of the taxpayers.
As described in Lisle I,
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.
Lisle I,
[IRA] owned controlling interests in several subsidiary corporations including Carleo, Inc., TMT, Inc., and BWK, Inc. As we will discuss, in 1983, IRA distributеd all of its assets to Carleo, 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.
Id. In sum, the Commissioner proceeded on a theory that the payments described above from the Kanter controlled corporation, IRA, to a subsidiary, Carleo,, which Lisle managed, were kickbacks that Kan-ter was paying to Lisle for influencing action by Prudential.
First, we agree with the Eleventh Circuit that Judge Couvillion did not clearly err in declining to further analyze the Commissioner’s flow of funds argument after he determined that no kickbacks occurred and thus Ballard, like Lisle, had not earned income from kickbacks from the Five transactions. If there was no kickback scheme that generated income to Lisle, there was no relevant money flow to follow.
Ballard III,
The fact that Kanter transferred money from IRA to Carleo, which entity and funds were under the management of Lisle, does not establish that Lisle earned that money. In
Lisle I,
we found 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 [to be] circular.”
We rejected the argument that Carleo was Lisle’s alter ego. Id. at 378. As to the payments to Lisle’s children, we found that “there is no- evidence of Lisle’s involvement in authorizing them,” and also questioned whether the payments to Lisle’s children from the Weaver deal (one of the Five) supported the Commissioner’s position that Lisle was tunneling money to his children.
It is true that Kanter, Ballard, and Lislе could have had an arrangement to split the funds from the Weaver deal, and accomplished this by tunneling 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 monеy 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 meetKanter 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 Carleo, 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 deаl 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.
Id. at 381-382. Regarding the loans, we noted:
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.
Id. at 382. We therefore disagree with the Commissioner that the flow of funds evidence provides such persuasive proof of the existence of a kickback scheme that Judge Couvillion’s contrary finding must be overturned.
The Eleventh Circuit made a similar finding as to taxpayer Ballard.
We nonetheless note that Judge Haines’s thorough treatment of the flow-of-funds argument does not convince us that Judge Couvillion’s finding concerning the scheme was manifestly unreasonable. The fact that Kanter transferred to TMT, Carleo, and BWK money received from the Five does not necessarily show that Ballard and Lisle earned that money. A finding that Ballard was the true earner of 45% of the payments because his corporation ultimately received 45% of the payments is circular. Likewise, Judge Haines’s attack on Kanter’s explanation for the allocation involves leaps of logic. Although Judge Haines accurately stated that Kanter’s reasoning that Carlco’s investment might imperil IRA’s deductions did not apply to TMT or BWK, this does not necessitate a conclusion that TMT, Carleo, and BWK were the parties’ alter egos. Rather, Kanter may have wished for TMT, Carleo, and BWK to maintain similar tax status. He was an acknowledged expert in our tax laws. Also, although Judge Haines accurately noted that all of the money allocated per the 45%-45%-10% split was traceable to the Five and that IRA had other money that was not allocated, this does not necessitate a finding that the allocation was a method of getting kickback income to anyone. Rather, Kanter simply may have chosen one of its sources of income to fund the allocation. In sum, Judge Haines attributed too much to these facts.
Ballard v. Comm’r,
V.
For the reasons stated above, we vacate the judgment of the Tax Court and remand this case to the Tax Court with instructions to enter an order adopting Judge Couvillion’s original report as the opinion of the Tax Court and to enter judgment consistent with that report and this opinion.
VACATED and REMANDED.