Legal News

11th Circuit Deals Blow to Marathon Tax-Evasion Case

By Amir Efrati

Here’s a tale of Form-1040 intrigue that comes to us courtesy of the 11th Circuit, which today dealt a blow to Internal Revenue Service’s nearly 20-year quest to claim taxes allegedly owed by a now-deceased lawyer. (Click here for the titillating 61-page decision.)

The following narrative will either make you laugh or cry, we’re not clear which. But in any event, hold onto your hats. Seriously.

The lawyer, Burton W. Kanter, who died in 2001 and was, according to this NYT story last year, “one of the nation’s leading tax advisers,” was accused by the IRS of evading taxes in the 1970s and 80s and of leading a scheme in which the Pritzker family of Chicago, which owns the Hyatt hotel chain, paid Kanter and two others millions of dollars in alleged kickbacks for helping them get a management contract for a San Francisco hotel built in 1973. The three conspirators then allegedly didn’t pay taxes on the money.

Following a 1994 trial, a special trial judge didn’t make a judgment but prepared an undisclosed opinion that concluded that Kanter should owe small amounts of tax because of technical violations but that he didn’t commit civil fraud. (It also found that there was no kickback scheme and that the other alleged conspirators didn’t commit fraud.) That confidential report then went to the U.S. tax court, which in 1999 ruled in favor of the IRS. However, here’s where things go a little haywire: the tax-court judge erroneously indicated he was adopting the special trial judge’s findings. The tax court also refused to disclose that judge’s report.

But while Kanter passed away two years later, lawyers for one of the alleged co-conspirators in the scheme, Claude Ballard, a former Goldman Sachs partner who had helped the Pritzker family get the hotel contract, appealed to the 11th Circuit, but only on the grounds that the special-trial judge’s report should be disclosed, thinking that its contents would argue in favor of his exoneration. However, the 11th Circuit affirmed the tax court decision, ruling that the report should stay undisclosed. Ballard then took the case to the Supreme Court, which in 2005 ruled that tax courts can not keep such reports secret.

The report was then made public and, sure enough, the report bolstered the Ballard’s defense.

Ballard then took the report, as new evidence, back to the tax court. However, this federal tax court judge ruled in favor of the IRS and rebuked the special trial judge’s original findings. Ballard then appealed that decision to the 11th Circuit, which brings us — alas — to today’s ruling: The 11th Circuit today reversed the tax court judge, finding they he should have given “due regard” to the special trial judge’s findings.

For those of you who made it this far, here’s the bottom line: the IRS will not be able to claim income taxes on $3.2 million worth of payments made to Ballards.

Meanwhile, Kanter’s estate has an appeal pending in the 7th Circuit over the same 2007 tax court decision, and the other defendant, who died before the original 1994 trial, has an appeal before the 5th Circuit.

Danny S. Ashby and Vester T. Hughes, Jr. of K&L Gates led the appeals effort for Ballard.

Full post as published by Law Blog - WSJ.com on April 07, 2008 (boomark / email).