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DID WE SAY "ADOPTED?" OH, WE MEANT "ADAPTED."

June 01, 2005

Is "Dilbert" really a documentary about the Tax Court's inner workings?

You know the strip. Imagine a subordinate - perhaps Asok - writing a long, detailed recommendation for the pointy-haired boss. The PHB then brings Asok to a board of directors meeting where he thanks Asok for his fine report, and tells the board he is embracing it in all respects - and proceeds to make the opposite recommendation while Asok watches in stunned silence.

Now replace "Asok" with "Special Trial Judge Couvillion" and "PHB" with "Judge Dawson," and we approximate the fact pattern in "Investment Research Associates v. Commisioner."

Tax Analysts today carries an extraordinary story (subscribers only) by their reporter Sheryl Stratton of how taxpayers slapped with civil fraud penalties by Judge Dawson had to go to the Supreme Court to uncover the Special Trial Judge's original report that Judge Dawson "adopted" -- but with opposite conclusions.

THE CASE

The original case involved a complex arrangement involving sale-leasebacks and non-recourse notes. The final tax court decision not only disallowed losses form the transactions, but also said three organizers of the transaction, including two attorneys, committed fraud.

By the looks of Judge Dawson's opinion, it appears that he simply cut and pasted the Trial Judge Report:

Nevertheless, the defendants' attorneys began to suspect that the Special Trial Judge Report "adopted" by Judge Dawson was not the opinion that the Trial Judge had actually written. The defendants lived in three different circuits, and each appealed the decision, asking for access to the original Trial Judge Report; they lost each time.

The Supreme Court agreed to hear the case -- a surprise to many observers, because usually the Supremes don't get involved when three circuits agree. They ruled, 7-2, that the appelate courts needed the original Trial Judge reports to properly consider the appeal (Ballard v. Commissioner).

EVERYTHING'S DIFFERENT NOW

It took three appeals court defeats and a Supreme Court decision to get the original Trial Judge Report. It was worth the effort, according the the Tax Analysts article:

Revelation of the more-than-300-page report not only vindicates the three taxpayers (of whom only Ballard survives) but also their lawyers, who maintained to three different appeals courts and finally the U.S. Supreme Court that the trier of fact's original report did indeed exist and held for the taxpayers

Ms. Stratton reports that the Tax Court is changing their procedures as a result of this case. That seems like a really good idea.

UPDATE: An abbreviated, publicly-available version of Ms. Stratton's article is available here.

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