Peter Reilly has posted a good discussion of the Second Circuit decision in
Diebold Found. v. Commioner, 736 F.3d 172 (2d Cir. 2013),
here. Peter's blog entry
Charitable Foundation Haunted by 1999 Corporate Tax Assessment (Forbes 11/17/12),
here.
The substantive decision in the case deals with the application of Section 6091 transferee liability. The case gets into some esoterica of transferee liability, so I will leaves readers of the opinion and Peter's blog to ferret that out. I will, however, just offer a gratuitous comment that the sophisticated players in the underlying game -- generically referred to as Midco transactions -- knew that when all the shuffling was over, the IRS would be left holding the bag for a large amount of tax dollars that was due and that those tax dollars not paid would be shared among the players in various ways intended to disguise the fact that they had just participated in key steps to evade federal taxes. Evade may be a strong word here, but for the level of sophistication -- lawyers involved -- by the players I have observed in the game, they knew -- certainly should have known -- that was the consequence of their participation in the Midco game. I think the Second Circuit gets that point and is not too bashful to say so. In this regard, Calvin Johnson, UT Law Professor, is quoted as saying that the shareholders (including the Diebold Foundation) [a]s a matter of economics, * * * got a price for their shares that included, by my estimates, 85 percent of the value of the tax evaded. Andrew Velarde,
Second Circuit Holding on Midco Acquisitions Seen as Big Win for Government, 2013 TNT 223-3 (11/19/13).
Moving on, at the bottom of his blog, Peter addresses the procedural issue that the Second Circuit resolves at the threshold in reaching the substantive issue it addressed. That procedural issue is the appropriate standard of review for appeals from the Tax Court. Section 7482(a)(1),
here, confers jurisdiction upon the courts of appeals to review decisions from the Tax Court "in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury." Pretty straight-forward. But the Second Circuit had to correct an error of its own making in order to calibrate the right standard for "mixed questions of law and fact." The Court's discussion of the problem and its resolution is relative short, so I just cut and paste it. However, in order to cut out some of the "noise," I omit most of the citations and some quotations marks.
In an appeal from the Tax Court, it is without dispute in this Circuit that we review legal conclusions de novo and findings of fact for clear error. While we have previously held the standard of review for mixed questions of law and fact to be one for clear error, all Courts of Appeals are to "review the decisions of the Tax Court . . . in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury." 26 U.S.C. § 7482(a)(1). Our case law enunciating the standard of review for mixed questions of law and fact in an appeal from the Tax Court is in direct tension with this statutory mandate. Following a civil bench trial, we review a district court's findings of fact for clear error, and its conclusions of law de novo; resolutions of mixed questions of fact and law are reviewed de novo to the extent that the alleged error is based on the misunderstanding of a legal standard, and for clear error to the extent that the alleged error is based on a factual determination. Two recent panels of our Court have recognized this contradiction between our case law and 26 U.S.C. § 7482(a)(1) but did not resolve the tension, as they determined that under either standard of review the outcome in the particular case would be the same. In the instant case, the standard of review affects the outcome, so our Court can avoid the question no longer.
The standard that mixed questions of law and fact are reviewed under a clearly erroneous standard when we review a decision of the Tax Court was established in this Circuit's jurisprudence in Bausch & Lomb Inc. v. Comm'r, 933 F.2d 1084, 1088 (2d Cir. 1991). Bausch & Lomb imported the standard from the Seventh Circuit, which, in Eli Lilly & Co. v. Comm'r, 856 F.2d 855, 861 (7th Cir. 1988), held the clearly erroneous standard to be applicable. Eli Lilly in turn relied upon another Seventh Circuit case, Standard Office Bldg. Corp. v. United States, 819 F.2d 1371, 1374 (7th Cir. 1987), a tax case on review from the district court. None of these decisions mention 26 U.S.C. § 7482(a)(1), which has been a part of the Internal Revenue Code since 1954. In Standard Office Building, the Seventh Circuit indicated that one of the open questions in the appeal was "the kind of 'mixed' question of fact and law . . . that, in this circuit at least, is governed by the clearly-erroneous standard." Id. (emphasis added). That court then cited a handful of cases from their circuit that stated this standard from cases reviewing the decision of a district court. The Seventh Circuit uses the clearly erroneous standard of review for mixed questions of law and fact when reviewing both decisions of the Tax Court and those of the district courts. Its standard is thus not in tension with 26 U.S.C. § 7482(a)(1), unlike this Court's.
