Erhard v. C.I.R. 516 U.S. 930, 116 S.Ct. 336 (1995)/Petition for a Writ of Certiorari

by Supreme Court of the United States

Supreme Court of the United States.
Werner H. ERHARD, Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
No. 95-135.
October Term, 1995.
July 24, 1995.
Petition for a Writ of Certiorari to the United States Court of Appeals for the Ninth Circuit

Petition for a Writ of Certiorari

Michael I. Saltzman, (Counsel of Record), Leslie Book, Stuart B. Katz, Kevin J. Liss, Baker & McKenzie, 805 Third Avenue, New York, New York 10022, (212) 751-5700, Counsel for Petitioner.

QUESTION PRESENTED

Is the requirement of I.R.C. § 7443A(b)(4), that only a Tax Court judge and not a special trial judge may decide a case assigned to the special trial judge for hearing and report, satisfied (1) when the Tax Court judge adopts the special trial judge's lengthy report verbatim, (2) when there is no opportunity for a party to make oral or written objections to the special trial judge's report, and (3) when the applicable Tax Court rule presumes that the decision of a special trial judge is correct?

TABLE OF CONTENTS

QUESTION PRESENTED ... i

TABLE OF CONTENTS ... iii

TABLE OF AUTHORITIES ... iv

OPINIONS BELOW ... 1

JURISDICTION ... 2

STATUTES AND RULES ... 2

STATEMENT OF THE CASE ... 4

REASONS FOR GRANTING THE WRIT ... 10

CONCLUSION ... 17

APPENDIX A ... 1a

APPENDIX B ... 3a

APPENDIX C ... 28a

APPENDIX D ... 30a

APPENDIX E ... 35a

APPENDIX F ... 49a

APPENDIX G ... 120a

APPENDIX H ... 122a

APPENDIX I ... 123a

TABLE OF AUTHORITIES

CASES

Anderson v. City of Bessemer City, 470 U.S. 564 (1985) ... 11

Burlington N.R.R. Co. v. Department of Revenue, 934 F.2d 1064 (9th Cir. 1991) ... 12, 15

Estate of Halas v. Commissioner, 94 T.C. 570 (1990) ... 16

Freytag v. Commissioner, 501 U.S. 868 (1991) ... 4, 5, 10, 11, 12, 13, 14, 16

Pacemaker Diagnostic Clinic of America v. Instromedix, 725 F.2d 537 (9th Cir.), cert. denied, 469 U.S. 824 (1984) ... 15

Reed v. Board of Election Comm'rs, 459 F.2d 121 (1st Cir. 1972) ... 12

Stone v. Commissioner, 865 F.2d 342 (D.C. Cir. 19 89) ... 11

United States v. Wilson, 864 F.2d 1219 (5th Cir.) cert. denied, 492 U.S. 918 (1989) ... 12

Vaughn v. Commissioner, 87 T.C. 164 (1986) ... 16

STATUTES

I.R.C. § 7443 ... 4

I.R.C. § 7443A ... 2, 9, 13, 14, 16

I.R.C. § 7443A(a) ... 2, 4

I.R.C. § 7443A(b) ... 4

I.R.C. § 7443A(b(4) ... i, 4, 10, 11, 13, 16

I.R.C. § 7482(a) ... 13

28 U.S.C. § 636(b) ... 14, 15

28 U.S.C. §1254(1) ... 2

MISCELLANEOUS

Fed. R. Civ. P. 53(e)(1) ... 14

Fed. R. Civ. P. 53(e)(2) ... 15

S. Rep.No. 371, 90th Cong., 1st Sess. 12 ... 15

United States Constitution, Article III ... 15

Christie, Judicial Review of Findings of Fact, 87 Nw. U. L. Rev. 14, 44 (1992) ... 11

Linda Silberman, Masters and Magistrates Part II: The American Analogue, 50 N.Y.U. L. Rev. 1297 (1975) ... 17

9A Wright & Miller, Federal Practice & Procedure, §2585:572 ... 11

Tax Court Rules of Practice and Procedure, Rule 151 ... 3

Tax Court Rules of Practice and Procedure, Rule 161 ... 16

Tax Court Rules of Practice and Procedure, Rule 182 ....... 3

Tax Court Rules of Practice and Procedure, Rule 183 ... 3, 5, 10, 11, 16

Tax Court Rules of Practice and Procedure, Rule 183(b) ... 5, 14, 16

Tax Court Rules of Practice and Procedure, Rule 183(c) ... 5, 6, 11, 12, 15

1 Petitioner, Werner H. Erhard, prays that a writ of certiorari issue to review a judgment of the United States Court of Appeals for the Ninth Circuit affirming a judgment of the United States Tax Court.

OPINIONS BELOW

The opinion of the United States Court of Appeals for the Ninth Circuit is reported at 46 F.3d 1470 (1995), and is reprinted at Appendix B, page 3a. [FN1] The initial memorandum opinion of the United States Tax Court is unofficially reported at 62 T.C.M. (CCH) 1 (1991), and is reprinted at Appendix F, page 49a. The supplemental memorandum opinion of the *2 Tax Court, which was issued pursuant to Petitioner's Motion for Reconsideration, is unofficially reported at 64 T.C.M. (CCH) 10 (1992), and is reprinted at Appendix E, page 35a. The second supplemental memorandum opinion of the Tax Court, which was issued pursuant to the parties' computations for entry of decision submitted to the Tax Court, is unofficially reported at 65 T.C.M. (CCH) 1786 (1993), and is reprinted at Appendix D, page 30a.

FN1. All page references of the form "__a" are to the Appendices to this petition.

JURISDICTION

The decision of the Court of Appeals below was entered on February 8, 1995 (Appendix B, page 3a). On April 25, 1995, the Court of Appeals denied a timely petition for rehearing (Appendix A, page la). The jurisdiction of this Court is invoked under 28 U.S.C. § 1254(1).

STATUTES AND RULES

Section 7443A(a), (b) and (c) of the Internal Revenue Code:
(a) Appointment.--The chief judge may, from time to time, appoint special trial judges who shall proceed under such rules and regulations as may be promulgated by the Tax Court.
(b) Proceedings Which May be Assigned to Special Trial Judges.--The chief judge may assign--
(1) any declaratory judgment proceeding,
(2) any proceeding under section 7463,
(3) any proceeding where neither the amount of the deficiency placed in dispute (within the meaning of section 7463) nor the amount of any *3 claimed overpayment exceeds $10,000, and
(4) any other proceeding which the chief judge may designate, to be heard by the special trial judges of the court.
(c) Authority to Make Court Decisions.-The court may authorize a special trial judge to make the decision of the court with respect to any proceeding described in paragraph (1), (2), or (3) of subsection (b), subject to such conditions and review as the court may provide.
Tax Court Rules of Practice & Procedure, Rule 183:
RULE 183. Cases Involving More Than $10,000. Except in cases subject to the provisions of Rule 182 or as otherwise provided, the following procedure shall be observed in cases tried before a Special Trial Judge:
(a) Trial and Briefs: A Special Trial Judge shall conduct the trial of any such case assigned for such purpose. After such trial, the parties shall submit their briefs in accordance with the provisions of Rule 151. Unless otherwise directed, no further briefs shall be filed.
(b) Special Trial Judge's Report: After all the briefs have been filed by all the parties or the time for doing so has expired, 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 *4 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.

STATEMENT OF THE CASE

The United States Tax Court is comprised of 19 judges appointed by the President for 15-year terms with the advice and consent of the Senate. I.R.C. § 7443. There are currently 14 special trial judges, more than two-thirds of the total number of Tax Court judges, who are appointed by the chief judge of the Tax Court. I.R.C. § 7443A(a).
The chief judge is authorized to assign four categories of cases to a special trial judge. I.R.C. § 7443A(b). In the first three categories of cases, subject to such conditions and review as the Tax Court may provide, the special trial judge has the authority to make the decision of the Tax Court. In the fourth category, the chief judge may assign to a special trial judge "any other proceeding that the chief judge may designate." I.R.C. § 7443A(b)(4). However, in this fourth category, the chief judge may authorize the special trial judge "only to hear the case and prepare proposed findings and an opinion. The actual decision then is rendered by a regular judge of the Tax Court." Freytag v. Commissioner, 501 U.S. 868, 874 (1991). In Freytag, this Court concluded that pursuant to I.R.C. § 7443A(b)(4), the chief judge may "assign any Tax *5 Court proceeding, regardless of complexity or amount, to a special trial judge for hearing and the preparation of proposed findings and written opinion," and confirmed that the special trial judge has no authority actually to decide the case. Id. at 877 (emphasis added).
Rule 183(c) of the Tax Court's Rules of Practice and Procedure requires the Tax Court judge to give "due regard" to the fact that the special trial judge "had the opportunity to evaluate the credibility of witnesses," and states that the findings of fact recommended by the special trial judge are "presumed to be correct." Moreover, Rule 183(b) provides that following post-trial briefs from 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." The report is not served on the parties, and the rule does not require that a party have an opportunity to be heard on objections to the report before it is acted on by the Tax Court judge.
At issue in this case is whether the statutory obligation of the Tax Court judge to make the decision of the Tax Court (and the prohibition of the special trial judge from making the decision of the court) is satisfied when under Tax Court Rule 183 the Tax Court judge must review the findings of fact of the special trial judge under a highly deferential standard, and parties are not given an opportunity to object and be heard on objections to the report before the judge acts on it.
Petitioner's case involved the determination of whether his purchase of the operating assets of a multi-million dollar, multinational educational training business and certain other assets from a separate corporate taxpayer, est, a.e.c., had economic substance for tax purposes, or whether it was a sham transaction. Erhard petitioned the U.S. Tax Court for a *6 redetermination of the deficiencies determined by the IRS for the years 1981, 1982 and 1983. Initially, the cases were assigned to a judge of the Tax Court. Then, without notice to Erhard and over Erhard's objection, the chief judge assigned the cases to a special trial judge for trial. [FN2] Erhard objected to the assignment to the special trial judge for two reasons: (1) there were disputed issues of fact which, because of the deferential standard of review accorded a special trial judge's findings, would likely become the findings of the court, and (2) the special trial judge assigned to the case might be improperly influenced by previous cases he had tried involving est, a.e.c. (not Erhard) and its controversial tax advisor, Harry Margolis. The chief judge advised the special trial judge of Erhard's objections, and after the special trial judge orally assured the chief judge of his objectivity, the chief judge denied the objections on the basis of this assurance.

FN2. This case is unlike Freytag where the taxpayer did not object to the assignment of the case to the special trial judge for trial.

Before his case was tried by the special trial judge, Erhard pressed his objections to the assignment by petitioning the Court of Appeals for the Ninth Circuit for a writ of mandamus directing the chief judge of the Tax Court to assign the case to a Tax Court judge. Erhard again pointed out the prejudice to him that would result if his case were tried by a special trial judge because of his partiality, and because under Tax Court Rule 183(c)'s deferential standard of review, the decision of the Tax Court would effectively be made by the special trial judge, not by the Tax Court judge. The Ninth Circuit denied the petition "for failure to show damage not correctable on appeal and for failure to show that tax court [sic] clearly erred as a matter of law." (Appendix H, page 122a).
The trial before the special trial judge lasted six weeks in three sessions beginning on November 1, 1988 and ending February 3, 1989. Petitioner presented 21 witnesses, including legal advisors, the executives of the business operations, and an Arthur Young partner, who testified at length about the business purpose and economic substance of the acquisition by petitioner, as well as four expert witnesses; 721 exhibits were received in evidence. The parties submitted post-trial briefs to the special trial judge on July 6, 1989, October 4, 1989, December 1, 1989, and January 16, 1990. Petitioner's briefs totalled approximately 750 pages. The case was under consideration by the special trial judge until July 1, 1991, approximately 20 months later.
On July 1, 1991, the Tax Court entered an order assigning the case to Tax Court Judge Irene F. Scott for review of the special trial judge's report. Judge Scott filed an opinion that same day adopting the special trial judge's 87 page report, T.C. Memo 1991-290, Appendix F, page 49a. Judge Scott had observed none of the trial, nor had she read the 27 volumes of trial transcript and the 721 exhibits. Without serving the parties with a copy of the report or giving Erhard the opportunity to file objections to the report, the judge adopted the special trial judge's report verbatim as the decision of the Tax Court. The report of the special trial judge recommended disallowing all depreciation claimed by Erhard on the business properties purchased and all interest deductions accrued and paid on the financing of the transaction. Under Tax Court Rule 183, not only did Erhard have no opportunity to take exceptions to the report of the special trial judge before Judge Scott adopted the report, Judge Scott deferred to the special trial judge's findings of fact and reviewed them under a clearly erroneous standard that required her to "presume that the *8 special trial judge's findings of fact are correct." See 46 F.3d at 1476, Appendix B, at page 16a.
On September 3, 1991, Erhard filed a motion for reconsideration on two legal issues. He contended that, even assuming the correctness of the sham determination, the Tax Court erred in denying him any depreciation on the purchased assets or any deductions for interest actually paid on the disputed loans, and in upholding the substantial understatement of tax penalty and tax-motivated interest. On September 3, 1991, Judge Scott held a hearing on Erhard's motion for reconsideration. At the hearing, Judge Scott stated that she had been sent the case five to six weeks before the order assigning the case to her was filed, and that she had conferred with the special trial judge about the case. The judge stated that she had not read the entire record. During the course of the hearing, the judge admitted:
Then I discussed [the case with Special Trial Judge Gussis] and I won't pretend I read all of these exhibits. I didn't ...
Excerpts of Record on Appeal, p. 797.
I want to hasten to tell you that I relied on what Judge Gussis said about credibility ...
Excerpts of Record on Appeal, p. 799.
... I don't pretend to have read every one of these exhibits or this whole transcript ...
Excerpts of Record on Appeal, p. 800.
... my review of the record, and I grant you, it is not as extensive as if I, personally had heard it. I did rely on the Special Trial Judge's findings, although I didn't just take them carte blanche. And I'm certainly not as familiar with the record as either party is.
Excerpts of Record on Appeal, p. 801 (emphasis added).
In a supplemental memorandum opinion filed on July 6, 1992, T.C. Memo. 1992-376, Judge Scott granted Erhard's motion as to the depreciation and substantial understatement issues, holding that Erhard should be allowed depreciation computed as if there had been no sale and that no substantial understatement penalty was due. (Appendix E, page 35a). The issues on which Judge Scott granted Erhard's motion were issues of law rather than fact, and therefore she was required to review them de novo, with no presumption of correctness. In the course of her supplemental opinion, Judge Scott remarked that her consideration had not been helped by Erhard's attempt to reargue the case:
Our attempt to review the record to ascertain what basis, if any, the record supports for these assets in the hands of WEA has not been assisted by petitioners' continuous argument that the sham transactions purportedly purchasing these assets should be recognized and that the values assigned to the assets by petitioners in the returns for 1981, 1982, and 1983 be accepted. 64 T.C.M. (CCH) 10, 11 (1992), Appendix E, page 38a.
Petitioner appealed the Tax Court decision to the Court of Appeals, arguing, inter alia, that the case had been effectively decided by the special trial judge, in contravention of I.R.C. § 7443A. The court below held that the Tax Court had not improperly allowed the special trial judge to decide the case. Although Judge Scott had admitted that she had not read every exhibit or the entire transcript, the Court of Appeals found that the judge was required under the Tax Court rules to give due regard to the special trial judge's report on findings of fact and credibility and to review his report under a clear error *10 standard. Although the petitioner's claim was that Judge Scott had not decided the case, but abdicated this duty to the special trial judge, the Court of Appeals nevertheless upheld the Tax Court's decision on the theory that, since the record was so voluminous, "it was perfectly reasonable for Judge Scott not to read every word." 46 F.3d at 1476, Appendix B, page 17a.

REASONS FOR GRANTING THE WRIT

Certiorari should be granted in order to resolve an important question left undecided four years ago in Freytag. That issue was whether "the deferential standard with which Tax Court Rule 183 requires a Tax Court judge to review the factual findings of a special trial judge allows the latter not only to hear a case but effectively to resolve it." Freytag v. Commissioner, 501 U.S. 868, 874 n.3 (1991). Tax Court Rule 183 violates I.R.C. § 7443A(b)(4) and this Court's decision in Freytag because Tax Court Rule 183 (1) requires the Tax Court judge to defer to a special trial judge's factual findings, and (2) does not give the parties the right to object to the special trial judge's report before the judge acts on it. Since Freytag, no court has addressed the issue of whether the deferential standard of Tax Court Rule 183 allows the special trial judge to not only hear but to decide the case. As a result, the decision of the Court of Appeals in this case does not conflict with the decisions of any other court of appeals. Nonetheless, review of this important question is appropriate for the following reasons:
1. The Court should consider this issue because it is an issue of first importance in the administration of the tax laws. Further consideration of the issue through court of appeals review is both unnecessary and will result in uncertainty in procedure in the Tax Court, where taxpayers file approximately 95 percent of all tax cases. In 1994, special trial judges rendered approximately 23% of the Tax Court's published decisions. *11 They handle not only small cases, but also other cases pursuant to I.R.C. § 7443A(b)(4). These cases constitute approximately 10% of the Tax Court's published decisions in 1994. 2. Freytag's requirement that the Tax Court judge decide the case cannot be met if a deferential standard, and certainly not if a clear error standard of review, is used. The opinion of the court below says that, "whichever course [the judge takes under Tax Court Rule 183 with regard to the special trial judge's report], she must presume that the special trial judge's findings of fact are correct, and she must give '[d]ue regard' to the special trial judge's opportunity to evaluate the credibility of the witnesses (Appendix B, page 16a). The presumptively correct standard of Tax Court Rule 183(c) "sought to establish the relatively high level of deference that the phrase 'clearly erroneous' entails." Stone v. Commissioner, 865 F.2d 342, 344 (D.C. Cir. 1989). But a clear error standard of review by the Tax Court judge does not comply with Freytag's requirement that the judge make the decision of the Tax Court. Freytag, supra, at 874 ("Petitioners appear not to appreciate the distinction between the special trial judges' authority to hear cases and prepare proposed findings and opinions ... and their lack of authority actually to decide those cases, which is reserved exclusively for judges of the Tax 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." Anderson v. City of Bessemer City, 470 U.S. 564, 574 (1985). Even if the reviewing court disagrees with the findings, it must accept the trier of fact's determination, provided only that it have some evidentiary support and is a permissible or plausible view of the evidence. 9A Wright & Miller, Federal Practice & Procedure, §2585: 572; Christie, Judicial Review of Findings of Fact, 87 Nw. U. L. Rev. 14, 44 (1992). By *12 deferring to the special trial judge's findings under the clearly erroneous standard, therefore, the Tax Court judge could not have substituted her judgment for that of the special trial judge on his factual findings and the conclusions he drew from them.
There is no reason to believe that a special trial judge's findings of fact are entitled to any greater deference on review than those of a magistrate or special master. A complete and careful review of a subordinate judicial officer's report is required to avoid improper "rubber-stamping" of the report by a district court judge. Burlington N.R.R. Co. v. Department of Revenue, 934 F.2d 1064, 1072-74 (9th Cir. 1991) (case remanded back to district court, which affirmed the special master's report in a one sentence order, which constituted improper "rubber stamp" of report); United States v. Wilson, 864 F.2d 1219, 1222 (5th Cir.) (court remanded case to district court judge because judge did not give "sufficient indication that he made his own determination based upon the record and unrestrained by the findings and conclusions of the magistrate"), cert. denied, 492 U.S. 918 (1989); Reed v. Board of Election Comm'rs, 459 F.2d 121, 123 (1st Cir. 1972) (when magistrate's findings of fact are approved by a "laying on of hands" by the district court, an "abnegation of judicial authority" has occurred). A deferential standard of review is inconsistent, therefore, with independent decision-making by the judge. Judge Scott's review was not "adequate" for Freytag purposes because Freytag assumes that a Tax Court judge will review the special trial judge's report in sufficient depth so that it can fairly be said that the decision of the Tax Court is the judge's decision. In fact, apart from the Circuit Court's observation that Judge Scott followed Rule 183(c)'s deferential standard of review, there is no real indication of what standard Judge Scott actually used in reviewing Special Trial Judge *13 Judge Gussis's report. The judge only said she did not take the special trial judge's findings "carte blanche," even though she adopted his report verbatim. If Judge Scott did not give the special trial judge full discretionary power, she also did not indicate in what respect she limited that power.
Accordingly, Judge Scott could not and did not give the special trial judge's findings of fact and findings of ultimate fact sufficient review to have made the decision in this case, as she was required to do by I.R.C. §7443A and this Court's opinion in Freytag. The Ninth Circuit's conclusion that the judge's review of the special trial judge's report was "adequate" overlooks the requirement of Freytag that the Tax Court judge must actually make the court's decision.
Finally, permitting the Tax Court judge to review the findings of fact of the special trial judge under a clear error standard will lead to an unconstitutional result. If the judge of the Tax Court is to review the special trial judge's findings of fact under a clear error standard, review by the judge of the Tax Court is the same as review by a court of appeals. [FN3] A court of appeals must accept findings of fact of the Tax Court unless there is clear error. See I.R.C. § 7482(a). If this same standard applies to the Tax Court judge's review of the special trial judge's report, the effect will be to create a Tax Court trial division comprised of special trial judges and a Tax Court appellate division consisting of the reviewing judges. Nothing in Freytag or the Internal Revenue Code authorizes Tax Court supervision of special trial judge findings and opinions in (b)(4) cases to be appellate in nature. These cases are meant to be decided by the Tax Court in the first instance, not merely *14 reviewed after a special trial judge heard the case and drafted the opinion.

FN3. Tax Court review may actually compare unfavorably even with review by a court of appeals. At least a court of appeals is briefed on the issues raised by the court below. In a Tax Court proceeding, the parties have no opportunity to file objections to the special trial judge's report.

3. The Tax Court rules must allow the parties to file objections and the judge must hold a hearing on those objections under procedures similar to those provided in the Federal Rules of Civil Procedure for the district court review of special master and magistrate reports. Anything less is inconsistent with I.R.C. § 7443A and this Court's decision in Freytag. The Federal Rules of Civil Procedure are instructive in this case [FN4] because the referral of a Tax Court case to a special trial judge is similar to the referral of a case by a district court for hearing and report to a magistrate judge or special master. The Tax Court special trial judge is a subordinate judicial officer analogous in status and function to a magistrate judge or a special master. See Freytag, supra. The special trial judge prepares a report, including findings of fact, in the same manner as a special master or a magistrate judge. Compare Tax Court Rule 183(b) with Fed. R. Civ. P. 53(e)(1) and 28 U.S.C. § 636(b). As is the case with special trial judges, the decision of a district court must be that of the district court judge and not of the magistrate.

FN4. Tax Court Rule l(a) itself provides, "Where in any instance there is no applicable rule of procedure, the Court or the Judge before whom the matter is pending may prescribe the procedure, giving particular weight to the Federal Rules of Civil Procedure to the extent that they are suitably adaptable to govern the matter at hand."

Indeed, a special trial judge's findings of fact are subject to the same level of deference given by a district court judge to a special master's report. A special trial judge's findings are "presumed to be correct," and a special master's findings of fact are not to be set aside "unless clearly erroneous." These standards are, in substance, the same. Notes of Advisory Committee on Rules, Note to Subdivision (e). The district court "may adopt the [master's] report or may modify *15 it or may reject it in whole or in part or may recommit it with instructions." Fed. R. Civ. P. 53(e)(2). Tax Court Rule 183(c) gives the Tax Court judge the same discretion.
There is one crucial difference, however, between the review procedures in the district court and those applicable to the Tax Court. After a special master prepares a report, but before the district court acts on it, the report must be served on the parties, who are entitled to file objections. Fed. R. Civ. P. 53(e)(2). If a party files objections, the district court must hold a hearing before ruling on the report. Moreover, the district court may not merely "rubber stamp" the master's report. Rather, the district court must respond to the particular facts of the case and address any objections to the report made by the parties. See Burlington N.R.R. Co. v. Department of Revenue, 934 F.2d 1064, 1072 (9th Cir. 1991) (district court's "rubber stamp" of master's order was "inexcusable abdication of judicial responsibility").
Similarly, when a district court assigns a case to a magistrate judge pursuant to 28 U.S.C. § 636(b), the district court must follow a notice and objection procedure virtually identical to that applicable to special masters' reports. However, the district court judge is expressly required to make a de novo determination of any matters to which objections are raised. "The merit of the de novo determination scheme lies in the duty of the district court to make its own determinations of magistrate rulings to which the parties object. ..." Pacemaker Diagnostic Clinic of America v. Instromedix, 725 F.2d 537, 546 (9th Cir.), cert. denied, 469 U.S. 824 (1984). The purpose of these procedures in the case of magistrates and masters is to ensure that these officers are not allowed to make the decision of the district court, in violation of Article III of the Constitution. S. Rep. No. 371, 90th Cong., 1st Sess. 12.

• 16 In contrast to the notice and objection procedures of the Federal Rules applicable to district court review of reports of magistrates and masters, under Tax Court Rule 183(b) parties are not entitled to receive prior notice of or an opportunity to file objections to the special trial judge's report before the Tax Court judge acts on it. This was not the case before 1984 when Congress enacted I.R.C. § 7443A(b)(4) to permit special trial judges to hear any proceeding assigned by the chief judge. Before 1984, the Tax Court's review procedures under the predecessor of Tax Court Rule 183 had virtually the same notice and objection procedures as the district court rules. It is doubtful that Congress would have sanctioned the use of special trial judges by statute if it had been informed that judges would review reports of special trial judges without giving the parties the right to make objections before they were acted on by the judges. Freytag, supra, at 875 ("The 1984 amendment was 'technical' in light of the historical development of the special trial judge's role ...").
  

With no other avenue to pursue under the Tax Court's rules, Erhard filed a motion for reconsideration pursuant to Tax Court Rule 161. This, however, was no substitute for the opportunity to object to the report before the judge acted on it because the granting of a motion for reconsideration pursuant to Tax Court Rule 161 rests within the discretion of the Court. Estate of Halas v. Commissioner, 94 T.C. 570, 574 (1990); Vaughn v. Commissioner, 87 T.C. 164, 166-67 (1986). A motion for reconsideration will not be granted unless unusual circumstances or substantial error is shown. This standard is too stringent to substitute for the review of special trial judges' reports required by I.R.C. § 7443A.
The lack of any opportunity to file objections to the special trial judge's findings before the Tax Court judge ruled, therefore, created in this case exactly the same danger that *17 exists in the district court when cases are assigned to a magistrate or special master for trial - that is, "a danger that the district court [or Tax Court] will merely endorse the ... report as its own decision." Linda J. Silberman, Masters and Magistrates Part II: The American Analogue, 50 N.Y.U. L. Rev. 1297, 1344 n.268 (1975). Because the statute prohibits perfunctory review or rubber-stamping of special trial judges' reports by the Tax Court, the Tax Court rules are inconsistent with I.R.C. § 7443A because they do not give taxpayers an opportunity to object to the report before its adoption by the Tax Court.

CONCLUSION

The petition for a writ of certiorari should be granted.

Decision, Supreme Court of the United States

• Erhard v. C.I.R. 516 U.S. 930, 116 S.Ct. 336 (1995)

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