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April 6 — The indictment of former U.S. Tax Court Judge Diane L. Kroupa on tax evasion charges has sent shock waves through the tax bar, raising questions about whether any of her rulings—some in recent, high-profile cases—could be vulnerable to challenge as a result.
The answer seems to be: Maybe.
The case against Kroupa and her husband, Robert E. Fackler, involves a fairly common issue—alleged mischaracterization of personal expenses as business deductions—which seldom results in criminal charges.
For that reason, some practitioners also question whether Kroupa has been singled out for special attention because of her status as a Tax Court judge.
Dennis J. Ventry Jr., a tax professor at the University of California, Davis, School of Law, doesn't think so.
“They lied to an IRS agent,” Ventry said in an April 6 interview. “Lying to a federal agent is obstruction.”
That is a felony offense, he noted.
According to the indictment, Fackler and Kroupa claimed deductions for numerous household, personal and travel expenses as either business expenses from Fackler’s political consulting firm and or non-reimbursed employee expenses incurred by Kroupa as a Tax Court judge. Kroupa also told their tax return preparer that proceeds from the sale of property in South Dakota was from an inheritance.
Questionable business expenses and mischaracterized income are routine issues in the Tax Court. If the court finds such expenses aren’t ordinary and necessary to the taxpayer’s trade or business or not sufficiently substantiated, the court disallows them and applies an accuracy-related penalty. The court will also recharacterize income and impose a penalty. These are civil matters.
But Kroupa and Fackler are facing criminal charges, Ventry said, because they tried to cover up the mischaracterizations.
“The obstruction charge may be what put it over the edge. If she said ‘I totally screwed up’ and came clean, the government may not have pursued criminal charges,” Ventry said.
“Smart people do dumb things all the time,” he added, “but this is a head-scratcher. If you’re a high-level government employee, you side on saying ‘no' to a deduction; you take the conservative approach.”
But David Aughtry, an Atlanta attorney who has represented defendants in both criminal and civil tax cases, is skeptical of the charges against Kroupa.
A partner in Chamberlain, Hrdlicka, White, Williams & Aughtry, he told Bloomberg BNA that he knows Kroupa personally, having argued cases before her at the Tax Court and having seen her at tax conferences.
“Judges are vulnerable to being railroaded,” he said. “Sometimes they are held to a strict liability standard when the rest of us would get a pass.”
The charges against Kroupa and Fackler stem from business deductions taken by Fackler's lobbying firm, Grassroots Consulting, which was included in the couple's joint returns for tax years 2004-2010.
“Are you buying paper for your printer for work or are you using it for personal purposes? Or some of both?” Aughtry said. “Your cell phone—is that a business asset or a personal asset? Your travel log: How much of your car usage is business and how much is personal? All those are debatable things. And in addition to that there are a lot of things that are not debatable but get overlooked because they are so small. You see some of those things in this case.”
In many cases, he said, judges are presumed to be more knowledgeable than the average taxpayer, so if there is a mistake, “it is presumed to be willful.”
“It's a false presumption,” Aughtry said. “It's a presumption of guilt rather than a presumption of innocence.”
Kroupa was appointed to the Tax Court in 2003 by former President George W. Bush. Her 15-year term was set to expire in 2018, but she retired abruptly and without explanation in 2014. Prior to her tenure on the court, she had served on the Minnesota Tax Court, where she was chief judge from 1998 to 2001.
“She was good; she had her hands on a lot of a big cases; she moved law on partnership cases—on when to apply penalties at the partner level,” Ventry said, citing her decision in Crispin v. Commissioner, T.C. Memo. 2012-70, a tax shelter case.
During her tenure on the court, Kroupa presided over thousands of cases—most of which ultimately settled—and issued more than 200 opinions. Whether any of those opinions could be in jeopardy now because of the indictment isn't clear.
Former U.S. Tax Court Judge Carolyn Parr, who retired in 2002, told Bloomberg BNA April 5 that she knows of no protocol or process for dealing with a situation where a judge or former judge faces tax evasion charges.
“I never heard of anything like that in the Tax Court,” she said.
Cynthia Gray, director of the National Center for State Courts, told Bloomberg BNA April 6 that she had never heard of a case being overturned due to actions by the judge unrelated to the case. For a case to be overturned, she said, the misconduct must be directly related to the case—such as accepting a bribe from one of the parties.
Richard Sapinski, member of Sills, Cummis & Gross PC, in Newark, N.J., said in an April 5 e-mail that if a taxpayer's attorney were to challenge one of Kroupa's rulings, it would require a showing of bias in the case.
Could a taxpayer's attorney try to raise doubts about Kroupa's impartiality on the basis that she herself was embroiled in a dispute with the Internal Revenue Service?
“The Tax Court judges are subject to the Code of Conduct for United States Judges and that would be a starting place,” Sapinski said. “There would be several potential canons violated if a judge favored one side” over another “in the hope that particular side would overlook some other issue or grant a benefit.”
There could be a parallel, he suggested, in a situation where a judge hearing criminal cases is charged with driving while intoxicated.
“There would likely be defense bar concern whether that tainted his decision-making in criminal cases before him,” Sapinski said. “But in the end, I think there would have to be a showing made by the claimant that supports a basis for thinking the judge was, in fact, not thinking impartially.”
The claimant would have to point to specific facts in his case showing bias and tie those facts to a violation of the canons, Sapinski said.
He added: “I never had a case before Judge Kroupa so I have no sense of how she handled cases, but I have never heard anyone complain that she was 'super-pro-government.' ”
But Ventry said he doubts that the indictment will result in a reversal of any case.
“The indictment goes back to 2004, and there’s no sign that what she was doing” with her personal taxes affected her decisions, he said.
Other major decisions by Kroupa include Eaton Corp. v. Commissioner, 140 T.C. 410 (2013), in which the court held that an advanced pricing agreement isn't subject to commercial contract law, but rather is “an administrative determination.”
Ruling on cross-motions for partial summary judgment, Kroupa held that the IRS could unilaterally cancel the APA, but the taxpayer could challenge the cancellation under an abuse of discretion standard.
Kroupa also ruled that the Bank of New York Mellon Corp. (BNY) could deduct interest expenses from the loan portion of a STARS transaction, a complex cross-border deal for which the IRS had disallowed all tax benefits (Bank of New York Mellon Corp. v. Commissioner, T.C. Memo. 2013-225, 2013 BL 255136).
Kroupa also killed the buzz in the business plan of marijuana sellers operating in jurisdictions where the substance has been legalized. In Olive v. Commissioner, 139 T.C. 19 (2012), she ruled that a taxpayer couldn’t deduct expenses related to selling the product for purposes of federal taxes, because the sale was illegal under federal law.
Regardless of their chance for success, the marijuana purveyors may be the most likely to attempt to challenge the ruling, despite the fact that it was a division opinion supported by the other presidentially appointed Tax Court judges and affirmed by the U.S. Court of Appeals for the Ninth Circuit.
Eaton was also a division opinion from which no other Tax Court judge dissented. The interest deduction ruling in BNY was affirmed by the U.S. Court of Appeals for the Second Circuit and that appeals decision was followed by the U.S. Court of Appeals for the Federal Circuit in a ruling on the same type of transaction.
Kroupa also ruled on at least 29 other cases where business expense deductions under tax code Section 162 were at issue. If any taxpayer had grounds to seek a rehearing based on judicial misconduct, it could be one of these.
Parr told Bloomberg BNA that while it isn't unusual for judges to be audited by the IRS, judges are obligated to disclose any conflict of interest. For example, if an audit of a judge's tax returns involved an issue that the judge is facing in a case before the court, then she would probably want to disclose that fact, Parr said.
The parties, in turn, could request that the judge be recused or the judge might recuse herself.
What impact the indictment against Kroupa might have on her rulings—whether an aggressive tax attorney could try to use it as a basis for challenging an adverse opinion—is an open question, she said.
“I just don't know,” Parr said.
With assistance from Matthew Beddingfield in Washington.
To contact the editor responsible for this story: Molly Moses at firstname.lastname@example.org
Text of the decision is in TaxCore.
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