Earlier this year, former U.S. Tax Court Judge Diane Kroupa was indicted for conspiracy to commit tax evasion and obstruction of an IRS audit. During her time on the court, Kroupa authored some significant opinions, including BNY Mellon v. Commissioner, which held that the taxpayer could not properly claim foreign tax credits generated through a so-called STARS transaction. Litigation with other taxpayers over the STARS transaction continues, and the government has relied heavily on BNY Mellon, even after Judge Kroupa’s indictment.
At least one taxpayer has scoffed at that reliance. In Santander v. United States, the taxpayer is currently defending its district court victory over its STARS transaction in the First Circuit. The government’s opening brief repeatedly cites BNY Mellon, but Santander’s response takes issue with that:
“The Government fails to mention that the factual findings and decision by the Tax Court in BNY (the first decision in the Government’s favor in STARS litigation) were rendered by a judge facing a disabling conflict of interest: she was simultaneously under investigation for tax fraud and indeed was subsequently indicted and resigned from the bench. The Government cites her findings and decision more than two dozen times in its opening brief—without disclosing that they were rendered in favor of an agency (the IRS) with the power to affect whether the Tax Court judge would be criminally prosecuted.”
From BNY itself, it’s impossible to tell whether the specter of criminal prosecution motivated Judge Kroupa to find in favor of the IRS. Also, judges who are not under criminal indictment have also held against taxpayers in litigation involving STARS transactions, which may suggest that Kroupa’s IRS-favorable decision was not intended to appease the prosecution.
Nonetheless, BNY reflects a special case because (as Santander notes) it was the first government-favorable decision in STARS cases. BNY surely influenced later courts, as shown by the numerous citations to that case in court briefs and judicial opinions. And though the Second Circuit affirmed Judge Kroupa’s decision in BNY Mellon, it may very well have viewed her factual findings differently had it known she was simultaneously facing a criminal investigation by one of the litigants. Though Judge Kroupa’s legal problems do not invalidate her opinions (which, formally speaking, are actually issued by the Tax Court as a body, not by her in her individual capacity), it seems unwise for the government to rely so heavily on BNY Mellon.
The Kroupa debacle also sheds some light on the ongoing debate over whether the Presidential removal power over Tax Court judges violates the separation of powers. The taxpayer in Kuretski v. Commissioner argued that, to secure a fair hearing, he wanted the Tax Court judge presiding over his trial to be free from Presidential influence. Many in the tax community rejected that allegation, suggesting that Kuretski’s challenge was baseless, if not absurd. However, the problems related to Kroupa’s prior opinions present at least one (extreme) case where a judge might be aware of the executive branch’s power over her, and where her awareness might affect how she disposes of a case.
Of course, even if the President’s removal power over Tax Court judges were eliminated, that would not protect federal judges from criminal prosecution for tax evasion. But if and when more Kuretski-style challenges appear, the reviewing courts may wish to maintain an open mind about how the power that the executive branch holds over a judge could improperly influence her disposition of a case.