It now appears that taxpayers are attempting to attack Judge Kroupa's orders or decisions in cases she decided while she was committing the conduct subject to the indictment and was even under audit that led to the indictment. See e.g., Andrew R. Roberson, Taxpayer Argues First Circuit Should Not Follow Tax Court Decision by Judge Indicted for Tax Fraud (McDermott Will & Emory's Tax Controversy 360), here. In the immediate subject of that blog entry, the taxpayer prevailed in the district court with respect to a foreign tax credit generator transaction. Santander Holdings USA, Inc. v. United States, 144 F. Supp. 3d 239 (D MA 2015), on appeal to the First Circuit (No. 16-1282) (the brief is linked on the MWE blog). The genre of transaction in issue in Santander, although sustained by the district court in that case, had been rejected by Judge Kroupa in the Tax Court and, based on Judge Kroupa's opinion, by the Second Circuit. Bank of N.Y. Mellon Corp. v. Commissioner, 140 T.C. 15, as amended by 106 T.C.M. (CCH) 367 (2013), aff’d, 801 F.3d 104 (2d Cir. 2015), cert. denied, 136 S. Ct. 1377 (2016) (“BNY”).
On the merits, Santander tries to bootstrap victory, as it did below, on two related holdings Compaq Comput. Corp. & Subsidiaries v. Commissioner, 277 F.3d 778 (5th Cir. 2001) and IES Indus., Inc. v. United States, 253 F.3d 350 (8th Cir. 2001), both involving foreign tax credit generator transactions of a different sort. I noted in a revision to my Federal Tax Procedure Book the following (Revision to Texts on Tax Shelters and Case Assignment (Federal Tax Procedure Blog 9/24/15), here:
A good example of a classic tax shelter is Compaq Computer Corp. v. Commissioner, 113 T.C. 214 (1999), rev’d 277 F.3d 778 (5th Cir. 2002). Please read both the Tax Court and the Appellate opinions now. In net, a classic abusive tax feature present in the case is that, except for the benefit of the foreign tax credit for foreign taxes paid that Compaq did not bear the economic burden, the deal was a money-loser. The Tax Court viewed the transaction as abusive and imposed penalties; the Fifth Circuit blessed the transaction. It was a tax shelter; it was just a tax shelter that, at least the appellate court, believed – or at least held, regardless of what it believed – was legal and not abusive. Both the Tax Court and the Fifth Circuit are good courts, with good judges having radically different views of what is an abusive tax shelter and where to draw the line. (Note the Fifth Circuit’s opinion, however, has not worn well with time.) fnSantander tries to breathe life into the earlier Compaq and IES decisions. But, since the Second Circuit and the Federal Circuit were the latest to pronounce on the specific type of tax credit generator transactions, Santander has to say something about those authorities. It tries to attack BNY based on Judge Kroupa's indictment. Here's how (footnote omitted):
fn E.g., Bank of N.Y. Mellon Corp. v. Commissioner, 801 F.3d 104 (2d Cir. 2015), cert. denied, 136 S. Ct. 1377 (2016) (“In so holding, we agree with the Federal Circuit in Salem and disagree with decisions of the Fifth and Eighth Circuits (Compaq and IES, respectively));” Lee A. Sheppard, The Fun Goes Out of Foreign Tax Credit Planning, 148 Tax Notes 1283 (Sept. 21, 2015) (hyperbolically, as is her wont, “The Second Circuit essentially reversed the Compaq and IES decisions.”) [JAT Note: the hyperbole is that the Second Circuit cannot reverse Compaq and IES but it can and did, at least according to the esteemed Ms. Sheppard, destroy any persuasive value they had (although, I think, most observers had viewed Compaq and IES as sua sponte without any continuing precedential value except perhaps, for exactly the same type of transaction, already legislative overruled, until reversed, by those respective circuits .]
1. This Court Should Not Follow The Tax Court’s Decision, Rendered By A Judge Subsequently Indicted For Tax Fraud.
The Tax Court’s decision in BNY (and the Second Circuit’s affirmance of that decision) is not entitled to weight for a further reason: it has recently come to light that the judge in that case—Judge Kroupa—faced a disabling conflict of interest when she rendered the BNY decision. In April 2016, Judge Kroupa was indicted for tax fraud on the ground that she purposely understated her taxable income by approximately $1 million and purposely understated the amount of tax she owed by at least $400,000.
The unsealed indictment reveals that at the same time she was considering the BNY case, she was under audit by the IRS and allegedly committing further tax fraud. It is obvious that she might have had an interest in currying favor with the IRS, the very agency helping to decide whether she would be criminally prosecuted. Judge Kroupa’s alleged misconduct “directly implicate[d] the character and integrity of the judge.” U.S. v. Jaramillo, 745 F.2d 1245, 1248-49 (9th Cir. 1984), cert. denied, 471 U.S. 1066 (1985) (upholding recusal of judge charged with bribery, fraud, and tax evasion).
Recognizing Judge Kroupa’s inherent conflict of interest in any tax case, the Tax Court has already permitted one taxpayer to move for reconsideration more than three years out of time. Order, Eaton Corp. v. Comm’r, Docket No. 5576-12 (T.C. June 29, 2016). Yet the Government did not disclose Judge Kroupa’s indictment in its opening brief, even though the Tax Court’s decision in BNY case is one of the Government’s primary authorities, cited more than two dozen times. The cumulative impact of Judge Kroupa’s decision in BNY is troubling. Her decision was the first to accept the Government’s position in a STARS case, and the Government used it successfully as favorable precedent in subsequent litigation. The Second Circuit affirmed Judge Kroupa’s decision based on deference to her fact-finding. BNY, 801 F.3d at 110, 119, 121-22. The trial court in BB&T cited Judge Kroupa’s decision nearly a dozen times, and heavily relied on its factual findings. 112 Fed. Cl. at 583. That fact-finding, and the precedent that it spawned, should be accorded no persuasive value in this Court.Not sure exactly the scope of the "precedent it spawned;" presumably, that is an attack also on the the Second Circuit's affirming opinion, but I am not sure that the Second Circuit opinion relied upon Judge Kroupa's resolution of uncontested factual findings. I have looked at the portions of the BNY opinion cited by Santander -- pp. 110, 119 and 121-122 -- and really do not see anything in those pages that could fairly be said to have relied upon any contested fact holdings. The facts relevant to the Second Circuit's opinion in BNY seem to have been uncontested, with the fight being over the legal characterization of the facts. (And, of course, there is the pesky companion case coming out of SDNY, AIG, that did not suffer from the claims about Judge Kroupa.) If that is the case, then Santander's Judge Kroupa gambit is weak at best. The mere fact that Santander had to make the argument may be an admission of weakness. (All litigators will have anecdotes where weak arguments have likely harmed -- sometimes seriously harmed -- cases.)
BTW, I do characterize Santander's tax gambit (the larger one) as a bullshit tax shelter for reasons that should be obvious. (I would have so characterized Compaq and IES; they were blessed however, so the characterization of bullshit does not necessarily mean that some courts can't be fooled.)