Monday, September 26, 2016

Update on Judge Kroupa Prosecution - Her Husband Pleads Guilty (9/26/16; 9/27/16)

This blog entry has been substantially revised and enhanced on 9/27/26 around 4:15pm because of my obtaining and analyzying the plea agreement, here.  I have therefore eliminated some preliminary discussion, such as preliminary sentencing calculations, in the original draft because the plea agreement provides more detail that I discuss below.

I have blogged previously on the indictment of former U.S. Tax Court Judge Diane Kroupa and her husband.  See Former US Tax Court Judge Kroupa Indicted (Federal Tax Crimes Blog 4/4/16; 4/5/16), here; and Former Tax Court Judge Kroupa Indictment - Part I - Conspiracy (Federal Tax Crimes Blog 4/5/16; 4/6/16), here. The change of plea minutes indicates that the husband has now pled guilty to Count 6 of the indictment which charges tax obstruction, § 7212(a), here.  The plea agreement is here; the indictment is here.

I picked up this news item from the Tax Prof Blog entry, Husband Of Retired Tax Court Judge Pleads Guilty To Taking $1 Million In Fraudulent Deductions (Tax Prof Blog 9/26/16), here, which linked to a newspaper report, Paul Walsh, Twin Cities husband of ex-tax judge admits duping IRS; charges against her pending (Star Tribune 9/26/16), here.

The plea is solely to Count 6 of the indictment, which alleges tax obstruction, I don't have the plea colloquy so don't know what Fackler said other than guilty to the plea of tax obstruction, § 7212(a), here. Count 6.  Often in plea agreements and colloquies, the defendant is required to or does admit his pattern of conduct which would include closely related offenses.  In this case, there is a parallel between tax obstruction in § 7212(a) and the defraud / Klein conspiracy in 18 USC § 371, here.  The defraud / Klein conspiracy is generally formulated as a conspiracy to impair or impede the lawful functions of the IRS, which is basically what tax obstruction is (and, for that reason, tax obstruction has been described as a one person defraud / Klein conspiracy).  The key difference is that tax obstruction can be charged without regard to whether there was a conspiracy and has a 3-year maximum sentence rather than 5-years for the defraud / Klein conspiracy.  As noted below, in the plea agreement, Fackler does admit to conspiratorial conduct with Kroupa.  The conspiracy was charged, but he does not agree to plea to the conspiracy count.

Here are my excerpts from and comments on the plea agreement, here, which I have just obtained from Pacer.

Suffice it to say as the introduction that Fackler does admit facts constituting the crime of conspiracy, although he does not formally plead to the conspiracy count.  What this means is that Fackler is admitting criminal conduct in which former Judge Tax Court Kroupa was a co-conspirator and, in the course of the conspiratorial conduct, committed other crimes (such as evasion, obstruction, etc.)

First, the plea agreement provides the following factual bases supporting the plea to Count 6:
2. Factual Basis. The Defendant admits the following facts and, where the defendant lacks direct knowledge, the defendant acknowledges that the. government has sufficient evidence to establish beyond a reasonable doubt the following facts, all of which constitute the factual basis for this plea. Furthermore, on the basis of the following facts, the defendant stipulates to having committed the additional offense of conspiring with Diane Kroupa to defraud the United States for the purpose of impeding, impairing, obstructing, and defeating the lawful functions of the Intemal Revenue Service of the United States Department of the Treasury in the ascertainment and computation of income taxes in violation of Title 18, United States Code, Sections 371 and 2: 
Conspiracy to Evade the Ascertainmentand Computation of Income Taxes 
Beginning no later. than in or about 2002 and continuing through 2012, the defendant conspired with his wife, Diane Kroupa, to impede, impair, and obstruct the Internal Revenue Service from correctly ascertaining and computing their joint income
* * * * 
FACKLER did not withhold or otherwise save any of the income he earned through Grassroots Consulting in 2002 to make tax payments to the Internal Revenue Service. As a result, in or about early 2003, when FACKLER and Kroupa began to organize their tax information, they did not have sufficient funds to pay their tax obligations for the previous year. When FACKLER and Kroupa discussed this problem, Kroupa told FACKLER that it was "his problem" and that FACKLER needed to fmd as many deductions as possible. FACKLER understood that Kroupa was instructing him to include personal expenses on Grassroots Consulting's Schedule C as business expenses in order to reduce their joint tax burden. FACKLER collected numerous personal expenses paid through his credit cards and Grassroots Consulting's bank account, and included them along with his legitimate business deductions on a spreadsheet that purported to summarize ·his Schedule C business expenses. Kroupa collected additional personal expenses from their joint bank account, and hand wrote them onto the spreadsheet FACKLER prepared. FACKLER and Kroupa then input the total expense figures-which included numerous personal expenses-onto a tax organizer that they provided to their tax preparer. FACKLER and Kroupa thereby significantly and fraudulently increased Grassroots Consulting's business expenses and reduced the amount of taxes they jointly owed to the IRS. 
Thereafter, each year from 2003 through 2011, FACKLER and Kroupa falsely reported a significant amount of personal expenses as Grassroots Consulting business deductions. For example, FACKLER and Kroupa fraudulently claimed the following personal expenses as Schedule C business expenses associated with the operation of Gras~roots Consulting: 
[Various and numbers enumerated personal expenses omitted] 
The method by which FACKLER and Kroupa compiled personal expenses to be inserted into Grassroots Consulting's Schedule C evolved as time went on. However, each year FACKLER generally reviewed business bank records, credit card records, and receipts to compile his business expenses, as well as numerous personal expenses, into a spreadsheet. The spreadsheet listed certain categories of expenses and the total amount of expenses purportedly incurred under each category. Kroupa typically prepared handwritten summaries of additional personal expenses from their joint personal bank account, and categorized them falsely according to Grassroots Consulting Schedule C's business expense categories. FACKLER either added the amoUnts from Kroupa's handwritten summaries to his spreadsheet and provided the totals to their tax preparer, or else provided the spreadsheet to Kroupa, who added personal expenses to the totals listed in FACKLER's spreadsheet and provided the combined amounts to their tax preparer. In some years, FACKLER and/or Kroupa wrote the inflated totals into a tax organizer that they then gave to their tax preparer, and in other years they simply provided the summary spreadsheet to the tax preparer. Neither FACKLER nor Kroupa revealed to the tax preparer that the amounts reflected in the spreadsheet and tax organizer included personal expenses disguised as business expenses. 
In total, from 2004 through 2010, the defendants fraudulently deducted at least $500,000 of personal expenses as purported Schedule C business expenses. As a result, the defendants caused the amount of adjusted gross income, taxable income, and total tax shown on their income tax returns to be falsely and significantly understated. 
Concealment of Reimbursed Expenses for Grassroots Consulting 
As part of the conspiracy, FACKLER also purposely caused the gross receipts attributable to Grassroots Consulting to be falsely understated by fraudulently deducting purported business expenses, such as travel and meals, for which F ACK.LER had previously received reimbursement from his clients. In total, FACKLER understated Grassroots Consulting's gross receipts by approximately $450,000. As a result, the defendants caused the amount of adjusted gross income, taxable income, and total tax shown on their income tax returns to be falsely understated. 
 Deduction of Personal Expenses as Unreimbursed Employee Expenses 
As part of the conspiracy, Kroupa falsely reported certain personal expenses as "Unreimbursed Employee Expenses" incurred in connection with her employment as a United States Tax Court Judge. For example, Kroupa fraudulently claimed the following personal expenses as Unreimbursed Employee Expenses:  
[Various and numbers enumerated personal expenses omitted] 
As a result, the defendants caused and attempted to cause the amount of taxable income and total tax shown on certain of their tax returns to be falsely understated.
Unreported Income from South Dakota Land Sale 
As part of the conspiracy, Kroupa purposely failed to report approximately $44,520 that she received in 2010 in connection with the sale of a parcel of real estate located in South Dakota. As a result, the defendants caused the amount of adjusted gross income, taxable income, and total tax shown on their income tax returns to be falsely understated. 
Cancellation of Indebtedness Income 
As part of the conspiracy, Kroupa falsely claimed that approximately $33,031 of cancellation of indebtedness income that she and FACKLER received from Bank of America in 2008 was not taxable because the defendants were fmancially insolvent. In fact, they had substantial assets that exceeded their liabilities, including retirement accounts, property, and investment accounts, rendering them solvent within the meaning of the tax code. As a result, the defendants caused the amount of adjusted gross income, taxable income, and total tax shown on their 2008 income tax returns to be falsely understated. 
False and Misleading Representations During 2006 Audit 
In or about 2006, FACKLER and Kroupa caused false and misleading representations to be made to the IRS Tax Compliance Officer who was conducting an audit of FACKLER and Kroupa's tax returns for the calendar years 2004 and 2005. Specifically, in response to inquiries and requests for documentation relating to Grassroots Consulting's business deductions, FACKLER and Kroupa caused their tax preparer to represent to the IRS Tax Compliance Officer that many of the expenses claimed on their tax returns were legitimate business deductions but FACKLER kept poor records. These representations were false-the expenses were personal in nature-although the tax preparer was unaware of this fact. Rather than provide the documents requested by the Tax Compliance Officer, which would have shown that the deductions were fraudulent, FACKLER and Kroupa concealed the records from both the tax preparer and the Tax Compliance Officer, telling both that they had failed to keep records related to the claimed expenses. At the conclusion of the 2006 Audit, FACKLER and Kroupa acknowledged tax deficiencies in the amount of approximately $48,000 (including interest and penalties) and they were issued an "Inadequate Records Notice" by the IRS informing the defendants that they had not been keeping adequate records of their business expenses. 
Obstruction and False Representations During 2012 Audit 
As part of the conspiracy, in or about 2012, FACKLER and Kroupa caused false and misleading representations to be made, and caused false and misleading documents to be delivered, to the IRS Revenue Agent conducting an audit of FACKLER and Kroupa's tax returns for the tax years 2009 and 2010. Specifically, after learning of the audit and the IRS Revenue Agent's requests for documents pertaining to their tax returns, FACKLER and Kroupa together reviewed their tax files, and Kroupa removed certain items requested by the Revenue Agent from the tax files because they could reveal the fact that FACKLER and Kroupa had inappropriately deducted numerous personal expenses. FACKLER and Kroupa then provided to their tax preparer, knowing that he would then provide to the IRS Revenue Agent, typed and handwritten documents purporting to summarize business expenses incurred by Grassroots Consulting that were, in fact and as they knew, personal expenses incurred by FACKLER, Kroupa, and their family members. 
During the audit, FACKLER (with Kroupa's knowledge) prepared cut-and-pasted credit card statements that purported to substantiate certain of the business expense deductions taken by Grassroots Consulting in 2009 and 2010, which as they knew represented personal expenses, knowing and intending that such documents would be provided in whole or in part to the IRS. 
Additionally, in response to a written inquiry from an IRS Revenue Agent regarding the nature of certain purported Grassroots Consulting payments to "service providers," FACKLER and Kroupa together concocted false explanations, and FACKLER wrote those false explanations on an IRS-prepared spreadsheet, justifying each category of payments as legitimate business expenses when, in fact and as they knew, many of the questioned payments were personal in nature. 
During the audit, in response to an inquiry from an IRS Revenue Agent regarding a deposit into her bank account in the amount of approximately $44,520 in July 2010, Kroupa sent an email to their tax preparer falsely and misleadingly informing the tax preparer that the deposit was part of an unrelated inheritance and not income received as part of a land sale by Kroupa in South Dakota.  
When FACKLER and Kroupa learned that the 2012 audit might progress into a criminal investigation, Kroupa instructed FACKLER to lie to the IRS. Believing that the investigation would focus solely on the false business deductions taken by FACKLER's company, Grassroots Consulting, Kroupa told FACKLER to tell the investigating authorities that Kroupa had no role in orgailizing or preparing the Grassroots Consulting portion of their joint tax return. On multiple occasions thereafter, Kroupa continued to insist that FACKLER falsely exculpate Kroupa.
These factual allegations, if true, paint a devastating picture of Kroupa's conduct.

Now for the really fun stuff -- the Sentencing Guidelines Calculations
Total Tax Loss
Each tax year from 2004 through 2010, FACKLER and Kroupa provided false information to their tax preparer and caused false tax returns that significantly understated their adjusted gross income, taxable incom~ and total tax to be filed with the Internal Revenue Service. Through the means described above, from ~004 through 2010,  FACKLER and KROUPA purposely understated their taxable income by approximately $1,000,000 and purposely understated the amount of tax they owed by at least $450,000.
The tax loss then becomes the principal driver of the Sentencing Guidelines calculations.  Paragraph 5 (beginning on p. 15) provides the Guidelines salculations.  I will step through the calculations.

First, the opening step is to determine the version of the Guidelines to apply.  Although not stating expressly, the plea agreement assumes the 2015 Guidelines rather than earlier Guidelines that might have been in effect when the criminal conduct occurred.  Prior to 2015, the Guidelines range breakpoints in the Tax Table, here, were as follows, with the Base Offense Level at the far right:
(G) More than $200,000 18
(H) More than $400,000 20
The 2015 Tax Table, here, provides the Base Offense Level as follows:
(G) More than $250,000 18
(H) More than $550,000 20
Thus, under the 2015 Guidelines version, the Base Offense Level is 18, rather that the 20 it would have been under the 2014 Guidelines version.  The plea agreement thus provides:
a. Base Offense Level. The parties agree and stipulate that appropriate Guidelines section is § 2T 1.1, and the base offense level is 18 because the tax loss resulting from the offense of conviction and stipulated conduct is more than $250,000 but less than $550,000. (U.S.S.G. §§ 2T1.1(a)(l) and 2T4.1(G)).
The express stipulation is as to the tax loss resulting from the "offense of conviction and stipulated conduct."  I presume that "stipulated conduct" is meant to include all of the relevant conduct.  Relevant conduct that is properly included in the tax loss calculation can include conduct in dropped charges and even acquitted or not charged conduct.  There might be some confusion because the conduct alleged in Count 6 only includes 2009 forward, whereas the stipulated conduct includes conduct in years from 2004 forward.

I had expected the sophisticated means 2 level upward adjustment (just on the assumption that some of the conduct would had met the low threshold for sophisticated means), but that adjustment is not included in the plea agreement.

I had not expected the the obstruction adjustment.  It is true that Fackler pled to an obstruction crime -- tax obstruction -- and admitted a Klein conspiracy obstruction.  But, normally, where obstruction is the conduct charged and thus included in the Base Offense Level, an additional enhancement for the same obstruction is not provided.  (See my notes below.)  So, here is what the plea agreement provides:
(1) Obstruction of Justice. The parties agree that the defendant willfully obstructed or impeded the administration of justice with respect to the investigation of the offense of  conviction and relevant conduct, and the offense level should therefore be increased by 2 levels. (U.S.S.G. § 3Cl.l). The parties stipulate and agree that this Guidelines enhancement applies even though the defendant is pleading guilty to Obstruction of a Tax Audit, in violation of Title 26, United States Code, Section 7212( a), in light of the dismissal of the other charges in the indictment. (U.S.S.G. § 1Bl.2(c)).
At least textually, the suggestion may be that this enhancement might not otherwise apply but is a bargained adjustment.  As suggested above, I am not sure it should apply where the conduct is in the conduct counting toward the tax loss from which the Base Offense Level is derived.  Otherwise it might be viewed as double counting.  I have not researched this notion, perhaps just a hunch, here are two related provisions of Guidelines § 3Cl.l:
Application Note 2:
This adjustment also applies to any other obstructive conduct in respect to the official investigation, prosecution, or sentencing of the instant offense where there is a separate count of conviction for such conduct.
Application Notes:
1.      Do not apply this enhancement where the offense guideline in Chapter Two, or another adjustment in Chapter Three, results in an equivalent or greater increase in offense level solely on the basis of the same conduct.
In the plea agreement, the parties also agree to the standard acceptance of responsibility level reductions of 2+1 and criminal history of 1, with a resulting Sentencing Table Offense Level of 17 and sentencing range of 24-30 months imprisonment.  This sentencing range is well within the maximum allowed by the single count of conviction, tax obstruction, which is a 3-year felony.

Now, although not expressly addressed in the plea agreement, the usual expectation would be that Fackler agree to cooperate in the further prosecution of any one within the scope of his admitted conduct, specifically here his estranged wife.  Certainly, he has already provided testimony, either by formal testimony or by proffer, against his estranged wife, so I presume that spousal privilege issues have been resolved.  And, his plea agreement resolves the criminal prosecution risk, so that he would not be able to assert a Fifth Amendment privilege.

For related entries:
  • Kroupa Criminal Case Status Report (Federal Tax Crimes Blog 8/26/16), here.
  • Attacks on Indicted Tax Court Judge Kroupa's Decisions (Federal Tax Crimes Blog 8/26/16), here.
And for some humor (at various levels, so I encourage experienced tax lawyers to read and read closely the how entry), see Lawyer Michael Minns, Tax Court Judge Who Sentenced People for Tax Evasion — Indicted for Conspiracy & Tax Evasion ( 6/26/16), here.  Here is a short excerpt to whet your appetites:
The Judge has a politically powerful white collar defense lawyer who does not show a single not guilty criminal tax jury finding on his website. Maybe modesty kept him from putting it up. Maybe he hasn’t tried a criminal tax defense case in front of a jury. Her husband’s defense attorney doesn’t show a single criminal tax not guilty verdict on his web page. Maybe he is too modest, or possibly his clients are not looking for trials but looking for favors? Maybe they think it’s too plebeian to talk about their jury trial victories. A quick google search didn’t pull up any published trials. These guys have contacts … and power… and they are not going to go to trial. They are already setting Judge Kroupa up for a settlement, and mercy, because the Judge has some mental disorders and a “slight” drinking problem. No idea about the husband. He has not yet shown any cards… except that; his lawyer would no more try this case before a jury than Isis would submit to American jurisdiction. 
If Judge Kroupa and her husband are convicted on all counts they could spend more than the next ten years in a Federal Prison. It would be their new home, and not their office and they would not be entitled to deduct the cost of living there. Fortunately, as has been for the last decade of their life, most of their expenses would be picked up by the Taxpayers.
As indicated above, there is no indication that either defendant will spend near 10 years in prison, for judges rarely go above the Guidelines range and usually sentence at the bottom or, exercise Booker discretion, below the Guidelines range.  And, look at the title of the article.  Tax Court judges do not sentence people for tax evasion or any other crime.

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