Judge Not Lest Ye Be Judged: Former Tax Judge Indicted.

With little notice or attention, U.S. Tax Court Judge Diane L. Kroupa retired from the bench four years before her 15-year term ended. At the time, it was unclear what prompted her sudden retirement. The reasons for her departure recently came to light when the US District Court of Minnesota issued an indictment alleging that Kroupa and her husband understated their taxable income by $1,000,000 over a six-year period, and failed to pay taxes of approximately $400,000.[1] Kroupa was appointed to the United States Tax Court in Washington D.C. on June 13, 2003, for a term that was scheduled to end on June 12, 2018. During her tenure, Kroupa presided over numerous tax controversies that frequently involved underpayment of tax and tax evasion. She was well regarded by her colleagues and was a respected member of the judiciary.

During her time on the bench, Kroupa was married to Robert Fackler, a self-employed lobbyist and political consultant doing business as Grassroots Consulting. Kroupa and Flacker filed their taxes as married filing jointly from at least 2004 through present.

The indictment paints a pretty damning picture. However, indictments usually read as though the IRS has a “slam-dunk” case against a taxpayer who is irrefutably guilty.  But at the end of the day, the indictment must be taken with a grain of salt because it is simply a summary of alleged wrongdoing based on what the government represents to a room full of people (jurors). Experienced practitioners know very well that the facts elicited after a real investigation can paint a radically different picture, one that exonerates the accused and refutes the alleged wrongdoing contained in the indictment.

The indictment contained six broad categories of alleged wrongdoing.

1. The government alleges that Kroupa mischaracterized $500,000 of personal expenses as business deductions. The expenses included costs related to a Maryland residence where Kroupa stayed when her court was in session. The alleged personal expenses also include limousine and taxi fees, costs for pilates classes, massage fees, and travel and lodging costs for trips to China, the Bahamas, Greece, and Thailand.

2. The indictment alleges that Kroupa took deductions for invalid unreimbursed employee expenses in connection with her role as US Tax Court Judge, which included ‘personal grooming services for family members.’ The government did not identify the amount of supposed invalid unreimbursed employee expenses.

3. In 2010 Kroupa and Fackler sold land in South Dakota. Allegedly, they failed to report $44,520 of income received from the sale on their jointly filed tax return.

4. Around 2008, some portion of a loan made to Kroupa and Fackler was forgiven. According to the incitement, the pair failed to report cancellation of debt income of $33,031 after they claimed to be insolvent. Allegedly they held substantial assets that greatly exceeded their liabilities, rendering the insolvency exception to debt forgiveness income inapplicable.

5. With respect to Fackler, the government alleged that Grassroots Consulting deducted $450,000 of business expenses for which it had already received reimbursement. Grassroots apparently understated its gross receipts by failing to include the reimbursements as income.

6. Finally, the government alleged that Fackler and Kroupa provided false and misleading documents to the IRS during two audits in 2006 and 2012.

No chance of exoneration, right? Consider this: many of the alleged personal expenses including travel costs, taxis, and limousines could be deemed ordinary and necessary for a lobbyist and political consultant, particularly where clients are based overseas. The same could be said for purchasing massages or jewelry on behalf of a client for the purpose of facilitating lobbying activities. Such expenses would be inappropriate in virtually all industries, except possibly lobbying. Were Fackler’s expenses erroneously attributed to Kroupa on their joint return? While it is implied that Kroupa was the benefactor, the indictment does not actually identify who received the jewelry or other benefits. In addition, Grassroots’ failure to include $450,000 of reimbursed expenses as income could be the result of tax preparer error, or Fackler’s malfeasance of which Kroupa had no knowledge. Did Kroupa have access to Grassroot’s bank account and accounting records? If she had no involvement in the business, how would she know which expenses had been reimbursed?

Obviously we need more facts to gain a complete picture, especially as it relates to Frackler’s lobbying activities and Kroupa’s involvement with Grassroots.  Both taxpayers are ultimately responsible for the accuracy of the information contained in the tax return. But as I have seen countless times in situations akin to these, the government can greatly embellish the “facts” set forth in the indictment, and there is often a reasonable explanation that only reveals itself after a genuine investigation. While additional taxes are usually owed, the “intentional” element necessary to prove evasion can be defeated, even where the indictment is as damning is it appears here.

— By Michael S. Cooper, Esq., Barnes Law

Michael Cooper is an associate attorney with Barnes Law, and is licensed to practice law in California.

The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] https://www.justice.gov/usao-mn/file/838191/download