Taxable Talk

Every year I hope that I won’t find any deserving individuals of the Tax Offender of the Year Award. To win this award, you need to do more than cheat on your taxes; it has to be a Bozo-like action or actions. As usual, we had plenty of nominees.

Coming in third this year is the Internal Revenue Service. What did the IRS do to deserve this award? Well, we have the IRS Scandal; it’s still unresolved. If we were to believe the IRS nothing untoward happened! I’m sure that’s why Commissioner Koskinen faced an impeachment resolution. And remember the data breaches? It wasn’t 104,000 people who were victimized back in 2015 (the “Get Transcript Hack) nor was it 334,000 taxpayers. There were over 700,000 people impacted (and over 500,000 unsuccessful attempts)! As Joe Kristan says, “The IRS: Protecting your identity since 1913.” Or not.

Coming in second place this year is the Miccosukee tribe of Indians in Florida. They’ve been fighting in both US District Court and US Tax Court that income to members of the tribe from a casino isn’t taxable. To date, they’ve lost every single case. Most recently, in August US District Judge Ceclilia Altonaga ruled that a tribal member must pay nearly $279,000 in taxes, penalties, and interest stemming from not filing a 2001 tax return. The Tax Court cases have been inching along; most recently, the Tax Court ruled that a trial will be held and that the tribe cannot subpoena witnesses from the Department of the Interior to interpret statutes (the judges will do that). In March, the tribe lost an appeal that they were immune from US taxes. (The lawsuit alleged that the US had waived sovereign immunity for the tribe. The lawsuit was dismissed in US District Court; the tribe appealed and lost that appeal.)

A husband and wife from Minnesota were indicted in April on tax evasion charges. The charges, detailed in the indictment, are very typical tax charges. The couple were alleged to have fraudulently claimed personal expenses as business expenses, including rent, utilities, garbage removal, household cleaning, remodeling windows, interior design fees, a dishwasher, furniture to stage a house for sale, Pilates classes, jewelry, wine club fees, and grooming expenses. (There are more, but that’s a good range of the expenses they claimed on their returns.)

They were also alleged to have not reported income from a sale of land in South Dakota, and to have not reported canceled debt income. Adding to their troubles, they were alleged to have lied to an IRS Office Examiner during an audit of their 2004 and 2005 tax returns in 2006. It’s a very bad idea to lie to an IRS employee; that’s a felony. They then allegedly lied again during an audit of their 2009 and 2010 returns (in 2012). One would think they had learned but….

Of course, they allegedly lied to their tax professional regarding all of the returns, grossly understating their income. They ended up owing an additional $500,000 in taxes, penalties, and interest.

Unfortunately, this kind of tax crime (taking personal expenses as business expenses) is fairly common. Most individuals believe that they just won’t get caught. As the Tax Court has noted,

Taxpayers may deduct ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. The term “ordinary and necessary business expenses” means only those expenses that are ordinary and necessary and are directly attributable to the trade or business. The term does not include personal, living, or family expenses. Simply because an expense would not have been incurred but for the taxpayer’s engaging in a trade or business is insufficient to allow a deduction. The nature of the expense must not be personal or otherwise nondeductible.

There are many expenses that are helpful, even essential, to one’s business, but which are not deductible in our tax system. Expenses of driving to and from work, for example, are not deductible. Expenses for clothing worn in a taxpayer’s trade or business, and the costs of laundering the clothing, are not deductible if the clothing is adaptable for nonbusiness wear.

The judge who wrote that decision is Diane Kroupa. Ms. Kroupa was a US Tax Court judge from June 2003 until her resignation in June 2014. She’s also one of the two defendants in this case. Yes, a former Tax Court judge committed tax evasion. And that is why she is the 2016 Tax Offender of the Year.

When Judge Kroupa and her husband were indicted, my reaction was the same as Law Professor Dennis Ventry, Jr. of the UC Davis Law School:

Smart people do dumb things all the time 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.

I didn’t report on this case when the indictment was issued in early April (it was during the annual down-time for my blog). I had noticed the story, of course, but basically couldn’t believe it. However, both Robert Fackler (Judge Kroupa’s husband) and Judge Kroupa pleaded guilty.

In the plea examination, Judge Kroupa admitted her crime:

Q. And neither you nor Mr. Fackler told the tax preparer the amounts reflected in the information, spreadsheets, or tax organizers that you gave him included personal expenses that were disguised as business expenses?
A. No.
Q. That fact is true?
A. That fact is true, we did not provide that information.
Q. And by doing that, you thereby significantly and fraudulently increased Grassroots Consulting’s business expenses, which then reduced the amount of taxes that you jointly owed to the IRS?
A. Correct.
Q. And on page 4 and page 5 of this plea agreement there is a list of descriptions of specific expenses that were included supposedly as business expenses which were, in fact, personal expenses, correct?
A. Correct.
Q. You’ve looked at this list and either you know that these are ones that were included or else you have seen evidence to that effect?
A. Correct.
Q. So in total from 2004 through 2010 did you and Mr. Fackler fraudulently deduct at least 500,000 of personal expenses as purported Schedule C business expenses?
A. Yes.

Judge Kroupa certainly knew the law; her resume is quite impressive:

Judge. b. South Dakota. B.S.F.S. Georgetown University School of Foreign Service, 1978; J.D. University of South Dakota Law School, 1981. Prior to appointment to the Court, practiced tax law at Faegre & Benson, LLP in Minneapolis, MN. Minnesota Tax Court Judge from 1995 to 2001 and Chief Judge from 1998 to 2001. Attorney-advisor, Legislation and Regulations Division, Office of Chief Counsel and served as attorney-advisor to Judge Joel Gerber, United States Tax Court, 1984-1985. Admitted to practice law in South Dakota (1981), District of Columbia (1985) and Minnesota (1986). Member, American Bar Association (Tax Section), Minnesota State Bar Association (Tax Section), National Association of Women Judges (1995 to present), American Judicature Society (1995 to present). Distinguished Service Award Recipient (2001) Minnesota State Bar Association (Tax Section). Volunteer of the Year Award, Junior League of Minneapolis (1993) and Community Volunteer of the Year, Minnesota State Bar Association (1998). Appointed by President George W. Bush as Judge, United States Tax Court, on June 13, 2003, for a term ending June 12, 2018.

Unfortunately, we must add, “Pleaded guilty to tax charges (2016)” to that list.

Judge Kroupa’s actions—a former Tax Court judge committing tax evasion—make her a worthy recipient of the 2016 Tax Offender of the Year Award.

That’s a wrap on 2016! While I am hopeful 2017 will not provide me a lengthy list of candidates for Tax Offender of the Year, I suspect that I’ll have plenty of choices.

I wish you and yours a happy, healthy, and prosperous New Year!