On August 15, 2016, the taxpayer in Santander Holdings USA filed its brief to the US Court of Appeals for the First Circuit in its case involving what the Internal Revenue Service (IRS) has labeled a “foreign tax credit generator” transaction. The taxpayer prevailed at the district court level and the IRS appealed that decision, arguing that the lower court’s opinion was contrary to existing precedent in the Tax Court and other appellate courts. Much has been written about these cases and the issue presented, but this post focuses on an interesting argument raised by the taxpayer regarding the weight to be afforded to a prior Tax Court opinion.

The taxpayer’s brief argues that the Tax Court opinion in Bank of New York Mellon should not be followed because “the judge in that case—Judge Diane Kroupa—faced a disabling conflict when she rendered” the opinion due to the fact that she was indicted for tax fraud in April 2016 and was under audit by the IRS and allegedly committing further tax fraud at the time she was considering the Bank of New York Mellon case. Citing an opinion by the US Court of Appeals for the Ninth Circuit, the taxpayer argued that the alleged misconduct directly implicated the character and integrity of Judge Kroupa and that the other appellate opinions on this issue heavily relied on her factual findings in deciding their cases. It further argued that the government’s reliance on “Judge Kroupa’s defective factual findings, [which were] made in a tainted proceeding … should be given no weight here.” Finally, the taxpayer, referencing the Eaton case, stated that, “[r]ecognizing Judge Kroupa’s inherent conflict of interest in any case, the Tax Court has already permitted one taxpayer to move for reconsideration more than three years out of time.” We have previously discussed the indictment of Judge Kroupa here and here.

It remains to be seen how the Tax Court will act in Eaton, as the parties continue to brief the matter raised in the motion for reconsideration, and what reaction the government and the First Circuit will have to the taxpayer’s argument in Santander Holdings USA. We will continue to follow these matters and provide updates in the future.