Anderson v. United States, No. 18-1133T, Fed. Cl,. Nov. 9, 2026

For tax professionals representing individuals and closely held business owners, determining the deductibility of legal expenses under Internal Revenue Code (IRC) § 162(a) requires a rigorous application of the “origin of the claim” doctrine. On November 9, 2026, the United States Court of Federal Claims issued a published opinion in Anderson v. United States that offers critical guidance on the intersection of trade or business deductions, collateral estoppel across successive tax years, and the jurisdictional limits of tax refund tribunals when confronted with collateral attacks on underlying criminal convictions.

Writing for the court, Judge Stephen S. Schwartz granted summary judgment in favor of the government, holding that the taxpayers were collaterally estopped from relitigating the business characterization of post-conviction legal fees and reaffirming that a civil tax forum lacks subject-matter jurisdiction to re-examine or disregard a final state court criminal conviction.

Factual Background and Procedural History

Plaintiff William French Anderson is a physician, pediatric specialist, and geneticist. His wife and co-plaintiff, Kathryn D. Anderson, is also a physician; however, because the underlying operative facts did not concern her directly, the court focused its inquiry on Dr. Anderson. In 2006, a California state jury convicted Dr. Anderson of sexually abusing a minor—specifically, the daughter of a colleague employed at his laboratory—while providing the minor with karate instruction and academic tutoring at his private residence (People v. Anderson, 144 Cal. Rptr. 3d 606, 609 (Cal. Ct. App. 2012)). The judgment of conviction was affirmed on direct appeal (id. at 640).

Over the subsequent two decades, Dr. Anderson engaged in extensive, unsuccessful post-conviction litigation across state and federal courts (see, e.g., In re Anderson, No. B232746, 2013 WL 4759680 (Cal. Ct. App. Sept. 5, 2013); Anderson v. Perez, No. CV 14-09463, 2016 WL 8078147 (C.D. Cal. Nov. 8, 2016), report and recommendation adopted, 2017 WL 379400 (C.D. Cal. Jan. 24, 2017)). A petition claiming actual innocence was also filed in California state court (People v. Anderson, No. BA255257 (Cal. Super. Ct. L.A. Cnty. Jan. 29, 2024)).

Central to Dr. Anderson’s defense and post-conviction strategy was his contention that he was “the victim of an elaborate scheme by the Chinese government to frame him and steal his intellectual property concerning a cancer drug he was developing.” He asserted that the evidence against him was falsified as part of an institutional espionage and sabotage campaign orchestrated by his former laboratory colleague.

Taxpayers’ Claims and Request for Administrative Relief

The taxpayers initiated two separate judicial proceedings to establish that Dr. Anderson’s post-conviction legal expenses were deductible under IRC § 162(a).

The first proceeding arose in the United States Tax Court regarding deficiency assessments for tax years 2013 and 2014 (Anderson v. Commissioner, T.C. Memo. 2023-42, 2023 WL 2660324 (Mar. 28, 2023), aff’d, No. 23-9002, 2024 WL 2239160 (10th Cir. May 17, 2024)). In that litigation, the taxpayers argued that evidence uncovered in 2013 and 2014 established that the criminal charges were designed to sabotage Dr. Anderson’s medical research business, meaning that his legal fees stemmed directly from his trade or business. The Tax Court rejected this position, ruling that the underlying conduct was personal, though it allowed a narrow $13,000 business deduction for fees paid to an independent IT consultant who performed investigatory work into corporate sabotage.

The second proceeding—the subject of the present Court of Federal Claims opinion—concerned tax years 2011 and 2012. For these earlier years, the taxpayers timely filed joint returns, paid their assessed income taxes, and subsequently filed administrative refund claims with the Internal Revenue Service. On their amended returns, the taxpayers asserted that “the taxpayer has incurred and deducted legal fees associated with criminal charges originating from his trade or business,” seeking refunds based on legal fees paid to habeas defense counsel Douglas W. Otto. Following the IRS’s formal disallowance of their refund claims, the taxpayers filed a refund complaint in the Court of Federal Claims pursuant to 28 U.S.C. § 1491(a)(1).

Statutory Framework and the Origin-of-the-Claim Doctrine

Under IRC § 162(a), taxpayers may deduct “ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” To qualify, an expenditure must be “appropriate and helpful to the taxpayer’s business and that results from an activity which is a common and accepted practice” (Amdahl Corp. v. Commissioner, 108 T.C. 507, 523 (1997)). Furthermore, the taxpayer bears the affirmative burden of clearly establishing statutory entitlement to the deduction claimed (Principal Life Insurance Co. & Subsidiaries v. United States, 116 Fed. Cl. 82, 100 (2014), quoting Interstate Transit Lines v. Commissioner, 319 U.S. 590, 593 (1943)).

In determining whether litigation expenses—civil or criminal—qualify as deductible trade or business expenses under § 162, federal courts apply the long-standing “origin and character of the claim” standard established by the Supreme Court in United States v. Gilmore, 372 U.S. 39, 49 (1963). As reiterated by the Federal Circuit, the deductibility of legal fees depends not on the potential financial or reputational consequences to the taxpayer’s enterprise, but exclusively on the “origin and character of the claim underlying the expense incurred” (Dana Corp. v. United States, 174 F.3d 1344, 1350 (Fed. Cir. 1999)).

Historically, where criminal charges originate directly from profit-seeking business activities, legal expenses incurred in defending against those charges are deductible (Commissioner v. Tellier, 383 U.S. 687, 690–93 (1966); Silberman v. United States, 40 Fed. Cl. 895, 906 (1998)). Conversely, where the underlying conduct is personal, the expenses remain nondeductible personal expenses under IRC § 262, regardless of the devastating collateral impact a conviction may have on the taxpayer’s professional license, business reputation, or ongoing livelihood (see, e.g., Siket v. Commissioner, T.C. Memo. 1978-124 (denying deduction to police officer defending against off-duty assault charges); Argyle v. Commissioner, T.C. Memo. 2009-218 (disallowing CPA’s defense costs for off-premises, non-business personal conduct); Swift v. Commissioner, T.C. Memo. 2024-13).

Issue Preclusion and the Separability of Tax Years Under Sunnen

The threshold defense raised by the Department of Justice was collateral estoppel (issue preclusion). In the Federal Circuit, collateral estoppel bars relitigation when: “(1) the issue to be decided is identical to one decided in the first action; (2) the issue was actually litigated in the first action; (3) resolution of the issue was essential to a final judgment in the first action; and (4) the parties had a full and fair opportunity to litigate the issue in the first action” (Arkla, Inc. v. United States, 37 F.3d 621, 624 (Fed. Cir. 1994), citing Mother’s Restaurant, Inc. v. Mama’s Pizza, Inc., 723 F.2d 1566, 1569 (Fed. Cir. 1983)).

In the specialized context of federal taxation involving successive tax years, identicality of issues is governed by the “separability” doctrine articulated in Commissioner v. Sunnen, 333 U.S. 591, 601 (1948). Under Sunnen, tax years are separable only in two limited situations:

When there has been a change in the applicable legal rules, the legal relationship between the parties, or a “significant change in the legal climate” (Arkla, 37 F.3d at 625 n.4, quoting Montana v. United States, 440 U.S. 147, 161 (1979); Peck v. Commissioner, 904 F.2d 525, 528–29 (9th Cir. 1990); Southwestern Exploration Co. v. Riddell, 362 F.2d 833, 837 (9th Cir. 1966)); or
When there exists a material difference in the “controlling facts” governing the transactions across the respective tax years (Sunnen, 333 U.S. at 599–600; Coleman v. Commissioner, T.C. Memo. 1990-509; Berry v. Commissioner, T.C. Memo. 1990-646).

Applying this standard, Judge Schwartz noted that the taxpayers identified no change in statutory, regulatory, or judicial standards between the 2011–2012 tax years and the 2013–2014 tax years reviewed by the Tax Court. Turning to factual separability, the court emphasized: “The only evident difference is the tax years alone, which is not enough by itself to establish separability.”

The court pointed out that the Tax Court had made an explicit factual determination that Dr. Anderson’s criminal conduct was personal and unrelated to his trade or business. As Judge Schwartz observed: “That is a finding about historical facts that predate the tax years at issue: Whether Dr. Anderson is innocent or guilty as a factual matter, the nature of his charged conduct must be the same for all subsequent tax years. On that issue, there is no way to establish a difference between the tax years, as the separability test requires.”

Furthermore, the taxpayers failed to establish any variance in the actual nature of the legal work performed by defense counsel Mr. Otto. For 2013 and 2014, the Tax Court found “no evidence” that payments to Mr. Otto were incurred to investigate trade secret theft rather than to pursue standard state habeas relief (Anderson v. Commissioner, 2024 WL 2239160, at *4). Because Mr. Otto’s billing descriptions and the underlying character of his work were identical across 2011 and 2012, the taxpayers were bound by the prior adverse factual determination.

The court also identified an insurmountable temporal contradiction in the taxpayers’ position. In the Tax Court, the taxpayers maintained that their investigation into IP espionage arose from “new evidence discovered in 2013 and 2014.” Addressing this chronological flaw, Judge Schwartz wrote: “Plaintiffs could not have spent money in 2011 or 2012 to investigate evidence that they did not discover until at least the following tax year. So if Plaintiffs’ legal expenses in 2013 and 2014 were not related to the investigation, their expenses in 2011 and 2012 must not have been either.”

Finally, while the Tax Court had allowed a limited $13,000 deduction for an IT consultant’s corporate investigation fees in 2013–2014, the taxpayers failed to identify or allocate any specific consultant payments for 2011–2012, resulting in forfeiture of that argument (DecisionPoint Corp. v. United States, 174 Fed. Cl. 475, 482 n.2 (2024)).

Jurisdictional Limits and the Impact of Actual Innocence Claims

Seeking to bypass the preclusive bar of collateral estoppel, the taxpayers invoked the “special circumstances” exception recognized in Montana v. United States, 440 U.S. at 155, arguing that newly discovered evidence establishing Dr. Anderson’s actual innocence justified relitigating the origin of the legal fees.

Judge Schwartz firmly rejected this theory, highlighting both doctrinal and jurisdictional impediments. Under the Gilmore framework: “The ‘origin and character’ of a claim presumably does not depend on whether the claim is true or false — only on its nature.”

Citing Duntley v. Commissioner, T.C. Memo. 1987-579, the court underscored that neither the lack of merit nor the allegedly fabricated nature of an underlying lawsuit transforms its inherent character. The purpose of a legal expenditure is fixed when the liability is incurred and cannot be altered retroactively by subsequent evidentiary revelations.

More fundamentally, the Court of Federal Claims addressed the constitutional and statutory limitations on its subject-matter jurisdiction. Under Tucker Act jurisprudence, the Court of Federal Claims possesses no jurisdiction over criminal proceedings (Kurt v. United States, 103 Fed. Cl. 384, 388 (2012), citing Joshua v. United States, 17 F.3d 378, 379–80 (Fed. Cir. 1994)), lacks authority to review or vacate criminal convictions (Reed v. United States, 25 Fed. App’x 903, 904 (Fed. Cir. 2001)), and cannot function as an appellate tribunal over state or federal court judgments (Double Lion Uchet Express Trust v. United States, 149 Fed. Cl. 415, 420 (2020)).

Because Dr. Anderson’s state court conviction remains undisturbed on the docket, the court was legally prohibited from entertaining claims that the underlying offenses were a fabrication. In unambiguous terms, Judge Schwartz held: “For all intents and purposes, this Court must assume that Dr. Anderson is guilty — regardless of Plaintiffs’ claims to the contrary.”

The court delineated the strict boundary governing tax refund inquiries: “This Court may look to the nature of charged conduct and decide whether it is connected to the taxpayer’s business. What it may not do is decide or assume, after conviction, that the charged conduct did not take place.”

Given that the charged and convicted offenses—sexual abuse of a minor during tutoring and karate lessons at the taxpayer’s residence—were undeniably personal, the court concluded that “it is hard to imagine how his legal expenses could have had the required nexus to his medical practice or research.”

Key Holdings and Conclusions

The Court of Federal Claims granted summary judgment to the United States and dismissed the taxpayers’ complaint with prejudice, establishing two controlling legal conclusions:

First, collateral estoppel precludes taxpayers from relitigating the business nature of legal expenses under IRC § 162 in a subsequent refund action when the identical characterization was fully litigated and decided against them for other tax years, absent a demonstrable change in controlling law or material historical facts. Mere difference in calendar tax years does not satisfy the Sunnen separability test.

Second, in applying the Gilmore origin-of-the-claim doctrine to criminal defense expenditures, federal tax tribunals must accept the legal validity and finality of underlying criminal convictions. A taxpayer cannot convert personal defense costs into deductible business expenses by collaterally asserting actual innocence or claiming that criminal charges originated from an external conspiracy against their business.

Practice Takeaways for CPAs and Enrolled Agents

For tax practitioners evaluating the deductibility of litigation expenses under IRC § 162, Anderson reinforces several fundamental principles:

Strict Adherence to Origin Over Consequences: Under Gilmore, the origin of the claim controls deductibility, not the economic consequences of an adverse verdict. Defending against allegations rooted in personal conduct—even conduct occurring with business associates or their families—remains personal under IRC § 262, regardless of whether a conviction destroys the taxpayer’s business or professional standing.
Immutability of the Origin at Inception: The character of a legal expenditure is determined at the time it is incurred. Allegations of malicious prosecution, framing, or subsequent actual innocence claims do not retroactively convert a personal criminal defense into an ordinary and necessary business expense.
Bifurcated and Detailed Invoicing: As illustrated by the Tax Court’s allowance of the $13,000 IT consultant fee in Anderson V, expenditures directly and genuinely incurred to investigate trade secret theft, corporate sabotage, or copyright infringement may qualify under § 162. However, practitioners must ensure that such engagements are strictly segregated from criminal defense advocacy, independently documented, and substantiated with contemporaneous, detailed time records and billing allocations.
Preclusive Risks Across Audit Cycles: When defending multi-year audit controversies across different judicial forums (e.g., Tax Court deficiency proceedings versus Court of Federal Claims or District Court refund suits), an adverse final determination on legal classification in one forum creates an immediate issue preclusion bar for other years under Sunnen, unless genuine factual or legal separability exists.

Prepared with assistance from Gemini Notebook.