Arkansas Supreme Court overturns ruling on ousted lawmaker’s back taxes

The Arkansas Supreme Court on Thursday ruled in favor of an ousted Republican state legislator who had appealed a lower court’s ruling in a dispute over how much he owes the state in back taxes.

Former state Rep. Mickey Gates, R-Hot Springs, was expelled from the Arkansas House of Representatives in 2019 after being arrested on charges that he owed the state more than $250,000 in unpaid taxes.

Gates pleaded no contest to one charge of failing to file a tax return; the other charges were dropped on several conditions, including that he pay those overdue taxes and $74,789 in restitution.

Ever since, Gates and his wife have been unable to agree with tax officials on how much the couple owes the state, and a final impasse led to Gates’ suit against the Arkansas Department of Finance and Administration.

A lower court judge granted summary judgment to the state, agreeing with the Finance Department’s analysis that Gates owed roughly $50,000 in back taxes.

However, the Supreme Court on Thursday concluded that the lower court judge didn’t have enough evidence to rule in the state’s favor.

“After reviewing the Gateses’ income tax returns and 1099s, DFA computed net taxable incomes that were greater than what the Gateses had reported,” Associate Justice Rhonda Wood wrote for the majority. “DFA could be correct, but its figures throughout the audit were moving targets, and it never revealed its math to the Gateses, the circuit court, or this court on appeal.”

The dispute

Gates did not file tax returns or pay individual or corporate taxes for his business — The Stonebridge Collection, which sells engraved pocket knives — from 2012-2017, according to state records, leading to his arrest and expulsion from the Legislature.

State tax officials initially determined that Gates’ outstanding tax liability was $50,519, plus penalties and interest.

However, that amount was amended several times, mostly over the Gateses’ contention that the state was taxing some legitimate business expenses.

“After this initial production, the parties communicated poorly,” the Supreme Court order said. “The Gateses continued to claim DFA was not recognizing some legitimate business expenses, but they conceded that some deducted expenses were personal. For example, the Gateses admited [sic] to thousands of dollars in personal expenses to Amway, Cranford’s Village Supermarket, restaurants, Wal-Mart, and Entergy. These admitted personal expenses were listed on the profit-and-loss statement of the Gateses’ business. DFA, on the other hand, in deposition testimony, could not define what constituted a legitimate business expense when asked to explain why it had excluded some seemingly business-related expenses.”

Eventually, DFA sent Gates a “Notice of Final Assessment,” tallying his tax liability at $54,187 in August 2020. However, a follow up letter three days later dropped the amount to $47,321.

In its ruling, the Supreme Court said it wasn’t clear what amount the lower court determined Gates owed.

“It is undisputed that the Gateses had some taxable income based on their filed tax returns. But we hold that a material dispute of fact exists regarding the amounts of their taxable income for 2015–2017,” the order states, adding that DFA must prove how it arrives at the amount of tax liability.

The high court reversed the circuit judge’s order granting summary judgment and sent the case back to the lower court for further adjudication.

Associate Justice Robin Wynne dissented from the majority, writing that he agreed with the lower court’s ruling.