I previously wrote about betonsports.com, a former Internet sports betting website. One of its executive, David Carruthers, made the mistake of changing planes at DFW. Unbeknownst to him, he had been indicted. His two-hour layover got extended…to 33 months at ClubFed. Sportsbetting on the Internet is generally against US law (though intrastate sportsbetting in Nevada is legal in certain situations).
Today, as I glanced through a Tax Court case on one Gary Kaplan, I saw the dollar amounts and did some math. Mr. Kaplan was assessed tax for two years totaling $24,369,493, and additions to tax totaling $12,358,596. That’s a total bill of $36,720,089, and certainly reason to petition the Tax Court.
Mr. Kaplan is the founder of betonsports.com. He took the company public on the London Stock Exchange in 2004. Mr. Kaplan transferred his shares of the business into trusts, and those trusts then sold shares. Mr. Kaplan never filed (or paid) tax returns, so the IRS created substitute for returns and assessed the tax and penalties noted above. This occurred after Mr. Kaplan was arrested and made a plea bargain on the criminal case.
Plea bargains are binding documents. They’re binding on the government, too. And that’s the major issue of the case: Did the plea bargain stop the IRS from assessing tax and penalties? Two excerpts from the plea agreement are quite on point:
[T]he Office of the United States Attorney for the Eastern District of Missouri agrees that no further federal prosecution will be brought in this District relative to the defendant’s participation in the BETONSPORTS ORGANIZATION, as described in the Third Superseding Indictment, of which the Office of the United States Attorney for the Eastern District of Missouri is aware at this time. In addition, the Office of the United States Attorney for the Eastern [sic] of Missouri and the Office of the United States Attorney for the Southern District of Florida, which has authorized the Eastern District of Missouri to enter into this agreement, agree that no federal prosecution will be brought in either District relative to the defendant’s involvement in a business venture known as Hope Mills Universal, of which said offices are aware at this time. In addition, the Office of the United States Attorney for the Eastern District of Missouri agrees that no federal criminal tax charges will be brought in this District relative to the defendant’s receipt of income from the BETONSPORTS ORGANIZATION, the sale of stock in BetonSports, plc and/or the investment of the proceeds in any such income or sale. [Emphasis added by the Tax Court.]
The second excerpt note that:
…[t]he defendant has discussed with defense counsel and understands that nothing contained in this document is meant to limit the rights and authority of the United States of America to take any civil, civil tax or administrative action against the defendant * * * except that the United States shall not seek civil forfeiture in connection with this case or any asset constituting or derived from the receipt of income from the BetOnSports Organization, the sale of stock in BetOnSports, PLC and/or the investment of the proceeds of any such income or sale. [Emphasis added by the Tax Court.]
The Tax Court noted that during the change of plea hearing the judge in the criminal case made sure that Mr. Kaplan knew that the government could initiate a civil tax proceeding:
[Court:] Do you understand, Mr. Kaplan, that there is a difference between a criminal tax proceeding and a civil tax proceeding?
[Petitioner:] Yes I do, Your Honor.
[Court:] And in this document, the U.S. Attorney’s Office has agreed it will not bring any criminal tax proceeding against you; however, that doesn’t preclude the initiation of any civil tax proceeding or administrative action against you.
[Petitioner:] I understand that. And we’ve agreed to that.
Mr. Kaplan argued that the statute of limitations barred the IRS’s actions. There’s an obvious problem with that: If you don’t file a tax return the statute of limitations never runs. Strike one.
The petitioner then argues that the plea agreement precludes the actions. The excerpts of the District Court’s questioning are particularly on point. The judge noted that this could happen; Mr. Kaplan said he knew it could. Strike two.
Mr. Kaplan’s last argument is that the IRS is precluded by judicial estoppel.
Under the doctrine of judicial estoppel, once “‘a party assumes a certain position in a legal proceeding, and succeeds in maintaining that position, he may not thereafter, simply because his interests have changed, assume a contrary position, especially if it be to the prejudice of the party who has acquiesced in the position formerly taken by him.’”
Unfortunately for Mr. Kaplan,
…because the plea agreement unambiguously reserved the Government’s right to bring a civil tax action against petitioner, petitioner suffered no detriment nor prejudice from any perceived “position” of the Government. For these reasons, petitioner’s judicial estoppel argument is without merit.
That’s strike three, and Mr. Kaplan owes the $36.7 million…plus interest.
If you ever make a plea deal with the government, you absolutely want to read the fine print. And if a judge points our that a civil tax proceeding could occur, you might want to inquire about that…especially if you have millions of dollar sitting around.