IRS goes after former BetonSports founder for an additional $36 million

Sunday March 16,2014 :  MORE PAIN FOR CONVICTED ONLINE GAMBLING OPERATOR
 
IRS goes after former BetonSports founder for an additional $36 million.
 
By the time US enforcement and tax authorities have finished with him BetonSports online gambling site founder Gary Kaplan (55) will have "contributed" $79 million to government coffers, made up of $43 million ceded to government as part of his plea deal, and a further $36 million squeezed from him through an IRS civil action.
 
These heavy penalties were discussed in a Forbes article over the weekend penned by Tony Nitti, an independent expert tax and legal writer after studying a recent Tax Court decision in Kaplan v. Commissioner, T.C. Memo 2014-43.
 
Nitti calculates that Kaplan's pre-penalties tax bill of $24 million in the affair translates into approximately $75 to $160 million of taxable income, depending on the character. 
 
Nitti sets the scene for his assessment by recapping the events following the federal bust of Costa Rica-based BetonSports
 
"Understand, sports betting is illegal in the U.S.because it is an evil, duplicitous act. (Unless of course, you’re in Vegas, in which case, feel free to parlay the Cowboys and 49ers to your heart’s content! No hypocrisy there.)," the author comments in general.
 
After pursuing Kaplan for some time, the federal authorities finally arrested him in the Dominican Republican and brought him back to the United States to face charges of illegal bookmaking, racketeering, mail fraud, and using wire communication to transmit bets, felonies which carry penalties of 75 to 100 years imprisonment and the possible criminal forfeiture of $180 million.
 
Two years later, Kaplan entered into a plea agreement with the government which resulted in a deal through which he would serve 41 to 51 months in prison and forfeit nearly $44 million to the federal government.
 
Importantly, the plea specifically provided that no further criminal charges could be brought against the taxpayer…but there was a caveat that the agreement did not limit the rights of the United States of America to take any civil, civil tax, or administrative action against the taxpayer.
 
This was to prove an expensive clause for Kaplan, but he had every opportunity to avoid its consequences, including specific guidance from the federal judge approving his criminal conviction, who asked Kaplan whether he fully understood the implications of the caveat, which exposed him to civil tax actions by the IRS.
 
Kaplan apparently said he understood the caveat and wished to go ahead with his plea deal.
 
The consequences became apparent shortly thereafter, when the IRS looked at Kaplan's tax affairs, especially a 2004 transfer of his shares in BetonSports to several trusts in the Channel Isle of Jersey.
 
Following the company’s PLO, Kaplan's trusts sold approximately 42 million shares of BetOnSports for $97 million at a time when he had no basis in the company’s shares. He allegedly failed to report any of the gain – or file a tax return – in either 2004 or 2005.
 
The IRS concluded that the Jersey trusts were grantor trusts for U.S. tax purposes and should therefore have been reported, assessing capital gains taxes owing on the trust funds at $24 million.
 
But the pain didn't end there; the taxman added a further $12 million in associated penalties, bringing the total owed to $36 million.
 
There was no happy ending for Kaplan; Nitti writes:
 
"Faced with a $36 million tax bill, the taxpayer argued that the IRS was precluded from bringing a civil tax action against him under the plea agreement. The Tax Court, armed with the sworn testimony from the plea hearing, had all the proof it needed that this was not the case.
 
"As a result, on top of the $43 million the taxpayer was forced to cede to the government as part of his plea deal, he was also held responsible for an additional $36 million in tax and penalties, proving once again that crime does in fact pay. For the IRS."
 
http://www.forbes.com/sites/anthonynitti/2014/03/15/online-sportsbook-founder-held-liable-for-36-million-in-tax-and-penalties/