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Online Sportsbook Founder Held Liable for $36 Million In Tax And Penalties

Mar 15 2014, 6:25pm CDT | by

Last week, I detailed my fantasy of fleeing public accounting for life as an illegal bookmaker. I was, of course, indulging in nothing more than a bit of playful escapism, meant to dull the pain of...

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31 weeks ago

Online Sportsbook Founder Held Liable for $36 Million In Tax And Penalties

Mar 15 2014, 6:25pm CDT | by

Last week, I detailed my fantasy of fleeing public accounting for life as an illegal bookmaker. I was, of course, indulging in nothing more than a bit of playful escapism, meant to dull the pain of another long busy season.

But after reviewing the Tax Court’s decision in Kaplan v. Commissioner, T.C. Memo 2014-43, I think I’m ready to give my two-weeks notice. Like, today. Because while Kaplan may not enlighten with regards to the tax law, it does reveal just how much bookmakers earn. And it’s a lot. As in a $24 million tax bill, which translates into approximately $75 to $160 million of taxable income, depending on the character.   

In Kaplan, the taxpayer made the sound financial decision to drop out of high school so he could support his two children by taking bets. Following a 1993 arrest in New York City on sportsbooking charges, the taxpayer sought the more friendly gambling environs of Aruba before eventually landing in Costa Rica.

Around that time, Al Gore was gracious enough to invent the internet, and indirectly giving birth to millions of hours of streaming pornography a highly lucrative offshore sports book industry.

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.) As a result, prior to the internet era, bettors were forced to place their wagers with shady local bookies. Because bettors could wager money without actually fronting the cash, it was easy for a gambler to bet above his means and suddenly find himself in serious trouble with nefarious sorts.

With the advent of internet gambling, however, everything changed. While it was still illegal for a U.S. citizen to wager on sports via the Web, the government was focused on taking down the sportsbooks, and largely ignored the bettors. More importantly, the birth of online sportsbooks helped to protect bettors from an adversary more harmful than even the FBI: themselves. Bettors now had to place a wager out of an account, and any money risked had to be deposited in the account prior to the wager. Of course, if the bettor deposited money into his account via a credit card, he could continue to dig himself a financial hole, but at least in this case it was the credit card company coming after him, and not Vito from Chambersburg threatening to break his thumbs.

The taxpayer in Kaplan launched BetOnSports LLC during the Web’s formative years, and the rush of bettors seeking the perceived legitimacy and financial protection of an online sportsbook quickly turned the BetOnSports into one of the most heavily-used and profitable sites in the industry.

In 2004, the taxpayer, anticipating a public offering by the now-flourishing BetOnSports, transferred his shares in the company to several trusts in the Isle of Jersey. As part of the company’s PLO, the taxpayer’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. The taxpayer failed to report any of the gain – or file a tax return, for that matter — in either 2004 or 2005.

In 2007, the taxpayer was arrested in the Dominican Republic by U.S. authorities on charges of illegal bookmaking, racketeering, mail fraud, and using wire communication to transmit bets. Upon his arrest, the taxpayer faced 75 to 100 years imprisonment and criminal forfeiture of $180 million.

Two years later, the taxpayer entered into a plea deal with the government. As part of the agreement, he would serve 41 to 51 months in prison and forfeit nearly $44 million to the federal government. The plea specifically provided that no further criminal charges could be brought against the taxpayer. Unfortunately for the taxpayer, however, the deal also specifically stated 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 taxpayer.

Before finalizing the plea, the judge asked the taxpayer if he understood the difference between criminal and civil tax proceedings, and that the plea deal continued to expose the taxpayer to civil tax charges. He responded that he did.

And therein lies the problem. Because soon after the taxpayer’s conviction, the IRS set about preparing tax returns for the taxpayer’s missing 2004 and 2005 tax years. After concluding that the Isle of Jersey trusts established by the taxpayer were grantor trusts for U.S. tax purposes – and thus the income allocable to the trusts were required to be reported by the taxpayer – the Service assessed over $24 million in tax related to the taxpayer’s unreported capital gain from the sale of BetOnSports stock. The IRS then tacked on $12 million in related penalties for late filing, late payment, and underpayment of estimated tax for good measure.

Faced with a $36 million tax bill, the taxpayer argued that the IRS was precluded form bring 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.

follow along on twitter @nittigrittytax

Source: Forbes Business


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