A Bad Day in Court

Published on: 07:24AM Mar 14, 2014

The Tax Court today released the Kaplan case. Gary Kaplan was a professional sports bookie. He started his career in the US and then moved it to the Caribbean before finally settling in Costa Rica. During this time, he formed a company called BetOnSports PLC. This company became the most successful overseas sports booking company (although about 98% of its business was from US customers).

In July 2004, BetOnSports went public on the London stock exchange. As part of this transaction, Mr. Kaplan transferred his shares to various trusts based in the Isle of Jersey. The trusts then sold shares in BetOnSports during 2004 and 2005, netting the trusts (really Mr. Kaplan) about $97 million.

In 2006, Mr. Kaplan was sued by the US Government for RICO and other charges and finally settled the case in 2009 for $43,650,000, about one-half of the Mr. Kaplan's remaining assets. As part of the plea bargain, the parties agreed that the government would not try Mr. Kaplan for any other issues related to his betting activities. In return, he would be allowed to keep his remaining funds.

The plea agreement was signed off by all parties and then, you guessed it, the IRS came calling. They issued a tax judgment against Mr. Kaplan in the amount of $24 million of tax, $12 million of various penalties and most likely interest of another few million on top of it. Since at most, Mr. Kaplan only had about $43 million of assets after his plea settlement, he was not pleased to see close to 90% of it going to the IRS.

He sued the IRS in court claiming the statute of limitations had passed. Since he had not filed a tax return for 2004 or 2005, the statute keeps running, so he lost that argument. He also argued that the plea agreement prevented the IRS from bringing a civil claim against him. The Court disagreed. He also pled that the trust's were the owner of the shares. The Court also shot this down by indicating these trusts are in fact grantor trusts. Under grantor trust rules, all income and expense of the trusts are directly attributable to the grantor of the trust.

Therefore, Mr. Kaplan lost on all arguments and owes $40 million to the IRS. This leaves him with $3 million to pay his healthy attorney fees. I am guessing from his original $97 million pay-day, he will end up with less than a $1 million. This is what I call a bad day in court.

This does not have much to do with farming, but, if you are thinking about placing assets in overseas trust to "hide" your income from the IRS; I would not recommend it. I would not want to see you have a bad day in court like Mr. Kaplan.