The former owner of defunct online gambling site BetOnSports has lost his bid to reduce his $36m tax bill.
On Wednesday, a three-judge panel of the Eighth Circuit US Court of Appeals rejected Gary Kaplan’s bid to overturn a a $36m back tax and penalties judgment levied against him. BetOnSports shut down in 2006 shortly after CEO David Carruthers was arrested in a Dallas airport during a stopover on his way to Costa Rica, which marked the opening salvo in the US Department of Justice’s crackdown on US-facing online gambling operators.
In 2009, BetOnSports founder Kaplan (pictured) reached a plea deal with federal prosecutors that gave him 51 months in prison and required him to forfeit nearly $44m in ill-gotten gains. In 2012, the Internal Revenue Service subsequently ordered Kaplan to pay an additional $25m in taxes and penalties on his 2004 online gambling earnings and a further $11m for 2005. Kaplan appealed, arguing (amongst other things) that the six-year statute of limitations had invalidated the IRS’ claims against him.
Kaplan took BetOnSports public on the London Stock Exchange in July 2004. Prior to this, Kaplan engaged in several transactions and stock transfers that netted Kaplan and his family members some $98m. This money was placed in two trusts, for which Kaplan was the sole grantor and thus responsible for the taxable income of the trusts. Needless to say, Kaplan paid the IRS bupkis.
Kaplan’s plea deal contained a clause saying the US gov’t “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.”
However, during a 2009 hearing, the court specifically asked Kaplan whether he understood that “there is a difference between a criminal tax proceeding and a civil tax proceeding,” to which Kaplan replied in the affirmative. The court further questioned Kaplan on whether he understood that the agreement “doesn’t preclude the initiation of any civil tax proceeding or administrative action” against him, to which Kaplan again replied that he understood.
In issuing Wednesday’s ruling, the Eighth Circuit panel noted Kaplan’s acknowledgement of these matters and said the agreement’s language was “unambiguous” on the right of the government to pursue a civil tax proceeding. The Court noted that “a civil forfeiture action is not an action to collect unpaid taxes.”
In dismissing Kaplan’s statute of limitations claims, the Court noted that Kaplan had never filed a tax return, and thus the statute of limitations clock had never actually begun ticking. Furthermore, the statute of limitations regarding tax on illegally derived income can last longer than six years.
The Court also slapped down Kaplan’s argument that the government had voiced no opposition to a pre-sentence report (PSR) that took no position regarding a tax liability. The Court noted that “no actual tax liability had yet to be determined” at the time of the PSR and the government had maintained its right to pursue a civil tax liability in the future. The Court further noted that it was Kaplan’s own legal team that prepared the PSR and thus “it was Kaplan, if anyone, who took the position of no tax liability being present.”