Criminal Plea Deal Doesn’t Negate Civil Action

August 31, 2015

In a recent case, an appeals court upheld the Tax Court’s decision that a bookie’s plea agreement on criminal charges does not bar a civil action for unpaid taxes.

Gary Kaplan operated an illegal sports booking business called BetOnSports. The majority of Kaplan’s booking business was located in the Caribbean islands and Costa Rica for most of the 1990s.

Right before the company went public in July 2004, Kaplan engaged in several transactions and stock transfers that allowed him to set up two trust funds worth $98 million dollars. These trusts were referred to as the “Bird Trusts,” and the money was located somewhere off the coast of France.

Kaplan was the sole grantor of the Bird Trusts. As the grantor of the trusts, Kaplan was responsible for paying income taxes on the earnings of the trusts. Kaplan neglected to pay federal income tax or capital gains tax for the trusts for either 2004 or 2005.

In 2006, Kaplan was indicted by a federal grand jury for operating an illegal bookmaking operation within the United States. Kaplan ended up making a plea deal with the government. In exchange for accepting reduced charges, Kaplan agreed to allow the federal government to take civil action against him regarding the two years at issue.

During a change-of-plea hearing in 2009, Kaplan was questioned about the provision in his original plea agreement that dealt with the right of the government to pursue a civil tax matter against him for the 2004 and 2005 tax years. Kaplan assured the judge that he understood the difference between a civil court matter and a criminal court matter. He insisted that he was aware of the ramifications of the plea deal.

After the change-of-plea hearing, the court accepted the plea offer and sentenced him to 51 months in jail and ordered him to forfeit $43.65 million to the United States.

Sometime in 2012, the IRS commissioner issued a notice of deficiency for failure to file and pay taxes for 2004 and 2005. Kaplan was also liable for interest and various penalties. The taxes, penalties and interest totaled almost $25.5 million for 2004 and a little over $11 million for 2005.

Kaplan challenged the IRS at the district court level and lost. He brought his appeal to the U.S. Court of Appeals for the 8th Circuit.

Kaplan raised three issues in his appeal:

1. The statute of limitations had run on the commissioner’s ability to assess the unpaid taxes.

2. His 2009 plea agreement barred the claim.

3. Judicial estoppel barred the commissioner’s determination.

The appeals court rejected all three of these issues.

The statute of limitations does not start to run until an income tax return is actually filed by the taxpayer. Because the taxpayer did not file a tax return for 2004 and 2005, the statute of limitations has not run on those tax years. So Gary Kaplan lost on this issue.

The 2009 plea agreement was unambiguous as to the government’s ability to bring a civil action against Gary Kaplan. In addition, during the 2009 change-of-plea hearing, the court referenced answers given by Gary Kaplan that clearly demonstrated that he understood the government had the ability to bring a civil tax proceeding against him.

On the issue of judicial estoppel, Kaplan felt that, because the government did not object to his Presentence Report, it was prevented from bringing a civil tax proceeding against him. In his report, Gary Kaplan did not list any tax liabilities for 2004 and 2005. There were a number of reasons that Kaplan lost this issue, including that the numbers contained in the report were compiled and put together by Kaplan himself, not the IRS. (Gary Kaplan v. Commissioner, U.S. Court of Appeals, Eighth Circuit, 14-2342, July 29, 2015)