Whopping FBAR Penalty in Criminal Plea; Beanie Baby Creator Gets Beaned With No Free Pass (9/18/13)

It is reported that Ty Warner (Wikipedia entry here), the mega-wealthy Beanie Baby creator, will plead to tax evasion charges related to offshore bank activity.  The criminal information is here.  The USAO NDILpress release is here.  What caught my eye was his agreement to pay $53.5 million in FBAR penalties, which is the largest FBAR penalty that I am aware of. For an early news report, see Becky Yerak, Ty Warner to pay $53M to settle tax evasion charges (9/18/13), here.  The news report indicates that the amount is the standard 50% of high balance during the relevant time period, but does not state what the relevant time period is.  The only bank account mentioned in the report is $93.6 million, so that apparently is not the high balance for the 50% FBAR penalty.  The $93.6 million was the amount in the UBS account when it was transferred to ZKB..

The press release says, in part:

“The charge alleges that Warner went to great lengths to hide from his accountants and the IRS more than $3.1 million in foreign income generated in a secret Swiss account,” Gary Shapiro, U.S. attorney for the Northern District of Illinois, said in a statement. He failed to pay taxes of $885,300 for calendar year 2002, court documents said. 

“By omitting his UBS income, Warner falsely reported his total income in 2002 was $49.1 million,” according to the charge.

JAT Comment 1:  The Government did get a plea to evasion, a 5 year felony, rather than tax perjury, a 3 year felony, as it was offering earlier in the criminal prosecution side of the overall offshore bank initiative.  Readers will recall that the Government was offering a defendant a plea with one count of FBAR violation (5 years) or 1 count of tax perjury (3 years).  Of course, the courts are sentencing anywhere near the maximum, so it probably is irrelevant in terms of sentencing and, given Mr. Warner's age and wealth, an evasion plea as opposed to the other crimes is not likely to be particularly troubling to him.

JAT Comment 2:  The FBAR penalty is roughly 6 times the taxes evaded for the calendar year 2002 (but there there is the pesky relevant conduct evasion that will play out in sentencing, see below).  The amount evaded for 2002 is 1/6 of his income reported for that year.  The rich are different from you and me.  (Attr. Fitzgerald / Hemingway.)  So, he may have paid originally paid tax of perhaps 1/10 or 1/8 of the income reported.  (That is speculation; perhaps he paid more or less which is not speculation.)

JAT Comment 3:  But then his reported net worth is $2.6 billion, so in terms of real world punishment, well not much.  He is probably more concerned with the public embarrassment than the cost of his behavior.  It would appear that for real punishment of the mega-wealthy a penalty keyed to the net worth should apply (if higher than the normal FBAR penalty; then, depending upon the amount, there could be some real punishment rather than just a nuisance).  Of course, if he gets some serious incarceration period -- which is what the Guidelines will indicate -- then there may be some real punishment.  But, the courts have been notoriously lenient in sentencing, at least for persons not so wealthy as Warner (and is earlier colleague among the mega-rich, Olenicoff).

JAT Comment 4:  The charged and pled year is 2002 which would normally be beyond the 6 year criminal statute of limitations.  But, there are any number of potential actions commonly undertaken in this fact pattern that could cause the statute for that year to be "refreshed"  with a new starting date.  This appears to be one:

h. On or about November 5, 2007, WARNER filed an Amended U.S. Individual Income Tax Return (Form 1040X) for calendar year 2002 with the Internal Revenue Service and claimed a tax refund based on a net operating loss carryback in excess of $39,000,000 related to his 2004 tax year. WARNER failed to include his 2002 UBS income of$3,161,788 and falsely understated the "Correct amount" of his adjusted gross income and taxable income on that form. WARNER additionally understated the "Correct amount" of his total tax by approximately $885,300;

The lesson is that, if first you cheat, let it rest. However, the truth is that the Government probably had other bases for a refreshed statute of limitations for 2002 and years other than 2002 easily within an open statute.  The pattern is to let the defendant pick an open year in the plea process.  I think that the Government prefers earlier years over late years, though.

JAT Comment 5:  I have been interested in the collateral consequences for some time.  So, just to reprise, for civil tax purposes (including the civil fraud penalty), the tax years since inception of this scheme (1996) would appear to be open for assessment and, if he agrees, by restitution.  And for criminal, the tax loss will include relevant conduct years all the way back to 1996, and those evaded taxes could be incorporated in a restitution order if the Government extracted that contractual commitment incident to the plea.  So there can be materially more punishment -- at least in dollars -- than indicated in the Information.