Tax Evasion without Imprisonment?

Beanie Baby creator H. Ty Warner’s sentencing for tax evasion left him on probation, but the recent appeal filing seeks to change his fate.

Jeffrey S. Freeman, J.D., LL.M

In September 2013 H. Ty Warner, creator of the mid-’90s craze of animal-shaped Beanie Babies, was charged with federal tax evasion stemming from an illegal offshore foreign bank account kept in Switzerland. Warner

tax evasionWarner, 69, of Oakbrook, Illinois grew up poor, but made quite the fortune from Beanie Babies. Forbes recently estimated Warner’s new worth at $2.6 billion. Despite his enormous fortune Warner failed to report all of his earned income. U.S. taxpayers are required by federal law to pay taxes on all income, regardless of the country in which it was earned.

Warner was accused of failing to report income earned from his foreign offshore Swiss bank account. According to court filings, Warner attempted to evade approximately $885,300 in income taxes for the calendar year 2002. U.S. Attorney for the Northern District of Illinois, Gary S. Shapiro, stated 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. Such conduct invites federal prosecution.”

Under federal sentencing guidelines, Warner faced up to 57 months in prison, however that was not the sentence that he received. During sentencing, the prosecution urged U.S. District Judge Charles Kocoras to put Warner behind bars for at least a year stating that without prison time “tax evasion becomes little more than a bad investment” and that wealthy felons can write a check to not face further punishment.

At his January 15, 2014 sentencing Kocoras issued Warner two years of probation and 500 hours of community service at Chicago high schools. Kocoras praised Warner for his charitable giving declaring that society was better served by giving him probation rather than a prison sentence. Warner also agreed to pay $27 million in back taxes and interest, and a civil penalty of more than $53 million.

The U.S. government has filed a “protective notice of appeal” with the U.S. appeals court over the January 15th sentencing order. It is not a routine matter for the U.S. government to appeal a criminal sentence, rather each case is considered individually and the Department of Justice must decide which cases would most likely be determined to have an unreasonable sentence by the court of appeals.

We will have to wait and see if Mr. Warner’s sentence stands up in the Court of Appeals.

Jeffrey S. Freeman, of Freeman Tax Law, notes that this is not the first time that the government has challenged a sentence that did not involve imprisonment. In UNITED STATES OF AMERICA, Appellant v. WILLIAM TOMKO a very similar situation where the U.S. filed to appeal Tomko’s sentence for tax evasion that did not include imprisonment. The Court of Appeals sided with the original sentencing where Tomko received a lesser sentence compared to similar defendants citing the defendant’s lack of criminal history, charitable involvement, and his acceptance of responsibility.

The Government argued that failure to incarcerate Tomko would compromise the deterrent effect that tax laws have on potential tax cheats if a rich defendant is able to buy his way out of prison. The District Court disagreed and sentenced Tomko to probation, alcohol treatment, community service, full restitution and the maximum fine. Noting that while the probation sentence was below the guideline range, the fine is above the guideline which serve to address the sentencing goals of punishment, deterrence, and rehabilitation.

About Freeman Tax Law

Freeman Tax Law is a boutique tax law firm with national exposure equipped to handle all domestic and international tax law matters. At Freeman Tax Law, the attorneys and professional staff have vast experience with foreign tax compliance, international tax planning, and resolving tax controversies involving offshore banking matters. Freeman Tax Law helps taxpayers and foreign entities become in compliance with laws such as Foreign Account Tax Compliance Act (FATCA) and Offshore Voluntary Disclosure Program (OVDP). In addition to handling complex tax controversies, the Freeman Tax Law team has extensive expertise in assisting clients with wealth management and estate planning.

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