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Kaplan v. Commissioner of Internal Revenue

United States Court of Appeals, Eighth Circuit

July 29, 2015

Gary Kaplan, Appellant
v.
Commissioner of Internal Revenue, Appellee

Submitted April 14, 2015

Appeal from the United States Tax Court.

For Gary Kaplan, Appellant: David I. Faust, Faust & Oppenheim, New York, NY.

For Commissioner of Internal Revenue, Appellee: Bruce R. Ellisen, Randolph Lyons Hutter, Gilbert Steven Rothenberg, Senior Attorney, U.S. Department of Justice, Washington, DC; William Wilkins, Internal Revenue Service, Washington, DC.

Before BYE, BEAM, and SMITH, Circuit Judges.

OPINION

BYE, Circuit Judge.

Gary Kaplan challenges a decision of the tax court[1] dismissing his petition and sustaining the Commissioner of Internal Revenue's (the " Commissioner" ) tax determinations. On appeal, Kaplan argues the court erred in holding 1) the statute of limitations had not run, 2) Kaplan's 2009 plea agreement did not bar a civil action for unpaid taxes, and 3) the doctrine of judicial estoppel did not apply. We affirm.

I

Kaplan operated an illegal sportsbooking business called BetOnSports. The business originated in New York City, but Kaplan eventually moved it to several Caribbean islands, followed by Costa Rica in the late 1990s. In July 2004, the company went public on the London Stock Exchange. Prior to going public, Kaplan engaged in several transactions and stock transfers, resulting in $98 million being placed in two trusts (the " Bird Trusts" ) off the coast of France. Kaplan and his family were the beneficiaries of the Bird Trusts and Kaplan was the sole grantor. As the grantor, Kaplan was responsible for the taxable income of the trusts; however, Kaplan neglected to pay federal income or capital gains tax for the Bird Trusts for either 2004 or 2005.

In 2006, a federal grand jury indicted Kaplan for operating an illegal online gambling business within the United States. Subsequently, Kaplan accepted a plea agreement for a reduction of charges and pleaded guilty to five of the remaining charges associated with his illegal gambling enterprise. One relevant part of the plea agreement, Section 2.E, which dealt with the ability of the government to bring civil actions against Kaplan, stated:

[N]othing contained in this document is meant to limit the rights and authority of the United States of America to take any civil, civil tax or administrative action against the defendant . . . except that the United States 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.

In 2009, the district court held a change of plea hearing. The court specifically questioned Kaplan about the above provision in the plea agreement (Section 2.E). First, the government noted " there is nothing in the agreement . . . that this office lacks . . . the power of the government to pursue any civil, civil tax, or administration action." Then, the court asked Kaplan, " Do you understand, Mr. Kaplan, that there is a difference between a criminal tax proceeding and a civil tax proceeding?" Kaplan stated, " Yes, I do, Your Honor." The court continued, " And in this document, the U.S. Attorney's Office has agreed it will not bring any criminal tax proceeding against you; however, that doesn't preclude the initiation of any civil tax proceeding or administrative action against you." Kaplan replied, " I understand that. And we've--we've agreed to that." The court subsequently accepted the plea agreement and sentenced Kaplan to fifty-one months of imprisonment, and ordered him to forfeit $43,650,000 to the United States.

In 2012, the Commissioner issued Kaplan a notice of deficiency for failure to file and pay taxes for 2004 and 2005. In addition to being liable for self-employment tax and income tax on capital gains, Kaplan was also liable for the following penalties: failure to file timely returns, failure to pay tax in a timely manner, and failure to pay estimated tax. The taxes and penalties totaled $25,479,233 for 2004 and $11,248,856 for 2005. Kaplan challenged the Commissioner's determinations by filing a petition in the tax court. Instead of challenging the income determination, Kaplan argued 1) the statute of limitations had run on the Commissioner's ability to assess the unpaid taxes, 2) Kaplan's 2009 plea agreement barred the claim, and 3) judicial estoppel barred the Commissioner's determination. The tax court rejected all three arguments.

On the statute of limitations issue, the court noted since Kaplan failed to file a return, the period for the Commissioner to assess taxes never began to run. Furthermore, while the enforcement period is generally six years, income from illegal sources can allow for a longer enforcement period. On the 2009 plea agreement issue, the tax court determined the agreement was unambiguous as to the ability of the government to bring a civil tax proceeding. Additionally, the court referenced the questions and answers given at the change of plea hearing, demonstrating Kaplan's knowledge and admitted understanding of the government's ability to bring a civil tax proceeding. On the issue of judicial estoppel, Kaplan argued the government's failure to object to the Presentence Report (PSR) prevented the government from bringing a civil tax proceeding against Kaplan.[2] The tax court rejected Kaplan's argument for several reasons. First, the representations in Kaplan's financial disclosure letter were his, not the government's. Second, representations of assets and liabilities are used to determine a defendant's ability to pay a fine or restitution, which was not at issue; therefore, the government had no immediate reason to object to the report. Third, even assuming the government did take an initial ...


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