H. Ty Warner, the billionaire creator of Beanie Babies and other plush animal toys, has been sentenced to two years’ probation – not federal prison – for failing to report more than $24.4 million in income, and evading nearly $5.6 million in federal taxes, from millions of dollars he hid for more than a decade in secret foreign financial accounts at two banks based in Switzerland.
Warner, the sole owner of TY Inc., which designs and sells plush toy animals including Beanie Babies, as well as other business interests, had been charged with, and had pleaded guilty to, a single count of tax evasion.
“Society will be best served to allow [Warner] to continue his good works,” U.S. District Judge Charles Kocoras said in imposing the sentence of probation. Judge Kocoras also ordered Warner to perform at least 500 hours of community service for at least three Chicago high schools and to pay a $100,000 fine.
In addition, Warner has paid more than $53 million in a civil penalty, representing 50 percent of the highest balance of his unreported foreign bank accounts, which at its peak was more than $100 million, as well as approximately $27 million in back taxes and interest.
In pleading guilty, Warner admitted that between 1996 and 2008, he opened and maintained undeclared bank accounts in Switzerland at both UBS AG and Zuercher Kantonalbank (ZKB); that he failed to report the income from those accounts, as well as their existence, on his individual income tax returns and amended returns for tax years 1996 through 2007; and that between 1999 and 2007, his unreported gross income from those accounts totaled $24,448,912. Prosecutors said that there were no records of how much he earned for the tax years 1996-98.
Warner also admitted that he failed to report his interest in the foreign bank accounts each year from 1996 to 2008 to the Treasury Department, as required on the Report of Foreign Bank and Financial Accounts (FBAR) form. U.S. taxpayers must report foreign financial accounts if the total value of the accounts exceeds $10,000 at any time during the calendar year, and a deliberate failure to file the FBAR form can result in a civil penalty of up to 50 percent of the high balance in the account each year.
According to court documents, Warner traveled to Zurich in January 1996 to open an undeclared account at UBS and executed a form instructing that any correspondence regarding the account be held at the bank in Switzerland rather than being mailed to him in the United States. Prosecutors said that Warner has never identified the source of the funds or the purpose behind the secret account, other than to suggest that opening the account was based on the success of Beanie Babies sales.
Prosecutors said that it “remains unknown if the initial deposits were diverted pre-tax funds, which, if so, would significantly increase the tax loss.”
In 2001, UBS agreed to report certain tax information to the Internal Revenue Service. In 2002, Warner’s UBS banker, Hansreudi Schumacher, left UBS and later counseled his former clients to move their UBS accounts to ZKB because it had no similar agreement with the IRS. In December 2002, prosecutors said, Warner traveled to Zurich and transferred approximately $93.63 million from UBS to ZKB, where his new account was managed by Schumacher, who was indicted in Florida in 2008 for conspiracy to defraud the United States and who remains a fugitive.
Prosecutors said that instead of opening the ZKB account in his own name, Warner opened the account in the name of a purported Liechtenstein entity, the “Molani Foundation,” which effectively concealed his identity as the account holder. According to the government, from 2002 through tax year 2007, Warner, again, did not report the existence of, or income from, the ZKB account, and he also failed to report the accounts and income on amended tax returns he filed in December 2007 for tax years 2002-05.
In early 2009, UBS entered into a deferred prosecution agreement with the United States, admitting that it helped U.S. taxpayers hide accounts from the IRS. As part of the agreement, UBS provided the government with the identities of, and account statements for, certain U.S. clients. The IRS also announced a voluntary disclosure program for taxpayers to declare secret accounts, but taxpayers whose accounts were already known the government were ineligible for the program.
Prosecutors said that despite publicity in 2009 of tax fraud indictments of former UBS employees, including Schumacher, and its U.S. clients, Warner did not attempt to disclose his account at ZKB until late 2009, after he learned that UBS was going to disclose client records and that Schumacher had been indicted. Warner requested eligibility for the voluntary disclosure program a week before the original deadline in September 2009, but the government had learned that he had an undisclosed UBS account in the summer of 2008, according to court documents.
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