Thursday, March 31, 2011

Electronic Arts Founder Stuck with Huge Tax Bill

A judge recently ruled that Trip Hawkins, founder of Electronic Arts, cannot rely on his personal bankruptcy to erase his tax debts. Trip reportedly owes more than $20 million resulting from “exotic strategies” to offset capital gains.


    There was a time when Trip Hawkins was a very wealthy man. In the mid-90s, he boasted a net worth of roughly $100 million, nearly all of it in EA stock. But in 1994 he started selling it off to fund the 3DO, a videogame console that came out in 1993 but never gained traction with the masses, and that's when his troubles began.

    The sale of EA shares resulted in a serious capital gains tax bill, which accounting firm KPMG told him he could dodge by using "exotic strategies to create the appearance of large capital losses without the real risk of loss," including the use of "offshore corporations, options and investments in offshore companies like UBS AG to artificially generate a high tax basis." I have no idea what that means but from 1996 to 2000, Hawkins claimed $56 million in capital losses.

    The IRS wasn't buying it, though, and in 2001 it challenged the legitimacy of such tax shelters and also began an audit of Hawkins. As if that wasn't bad enough, 3DO finally sputtered to a halt, going bankrupt in 2003. In 2006, Hawkins and his wife filed for personal bankruptcy; their debts were discharged by the court but, thanks to a provision in the law prohibiting the discharge of tax debts in cases where people have "willfully" attempted to evade paying, the IRS and the California Franchise Tax Board both successfully challenged the ruling.

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