Living Large After Going Bust No Proof of Tax Scam

(CN) - Evidence of video game pioneer William "Trip" Hawkins' allegedly lavish post-bankruptcy lifestyle is not enough to prove that he willfully avoided paying more than $20 million in taxes, the 9th Circuit ruled Monday.

Hawkins co-founded gaming giant Electronic Arts Inc., but later lost a fortune on the failure of 3DO, which developed a line of consoles and games in the 1990s.

As of 1996 Hawkins' net worth was around $100 million, according to the appellate court, which said his "saga reads like a Fitzgerald novel, telling the story of acquisition and loss of the American dream, and the consequences that follow."

On the way up, Hawkins acquired a $3.5 million home, a private jet and a condominium in high-priced La Jolla, according to the ruling.

But just as the IRS began to question the legality of several of Hawkins' Cayman Island tax shelters in 2001, 3DO began to tank. The company sought Chapter 11 reorganization in 2003, followed by Chapter 7 liquidation.

The IRS piled on in 2005, saying Hawkins owed more than $20 million in unpaid taxes, penalties and interest for the years 1997-2000.

The bankruptcy court eventually confirmed a liquidation plan that discharged most Hawkins' debts, but it also said that the IRS and California tax collectors could still bring suit to determine if his unpaid taxes could be discharged as well.

In response, Hawkins and his wife sought a court order that all of their unpaid taxes were covered by the bankruptcy court's ruling. The IRS shot back with its own lawsuit, claiming that the Hawkinses still owed the debts because their high-end lifestyle after 2003 amounted to a "willful attempt to evade taxes."

The bankruptcy court agreed with the government after finding that the Hawkinses expenses had exceeded their earned income by "$516,000 to $2.35 million" during the same period.

The court found that Trip Hawkins' tax debts had not been discharged by the previous ruling, but let his wife, Lisa Hawkins, off the hook for hers.

U.S. District Judge Jeffrey White affirmed the bankruptcy court ruling in San Francisco, and Hawkins took the issue to the 9th Circuit.

Deciding for the first time that tax evasion in this context requires "specific intent," the divided appellate panel reversed on Monday and sent the case back to San Francisco.

"Because neither the district court nor the bankruptcy court had the benefit of our conclusion that denial of discharge for 'willfully attempt[ing] in any manner to evade or defeat' a tax debt requires that the acts be taken with the specific intent to evade the tax, we vacate the judgment and remand so that the courts can reanalyze the case using the specific intent standard," wrote Judge Sidney Thomas for the majority.

Judge Johnnie Rawlinson noted in dissent that the ruling could give the very rich "an unfettered ability to dodge taxes with impunity."

"There is little doubt, if any, that William Hawkins deliberately decided to spend money extravagantly rather than pay his duly assessed state and federal taxes," Rawlinson wrote.

She pointed out that even after admitting in a 2004 petition to reduce child support payments that he owed $25 million in taxes, Hawkins "maintained a home worth well over $3.5 million, and an ocean-view condominium worth well over $2.6 million."

"Although there were only two drivers in the family, Hawkins purchased a fourth vehicle that cost $70,000," Rawlinson added. "At the family court hearing, Hawkins' bankruptcy attorney 'testified that Hawkins' intent was not to pay the tax debt, but to discharge it in bankruptcy. ..."

"... This testimony is a strong indication of a willful intent to avoid the payment of taxes by hook or by crook," she wrote.

Hawkins' attorney, Heinz Binder of Binder & Malter in Santa Clara, was unavailable for comment on Monday.

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