Electronic Arts Founder Stuck With Huge Tax Bill

Electronic Arts founder Trip Hawkins is on the hook for more than $20 million in taxes after a judge ruled that he can’t get away with using personal bankruptcy to wipe the slate clean.

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.

It appears that to a large extent, Hawkins strung himself up on this one. During a 2004 family court filing in which he sought a reduction in child support payments to his first wife because of his worsening finances, Hawkins admitted he was insolvent and talked about using bankruptcy to ease his tax burden. But although he sold off real estate and made some tax payments, he continued to live an extravagant lifestyle.

Judge Jeffrey S. White noted that Hawkins claimed monthly expenses of $94,900 in 2005 and in 2004, ten months after admitting that his tax bill had left him effectively broke, dropped $70,000 on a Cadillac Escalade, the fourth vehicle in two-driver household. The judge rejected Hawkins’ argument that proof of fraud was necessary to deny the discharge, saying it was enough for him to continue to make “large discretionary expenditures” while his tax bill continued to loom.

And why, you may wonder, do we care? Because Trip Hawkins is a legend in the industry. He founded Electronic Arts in 1982, putting it on the path to becoming the biggest videogame publisher in the world and pioneering the idea of giving game developers front-and-center credit for their creations. The 3DO was a revolutionary console but failed to catch on, thanks to its ridiculously high price and the arrival of the PlayStation soon after its launch, and even after switching exclusively to software development in 1996 the company couldn’t make a go of it. In 2003 Hawkins launched mobile game developer Digital Chocolate and in 2005 he became the eighth person inducted in the Academy of Interactive Arts and Sciences Hall of Fame.

Source: Forbes