Electronic Arts and now Digital Chocolate (Millionaire City
) founder Trip Hawkins allegedly owes more than $20 million in federal and California state taxes, and a U.S. district judge has rejected his efforts to claim bankruptcy in the face of the tax debt.
The decision by U.S. district judge Jeffrey S. White upholds an earlier decision by a bankruptcy court; the judge alleges Hawkins, who had been availing himself of tax shelters later disallowed by the IRS, "continued to spend money extravagantly with knowledge of his tax liabilities."
Hawkins and his spouse originally filed for Chapter 11 in 2006, listing assets of $5 million and debt of $28 million, almost all of which was owed to tax agencies. The pair got those debts discharged, but the tax agencies leveraged a bankruptcy law provision to revive them -- debts can't be cleansed if the taxpayer "willfully attempted in any manner to evade or defeat such tax."
Hawkins proposed to settle the outstanding tax debt for $8 million, but the IRS refused. The recent decision prohibits Hawkins to use a bankruptcy filing to absolve the outstanding taxes.
According to a report in Forbes' Informer blog
, by the time Hawkins was in charge of 3DO in the early 1990s after founding EA, he had an estimated net worth of $100 million, almost all of it in EA stock.
Hawkins sold shares partly to raise capital for investments in 3DO, but according to the report, accounting firm KPMG suggested Hawkins avoid taxes through "exotic" tax shelter strategies involving offshore corporations, options and other investments that would create the appearance of large losses without risk of actual loss.
Hawkins reportedly claimed $56 million in losses between 1996 to 2000, and in 2001 the IRS moved to prohibit the kind of tax shelter exploitation strategy in which Hawkins and numerous other wealthy entrepreneurs were alleged to be engaging. As 3DO approached bankruptcy, the IRS audited Hawkins in 2001.
Hawkins claimed insolvency in January 2004 while in family court to seek a reduction on child support payments he owed his first wife. According to Forbes, Hawkins admitted at the time that he wanted to use bankruptcy to reduce his tax liability.
But after that, despite selling assets and making some payments toward his tax debt, Hawkins "continued to make unnecessary and unreasonable expenditures despite this knowledge of his finances," in the words of Judge White -- a reported $94,000 in monthly expenses during 2005, including payments on four cars and child care even though the child's mother stayed in the home.
Hawkins founded social gaming firm Digital Chocolate in 2003, and in addition to Millionaire City
, the company's released MMA Pro Fighter, Rollercoaster Rush
and Tower Bloxx
. The company recently received $12 million in venture capital funding from several investment partners.
In a memo sent to Digital Chocolate employees and published by the San Francisco Business Times
, Hawkins says the tax evasion allegations are ""misleading and erroneous to the point of invalidity."]