Federal prosecutors have charged the creator of Beanie Babies with federal tax evasion.
The tax evasion charges against H. Ty Warner stem from $3.1 million in income from a foreign bank account that he failed to report to his accountants and include on his 2002 federal income tax return. The income would have resulted in an additional $885,000 in taxes. As a result, Warner has agreed to pay a $53.5 million penalty to the IRS.
“We encourage taxpayers to think of the serious consequences, including possible criminal penalties, for willfully presenting false information on their federal tax returns,” said James Lee, Special Agent-in-Charge of the Criminal Investigation Division of the Internal Revenue Service. Lee announced the charges against Warner on Wednesday.
“All taxpayers must honor their obligation to report all of their income and pay all of the taxes they owe,” Lee continued.
Warner’s attorney, Gregory Scandaglia, indicated his client would plead guilty to the charge of federal tax evasion and pay the $53.5 million penalty.
“This is an unfortunate situation that Mr. Warner has been trying to resolve for several years now, including through an attempt to enroll in the IRS’s Offshore Voluntary Disclosure Program in 2009,” Scandaglia said. “Mr. Warner accepts full responsibility for his actions with this plea agreement.” As a result, Warner will pay “a civil penalty… for failure to file a Foreign Bank Account Report.”
“Regardless of wealth, everyone must pay taxes on all of their income, not just the amount they choose to report,” said Gary Shapiro, the United States attorney representing the prosecution’s case against Warner. “Such conduct invites federal prosecution.”
Warner must still be formally arraigned on the tax evasion charge. That arraignment is scheduled for October 2. Federal tax evasion carries a maximum of a five-year prison sentence. However, it is likely Warner’s attorney negotiated no jail time for his client in exchange for the sizable penalty he has agreed to pay to the IRS.
The Rise and Fall of Beanie Babies
Warner created Beanie Babies in 1993, when his company Ty Inc. originally sold nine different Beanie Babies animals. The animals got their name because they were filled with “beans”, tiny plastic pellets that allowed the animals to be posed rather than the traditional fabric used in stuffed animals.
The Beanie Babies quickly became a collectible item, because they were small and retailed for only a few dollars each. In addition, it was not clear to buyers just how many of each animal were available in the limited production runs of each animal. As a result, some collectors paid thousands of dollars for individual Beanie Babies.
By the late 1990s, with the rise of Internet-based sales channels such as eBay, it became clear to buyers that there were far more units available of each individual Beanie Babies animal than was originally estimated. As a result, the value of collecting the animals for financial gain disappeared.
Although Ty Inc. retired Beanie Babies in 1999, consumer demand was still sufficient such that the company restarted production in 2000. In total, over 300 different styles of Beanie Babies animals were produced. Even though the collectable nature of Beanie Babies largely disappeared, hundreds of millions of Beanie Babies have been sold.
Warner, 69, who was the sole owner of Ty Inc., now has an estimated net worth of $2.6 billion.
Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.