How the US government miscarries justice: Inside the Ty Warner tax evasion case

Ty Warner is an interesting character.  Before striking it big with “Beanie Babies," Ty worked as a salesman for Dakin – which at the time was a plush toy maker.  In eccentric fashion he’d arrive at appointments in a white Rolls Royce convertible – wearing a fur coat and top cat and holding a cane. Ty reasoned that his eccentric look and style would garner the attention of potential buyers.  Apparently his sales tactics were effective, his former boss called him “the best salesman that [he] had ever met.”     


When Ty traveled to Italy in the early 80s he came across stuffed cat toys sold on the street, that were unlike those available in the US – he saw an opportunity to introduce his version of the toys to the US market. He started with cats and bears stuffed with a posable lining and plastic pellets –  the dolls looked under-stuffed and different than a typical stuffed animal. The dolls were a huge success and by 1991 the company was international – selling product in Canada, the UK and the rest of Europe.


Ty’s best day were ahead of him when the Beanie Babies debuted in 1993. Sales of the original nine were weak. To increase demand for the product, Ty utilized the scarcity principle, by announcing that the original nine dolls would soon be retired. This created a fire storm of purchases. People felt that scarcity close to their hearts, and stuffed plush toys were raging hard.
I recall helping my friend’s mom move a massive bookcase into their well-appointed living room.  She used the bookcase to safely display her best Beanie Babies behind uv-resistant glass.


Beanie Babies were a widespread craze and red hot for close to a decade.  By the late 90s, Beanie Babies were an international sensation. In 1997, Ty partnered with McDonalds to promote the product through McDonald’s Happy Meals, which helped expand the product and sell McDonald’s Happy Meals. The product sold well in the US, and also did incredibly well in Australia, Canada, England, Germany, Japan, Malaysia and Singapore.  The prolonged success of the product made Warner a billionaire.


However, with International success comes tax complications.  In Warner’s case, his scope of wealth exceeded the resources of his tax advisors.  One of the tax problems with international expansion is that one’s advisors might not be aware of compliance issues with international tax reporting.  In Ty’s case, his team had realized that they had a problem with unreported foreign bank accounts in Switzerland. Bank accounts over $10,000 must be reported on a separate form known as an FBAR. In 2009, most tax professionals and IRS auditors were completely unaware of the FBAR form. Why? While the FBAR was created in 1970, the IRS never bothered to enforce it.

The government launched a FBAR amnesty program in 2009 called the Offshore Voluntary Disclosure Initiative. Warner tried to participate in the program. But the government denied him entry, claiming that they were already investigating him and that he was facing criminal charge

Did Ty Warner have a motive to commit tax evasion of did he make an understandable mistake?


It’s very questionable.  A billionaire is not the type of person who commits tax evasion.  Billionaires don’t need to evade taxes. They truly have more money than they can spend. Further, there is far too much risk relative to return on investment when evading taxes – it’s a foolish way to gamble with money and liberty. I suppose that he could have been evading taxes for the thrill of it, but this does not fit the character of a person with his philanthropic record.


People who commit tax evasion are people who are taking financial short cuts to attain wealth.  However, in my experience, tax evaders are really bad at maintaining wealth. They might have a few million dollars one day, but in short time the money is often lost or squandered.


The indictment and conviction of Warner was intended to scare the public in to paying their taxes. The government leveraged Warner’s fame to get the American public fearful and respective of an all-mighty tax system.


So then why did he plead guilty, rather than go to trial?


From what I can garner, his tax advisors made a mistake. His tax team seemed to be local advisors that he trusted; whom grew as he grew. I suspect, that they had poor expertise in international reporting, and that the government saw an opening to attack someone very famous and to leverage his fame into awareness of international taxation and foreign bank reporting.


I can tell you from my own experience as an international tax attorney, that it is incredibly common to find good tax practitioners who make big mistakes on foreign reporting.  International taxation is complicated and very different than domestic taxation.


Warner could have gone to trial and hoped to prove a lack of willful intent, and I think a good criminal defense attorney could have gotten him acquitted. But, there’s two problems when one goes to trial. First, there is a possibility of acquittal, but a good chance that one could lose big.  Second, in order for Warner to prove his innocence at trial, he would need to provide dispositive evidence that his tax team dropped the ball.  Which could precipitate criminal charges to his tax team.  My guess is that Warner reasoned that he could absorb the far arrows better than the people he looked at as essential into making him a billionaire.  Therefore, Warner plead guilty, paid restitution and penalties, received two years of probation, and fortunatley never had to serve a day inside of a prison cell.


The important lesson: There are different tax rules for celebrities and for others with some degree of fame. The IRS is desperate to gets its message out of how unreasonable it can be by attacking celebrities and those with some notoriety. Some Americans can evade taxes for years and have little to worry about. Those with a following can be charged even if they make an innocent mistake. Therfore, make sure your international affairs can withstand the most brutal IRS scrutiny.