The IRS Sank These Millionaires’ Idea Of Turning a Yacht Into a Tax Break

Credits: Claudio Poggio/ Unsplash
  • The Ridingers thought the 2016 donation would save them about $2 million on their taxes. Instead, they ended up paying $3.5 million in taxes and penalties.
  • Yacht donations are rare. In 2019, the most recent year for which IRS data are available, American taxpayers donated about 4,000 boats.
  • The IRS swooped in, contending that Mr. Ridinger knew that Utopia II wasn’t worth the amount listed on his tax returns.

JR and Loren Ridinger wanted a new yacht. First, they needed to get rid of the old one. The 116-foot Utopia II wasn’t selling, so the Ridingers and their lawyers hatched an alternative plan: Donate it, and reap a big tax deduction.

Tax filing

Lots of charities take shoes and clothes. Some take cars (often selling them for cash). Yachts, not so much.

What followed was an odyssey now approaching its eighth year. Audits, lawsuits, a midsea collision. The lesson: Think very, very carefully before you donate your yacht.

The tax filings of the super rich—and the Ridingers, who made a fortune recruiting people to sell anti-aging creams and vitamin supplements, are very rich—are enormously complicated affairs. Wealthy taxpayers rely on a bevy of accountants, lawyers and financial advisers to navigate them. 

Problem with IRS

All that advice is no guarantee of a flawless return that passes muster with the Internal Revenue Service, especially with the agency poised to hire more auditors to patrol the tax filings of the top 1%.

The Ridingers thought the 2016 donation would save them about $2 million on their taxes. Instead, they ended up paying $3.5 million in taxes and penalties.

Mr. Ridinger died suddenly last year, but the fight over Utopia II continues. In a lawsuit against their former lawyers, Mrs. Ridinger says the couple was misled into a transaction that ultimately benefited the attorneys. 

Their onetime lawyers say the couple and their companies misrepresented the yacht’s value and that the transaction didn’t personally benefit them.

The Ridingers business

The Ridingers traded up to larger vessels as they built Market America Worldwide Inc. into an international business with huge conventions for the company’s “UnFranchise Owners.” 

Those “UnFranchise Owners” sell goods to their networks and earn a commission when they recruit others to do the same. 

“I’ve always loved the water, I’m a triple Pisces,” Mr. Ridinger said in an interview on a yachting YouTube channel posted in 2019. 

Mr. Ridinger was known for his hourslong motivational speeches at Market America’s events. In tinted glasses and sweating through his dress shirt, he used a human-sized hamster wheel to pitch attendees on achieving financial freedom. 

He dismissed claims that his business was a pyramid scheme, instead saying it was a “dimaryp”—pyramid spelled backward. 

In 1999, Market America bought a steel-hulled Feadship yacht and named it Utopia II. 

The family eventually added the more spacious Utopia III to its fleet. When they were in Miami, far from Market America’s headquarters near the Greensboro, N.C., airport, they docked the boats next to Casa de Sueños, their Mediterranean-style compound. 

In New York, the Ridingers kept the yachts at a Hudson River marina visible from their apartment with its Swarovski-studded bathtub. 

The Ridingers’ celebrity friends were frequent guests. Jennifer Lopez celebrated her 43rd birthday on Utopia III. 

Kim Kardashian and Kanye West shared a kiss on the boat one Fourth of July. “Our hobby is collecting people,” Mr. Ridinger said in the interview with the yachting YouTube channel.

Yacht donation

In 2016, the couple reported adjusted gross income above $36 million, putting them in the top 0.01% of Americans that year. 

They agreed to pay more than $40 million to buy a sleek 207-foot yacht, which they would name Utopia IV.

The aging Utopia II had to go. It had been on the market for a decade for $5.4 million but had failed to attract a buyer. The solution: A charitable donation that would reduce their tax burden.

Yacht donations are rare. In 2019, the most recent year for which IRS data are available, American taxpayers donated about 4,000 boats, planes and other non-car vehicles, averaging about $19,000 in value. Car donations averaged about $1,700. 

The Ridingers first considered donating Utopia II to AMIkids Inc., a charity known for accepting yachts, according to the lawsuit filed by Mrs. Ridinger and her husband’s estate against their former attorneys. 

Tampa-based nonprofit AMIkids accepts about 20 donated boats a year and screens them to avoid getting stuck with unexpected maintenance and operating costs, said CEO Mike Thornton.

Utopia II donation

The plan changed when the Ridingers started using a new legal team, Ralph Stone and Rachel Gould of Meister, Seelig & Fein. 

Ms. Gould lived a dozen floors below the Ridingers in their Manhattan building. Through their lawyer, they said the Ridingers’ lawsuit is meritless.

The lawyers advised the Ridingers to donate Utopia II to Veterans Inc., a charity based in Worcester, Mass. Mr. Stone is on the charity’s advisory council.

The Ridingers gave the boat to Veterans Inc., and claimed a $4.9 million deduction, matching an outside estimate of the yacht’s value, according to court filings. At the couple’s tax rate, the deduction was worth nearly $2 million in federal tax savings. 

Utopia II was the only donated boat Veterans Inc. accepted between July 2011 and June 2020, according to tax filings. The charity didn’t respond to requests for comment. 

Mr. Stone and Ms. Gould created a limited-liability company to buy the yacht from the charity for $4.9 million immediately after the donation. The lawyers issued the charity a promissory note instead of paying cash, court documents show. 

The charity then assigned the note to a company called Killer Impact, which Ms. Gould co-founded to make socially responsible films and other projects. 

Veterans Inc. reached an agreement in which it said that Killer Impact’s projects would fulfill its own charitable purpose and that the charity would get a 10% administrative fee, according to court documents. 

When the lawyers sold the boat a year later for $1.3 million, the charity got $130,000. (Mr. Stone and Ms. Gould say the transaction was designed to benefit the charity, not them.) 

IRS swooping in

The IRS swooped in, contending that Mr. Ridinger knew that Utopia II wasn’t worth the amount listed on his tax returns. 

The agency requires appraisals for valuable property donations and disclosure when charities quickly sell donated items. But the government doesn’t necessarily accept what taxpayers submit.

The IRS, which had an employee named Utopia involved in the case, assessed the boat’s worth at $1.5 million. 

Court documents show that the agency demanded $6.2 million in taxes and penalties from the Ridingers for 2016 and 2017 after examining the boat donation and other issues on their returns, including whether the yacht was used for Market America business. 

Fraudulent transactions

The couple challenged the government in the U.S. Tax Court. In court filings, the Ridingers said they were unaware of how Mr. Stone and Ms. Gould had structured the transaction.

The IRS, however, argued that Mr. Ridinger, Ms. Gould and Mr. Stone “planned a fraudulent transaction.” 

The yacht had remained docked outside the Ridingers’ Miami home after the sale to the LLC, the IRS said, where it wasn’t charged docking fees. 

What’s more, the agency said, Mr. Ridinger could continue to use the yacht for free.

In July 2022, the Ridingers settled with the IRS, agreeing to pay about $3 million in back taxes and another $450,000 in penalties. Still, they avoided the IRS’s stiffer fraud penalties. 

By then, the Ridingers had also donated Utopia III to a charity with a history of accepting boats—National Save the Sea Turtle Foundation Inc., according to the U.S. Coast Guard records.

New vessel contemporary look

And the Ridingers had moved on to Utopia IV. The new vessel had a more contemporary look than their earlier yachts. 

Instead of traditional wood paneling and upholstered furniture, it featured a large television that slid out from a wall, a sun deck with Tiffany-blue pillows and a sculpture bearing the names of Ridinger family members. 

“Utopia means blissful perfection, the perfect place, and I ask the seas and the ocean for a safe journey and a happy journey for everyone who travels with her,” Mrs. Ridinger said before cutting a ribbon that flung a bottle of sparkling wine into Utopia IV’s hull at its March 2018 launch. In a video of the yacht’s maiden voyage, Mr. Ridinger compared himself to Christopher Columbus.

Utopia IV flaws

The couple sued the family that manufactured the vessel the following year, claiming technical flaws caused Utopia IV to “toss uncontrollably, inciting crew panic, damaging major equipment onboard and ripping furniture and fixtures off their floor mountings, and shattering glass on various surfaces.” The two parties eventually settled. 

In August 2021, angel investor Ron Conway chartered Utopia IV for 11 days for nearly $600,000. He said he seriously injured his knee while trying to disembark from the small boat that brought him to shore in Martha’s Vineyard. He sued the vessel, claiming its owners were negligent and left staff ill-equipped.

U.S. Marshals arrested the yacht on Mr. Conway’s behalf. Market America put up $3 million to free the yacht in November 2021. 

It soon left for the Bahamas to pick up a new set of charter guests. They were sitting on one of the yacht’s decks on the evening of Dec. 23 when they were thrown from their chairs.

Utopia IV had crashed into a tanker. Former crew members who say they were injured in the crash have sued, claiming they haven’t been paid or had medical bills covered in accordance with the law. 

IRS settlement

The company that owns the yacht for the Ridingers has denied the allegations. Utopia IV was towed back to the U.S. for repairs. A lawyer for the family said any issues with the boat have been fixed. 

The Ridingers chartered a yacht for a Mediterranean trip last summer. Off the Croatian coast in August, a month after the IRS settlement was completed, Mr. Ridinger, 72 years old, suffered a pulmonary embolism and died. 

Press reports listed him as nine years younger than his actual age. Ms. Lopez and her husband, Ben Affleck, sat next to Mrs. Ridinger at his October memorial service.

Mrs. Ridinger filed the lawsuit over the donation a few weeks later. It is winding its way through federal court.

Utopia IV is on the market for $48 million.

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Source: The Wall Street Journal


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