- U.S. seeks about $2.2 billion for money family held offshore
- Judge says some trusts in IRS case give her `heartburn'
Samuel Wyly’s lawyer, fighting a $2.2 billion claim by the Internal Revenue Service, told a skeptical judge that his client’s tax planning was “aggressive but not illegal.”
The IRS is suing to recover unpaid taxes, interest and penalties on money held in offshore trusts from 1992 to 2013 by Sam Wyly and his late brother Charles, who got rich building businesses including the Michaels Stores Inc. arts-and-crafts chain. The Dallas bankruptcy judge heard closing arguments Wednesday.
Wyly and his brother’s widow, Caroline “Dee” Wyly, filed for bankruptcy protection after the Securities and Exchange Commission won a fraud lawsuit against the brothers in Manhattan in 2014. Charles died in a car accident in 2011. The SEC verdict also prompted demands for 22 years’ worth of back taxes and penalties by the IRS, which the agency said was related to the securities fraud.
The IRS alleges the Wylys established and controlled “an elaborately complex network of numerous offshore entities in known tax havens that engaged in a series of financial transactions to avoid detection and taxation.” The Wylys say they relied on experts to sign off on the trusts.
“The debtors have shown that the planning here was aggressive but not illegal,” Wyly attorney Donald Lan told U.S. Bankruptcy Judge Barbara Houser. “Aggressive does not mean it’s fraud. Aggressive does not even mean it’s wrong. Aggressive means there is a risk you are going to lose.”
Houser expressed doubts about one particular round of trusts, saying they gave her “heartburn.”
“Those trusts were wrong from the beginning,” the judge said. “Those trusts were, should I say it, fraudulent.”
She also took issue with the Wylys’ reliance on experts, a repeated theme during 11 days of testimony. If that was the law, she said, then every taxpayer could hide behind an agent and “nobody would ever be liable for anything.”
Houser said none of her questions should suggest she has her mind made up. The judge will issue a written opinion of her findings, which will determine how big a claim the IRS can assert in the Wylys’ Chapter 11 case.
“The evidence is clear the Wylys lied, concealed and evaded their way to hundreds of millions of tax-free profits from Isle of Man trusts they controlled,” IRS lawyer Jonathan Blacker told the court. He said the brothers used the trusts as their “personal tax-free piggy bank.”
He said Sam Wyly portrayed himself as an Eagle Scout and patriotic American, but the reality was he paid lawyers to research whether giving up his U.S. citizenship would absolve him of tax liabilities. Wyly also told his lawyer that if the government ever challenged the offshore trusts he would “litigate with the IRS for years and then settle for pennies on the dollar,” Blacker said.
The IRS is seeking $1.4 billion from Samuel Wyly and $834 million from his sister-in-law, with penalties and interest accounting for 80 percent of the totals, according to a Jan. 25 government brief. The tax agency chopped about $1 billion off its initial claim as a result of disclosures the Wylys made on the eve of the trial, according to the brief.
Those disclosures showed the “availability of other tax attributes” that cut some deficiencies the IRS had originally identified, the agency said, adding that it had been seeking the information since last year. The remaining IRS claims still threaten to wipe out the Wyly fortune.
The government alleges the brothers’ 14 Isle of Man trusts and 40 subsidiary companies were used to dodge taxes on hundreds of millions of dollars of stock options and warrants. The Wylys used the untaxed principal and gains to buy luxury houses in Dallas, ranches and a condo in Colorado, a Texas horse ranch and an art gallery, as well as art, collectibles, antiques and jewelry, according to the U.S.
Charles and Dee Wyly bought jewelry worth $4.3 million, including a $735,000 diamond necklace and a $667,000 diamond ring, according to the IRS. Loans totaling $140 million were used to bring untaxed funds onshore for use by the brothers or their children, or for new businesses they were establishing, the IRS said.
Dee Wyly “did not know enough about her husband’s tax situation to be able to form the intent to commit tax fraud,” according to a brief filed by the family. She had been married to Charles for 56 years when his Porsche was struck by another vehicle in western Colorado, killing him at the age of 77.
The Wylys have also argued that the government’s proposed penalties for failure to file, totaling more than $940 million, are “grossly disproportional” to the alleged infractions and are constitutionally excessive.
Blacker, the IRS lawyer, said the securities fraud for which the Wylys were found liable in the New York case was carried out “to attain the tax benefits of the offshore system.”
“This was all tax-related,” he said.
The case is In re Samuel E. Wyly, 14-bk-35043, U.S. Bankruptcy Court, Northern District of Texas (Dallas).