© 2015 The Texas Lawbook.
By Mark Curriden
(May 10) – A federal bankruptcy judge in Dallas ruled late Tuesday that Dallas entrepreneurs Sam and Charles Wyly committed tax fraud when they created a series of offshore trusts in the Isle of Man in the 1990s to shield more than $1 billion for the family tax-free.
U.S. Bankruptcy Judge Barbara Houser, in a 459-page opinion, said that there is “clear and convincing evidence” that the “heart of the Wyly offshore system had been established through deceptive and fraudulent actions.”
The ruling means that Sam Wyly will be required to pay the IRS as much as $1.4 billion in back taxes and penalties.
At the same time, Judge Houser ruled that Charles Wyly’s widow, Dee, “is innocent of any wrongdoing.”
The fact that Dee Wyly “did not know the details of what Sam and Charles had done offshore is clear,” Judge Houser wrote. “There was nothing that should have ‘tipped her off” that something was amiss. She did not commit fraud, she did not participate in any fraud, she was not willfully blind, and she is entitled to the benefit of the innocent spouse defense.”
The Wylys filed for protection under Chapter 11 of the U.S. Bankruptcy Code in 2014 after a New York judge hit Sam Wyly and his now-deceased brother, Charles, with a $299 million judgment for federal securities violations involving offshore trusts.
In April 2015, the IRS accused the Wylys of tax evasion and fraud related to the offshore trusts. The IRS seeks $1.4 billion in back taxes, fees and penalties from Sam Wyly and $800 million from Dee Wyly. Charles Wyly died in a car crash in Colorado in 2011.
The IRS claims that the Wylys, who made billions of dollars growing and then selling Michaels Stores and Bonanza steakhouses, set up the series of offshore trusts in the Isle of Man in order to hide income from being taxed, while still using the money in the trusts to fund their lavish lifestyle.
The government claims that the trusts were sham operations that were used to purchase multimillion-dollar houses, $700,000 pieces of jewelry and artwork any time the Wyly family demanded it.
Lawyers for the Wylys claimed that they intended for the trusts to be legally proper and that they relied upon lawyers and tax professionals to make sure the trusts were operated lawfully.
But Judge Houser, who heard more than three weeks of testimony and reviewed thousands of pages of legal and tax documents, described the trusts as a “tax scheme implemented… in such a way as to attempt to shield the Wylys from this outcome is equally clear.”
“But the substance of those documents, if carefully examined, reveals the truth,” Judge Houser wrote. “The Wylys’ version of the truth is simply too glib.”
To accept the Wylys’ explanation, the judge wrote, “requires the court to be satisfied that it is appropriate for extraordinarily wealthy individuals to hire middlemen to do their bidding in order to insulate themselves from wrong-doing so that, when the fraud is ultimately exposed, they have plausible deniability.
“While Sam wants us to believe that he had no idea of these fraudulent and deceptive acts, his silence is deafening, as he never denied knowledge of the bad acts,” Judge Houser said. “Even assuming Sam did not know about all of the ‘bad acts’ undertaken to benefit him because he hired others to ‘make it happen,’ the fact that Sam had the financial wherewithal to attempt to insulate himself from the ‘bad acts’ that occurred here cannot change the proper outcome or, if it does, an appellate court will have to so rule.”
Judge Houser said she found it “hard to believe” that the lawyers and tax professionals the Wylys hired never informed them of the dangers, risks or limits of the offshore trusts.
“Perhaps that happens all the time in Sam’s life, but if it happened in mine, I would be asking questions – lots of them,” the judge said.
Judge Houser recognized Wyly as a “sophisticated and well-educated businessman that accumulated great wealth through his business acumen and hard work, but she rejected his claim that he allows others to make financial decisions without his knowledge.
“He does not simply turn his wealth over to others and wish them luck,” the judge ruled. “The Court is convinced Sam knew what was happening in connection with the offshore system and that no money or assets moved within that system without Sam’s knowledge and express direction.
“Let me be clear, that Sam’s directions to the offshore trustees was usually done through the formality of Sam making his ‘wishes’ known to them – directly or through the trust protectors he appointed — is of little consequence,” Judge Houser said. “The [Isle of Man] trustees never refused to follow Sam’s ‘wishes’ — even when that made little sense — as they understood that their jobs depended upon it. If a Sam ‘wish’ was not granted, they would be removed—plain and simple.”
Judge Houser ordered the lawyers for Sam Wyly and the IRS to meet during the next 30 days to possibly come to an agreement on how much Wyly should be required to pay. If the two sides are unable to agree, the judge said they each party should submit their proposals within 45 days.
“While Sam and Dee Wyly are pleased that the court rejected the IRS’s gift tax claim and found Dee Wyly to be an innocent spouse, they are surprised and disagree with the court’s fraud finding as to Sam and his brother Charles,” Wyly family General Counsel Stewart Thomas said in a written statement.
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