© 2015 The Texas Lawbook.
By Mark Curriden
(Jan. 28) – A lawyer for Sam and Dee Wyly told U.S. Bankruptcy Chief Judge Barbara Houser that the tax evasion and tax fraud case brought by the Internal Revenue Service is nothing more than “a bunch of sound bites” and allegations that are not based on federal tax law.
The IRS’ lawyer countered that the evidence presented during the past four weeks of the unprecedented billion-dollar bankruptcy trial shows that the Wylys “never intended to pay taxes” on the hundreds of millions of dollars they kept in offshore trusts on the Isle of Man.
The claims came Thursday during more 12 hours of closing arguments over the past two days during which Judge Houser repeatedly raised questions about the legitimacy of both sides’ positions and arguments.
“The issues in this case are interesting and complex,” the judge said Thursday.
Judge Houser is likely to take several weeks to review the evidence before she issues a ruling in the case, which is considered by legal experts as one of the most complex bankruptcy trials since the Hunt brothers declared bankruptcy three decades ago.
Interestingly, Judge Houser was a young lawyer who represented the creditors in the Hunt bankruptcy.
The Wylys filed for bankruptcy in 2014 after a New York court fined them $299 million for violating federal securities laws when they created a series of offshore trusts in the Isle of Man.
Four months later, the IRS accused the Wylys of tax evasion and fraud and is seeking $2.2 billion in back taxes, fees and penalties.
IRS prosecutor Jonathan Blacker told Judge Houser that the Wylys’ own internal financial records show the money they expected to avoid paying in taxes through their offshore trusts.
“This is your Perry Mason moment,” Blacker said. “This is just as good as Sam Wyly taking the witness stand” and admitting it.
But Judge Houser expressed doubts.
“I’m not sure the accounting records show what you think it shows,” she said.
The judge also told the IRS that she has doubts about its argument that each alleged distribution of money from the trusts are technically a “reportable event,” which would require the Wylys to file notice of the distribution to the IRS, which they did not do.
Judge Houser said the evidence shows the money from the trusts was distributed to other entities, such as limited liability corporations, and not to the Wylys as individuals, as required under the code cited by the IRS.
“The debtors say they don’t understand your theory on this, and, quite frankly, I don’t understand it either,” Judge Houser said.
Lawyers for the Wylys say that if the IRS cannot prove that the distributions were a “reportable event,” then about $500 million in the IRS proposed penalties evaporate.
Judge Houser gave both sides until Feb. 10 to file final legal briefs.
“This has been a long process,” the judge said at the end the court day. “We will work as diligently as we can and fast as we can… to issue a thoughtful analysis,” Judge Houser said.
“We have 10 minutes left,” she concluded. “Take time exiting the building.”
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