DALLAS (CN) — Two children of former Texas billionaire Sam Wyly intervened in his bankruptcy case Tuesday, seeking to shield their trust from the Internal Revenue Service’s $1 billion tax fraud judgment against their father.
Evan and Lisa Wyly filed an adversary proceeding as trustees of the Wrangler Trust in Dallas Bankruptcy Court, disputing the IRS’ claim the trust is their father’s alter ego.
The IRS sought to collect from the trust after U.S. Bankruptcy Judge Barbara Houser ordered Wyly to pay more than $1 billion last year. After a three-week trial in January 2016, Houser concluded that Sam Wyly and his late brother Charles committed tax fraud when they used offshore trusts on the Isle of Man to hide more than $1 billion from the IRS. She did not believe Wyly’s claim that he was merely following the advice of his accountants and attorneys.
The adult children say the Wrangler Trust is an “independent entity, separate and apart” from their father and that it is a creditor in the bankruptcy case. They say the trust’s purpose is to provide for “relative health, education and maintenance needs” of Wyly’s children and “the discretionary needs” of his grandchildren.
“The financial activities of Wrangler Trust are not and have never been intertwined with those of the debtor,” the 10-page filing states. “The Wrangler Trust is not and has never, in any sense, operated as a sham.”
The IRS claims Sam Wyly received more than 70 percent of the trust’s distributions, that he used the money to fund his lavish lifestyle and that he arranged for the trust to satisfy charitable commitments.
“Even assuming that these allegations are true and can be proven by the IRS, it would not change the fact that under governing legal standards, the Wyly trust is not the debtor’s alter ego, and the Wrangler Trust is not liable for the debtor’s debts,” the filing states.
Wyly, 82, made his fortune co-founding Sterling Software in 1981 and buying an interest in arts-and-crafts retailer Michaels in 1982. Sterling was sold for $4 billion in 2000 and Michaels Stores for $6 billion in 2006.
Sam Wyly and his brother’s widow, Carolyn “Dee” Wyly, filed for Chapter 11 bankruptcy protection in 2014 to prevent collection of a $299 million judgment in favor of the U.S. Securities and Exchange Commission from 2010 in Manhattan Federal Court.
Wyly settled the SEC judgment against him for $198 million after Houser ruled for the IRS. Houser approved the SEC settlement in November 2016.
During his bankruptcy trial, Sam Wyly testified that he filed for bankruptcy protection to make the IRS “put up or shut up” about its tax claims against him, and to spare his children uncertainty after years of audits.
His children seek declaratory judgment that the trust is not Wyly’s alter ego. They are represented by Jason S. Brookner with Gray Reed in Dallas.