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Giant Tax Bill Coming to Sam Wyly

DALLAS (CN) - Former billionaires Sam and Charles Wyly committed tax fraud when they used offshore trusts on the Isle of Man to hide more than $1 billion from the IRS, a federal bankruptcy judge ruled Tuesday evening.

U.S. Bankruptcy Judge Barbara J. Houser found "clear and convincing evidence" of a "badge of fraud" in the offshore trusts the Wylys used from 1992 to 2005.

She did not buy Sam Wyly's argument that he simply followed the advice of his accountants and lawyers.

"Sam cannot rely on the favorable portions of the professional's advice he sought, while feigning ignorance of the factual predicates upon which that advice relied for its accuracy," the 431-page opinion states. "Perhaps that happens all the time in Sam's life, but if it happened in mine, I would be asking questions - lots of them. Sam is a sophisticated and well-educated businessman that accumulated great wealth through his business acumen and hard work."

Wyly, 81, 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.

Wyly and his brother's widow, Carolyn "Dee" Wyly, filed for Chapter 11 bankruptcy protection in 2014 to prevent collection of a judgment in favor of the U.S. Securities and Exchange Commission from 2010.

A Manhattan federal jury agreed with the SEC that the brothers made $550 million from more than 700 hidden transactions in 40 companies operated off of the trusts that moved money between the Cayman Islands and Dallas.

The IRS has pursued the Wylys for the money, seeking more than $2.2 billion in back taxes and penalties — down from its original demand of $3.2 billion.

During the three-week trial in January, Wyly testified he used the offshore trusts because he had lost confidence in "fragile" U.S. banks after the savings and loan crisis in 1980s.

His attorneys said the family relied on their accountants and lawyers to evaluate the offshore trusts and get tax advice.

Houser was not persuaded, writing that "Sam knew what was happening" in the offshore system and that no money moved in the system "without Sam's knowledge" and 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," the opinion states. "The IOM 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. The court does not believe that the law permits Sam to hide behind others and claim not to have known what was going on around him."

The judge said that to accept Wyly's explanation would require her to "be satisfied that it is appropriate for extraordinarily wealthy individuals to hire middlemen to do their bidding in order to insulate themselves from wrongdoing so that, when the fraud is ultimately exposed, they have plausible deniability."

Wyly testified that he filed for bankruptcy protection to force the IRS to "put up or shut up" about its demands. He said he had been audited for a decade and that the agency failed to tell him if he owed more taxes during that time.

He insisted the offshore trusts were for deferring taxes, not to avoid paying them. On cross-examination, IRS attorneys accused Wyly or looking into renouncing his U.S. citizenship to reduce his tax liabilities.

Houser concluded, however, that there is "no evidence" Dee Wyly participated in the securities fraud. Her husband died in a car collision in 2011.

"While she may have benefited from it, that alone is insufficient for it to constitute a badge of fraud against her here," the opinion states. "That she did not know the details of what Sam and Charles had done offshore is clear. And, 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."

Houser ordered Wyly and the IRS to reach an agreement on how much of the judgment will be paid within 30 days. If no agreement can be reached, both sides are to submit proposals within 45 days.

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