DALLAS (CN) – A Dallas bankruptcy judge said some of the offshore trusts former billionaire Sam Wyly and his deceased brother set up gave her “heartburn,” as a three-week trial over their $2.2 billion tax bill ended.
U.S. Bankruptcy Judge Barbara J. Houser said Wednesday that certain trusts were “fraudulent” and “wrong from the beginning.”
But she disputed the IRS’ assertion that the Wylys’ breaking of federal securities laws to avoid taxes is evidence in itself of tax fraud.
Houser told both sides to not “hope or despair” at her harsh questioning, that she had yet to decide how to rule and would issue a written opinion on how much the Internal Revenue Service can collect from Wyly, 81, and his brother Charles’ widow, Carolyn Wyly.
Both filed for Chapter 11 bankruptcy protection in October 2014 to stave off a $299 million judgment in the Securities and Exchange Commission’s favor.
A Manhattan federal jury found that the brothers made $550 million from more than 700 hidden transactions in 40 companies operated by offshore Isle of Man trusts that shuffled money between the Cayman Islands and Dallas.
The IRS intervened in the bankruptcy and is demanding $2.2 billion in back taxes and penalties.
Wyly testified he used the offfshore trusts because he had lost confidence in “ fragile ” U.S. banks.
He 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 testified that a domestic bank had pulled Michaels’ line of credit during the savings and loan crisis in the 1980s, leaving him to “scramble” to find other sources of financing for his stores.
The Wylys’ attorney, Don Lan, said the tax planning in the case was “aggressive, but not illegal” and that the IRS failed to prove the Wylys committed tax fraud. He said the family relied on the opinions and advice of their attorneys.
“Aggressive does not mean fraud,” Lan said during closing arguments. “Aggressive does not even mean it is wrong; it means there is a risk you will lose.”
But Judge Houser said she “is not buying” that argument: that it would allow any business to “go out and hire some schmucks” to draw up fraudulent trusts without repercussions.
Lan said the Wylys reported the problem in 2003 as soon as they learned of it, and that that “is not the action of a guilty person.”
Justice Department attorney Jonathan Blacker disagreed, telling Houser the Wylys reported themselves only after they found out they were facing subpoenas. He said the trusts were beyond aggressive: they were “illegal” and a “fraud.”
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