Ex-Billionaire’s Kids Try to Hang Onto Trust

March 9, 2017
By David Lee

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.

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, 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.

From Courthouse News.

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Sam Wyly Must Cough Up $198 Million

November 14, 2016
By David Lee

DALLAS (CN) – A federal bankruptcy judge approved former billionaire Sam Wyly’s $198 million settlement with the Securities and Exchange Commission, ending six years of litigation over millions of dollars in profits hidden in offshore trusts.

U.S. Bankruptcy Judge Barbara J. Houser approved the settlement on Nov. 8, one month after Wyly and the Securities and Exchange Commission agreed to the settlement in Manhattan Federal Court.

A federal jury agreed with the SEC that Wyly and his late brother Charles made $550 million from more than 700 hidden transactions in 40 companies operating through trusts in the Isle of Man that moved money between the Cayman Islands and Dallas.

Under terms of the settlement, the SEC agreed to stop trying to claw back more than $500 million Wyly is believed to still have in the offshore trusts.

Wyly and his brother’s widow, Carolyn “Dee” Wyly, filed for Chapter 11 bankruptcy in Dallas in 2014 to avoid collection of the SEC judgment. The Internal Revenue Service pursued its own claims against the Wylys in Houser’s court, seeking as much as $3.2 billion in back taxes and penalties.

Wyly 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.

Houser’s 4-page order states that $705,000 will be held in trust for unsecured claims held by nongovernment creditors, with the exception of the Joint Official Liquidators of Security Capital and Wrangler Capital.

Houser ruled in May that there was “clear and convincing evidence” of a “badge of fraud” in the offshore trusts the Wylys used. She was not persuaded by Wyly’s testimony that he was simply following the advice of his accountants and lawyers, saying that “Sam knew what was happening.”

“Sam cannot rely on the favorable portions of the professionals’ advice he sought, while feigning ignorance of the factual predicates upon which that advice relied for its accuracy,” Houser said at the time.

“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.”

During the three-week bankruptcy trial in January, Wyly testified that he filed for bankruptcy to force the IRS to “put up or shut up” about its demands. He complained that he had been audited for a decade and that the IRS failed to tell him whether he owed more taxes during that time.

By Courthouse News.

Giant Tax Bill Coming to Sam Wyly

May 11, 2016
By David Lee
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 of 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.

Judge Gets ‘Heartburn’ in $2 Billion Tax Trial

January 29, 2016
By David Lee
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.”

From Courthouse News.

Sam Wyly Cross-Examined in $2.2 Billion Tax Trial

January 12, 2016
By David Lee
DALLAS (CN) – On the first day of cross-examination, Internal Revenue Service attorneys accused former Texas billionaire Sam Wyly of looking into renouncing his U.S. citizenship to reduce his tax liabilities.
Wyly, 81, testified for more than 90 minutes Monday during the second week of his bankruptcy trial.
Wyly and his brother Charles’ widow, Carolyn Wyly, 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.
Assistant U.S. Attorney Holly Church entering into evidence 2004 correspondence between the Wylys’ staff and attorneys that indicate his interest in renouncing his citizenship.
Church entered additional correspondence into evidence from the early 1990s from the family’s attorneys that indicate that if the IRS ever went after the offshore trusts, the family “could litigate it for years and settle for pennies on the dollar.”
IRS attorneys say the offshore trusts were used to hide income that funded the expensive lifestyle of Wyly and his family.
Wyly’s attorneys disagree, calling the dispute an honest difference of opinion on tax law.
Wyly testified on Friday that he filed for bankruptcy to make the IRS “put up or shut up” about its tax claims, and to spare his children uncertainty after years of audits.

From Courthouse News.

Wyly Filed Bankruptcy to Force IRS to “Put Up or Shut Up”

January 11, 2016
By David Lee
DALLAS (CN) – Former Texas billionaire Sam Wyly said he filed for bankruptcy to force the Internal Revenue Service to “put up or shut up” about its claims for $2.2 billion in taxes and penalties on his offshore trusts.
On Friday, Wyly, 81, accused the IRS of auditing his income tax returns for a decade and failing to tell him if he owed additional taxes during that time. He testified for 90 minutes during the third day of his Chapter 11 bankruptcy trial, telling U.S. Bankruptcy Judge Barbara J. Houser he did not want to leave the uncertainty for his children to worry about.
“I filed to make the Internal Revenue Service put up or shut up,” he said.
Wyly emphatically stated several times that his object in using the offshore trusts was to defer taxes, not avoid paying them.
Describing himself as no expert at any one thing, Wyly echoed earlier statements by his attorneys and testimonyby his son, Evan Wyly: that he relied on the family’s accountants and lawyers to evaluate the offshore accounts and tax strategy.
Wyly 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’s legal troubles began when a Manhattan federal jury ruled in favor of the Securities and Exchange Commission in 2014 that Wyly and his deceased brother, Charles, made $550 million from more than 700 hidden transactions in 40 companies operated by Isle of Man trusts that shuffled money between the Cayman Islands and Dallas.
Wyly and his brother’s widow, Carolyn Wyly, filed for bankruptcy protection in Dallas several months later to stave off collection on the judgment. The IRS intervened in the bankruptcy in April 2015, seeking an additional $3.2 billion in back taxes and penalties. The agency later reduced its demand to $2.2 billion.
IRS attorneys say the offshore trusts were used to hide income that funded the expensive lifestyle of Wyly and his family.
Wyly’s lawyers disagree, characterizing the dispute as an honest difference of opinion on tax law.
On Thursday, Wyly testified that he set up the offshore trusts after losing faith in “fragile” U.S. banks after the savings and loan crisis of the 1980s.
Wyly testified that a domestic bank had pulled Michaels’ line of credit during the crisis, leaving him to “scramble” to find other sources of financing for his stores.

From Courthouse News.

Fmr. Billionaire Wyly Says He Lost Faith in U.S. Banks

January 8, 2016
By David Lee
DALLAS (CN) – Facing a $3.2 billion IRS bill for alleged tax evasion, former Texas billionaire Sam Wyly testified Thursday that he used offshore trusts because he had lost confidence in “fragile” U.S. banks.
Wyly, 81, testified for 90 minutes during the second day of his Chapter 11 bankruptcy trial. U.S. Bankruptcy Judge Barbara J. Houser imposed the daily time limit on Wyly’s testimony due to his age and declining health.
Accused of running one of the largest tax frauds in American history with his deceased brother, Charles, Wyly said he lost faith in the domestic banking system after the savings and loan crisis in the 1980s.
Wyly testified that he opened his first trust on the Isle of Man in 1992 because the British Crown dependency has existed for “1,000 years” while the United States is only a fraction as old.
Wyly 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 S&L crisis, leaving him to “scramble” to find other sources of financing for his stores.
The IRS is pursuing the Wylys after they lost a lawsuit filed in 2010 by the Securities and Exchange Commission in Manhattan Federal Court. They were accused of playing a “global game of hopscotch” by hiding assets in their four companies – Sterling, Michaels, Sterling Commerce, and Scottish Annuity & Life Holdings Ltd. – from 1992 to 2004.
The jury in that case concluded in 2014 that the Wylys had made $550 million from more than 700 hidden transactions in 40 companies operated by the Isle of Man trusts that shuffled money between the Cayman Islands and Dallas.
Wyly and his brother’s widow, Carolyn Wyly, filed for Chapter 11 bankruptcy protection several months later in an apparent bid to stave off collection on the judgment. The IRS intervened in the bankruptcy in April 2015, telling the court the brothers owe $3.2 billion in back taxes and penalties.
Wyly’s son, Evan, denied under oath Thursday that the family sought to evade taxes through the offshore trusts. His testimony echoed the primary argument of Wyly’s attorneys – that the family relied on their accountants and lawyers to evaluate the offshore accounts and get tax advice.

From Courthouse News.