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Offshore trusts: Wyly defense rejected by bankruptcy judge

Two years ago, former billionaire Sam Wyly lost a fraud trial in New York that exposed a web of offshore entities that were used to shelter millions of dollars. After the 2014 verdict, the IRS entered the fray seeking $1.4 billion in back taxes. Penalties and interest accounted for 80 percent of this amount.

The 2014 verdict prompted Wyly and his sister-in-law to file for bankruptcy (his brother and business partner had died in a car crash). If he had hoped for a better outcome in a Texas bankruptcy case, he was disappointed last week.

During the two-week bankruptcy trial, the Wylys tried to prove they had not defrauded the IRS.

The IRS provided substantial evidence of a lifestyle that included Texas mansions, mountain ranch properties in Colorado and rare artwork. According to the IRS, offshore trusts purchased some of the property and would loan it to the family or gift it children to avoid taxes.

Lack of knowledge: What is the person's background?

Sam Wyly argued that he relied on the guidance of lawyers and accountants to manage his money. He claimed he had little idea how the offshore trust arrangements - called "aggressive but not illegal" by his attorneys - actually worked.

The judge had little patience for his argument stating in her opinion that "to accept the Wyly's explanation required the court 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."

Dee Wyly, on the other hand, testified that she had entrusted financial matters to her husband. She also didn't read many documents before signing them.

The judge accepted this argument finding that the wife didn't "have the educational background or sophistication in business and tax matters to know if her returns contained any understatements of income."

Discharging taxes in bankruptcy

This case is illustrative of the point that you cannot discharge back taxes in bankruptcy after filing fraudulent returns or willfully attempting to evade taxes.

Offshore has become an enforcement priority. Prosecutors take these claims seriously and have fought to set examples. If you have any questions about reporting requirements for offshore holdings or an offshore entity, speak with a skilled Brown P.C. tax attorney.

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