During bankruptcy proceedings, a bankruptcy court judge ruled that Sam Wyly and his brother Charles had committed tax fraud and should be subject to penalties for an attempt at tax avoidance.
The attempt at tax avoidance involved a very complicated scheme which used offshore non-grantor trusts to provide ready access to funds which were not properly reported. Taxes, of course, were not paid on the funds that were owned by offshore entities, and the brothers reportedly engaged in a sustained course of tax evasion for close to 15 years.
The case shows that even complex offshore arrangements aimed at avoiding taxes are not foolproof. The Internal Revenue Service (IRS) and the Department of Justice (DOJ) can and will uncover a wide variety of different schemes aimed at escaping full tax liability. The consequences can be serious if wrongdoing is discovered and a Boston criminal tax attorney should be consulted to provide assistance.
Professional Help Not a Defense in Tax Fraud Cases
The Wyly brothers were on several company boards back in 1992, and they received millions of dollars’ worth of stock options and other types of compensation for their service. Instead of paying taxes on money received for their services, the Wylys turned to professionals to help them set up a complex scheme to evade tax obligations.
As part of the effort to avoid taxes, the Wylys established 16 different offshore trusts, 38 corporations offshore, and 10 corporations in Nevada. The Nevada corporations were owned by offshore non-grantor trusts, which were lacking in named beneficiaries and weren't subject to the same kinds of taxation as would have been required by grantor trusts.
The Wylys had control over the trusts the whole time, and reportedly used the trusts like a personal piggy bank to spend and take money out of at any time. The Wylys used nonbinding letters to communicate their wishes for the trust, rather than naming beneficiaries in the trust instrument.
Annuity agreements were also obtained by using the value of the stock options and an argument was made that no taxes should be paid on compensation until annuity payments began.
This complex scheme allowed for the brothers to avoid taxes for a lengthy period, until a 2010 charge by the SEC led to a $300 million judgment in 2014. Sam Wyly filed for bankruptcy after the judgment was handed down, and a tax assessment was triggered. The tax assessment revealed that the Wylys had failed to properly report and pay taxes on offshore income since 1992.
The Wylys tried to argue they simply relied on professional advice in setting up this complicated scheme. However, the bankruptcy judge found their explanation too superficial and the judge expressed concerns that a precedent could be established in which wealthy people shielded themselves from liability by hiring middlemen to carry out the process of tax avoidance.
The Wylys will now face penalties for failure to pay taxes. Kevin Thorn, a criminal defense lawyer in Boston, can provide representation to anyone who is in a similar situation with concerns about whether they will end up facing serious consequences as a result of being accused of evading their tax duties. Get help as soon as possible to protect your assets.
For a consultation, contact Kevin E. Thorn, Managing Partner, at firstname.lastname@example.org or (617) 692-2989