The twisted tale of former billionaire brother Sam Wyly and his late brother Charles took a new turn recently when a federal bankruptcy judge found that the pair had committed tax fraud with a convoluted scheme of offshore bank accounts, shell corporations, trusts and other tax shelters. The brothers system involved transferring their interest in various commercial enterprises (among them such well-known companies as Michael’s arts and crafts stores and Bonanza Steakhouses) to trusts in exchange for private annuities.
The IRS claimed that the brothers’ scheme was purposeful to avoid capital gains taxes and pursued tax evasion and fraud charges and payment of back taxes. The pair also faced securities fraud charges prior to Charles’ untimely death. Bankruptcy proceedings were initiated by Sam and by Charles’ estate prior to a 2015 ruling finding that the Wyly brothers owed billions in back taxes, penalties and interest as a result of their shady tax dealings.
The bankruptcy court’s decision
U.S. Bankruptcy Court Judge Barbara Houser found, after a two-week trial, that the Wyly brothers’ argument that they relied on the advice of experts regarding the legality of their offshore trust and annuity system wasn’t supported by evidence. She found there to be “clear and convincing evidence” that the brothers, given their business acumen, skill and savvy with regards to complicated financial dealings, purposely engaged in the extremely complicated tax evasion scheme for the sole purpose of avoiding tax payments and increasing their personal wealth. Furthermore, she stated that there was no evidence anywhere in the record to support a “legitimate business reason requiring this level of complexity.”
Judge Houser did find that, with regards to Charles Wyly’s widow, Dee Wyly, she wasn’t culpable for the fraudulent actions undertaken by her husband. Houser found no evidence to support that Dee had any knowledge of the trust scheme. Generally, spouses are liable for the legality of tax returns to which they sign their name, but the IRS does grant relief in certain situations when one spouse can demonstrate that they didn’t know and had no reason to know that there was any impropriety with regards to the return and it would be “inequitable” to hold that spouse liable under the circumstances. This is covered by IRS Code Section 6015(b) and (c), and is known as “innocent spouse” relief.
In this case, Dee Wyly was found to be an “innocent spouse” with no knowledge or understanding of her late husband’s illegal tax avoidance activities. This means that Dee Wyly isn’t responsible for paying taxes, interest and penalties pursuant to previously filed tax returns to which she signed her name.