Texas tycoon Wyly faces $2 billion tax trial over offshore trusts

[January 05, 2016]  By Nate Raymond

(Reuters) - Texas tycoon Sam Wyly is set to face off against the Internal Revenue Service at trial on Wednesday over more than $2 billion the agency says he owes for using offshore trusts to engage in one of the largest tax frauds in U.S. history.

The trial in federal bankruptcy court in Dallas comes nearly a year after Sam Wyly and his late brother Charles' estate were ordered to pay the Securities and Exchange Commission $299.4 million for engaging in a massive securities fraud through those same trusts.

In the SEC case, a Manhattan jury in 2014 found the Wylys liable for scheming to hide from investors $550 million in trading profits in the stocks of four companies on whose boards they sat.

Following the SEC's victory, Sam Wyly, who last appeared on Forbes' list of the 400 richest Americans in 2010 with a net worth of $1 billion, and Caroline "Dee" Wyly, Charles Wyly's widow, filed for bankruptcy in October 2014. Charles Wyly died in a car crash in 2011.

In April, the IRS filed claims asking the Wylys for a total of $3.22 billion in back taxes, penalties and interest, $2.03 billion of which is being sought from Sam Wyly.

Those claims, stemming from what the IRS has called one of the largest U.S. tax frauds, are now at the center of the trial before U.S. Bankruptcy Judge Barbara Houser.

The IRS says the Wylys starting in 1992 used a maze of trusts in the Isle of Man to evade paying taxes while exercising stock options and warrants they earned as directors of Sterling Software Inc, Michaels Stores Inc, Sterling Commerce Inc and Scottish Annuity & Life Holdings Ltd, now called Scottish Re Group Ltd.

The Wylys used the offshore system to fund business interests and to buy art, jewelry, and real estate, the IRS says.

The Wylys have denied engaging in fraud, saying they relied on lawyers who "thoroughly vetted" the offshore system, which was intended to allow them to defer, not avoid, taxes.

Stewart Thomas, outside general counsel for the Wyly family, called the IRS's tax fraud claim "absurd," and said the Wylys had "acted in good faith" and relied on the advice of numerous tax attorneys and accountants.

The IRS case mirrors the SEC lawsuit, which was filed in 2010 after years of civil and criminal investigations.

Both Wylys are expected to testify at the trial.

The case is In re Samuel Evans Wyly, U.S. Bankruptcy Court, Northern District of Texas, No. 14-35043.

(Reporting by Nate Raymond; Editing by Noeleen Walder and Andrew Hay)

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