Sam Wyly, a businessman who founded Sterling Software in the 80s and who held an interest in the retail chain Michael’s, recently entered into a settlement regarding profits that he had allegedly made in offshore trusts.
According to the settlement agreement that was approved by U.S. Bankruptcy Judge Barbara Houser in Dallas, Texas, Mr. Wyly will pay $198 million, bringing a six year period of tax litigation to an end.
In Mr. Wyly’s case, the Judge had previously stated that she did not believe that Mr. Wyly did not know what was going on when hundreds of millions of dollars had been made in offshore trusts that were hidden from the U.S. This ruling followed a 2014 decision where a federal jury in Manhattan had found that he had used offshore trusts to hide his stock purchases and to evade federal trade limits. Following the verdict, Mr. Wyly had filed bankruptcy and began his fight with the IRS.
In a previous ruling, the Judge had rejected Mr. Wyly’s explanation that Mr. Wyly had relied on his lawyers to set up the offshore trusts and that he did not understand the details. The judge ruled that wealthy individuals simply are not at liberty to hire middlemen to insulate themselves from liability.
Offshore Trusts and the Risks of Tax Litigation
As this case highlights, the IRS is interested in uncovering the use of offshore trusts to hold wealthy individuals accountable when they have not paid taxes on their profits from the offshore trusts and when they have used offshore trusts to evade U.S. laws. It reveals some of the dangers involved in using offshore trusts.
What Is an Offshore Trust?
In general, offshore trusts are similar to domestic trusts except that they are used to take advantage of laws in other countries. These laws may include provisions regarding investments, provisions to obscure the owners of a trust, or provisions to seek tax benefits.
As seen in the case above, there were financial regulations that would have limited a domestic trust from making certain investments. In order to circumvent those regulations, the offshore trust was used to take advantage of more flexible investment rules to allow the trusts to take on investment opportunities that would have been considered unlawful for a domestic trust.
As seen in the rulings in Mr. Wyly’s case, there are substantial risks to using offshore trusts. These risks can expose individuals to tax litigation, and potentially to the loss of profits from using offshore trusts improperly.
The case is a cautionary tale that highlights the importance of discussing your finances with an experienced tax lawyer and fully understanding the legal consequences of your decisions when making investment decisions. Call the Sammahorn Law Firm today (903) 595-1000.