Billionaires and Off-Shore Trusts: The Wyly Case

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Article By: Gary Wolfe, The Wolfe Law Group

off-shore trusts
Image by Steve Buissinne (Pixabay)

Billionaires and Off-Shore Trusts: The Wyly Case

In the recent case of Sam and Charles Wyly, Texas billionaires who maintained extensive off-shore holdings held in 58 Isle of Man Trusts, in May 2016 a federal bankruptcy court judge held that they were fully taxable on the off-shore trust income and affirmed that the IRS was due taxes: Sam Wyly owed $1.4B and Charles Wyly (deceased) owed $800m. The judge gave the parties 30 days to work out a
settlement with the IRS or risk bankruptcy dismissal (which was filed by Sam Wyly to pre-empt multi-year ongoing IRS tax audits) ie. settlement by 6/16.

The Wylys contention was that the offshore trusts were not owned by them (they had a different settlor), were “non-grantor trusts” and not subject to US income tax. The Judge did not agree citing their
lack of credible testimony in which their maze of trusts was nothing more than a “tax dodge.” It appears the Wylys used “straw persons”( ie. 3rd party nominees) to settle the off-shore trusts even though
the funds came from the Wylys.

Altek Media Group

The Wylys tax planning strategy ignored IRC Sec 679 which classifies all assets that a US taxpayer sends to an offshore trust as their assets subject to US income taxation,& correspondingly US estate
and gift tax( ie. the trusts are grantor trusts and the grantor (Wylys) is subject to tax on the income from the assets sent offshore). The Wyly strategy appears to have ignored the gift tax consequences
of their offshore transfers of millions of dollars to the 58 IOM trusts. If the offshore trusts were in actuality irrevocable non-grantor trusts (a revocable trust is a grantor trust) then the transfers to the trust
were subject to both gift tax and gift tax reporting. In 2016 the gift tax exclusion amount is $5.45m, any transfers above that amount are subject to a 40% gift tax and the filing of Form 709: US Gift tax
return.

So words to the wise… if you have funded an off-shore trust have an independent review done by a third party expert (not the counsel who established the trust) and confirm its tax status( ie. is it a grantor
trust subject to full tax reporting or a non-grantor trust, subject to reporting only on distributions received(due). The grantor trust issue is critical to clarify to avoid civil & criminal penalties. A US Foreign
Grantor Trust (ie. an offshore trust) must report all income (worldwide) to the IRS ( Form 3520-A, annual foreign trust tax filing), disclose offshore bank accounts / over $10k(Fincen Form 114/FBAR filings which are subject to an annual 50% penalty of the highest account balance for the year and up to 10 years in jail for willful failure to file FBAR; FATCA form 8938 due from the US taxpayer for foreign
financial assets over $50k).

Failure to report the income from the income from a US foreign grantor trust subjects the taxpayer to criminal prosecution for multiple tax crimes ie. willful evasion of tax (5 year felony), obstruction of tax
collection (3 year felony), conspiracy to avoid tax (5 year felony if done in tandem with 3rd party advisors) plus the 10 year felony for FBAR violations. In addition, the filing of a false individual income tax
return suspends the statute of limitations for IRS tax audits, risks a 75% civil tax fraud penalty (imposed on the tax underpayment) an additional 3 year felony for filing a false tax return so a total of 5 separate felonies plus risk of forfeiture of the entire account (in the case of Florida taxpayer, Carl Zwerner the FBAR penalty was 150% of his Swiss bank account ie nearly $2.4m on a $1.6m bank account, imposed after he lost at trial with the IRS).

WOLFE LAW GROUP

Taxpayers who do not pay the taxes due on their grantor trusts (offshore income) risk additional criminal prosecution for three separate 20 year sister felonies: wire fraud/mail fraud (if they use wires,
mail or telephone as part of their tax scheme) and money laundering (if they use the tax evasion proceeds to purchase assets).

These issues are expensive, dangerous and critically are often misunderstood so an ounce of prevention will prevent ton of tax problems.

Please see my 2016 book (available on Amazon as an e-book:
The IRS & Offshore Tax Evasion: US Foreign Grantor Trusts); you may find it on my website see books button.

About the Author:

Gary S. Wolfe, Esq.
International Tax Counsel
gsw@gswlaw.com

The Wolfe Law Group represent U.S. Taxpayers for IRS Tax Audits, U.S. Investors who have International Investments, and Foreign Persons who invest in the United States. We have over 30 years of experience, specializing in IRS Tax Audits and International Tax Matters including: International Tax Planning/Tax Compliance, and International Asset Protection.

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