Deep Pockets Can Hold Sticky Details; Billionaire Donors to Clinton, McCain Are Tied to Tax Avoidance Schemes, by Walter F. Roche Jr. & Michael A. Hiltzik
What’s a politician to do upon discovery that a generous billionaire donor turns out to be a major tax dodger? It’s a dilemma already encountered by the Republican and Democratic parties in this season of unprecedented political fundraising.
At a time when newly powerful Democrats, including presidential hopeful Sen. Hillary Clinton of New York, are pressing for aggressive pursuit of unpaid tax bills to boost federal revenue, the party’s biggest financier and prominent Clinton backer [Hollywood mogul Haim Saban] is tied to one of the largest individual tax avoidance schemes on record.
And two Republican billionaires [Sam and Charles J. Wyly Jr. ] — Texas brothers who have poured a small fortune into supporting the presidential bids of two George Bushes and, more recently, Sen. John McCain (R-Ariz.) — were accused last year of exploiting offshore havens to escape taxes on nearly $200 million in gains.
For the L.A. Times’ detailed descriptions of the tax shelter strategies deployed by Mr. Saban and the Wyly Brothers, see below the fold. (Hat Tip: Ellen Aprill.)
Haim Saban’s deal to avoid paying taxes on $1.5 billion in profit from the sale of his interest in Fox Family Worldwide Inc. to the Walt Disney Co. was developed by the Seattle-based Quellos Group and involved two offshore shell companies on the Isle of Man.
The scheme had two elements. First, it lumped together in a paper partnership those profits with selected high-tech and dot-com stocks, assembled by the Quellos Group, that had lost value in the market plunge that began in 2000. The aim was to offset profits with equal losses. Under some circumstances, partnerships may acquire losses as offsets against profits, but the Internal Revenue Service challenged Saban’s transactions.
In the second element, Saban engaged in a complicated option transaction. Senate investigators alleged that the sole purpose was to cloak the deal with the appearance of profit-making potential — a critical element in persuading the IRS that a tax shelter is a legitimate investment rather than merely a tax-avoidance scam. In this case, investigators said the economic justification was a pretense.
Saban told investigators that the elaborate transactions went over his head, and that he relied on professional tax advisors and lawyers in agreeing to the deals. But he also acknowledged that he knew the purpose was to permanently shelter his taxable gains — saving him at least $300 million in payments to the U.S. Treasury.
Over 13 years, starting in 1992, billionaire Texas businessmen Sam and Charles J. Wyly Jr. sheltered $190 million due them from their U.S. companies — Michaels Stores Inc., Sterling Software and Sterling Commerce — by transferring the money to scores of offshore trusts, mostly on the Isle of Man, according to Senate investigators.
The trusts then allegedly made loans or other deals enabling the Wylys to use the money without declaring formal ownership. In some cases the trusts bought houses, furniture, artwork or jewelry for the use of Wyly family members, including a $937,000 portrait of Benjamin Franklin purchased by an offshore trust in 1999 and delivered to Sam Wyly’s house in Aspen, Colo.
The trusts were nominally under the control of independent "trust protectors," but these trustees accepted investment instructions from the Wylys. The instructions were worded as mere "recommendations" to conceal the Wylys’ decision-making role, the committee said. The trust protectors were typically lawyers or advisors who held other positions with the Wyly family.
The Wylys maintain that the trusts were genuinely independent because the trust protectors always had the authority to reject the "recommendations."
On at least one occasion a Wyly assistant upbraided one of Sam Wyly’s sons, Evan, for communicating an instruction too forcefully, reminding him that there could be "no appearance that the Wylys are in control of the trusts." Evan, according to Senate investigators, duly promised "to be more careful."
