Samuel Wyly’s lawyer, fighting a $2.2 billion claim by the Internal Revenue Service, told a skeptical judge that his client’s tax planning was “aggressive but not illegal.”

The IRS is suing to recover unpaid taxes, interest and penalties on money held in offshore trusts from 1992 to 2013 by Sam Wyly and his late brother Charles, who got rich building businesses including the Michaels Stores Inc. arts-and-crafts chain. The Dallas bankruptcy judge heard closing arguments Wednesday.

Wyly and his brother’s widow, Caroline “Dee” Wyly, filed for bankruptcy protection after the Securities and Exchange Commission won a fraud lawsuit against the brothers in Manhattan in 2014. Charles died in a car accident in 2011. The SEC verdict also prompted demands for 22 years’ worth of back taxes and penalties by the IRS, which the agency said was related to the securities fraud.

The IRS alleges the Wylys established and controlled “an elaborately complex network of numerous offshore entities in known tax havens that engaged in a series of financial transactions to avoid detection and taxation.” The Wylys say they relied on experts to sign off on the trusts.


‘Not Illegal’


“The debtors have shown that the planning here was aggressive but not illegal,” Wyly attorney Donald Lan told U.S. Bankruptcy Judge Barbara Houser. “Aggressive does not mean it’s fraud. Aggressive does not even mean it’s wrong. Aggressive means there is a risk you are going to lose.”

Houser expressed doubts about one particular round of trusts, saying they gave her “heartburn.”

“Those trusts were wrong from the beginning,” the judge said. “Those trusts were, should I say it, fraudulent.”

She also took issue with the Wylys’ reliance on experts, a repeated theme during 11 days of testimony. If that was the law, she said, then every taxpayer could hide behind an agent and “nobody would ever be liable for anything.”

Houser said none of her questions should suggest she has her mind made up. The judge will issue a written opinion of her findings, which will determine how big a claim the IRS can assert in the Wylys’ Chapter 11 case.

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