This Wall Street Journal ($) article reports that Manhattan District Attorney Robert Morgenthau has launched an investigation in New York of Bank of America, Dallas-based investor Sam Wyly and his brother, and several other institutions in regard to lucrative tax shelters that the Wylys set up in the English tax haven, the Isle of Man. Here is a previous post on the colorful Mr. Wyly, who was also one of President Bush’s biggest campaign contributors in both the 2000 and 2004 election campaigns.
Although legally a possession of the United Kingdom, the Isle of Man operates as an independent country with its own financial laws, the most important of which is that a foreign government cannot enforce in the Isle of Man courts a claim for unpaid taxes against an Isle of Man entity. Thus, tax-shelter promoters often tout the Isle as a convenient tax haven just an hour’s flight from London.
Mr. Morgenthau’s office, and now the Internal Revenue Service and the Securities and Exchange Commission, are investigating a popular stock option that B of A helped the Wylys establish to lock in gains on stock options during the bull market of the 1990’s. The IRS has already determined that the transaction was widely used as a tax shelter, so this new investigation is a part of a larger IRS drive to to identify and punish firms that promoted improper tax shelters.
Under the particular shelter under scrutiny here, wealthy businessmen and U.S. corporations donated options to trusts that they alleged were not under their control. The IRS contends that they retained control of the trusts and that over 40 U.S. corporations and dozens of executives used the arrangement to shelter income and avoid paying more than $700 million in taxes. The Wylys contend that they neither owned nor controlled the trusts, and that they were legitimate vehicles established for the benefit of family members and charities.