[Dialogue] Tax Cheats Called Out of Control

[Harry Wainwright]

Published on Tuesday, August 1, 2006 by the New York
<http://www.nytimes.com>  Times 

Tax Cheats Called Out of Control 

by David Cay Johnston

 

So many superrich Americans evade taxes using offshore accounts that law
enforcement cannot control the growing misconduct, according to a Senate
report that provides the most detailed look ever at high-level tax schemes. 

Among the billionaires cited in the report are the owner of the New York
Jets football team, Robert Wood Johnson IV; the producer of the "Mighty
Morphin Power Rangers" children's show, Haim Saban; and two Texas
businessmen, Charles and Sam Wyly, who the Center for Public Integrity found
in 2000 were the ninth-largest contributors to President Bush.

Mr. Johnson and Mr. Saban, who are portrayed as victims in the report, are
scheduled to testify today before the Senate Permanent Investigations
subcommittee. They are expected to say that professional advisers assured
them their deals to avoid taxes were more likely lawful than not. The Wyly
brothers told the committee that they would invoke their Fifth Amendment
right against self-incrimination and thus were not called to testify. The
report characterizes them as active participants in tax schemes.

Cheating now equals about 7 cents out of each dollar paid by honest
taxpayers, as much as $70 billion a year, the report estimated.

"The universe of offshore tax cheating has become so large that no one, not
even the United States government, could go after all of it," said Senator
Carl Levin, the Michigan Democrat whose staff ran the investigation.

Senator Norm Coleman, the Minnesota Republican who is chairman of the
subcommittee, adopted the minority report on Sunday as the product of the
full committee.

The report details how the Quellos Group, a tax shelter boutique based in
Seattle, "concocted a tax shelter" using $9.6 billion "worth of fake
securities transactions that were used to generate billions of dollars of
fake capital losses."

Senator Levin said that when investigators asked for trading records they
were first told the trades were private, over-the-counter transactions. He
said investigators asked for trading tickets or other evidence of who owned
the $9.6 billion worth of stock and were told the stocks were never owned by
the parties involved.

"They just wrote down numbers on paper and claimed losses," he said. "It was
just like fantasy baseball, except the taxes not paid were for real."

Quellos, in a statement, said, "we fundamentally disagree with the report,
which presents a one-sided view." It said the transactions, which the Senate
committee describes as fabrications, were real and involved "a significant
possibility of economic gain and loss."

The investigation, which took 18 months, involved 74 subpoenas, 80
interviews and the collection of more than two million documents, and yet
Senator Levin said "the six cases we present are just examples, just a
pinhole look."

The 400-page report recommends eight changes, some of them aimed at going
after the law and accounting firms, banks and investment advisers that the
report says enable tax schemes that rely on complexity, secrecy and
compartmentalizing information so that advisers can claim they had no idea
that the overall transaction was a fraud.

"We need to significantly strengthen the aiding and abetting statutes to get
at the lawyers and accountants and other advisers who enable this cheating,"
Senator Levin said, adding that "we need major changes in law to stop the
use of tax havens" by tax cheats.

It also recommends new rules that strip away the underlying legal
presumptions that make offshore tax havens like the Cayman Islands, Nevis,
the Isle of Man and Panama attractive places for Americans to hide assets
and income from the Internal Revenue Service.

Senator Levin said the law "should assume that any transaction in a tax
haven is a sham."

He said that during the investigation he grew angry as he learned how common
cheating had become and how existing government rules aided tax cheats. He
said that complex schemes were broken into discrete pieces, allowing
professional advisers working on each piece to assert that they had no idea
that, taken as a whole, a scheme was improper.

"I get incensed by people who use tax havens to not pay their taxes while
the average guy has to pay his taxes because they are taken out of his pay
before he gets it," he said.

Both Mr. Johnson, the football team owner and scion of the Johnson & Johnson
health care fortune, and Mr. Saban, the television mogul, are portrayed in
the report as victims.

The two men, through representatives, said yesterday that they relied on
professional advisers who told them the transactions were lawful, and that
they were now settling with the Internal Revenue Service.

Mr. Johnson, known as Woody, told Senate investigators two weeks ago that to
buy the Jets in 1999 he had to sell assets, incurring the 20 percent tax on
long-term capital gains in effect at the time. He said that a way to defer
the tax was proposed by Larry B. Scheinfeld, who had been his accountant at
KPMG until he joined Quellos, where he worked closely with Chuck Wilk, a tax
lawyer.

The technique involved a complex set of circular transactions using what the
Senate report characterized as sham corporations in the Isle of Man with
shell corporations given names like Jackstones. Their ownership was kept
secret.

"Ain't capitalism great!" Mr. Wilk wrote to Mr. Scheinfeld in an e-mail
message extolling the tax benefits of the Johnson deal. Three weeks later,
when the deal was set, Mr. Scheinfeld wrote back: "I just hope Woody doesn't
get cold feet or have the I.R.S. select his return for an audit!"

The report details a scheme created for Mr. Saban to avoid more than $300
million in taxes from sale of his half interest in the Family Channel and
related properties.

Mr. Saban told Senate investigators that he never understood the
transactions but undertook them after asking two questions of Mr. Wilk and
his personal tax lawyer, Matthew Krane.

Mr. Saban said he asked whether the deals were legal and whether a major law
firm would certify them as proper. The two lawyers, Mr. Saban said, answered
"yes to both," so he went ahead.

Later, when Mr. Saban learned that he had paid $54 million in fees to
Quellos; Cravath Swaine & Moore, a New York law firm; and others for what
turned out to be what the report described as fake transactions, he said he
felt "misled, lied to and cheated."

Lewis R. Steinberg, who as a Cravath Swaine partner helped design the deal
and wrote an opinion letter attesting that it was more likely than not to
work as a tax shelter, told Senate investigators last week that he relied on
assurances from Quellos and Mr. Johnson that real transactions took place,
not fake trades. Mr. Steinberg, who is now at UBS Securities, another firm
named in the report, is a prominent tax lawyer and in 2004 was chairman of
the tax section of the American Bar Association.

The report also dissects deals by the Wyly brothers of Texas, showing how
they made at least $190 million through stock option exercises offshore but
had yet to pay taxes on most of the money. They then borrowed against their
offshore accounts to buy jewelry, pay for portraits of family members, buy
homes and operate properties named Rosemary's Circle R Ranch, LL Ranch,
Stargate Horse Farm, Cottonwood Galleries and 36 Malibu Colony.

Senator Levin said he might propose limiting or barring the transferring of
executive stock options to others, as well as more disclosure when they are
exercised.

The report says that Credit Suisse First Boston, Lehman Brothers and Bank of
America "all knew that the offshore entities" for which they made trades
were associated with the Wylys, but ignored rules requiring disclosure of
these transactions and helped them hide the true ownership of the assets.
Only when Robert M. Morgenthau, the New York District attorney, issued
subpoenas in 2004 did Bank of America close the Wyly accounts.

William Brewer, a Dallas lawyer for the Wylys, said that while the Senate
report "intends to present a balanced view, the committee report is
reflective of a number of misunderstandings."

"The Wylys believe they have paid all taxes due," he added. "And in any
event, as the report makes clear, the Wylys were counseled by an armada of
lawyers, brokers, financial professionals and offshore service providers to
ensure that they were at all times fully meeting their obligations."

Copyright 2006 The New York Times Company

###

 

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