Former billionaire Sam Wyly committed tax fraud by shielding more than $1 billion in family wealth in offshore trusts, a federal bankruptcy judge in Dallas ruled Tuesday.

Mr. Wyly's brother Charles, who is deceased, was also part of the "deceptive and fraudulent" scheme, according to U.S. Bankruptcy Judge Barbara Houser.

The ruling is a win for the IRS, which accused members of one of Dallas's most prominent families of evading taxes while still living the good life on money that came from the business operations the Wylys once ran, including Michaels Stores and Bonanza steakhouses.

Exactly how much Sam Wyly will have to pay remains to be seen. The IRS sought $1.4 billion in back taxes and penalties from Sam Wyly, and other money from Dee Wyly, widow of Charles Wyly.

Stewart Thomas, a lawyer for the Wyly family, said he was still "evaluating" the 459-page opinion but that his clients disagreed with parts of the ruling.

"While Sam and Dee Wyly are pleased that the court rejected the IRS's gift tax claim and found Dee Wyly to be an innocent spouse, they are surprised and disagree with the court's fraud finding as to Sam and his brother Charles," Mr. Thomas said.

Sam Wyly filed for bankruptcy protection in 2014, in a bid to deal with a $299 million damages award for federal securities law violations involving the offshore trusts.

Judge Houser found Dee Wyly didn't commit tax fraud, and had no reason to know the offshore money that was paying for lavish homes, artwork and jewelry had been improperly hidden from U.S. tax authorities. She was married to Charles Wyly for 56 years. He died in 2011.

"There was nothing that should have 'tipped her off' that something was amiss," the judge wrote.

Not so for Sam and Charles Wyly. Judge Houser didn't buy the argument that the brothers reasonably relied on the advice of lawyers and advisers in sending their money to an overseas tax haven.

Lawyers for the accused Wylys contended the web of trusts were set up for appropriate tax and estate-planning purposes, and weren't under the family's control. They denied wrongdoing.

Judge Houser said she refused to find "that it is appropriate for extraordinarily wealthy individuals to hire middlemen to do their bidding in order to insulate themselves from wrongdoing so that, when the fraud is ultimately exposed, they have plausible deniability."

Bankruptcy court papers say Mr. Wyly has reined in his lavish lifestyle, selling his New York City apartment and several paintings through Christie's Inc. He has let go of both staffers in his "family office," as well as writers who helped him author books on entrepreneurship. The bankruptcy was meant to help Mr. Wyly negotiate a repayment plan for his debts.

Securities and Exchange Commission officials had accused the Wyly brothers of using a web of trusts and other entities based in the Isle of Man and Cayman Islands to sell large portions of shareholdings in four companies but not disclosing those sales in filings with regulators over a 13-year period starting in 1992.

The Wylys built their fortune by founding or acquiring several companies, including business-software makers Sterling Software Inc. and Sterling Commerce Inc., arts-and-crafts chain Michaels Stores Inc. and insurer Scottish Re Group Ltd. Sterling Software was later sold to CA Technologies Inc. and Sterling Commerce to AT&T Inc., which later sold it to International Business Machines Corp.

Katy Stech contributed to this article.

Write to Peg Brickley at peg.brickley@wsj.com

 

(END) Dow Jones Newswires

May 11, 2016 10:35 ET (14:35 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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