Tuesday, August 01, 2006
By Ely Portillo
WASHINGTON - Sham companies hiding the assets of super-wealthy Americans and corporations offshore are costing the U.S. Treasury as much as $100 billion a year in lost taxes, a Senate subcommittee will document on Tuesday.
Facilitated by willing lawyers and banks, elaborate semi-legal scams are used to hide cash overseas even as Americans access and use the funds while avoiding the IRS. The Senate Homeland Security and Governmental Affairs Subcommittee on Investigations will release a 370-page report at a hearing Tuesday detailing its yearlong investigation into these schemes.
"Neither their methods nor their purpose will stand the light of day," said Sen. Carl Levin, D-Mich., of the tax shelters, calling them a "total sham."
The Senate panel estimates that wealthy individuals avoid paying between $40 billion and $70 billion in taxes annually and corporations evade $30 billion in taxes a year by using these offshore companies. Some of those accused in the report have pleaded guilty to tax evasion, and others are under investigation.
"Let me be clear: The abuse of offshore tax havens raises the amount of taxes for you and me," said Sen. Norm Coleman, R-Minn., chairman of the subcommittee.
The scams are extremely complicated by design. They involve dozens of corporations set up on paper in countries that have no tax laws and weak government oversight, such as the Cayman Islands in the Caribbean Sea, or the Isle of Man in the Irish Sea. With no real assets, these companies' purpose is to disguise the source of money coming mainly from Americans.
Two primary tax-dodging ploys are cited. First, in order to cancel out capital gains and thus avoid paying taxes, offshore companies fake financial transactions to create fake capital losses.
Alternatively, Americans invest their money in overseas trusts that they appear to have no control over. Then those trusts invest the money, often using it to buy property or businesses. That's legally tax-free as long as the beneficiary has no control over the trust. However, the beneficiaries secretly control many of these trusts, according to the report.
The biggest example of the first kind of tax shelter was called POINT, or Personal Optimized INvestment Transaction, devised in 1999 by the Seattle-based firm Quellos LLC. According to the subcommittee, Quellos coordinated the sale of stocks between companies based on the Isle of Man. No money changed hands, but the deals were designed to look like they were losing money. American clients bought interests in the companies "losing" money, then claimed those paper losses as their own.
POINT erased $2 billion of real capital gains for clients with fake losses and cost the Treasury approximately $300 million in unpaid taxes. At one point, Quellos was picking names for its shell corporations from crayon colors, according to subpoenaed e-mails.
The Wyly family of Dallas used the second kind of tax shelter, giving $190 million in stock options to trusts on the Isle of Man in 1992. Those trusts took the money and lent it back to the Wylys' companies or bought them property, according to the report.
Since the Wylys maintained that the trusts were independent, they paid no taxes on most of the original money or the $720 million it generated over the next 13 years. However, the subcommittee alleges that they directed all of the trusts through go-betweens.
The Wylys maintain that their activities are legal.