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Offshore tax havens cost U.S. up to $70B

Havens used by wealthy taxpayers to dodge taxes are targeted by Senate panel, which seeks to close them.

August 1 2006: 6:57 AM EDT

WASHINGTON (Reuters) -- Offshore tax havens used by the wealthy cost U.S. taxpayers $40 billion to $70 billion a year and should be shut down, a Senate panel said in a report naming specific wealthy people as tax haven abusers.

The Senate Permanent Subcommittee on Investigations has probed tax schemes for years, targeting the lawyers and bankers behind them and the companies that used them.

In a new report issued Monday, the panel named individuals, including New York health care heir Robert Wood Johnson IV, Hollywood media mogul Haim Saban and Texas' Wyly brothers, as haven abusers.

"Our investigation blows the lid off tax haven abuses that use sham trusts, shell corporations, and fake economic transactions to hide the fact that U.S. citizens are ... dodging taxes," said Michigan Democratic Sen. Carl Levin.

Minnesota Republican Sen. Norm Coleman, subcommittee chairman, said, "Using offshore jurisdictions to shelter income is unfair ... We need to close these loopholes."

The subcommittee is set to hold a hearing on the matter Tuesday morning. It said Johnson, Saban and Michael French, a former Wyly brothers associate, will testify.

The subcommittee report said that Johnson, Saban and three other, unnamed taxpayers, purchased a tax shelter known as the Personally Optimized Investment Transaction, or POINT, from Quellos Group, a Seattle-based investment firm.

The report said POINT shelters were used to "erase over $2 billion in capital gains that would otherwise have been taxed, costing the U.S. Treasury lost revenue of about $300 million."

The report said law firms such as Bryan Cave and Cravath Swain & Moore worked with Quellos on POINT, while major banks including HSBC provided financing.

Representatives from Quellos, Bryan Cave, Cravath Swain & Moore and HSBC are scheduled to appear at the hearing.

A spokesperson for Saban said he has been cooperating with the subcommittee, and that he relied on a long-term tax advisor in entering into a tax-related transaction in 2001.

The spokesperson said Saban "is in the process of arranging with the IRS and state authorities to pay the taxes, interest and substantial penalties stemming from that transaction."

In a statement, Quellos said it has cooperated with the subcommittee and defended the POINT transactions, saying they were approved by top law firms and registered with the IRS.

"We fundamentally disagree with the report, which presents a one-sided view and ignores all information that is inconsistent with its conclusion," Quellos said.

Johnson is owner of American football's New York Jets and chairman of New York-based Johnson Co., which did not immediately return a telephone call seeking comment.

The subcommittee said the Wylys from 1992 to 2005 moved over 17 million stock options and warrants worth about $190 million into a web of 58 offshore trusts and shell companies.

The Wylys used annuity payment agreements to avoid taxes on the options for years, the panel said.

The options involved came from companies linked to the Wylys - retailer Michaels Stores, Sterling Software and Sterling Commerce, the panel said.

Investment gains from the trusts went to loans, business ventures, real estate and "art, furnishings and jewelry for the personal use of Wyly family members," the report said.

William Brewer, a lawyer for the Wylys, said his clients relied on lawyers and accountants for advice and "continue to believe that their actions were entirely proper under law."

He said the subcommittee report "is reflective of a number of misunderstandings. As such, we hope that it will not mislead people to reach inappropriate conclusions. The Wylys believe they have paid all taxes due."

Coleman and Levin called for reforms such as sanctions on uncooperative tax havens and various tax law changes.