The former US ambassador to Ireland Richard J. Egan used a sham tax shelter to cheat the US government out of more than $62 million, a federal judge has ruled.
The transactions were executed in 2001 and 2003, while Mr Egan was serving as former president George W. Bush's first ambassador to Ireland.
The co-founder of top data storage equipment firm EMC Corporation, who died last August, used a variation of a widely used transaction known as "Son of Boss" to avoid paying capital gains taxes on more than $327 million in gains from stock or options in Boston-based EMC, according to court papers.
In a 357-page decision, US District Judge Dennis Saylor in Boston ruled yesterday that Mr Egan and his wife, Maureen, concocted transactions with offshore entities to generate artificial tax losses intended to wipe out his taxable gains.
The Egans were aided by nine advisers, including law firms and accountants, Judge Saylor wrote. The transactions were managed by their son, Michael J. Egan, the judge said.
"None of the participants in these complex transactions believed that they were real business transactions, with any purpose other than tax avoidance," Judge Saylor said. “Indeed, it is highly doubtful that any participant believed, even for a minute, that the transactions would withstand legal scrutiny if discovered."
The Internal Revenue Service outlawed the Son of Boss transaction in August 2000, something the Egans and their advisers were aware of, Judge Saylor wrote.
The transaction was widely used in the late 1990s, In 2004, about 1,500 people settled with the IRS in exchange for reduced penalties, paying more than $6 billion.
The shelter "involved creating transactions with offsetting positions, which by itself meant that there was no economic risk," said Howard Medwed, a partner in the Boston law firm Burns and Levinson LLP.
The Egans didn't settle. They deposited $62.1 million with the IRS and sued the government in 2005 to get the money back.
Judge Saylor wrote that a "significant feature of the scheme" was the reliance on legal opinions provided by four law firms that the transaction was legitimate.
The law firms, dubbed "tax promoters" by Judge Saylor, included Proskauer Rose LLP and Brown and Wood LLP, which was acquired by Sidley Austin LLP.
KPMG, which prepared the Egans' tax returns, agreed in 2005 to pay $456 million to avoid criminal prosecution over its sale of tax shelters such as the one used by the Egans.
Judge Saylor ruled yesterday the IRS can keep the tax payments. Among other things, he said, the Egans knowingly engaged in the transactions after the IRS outlawed them and went to great lengths to hide them from the tax agency. The IRS also sought more than $13 million in penalties.
Mr Egan, who was suffering from lung cancer, shot himself last August. He was 73. He served as US ambassador to Ireland from 2001 to 2003.