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WSJ STORY ON MAN-LY PRIVATE ANNUITY

July 31, 2006

Can your annuity own a pocket watch?

That's the question raised in a Wall Street Journal front-pager ($link) today about the tax lives of the Dallas Wyly brothers, Sam and Charles. They set up private annuities and trusts on the Isle of Man that conveniently are invested in collectibles, jewelry and art kept at the Wyly brothers U.S. homes. A brief excerpt gives you the flavor:

The Isle of Man is a misty, quasi-independent republic of 75,000 people in the sea between England and Ireland. Much of the Wylys' network was set up from a medieval village at its southern tip by a British businessman known locally for greeting clients with a macaw perched on his shoulder. Ronald Buchanan long worked at an 18th-century mansion known as Lorne House, which was also the name of his business.

One of Mr. Buchanan's main associates working on Wyly trusts was an ex-stockbroker who is now wanted on fraud charges in South Africa. A review of court records, legal opinions and Wyly family memorandums, as well as interviews with lawyers and regulators, shows that the two men helped the Wyly brothers set up more than two dozen offshore companies and trusts over the past 15 years.

The story reminds me of the Melnik brothers, who set up an annuity in Bermuda and used the annuity as a personal piggy bank. The Tax Court had no difficulty disregarding the purported annuity, but declined to impose penalties. As a federal grand jury and a Congressional panel are looking into the Wyly's financial lives, the U.S. tax authorities may want to keep them from getting off as easily as the Melniks.

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