Recently filed federal court documents offer a glimpse into the tax avoidance machinations of the super-rich, many of whom go to the greatest lengths to bilk Uncle Sam despite the steadily decreasing tax burden that Washington lawmakers place on them.
Wendell Murphy, one of the richest men in North Carolina, former state senator and current chairman of the Board of Trustees at N.C. State University (he lent his private jet to Athletic Director Lee Fowler in his search for a new basketball coach), reported losses of $100 million to the IRS in 2000, according to The News & Observer. But in December 2005, the IRS ruled that some of those losses were the result of "sham" tax shelters and sent the Murphys a tax bill for almost $26 million.
The billionaire pork boss and his family, once owners of the second largest hog farm in the country, wrote a few checks and paid the back taxes, but late in March (a few weeks before U.S. House and Senate leaders finalized tax cuts for the wealthy), the family filed three suits against the United States of America claiming that the IRS had reached too far into their pockets. They wanted their money back.
The dispute centers on the way the Murphys reported the sales of their business property. In 2000, the family sold Murphy Family Farms to Smithfield Foods for more than $450 million in stock. Smithfield also assumed the debt Murphy Family Farms incurred when pork prices crashed that year. The IRS claims that the Murphys created false partnerships that engaged in financial practices to hide gains and create losses.
In a letter responding to the Murphys' tax return, now a part of the record in U.S. Court of Federal Claims in Washington, the IRS wrote: "The formation of Murphy Pork Partners, the acquisition of any interest in the purported partnership by the purported partners, the purchase of offsetting options, the transfer of offsetting options to a purported partnership in return for a purported partnership interest, the purchase of assets by the purported partnership, and the distribution of those assets to Murphy Pork, Inc. in complete liquidation of the purported partnership interests, and the subsequent sale of those assets to generate a loss, all within a period of nine months, had no business purpose other than tax avoidance, lacked economic substance, and in fact and substance, constitutes an economic sham for federal tax purposes."
The Murphy family suit is a matter-of-fact denial of the IRS claims. The principal counter-evidence offered is the fact that the family relied on the advice of qualified tax professionals, so they can't be at fault. "The Partners were introduced to the transactions by their longtime advisor [Ernst] & Young, LLP, which presented the transactions as sound and legal business investments."
While the IRS says the reported losses are designed to avoid paying taxes that are legally due, court documents say the government is not considering criminal charges.
Department of Justice officials would not comment on the specifics of the case. In an e-mailed statement, Joel Crouch, the attorney who will argue the case on the Murphys' behalf, stated: "In 2000, Mr. Murphy and his family entered into the transaction at issue on the advice of their longtime advisors and other highly reputable tax advisors. Mr. Murphy and his family cooperated with the IRS during the examination and have since paid the proposed tax liability. The family members believe they are entitled to a refund of the amounts they have paid to the IRS and have filed the actions with the belief that their reliance on their tax advisors was well founded."
The Murphys are not the only North Carolinians accused of hiding money from the IRS. Prominent Republican, former U.S. attorney and Jesse Helms aide Sam Currin was indicted last month by a federal grand jury in Charlotte, accused of conspiring to commit tax fraud. Prosecutors say Currin and two co-defendants met a number of times with undercover IRS investigators who say the defendants proposed an unlawful method of setting up foreign trusts and offshore bank accounts to hide income and avoid paying taxes.
The indictment also says Currin gave "materially false and misleading answers" to a grand jury in Charlotte in December, tried to persuade another attorney to make false statements, and withheld documents from the grand jury, according to the Charlotte Observer.
The grand jury indicted four people in the case, including Currin. A fifth defendant, Raleigh lawyer Robert Wellons, pleaded guilty this month to a charge of conspiracy to obstruct justice and is cooperating with prosecutors, the Observer reported.