President Bush's last Irish ambassador, Richard Egan, set up a $62 million illegal tax shelter as soon as he became ambassador, the US Internal Revenue Service has said.
Following an investigation, the IRS claims that Mr Egan set up an "economic sham" whose principal use was to reduce his tax payments.
The IRS said that Mr Egan, the billionaire co-founder of Massachusetts' most valuable technology company, EMC Corp, used two companies to set up the scheme using a European-style options scheme as soon as he resigned as the head of EMC to become ambassador.
Mr Egan and his family were the most successful fundraisers for President Bush's re-election campaign and have long been major contributors to the Republican Party.
Mr Egan has now begun legal action against the IRS in Worchester, Massachusetts, claiming that the investment scheme was perfectly legal.
In the lawsuit, Mr Egan said he set up the scheme when he resigned from the EMC board in September 2001 "to enter government service" and was looking for ways to sell his stock without it being reported by the media.
The lawsuit claims that because of securities law and EMC's own policies, Mr Egan "could only sell his stock during narrow windows of time" and that "the media reported plaintiff's sales of stock, so any 'large' sales would likely have a negative impact on the corporation's stock price". Mr Egan's lawsuit says that an unnamed "international accounting firm" urged him to use a European-style options scheme with another businessman, Sam Mahoney, but only after Mr Egan said he wanted to avoid "mass-marketed" or "abusive" tax dodges.
He said that by the time he became Irish ambassador, EMC's stock had collapsed from more than $100 a share in 2000 to below $12 in 2001. Mr Egan said his family's investment corporation used two companies, Helios Trading and Alpha Consultants, to develop an options trading strategy that paired Mr Egan with Mr Mahoney, who was looking for a similar investment strategy.
He said that he told his lawyers he did not want to invest in any scheme that the IRS considered illegal and said the IRS were mistaken in their interpretation of the scheme.
Mr Egan remained as Irish ambassador for just 15 months and later volunteered as a fundraiser for President Bush's re-election campaign. He and his family were known to Republicans as the "first family of fundraising" because their efforts were so successful.
The Irish Times also revealed that he and his family were funding the independent leftist presidential candidate, Ralph Nader, in an effort to drain liberal votes away from Democratic candidate John Kerry.