THE LATE Richard J Egan, the billionaire founder of EMC, the world’s largest data storage company, cheated on his US income tax on a massive scale while he served as George W Bush’s ambassador to Dublin, Judge Dennis Saylor of the US district court of Massachusetts found in a decision handed down on Monday.
Mr Egan died from a self-inflicted gunshot wound on August 28th last. He was 73 and had been suffering from lung cancer. Monday’s decision by Judge Saylor followed a 44-day trial, during which more than 3,700 exhibits were presented, in late 2008.
The 357-page decision rules that Mr Egan, his wife of 52 years, Maureen, and their son, Michael, attempted to shelter $327.4 million in capital gains from US tax in 2001 and 2002. Mr Egan was ambassador to Ireland from 2001 until 2003.
Between 1992 and 2004, Mr Egan contributed $760,083 to mostly Republican election campaigns, including Mr Bush’s. His estate must now pay $75.1 million to the Internal Revenue Service (IRS) in back taxes and penalties.
In his decision, Judge Saylor details two complex tax shelter transactions that were concocted by Fidelity International Currency Advisor and Fidelity High Tech Advisor for the Egans.
“None of the participants in these complex transactions believed that they were real business transactions, with any purpose other than tax avoidance,” Judge Saylor writes.
“Indeed, it is highly doubtful that any participant believed, even for a minute, that the transactions would withstand legal scrutiny if discovered . . . the Egans and their advisors went to great lengths to try to ensure that the IRS would never find out about the transactions – including, among other things, the filing of partnership and individual tax returns with multiple false and misleading entries.”
In May 2000, the Egans interviewed what Judge Saylor calls “tax shelter promoters” who specialised in helping wealthy clients avoid tax. They settled on the international accounting firm KPMG. The complex scheme developed by affiliates of KPMG was designed to create artificial losses to offset ordinary income.
Such “Son of Boss” transactions were common in the 1990s, but in August 2000 the IRS issued a notice criticising them and stating that they would not be recognised. “The promoters and the Egans nonetheless pressed forward with the capital gains strategy . . .” Judge Saylor writes.
By early 2001, the promoters had developed a variation on the scheme called a “Financial Derivatives Investment Strategy” or FDIS. The FDIS “generated paper ‘losses’ for taxpayers by assigning any offsetting ‘gains’ offshore,” Judge Saylor explains. Intriguingly, his judgment mentions, without naming them, “two Irish confederates of the tax promoters” to whom the “gains” were assigned.
In his condemnation, Judge Saylor notes that “a taxpayer cannot undertake phony or meaningless transactions and claim a tax advantage”.
He says the Fidelity High Tech and Fidelity International transactions “were complete shams, without any economic substance of any kind” and concludes that the Egans’ “claim of good faith reliance on counsel is . . . wholly without merit”.
In 2002, when the IRS required disclosure statements from taxpayers participating in certain types of tax shelters, KPMG, which was preparing the Egans’ return, told them such a disclosure would be required. The Egans fired KPMG.
Mr Egan’s obituary in the Boston Globe of August 30th, 2009 spoke of his “humble origins”. He joined the US marine corps at age 17 and was a helicopter crew chief during the Korean War.
He earned a degree in electrical engineering at Northeastern University, which named its Maureen and Richard J. Egan Engineering and Science Research Center after him. Mr Egan worked with the team at Massachusetts Institute of Technology that developed the guidance system for the Apollo spacecraft.
Judge Saylor noted that “Richard Egan was one of the most successful businessmen in the history of the United States.”
His dedication to charities such as the Boy Scouts of America and the Children’s Hospital sits uneasily with his posthumous condemnation for tax evasion.