- Authorities say billionaire Robert F. Smith used an offshore trust to conceal $200 million that he earned from his first private equity firm, thereby avoiding paying $43 million in taxes over nearly a decade.
- In a seven-page non-prosecution agreement, the Department of Justice said that two unnamed advisors led Smith to create offshore trusts to avoid paying taxes on some of the profits from his first venture capital fund.
- The document states that Smith used the $200 million of income he never reported to the IRS to purchase a $2.5 million vacation home in Sonoma, California, as well as three properties in France.
- Axios reported that Smith’s tax troubles are more serious than the billionaire had previously led Vista investors to believe, causing turmoil inside his software-focused venture fund.
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Robert F. Smith, best known as the billionaire who paid off the student loans of a college’s entire graduating class, hid $200 million in an offshore trust designed to dodge federal taxes, the Department of Justice said Thursday.
According to prosecutors, Smith used offshore trusts to hold half of his ownership stake in Vista’s first private equity fund and dodge $43 million in taxes over a span of 15 years (taxes went unpaid for nine of those years, the same years the fund was profitable).
Smith paid $139 million in back taxes, penalties, and interest to resolve authorities’ four-year investigation into his finances, Business Insider previously reported. The Department of Justice published Smith’s non-prosecution agreement Friday, revealing details of Smith’s troubles with the IRS.
A representative for Smith at Vista Equity Partners declined Business Insider’s request for comment on the contents of the non-prosecution agreement or on Axios’ reports of its effects within the firm.
A dubious partner
Prosecutors traced Smith’s troubles back to his time as a young investment banker at Goldman Sachs, when he allegedly met a person identified only as “Individual A.” Both various news reports and a source familiar with the matter identified that person as Houston businessman Robert Brockman, who is still under investigation for what DOJ called the “largest-ever” tax fraud scheme by a U.S. citizen.
At the time, Brockman was the CEO of a company he owned through a foreign holding company and a Bermuda-based trust and told Smith that he could then sell said company without paying taxes on the profits, per the statement of facts. Brockman was more than 20 years Smith’s senior at the time, a source familiar with the matter told Business Insider.
When Smith left Goldman to open a private equity firm in 2000, Brockman became the sole investor in the firm’s first fund, eventually using his foreign trusts to sink in $1 billion, according to the document. Brockman required that Smith’s fund be held through a “perfected foreign trust” in the Cayman Islands similar to Brockman’s original company to hide the two firms’ connection from the IRS, per the statement of facts. Smith realized Brockman alone controlled all of the trusts in question, but viewed the new fund as a “unique business opportunity he eagerly wanted to pursue,” the non-prosecution agreement states.
To create the trusts needed to complete this scheme, Brockman recommended a lawyer that prosecutors call “Individual B.” “B” had a long history with “A,” and created “A’s” original trust decades earlier, per the document. “B” promised Smith that the assets in the new trust would be exempt from American income and estate taxes if that trust appeared to be funded by one of Smith’s British relatives and some of the money went to charitable endeavors, according to the agreement. The trust’s documents contradicted “B’s” claims and sounded “too good to be true,” prosecutors wrote, but Smith never got a second opinion from another lawyer.
The new trust was called Excelsior and based in Belize, according to the document. Smith paid “B” more than $800,000 over the next 14 years to set up, maintain, and create a paper trail for the trust for him, but ultimately made all the decisions, the document states. “B” also created a Nevis-based company called Flash, owned by Excelsior, through which he owned a 4% stake of his VC fund, in addition to the 4% stake that Smith publicly owned, so he could avoid paying taxes on some of the firm’s profits, the document states.
A California country home and a French ski retreat, both tax-free
Smith’s holding company started generating income from its stake in Vista’s first fund in 2005, which he and his then-wife used to purchase and renovate a $2.5 million vacation home in Sonoma, California, and three properties in Megève, France, the document states. The agreement also states that Smith transferred $13 million from Flash’s bank account to a US account for his personal use between 2011 and 2012, which he used to remodel his Colorado home and fund his charitable work, and filed numerous false tax forms in the process.
When the fund was wound down, Smith donated the account’s remaining funds to a charitable organization, the document states. The source familiar with the situation said the remaining funds went to Smith’s Fund II Foundation, where it funded scholarships for minority students, the preservation of Martin Luther King, Jr.’s homes, and efforts to support Black women with breast cancer.
Smith ultimately agreed with the DOJ’s assertion that he should have paid taxes on the $200 million held in the offshore structure, but will not be prosecuted because of the agreement. An unnamed source told Axios that Smith called the investigation “humbling,” and said he regretted the “undue burden” his legal troubles had put on those around him, including his colleagues at Vista.
Smith also “underplayed” the scope of the investigation into his taxes to Vista’s investors, Axios reported Friday, causing turmoil inside the software-focused firm.