(Bloomberg) The widow of Texas billionaire Charles Wyly told a judge the IRS wrongly accused her of a “sinister” tax-avoidance plot to bolster the agency’s $1.2 billion claim in her bankruptcy case.

Caroline “Dee” Wyly, who is in her early 80s, asked the U.S. Bankruptcy Court in Dallas to toss out a $386 million fraud penalty sought by the Internal Revenue Service, arguing there’s no evidence she systematically deceived the agency for 22 years.

“To the surprise of virtually no one, the IRS’s quest was doomed from the start,” her lawyers said in a Nov. 6 filing. “In the six months of aggressive discovery the government has conducted” since its claim, “it has uncovered no evidence to support its baseless accusations of fraud.”

Wyly, who was married to Charles Wyly for 56 years before his death in a 2011 car crash, said she regularly signed tax documents without reviewing them because she trusted her husband and their advisers.

Trading Fraud
Dee Wyly sought Chapter 11 protection last year after a New York jury found that her husband and his brother, Samuel Wyly, carried out an offshore stock-trading fraud that generated hundreds of millions of dollars in illegal profit. The IRS is seeking more than $3 billion in back taxes from Sam Wyly and his brother’s estate.

The IRS never issued a notice of deficiency on Dee and Charles Wyly during the tax years in dispute, 1992 to 2013, according to the filing. The agency also failed to show that Dee Wyly knew about the offshore tax structure used by the Wyly brothers, or that she understood any of her husband’s financial dealings, the lawyers said.

“She trusted her husband who, since the beginning of their marriage in 1955, had never given her any reason not to trust him,” her lawyers said in the filing.

Dee Wyly has said she was left insolvent after husband’s Porsche was struck by another vehicle in western Colorado, killing him at the age of 77.

Widow’s Assets
In a bankruptcy filing last year, Dee Wyly listed assets of $67 million and debt of $81 million, and that was before the IRS filed its claim for $1.2 billion. Among her assets are a $6.7 million Dallas mansion, a home in Woody Creek, Colorado, valued at $28 million, $4 million worth of furs and jewelry, and more than $1 million worth of art, books and antiques. It’s not nearly enough to repay her creditors, she says.

Julianne Breitbeil, a spokeswoman for the IRS, said federal law bars the agency from commenting on individual tax returns.

A federal jury in Manhattan found the Wyly brothers, who developed companies including the arts and crafts retailer Michaels Stores Inc., hid stock offshore and made illegal trades for 13 years, making $550 million in illegal profit.

The bankruptcy is Samuel E. Wyly, 14-bk-35043, U.S Bankruptcy Court, Northern District of Texas (Dallas).

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