At the outset, I caution that I have some detailed knowledge about the case, having represented an unindicted individual involved at the edges of the Aegis investigation. Sometimes that past participation may influence how I read the opinion, particularly the facts. With that caution, here are the facts from the Court's opinion (cut and paste):
The Aegis trusts were typically marketed to wealthy, self-employed individuals whose income could not be easily traced through the W-2 forms that are issued to ordinary taxpayers. Aegis representatives, including the defendants, conducted seminars promoting the Aegis trusts in cities around the country. Attendance at these seminars was by invitation only, and guests were charged between $150 and $500 to participate. Attendees were told at such seminars that use of the Aegis trust system would reduce if not eliminate their federal income taxes. * * * * Those persons who purchased packages of one or more trusts were also encouraged to purchase trust management services from Aegis Management or Sigma, for which they would pay thousands of dollars annually on top of the $10,000 to $50,000 they paid for the trusts themselves. These management services included advice and counsel on using the trusts to conceal income and assets from the IRS.
The typical Aegis system comprised multiple domestic trusts, including a business trust, an asset management trust, and a charitable trust. (As we shall explain in a moment, foreign trusts were also used in many instances to further conceal an individual's assets and income.) The centerpiece of the system was the business trust, also referred to as a "common law business organization" or "CBO." The business trust was purportedly modeled after the Massachusetts Business Trust, a non-statutory arrangement by which ownership of a business is transferred to a trust in exchange for certificates of beneficial interest; the trustee then holds and manages the business on behalf of the holders of those certificates. See Navarro Sav. Ass'n v. Lee, 446 U.S. 458, 468-69, 100 S. Ct. 1779, 1785-86 (1980) (quoting Hecht v. Malley, 265 U.S. 144, 146-47, 44 S. Ct. 462, 463 (1924)) (describing Massachusetts Business Trust). A key point distinguishing the Aegis business trust (along with the other trusts making up the Aegis system) is that an independent trustee never assumed any real control over the trust assets. With the aid of Aegis personnel, a purchaser nominally would transfer his assets—including his businesses and residence—to one or more trusts and formally cede control of those assets to the named trustee, typically Bartoli, Parker, or Stambulis. But routinely, within a few days after the trust was first established—and sometimes before the client had even transferred assets to the trust—the Aegis attorney would resign by means of a boilerplate letter citing "circumstances beyond [his] control," and appoint the client as his replacement. E.g., R. 917 Tr. 3495-96; R. 921 Tr. 5408-09; R. 965 Tr. 306. Because the purchaser thus retained control over the assets assigned to the trusts, the transfer of those assets into the trust amounted to nothing more than a paper transaction with no economic substance. fn1 Again, the sole purpose of the trust was to conceal the purchaser's assets from the IRS in an effort to reduce his tax liability. As the defendants themselves put it to their clients, the clients would "own nothing but control everything." R. 921 Tr. 5384, 5406; R. 943 Tr. 204.
fn1 As originally envisioned by Bartoli, a client's wife would first convey all of her interest in the couple's property to her husband, she would then become the temporary "independent" trustee of the business trust, her husband would transfer the property to that trust, and finally he would succeed his wife as the trustee. As the defendants implemented the system, an Aegis attorney replaced the client's spouse as the initial trustee.
That the Aegis trust system was a fraudulent scheme was borne out in the manner in which the underlying documentation was prepared. We have noted, for example, that the purportedly independent trustee named in the creation of the trust routinely would resign shortly after the trust was created and be replaced by the client on whose behalf the trust was created. Typically the boilerplate resignation letter was prepared and signed at the same time as the paperwork creating the trust, although it was dated several days later, leaving no doubt that the resignation of the initial, "independent" trustee was planned from the outset. Moreover, in many instances, the trust documents were backdated to make it appear that a client had (nominally) transferred his assets to the trusts long before he had even purchased the trusts—sometimes years earlier—in order to retroactively claim the tax advantages of the trusts. (False notarizations were routinely provided to give cover to the backdating.) An additional fee was sometimes charged for backdating documents in this way. Finally, false documents were created to make it appear that various legally important events had taken place—for example, minutes indicating that the directors of a trust had met—when in fact they never had.
The income that Aegis clients derived from their businesses was also diverted to the trusts by means of management and consulting contracts between the clients' businesses and their trusts, an arrangement that Aegis personnel suggested and helped to implement. Ostensibly, pursuant to such a contract, a trust would provide services to the client's business, for which the business would in turn compensate the trust. In actuality, the trust would provide no services to the business, although the business would compensate the trust and write the payments off as an expense. The actual purpose of these contracts was thus to conceal the diversion of business profits to the trusts without the payment of taxes on that income. See Ellefsen, supra, 655 F.3d at 775, 779-80.
The money that Aegis clients transferred to their trusts would be returned to the clients and their businesses in a variety of ways. In some instances, the trusts would make fictitious loans to the client or his business. In other instances, charitable trusts were used to pay for things that really had nothing to do with the stated aims of those trusts. For example, a charitable trust might pay hundreds of thousands of dollars to purchase a primary residence or vacation home for the Aegis customer, on the theory that the home would serve as the "world headquarters" of the trust. R. 943 Tr. 207, 222. Similarly, the charitable trust might pay for a family vacation trip on the theory that one of the purposes of the trip was to visit charitable enterprises to which the trust might make donations.
Tax returns were prepared for the Aegis trust purchasers and for the trusts themselves, but these too were fraudulent in multiple respects. First, Aegis clients were advised by the defendants to assign their own income to the trusts despite the fact that the income was being earned and controlled by the clients just as it had been before the trusts were created. Second, clients were advised to report that assigned income on certain trust tax returns, but then to pass the income on to other trusts without taxes being paid on that income. The result was that the income remained in the clients' hands, but the tax liability was transferred elsewhere. Third, the defendants encouraged clients to claim various deductions on the trusts' federal tax returns that had no basis in law or fact. For example, clients were told to deduct their household utility and other expenses on the theory that their homes were the "world headquarters" of their trusts. College tuition for clients' children was likewise posited as a trust expense based on the notion that the children would one day become directors of the trusts.
The wealthiest Aegis clients were advised to participate in an offshore trust system employing foreign trusts and so-called "international business companies" (IBCs) in Belize. Belize was chosen as the locus for the offshore system because it was not particularly cooperative with the United States on issues related to asset-hiding and tax evasion. David Jenkins, a citizen of Belize, assisted the defendants with this aspect of the Aegis system, which commenced in 1995. The use of offshore trusts and foreign bank accounts enabled clients to further conceal their income by nominally transferring that income to a foreign trust. Again, control of the money would in fact remain with the client, but the tax liability would be shifted to a foreign entity that would, in actuality, file no U.S. tax return and pay no tax.
As with the domestic trusts, foreign trusts and IBCs were established in such a way as to create the illusion that they were not under the control of Aegis clients. Jenkins would designate certain foreign entities to serve as the nominal directors, trustees, and protectors of these trusts or IBCs. For example, Freedom Services Company, an entity directed by Vallone, was often named as a trust protector (whose job it was to oversee the trustee), and a second company controlled by Jenkins was typically named as trustee. Meanwhile, Aegis clients were given undated letters of resignation from Vallone and Jenkins so that control of the trusts and IBCs at all times remained with them. Offshore accounts in Antigua were established in the names of these Belizean trusts and IBCs, and these accounts too were in reality under the control of the Aegis clients.
To effect the concealment of his income using the offshore trust system, an Aegis client was advised to first transfer his untaxed income to a trust bank account in the United States. From there, the money would be transferred to a bank account in Antigua that was held in the name of a foreign trust. The money was then transferred again to a second bank account, this one in the name of an IBC. The transfer of funds between domestic and foreign trusts often was characterized as a loan, evidenced by one or more promissory notes. Because the transfer of funds from one trust account to another was simply a means of hiding the client's funds from the IRS, these notes were a fiction. But to give them a patina of legitimacy, Aegis clients were advised that periodic demands should be made on the notes and, in turn, relatively small repayments (say, $10,000) should be made on the outstanding "loans."
Once a client's funds had been transferred to the IBC's bank account, the money could be repatriated to the client in the United States in one of several ways. The client would be given a credit card linked to the IBC account in Antigua, which card he could use to access his money, either by making purchases using that card or by receiving cash advances through Automated Teller Machines (ATMs) in the United States. Because the card was linked to an offshore account, there would be no record of these transactions clearing in the United States. The IBC could also make fictitious "loans" or "gifts" of deposited funds to the client.
No taxes were paid on income diverted through the offshore trust system. Aegis clients were assured that the IRS would not have access to offshore trust and bank records and would never be able to link the clients to the control of the IBCs or the bank accounts linked to those IBCs. The system worked to the benefit of the defendants as well: they could receive transaction fees equal to two or three percent of any funds funneled through the offshore trusts.There are some interesting facts about the investigation, including an undercover investigation of the operations, and the many points at which the players had objective information that the scheme was fraudulent and chose to ignore that information.
Here are some other snippets:
1. Some of the players attended a promotional cruise for prospective investors where "trust 'guru' Joe Izen warned participants that "people are gonna get put in jail" for not reporting personal purchases paid for with foreign credit cards drawing on funds they had placed in offshore trusts." Subsequently, one of the defendants wrote a letter in which he mentioned Izen's presentation and joked, 'I overheard both IRS agents in the audience telling each other they didn't get what they came for (just kidding).'" (See court version, p. 129, fn 12.) In fact, I think there were two undercover agents attending some of the meetings to promote prospective investors, but apparently not this one. And, the promoters had Izen present to help them promote the scheme, so why was he saying things such as this? Of course, the scheme was illegal whether or not the taxpayers' repatriated the offshore money with the foreign credit cards, so Izen may have just been saying that that will be how they get caught, with the implication being that they should not use the foreign credit cards. Izen was prescient in this regard because the IRS subsequently obtained John Doe summonses to get to credit and debit card transactions records in the possession of U.S. based credit card transaction processors and thereby identified many taxpayers with offshore accounts who thought the veil of secrecy would last forever.
I will discuss some, but not all, of the legal issues resolved in later installments.
Other information and links:
DOJ Tax Press Release on original conviction: SIX PRINCIPALS OF FORMER AEGIS COMPANY CONVICTED OF $60 MILLION TAX FRAUD CONSPIRACY FOLLOWING THREE-MONTH FEDERAL TRIAL (5/19/08), here. Excerpts from the press release are:
All six defendants were found guilty today of one count of tax fraud conspiracy – specifically, conspiracy to defraud the United States by impeding the IRS in the collection of tax revenue and conspiracy to aid and assist the preparation and filing of false tax returns on behalf of Aegis clients. All six defendants were also found guilty of additional charges, while two of the six were also acquitted on some counts. * * * * The defendants are:
Michael A. Vallone, 48, of Orland Park, one of the founders of Aegis, which marketed and sold trust packages throughout the country through a network of promoters, sub-promoters, managers, attorneys and accountants. Vallone was the executive director of Aegis and a principal in the company;
Edward B. Bartoli, 78, of Clearwater, Fla., a former attorney, who was also one of the founders of Aegis, the legal director, and a principal in the company;
Robert W. Hopper, 62, of Gadsden, Ala., also one of the founders of Aegis, the managing director, and a principal in the company;
Timothy Shawn Dunn, 48, of Chesterton, Ind., a certified financial planner, who was a promoter and manager of Aegis trusts, and the managing Director of the Aegis Management Company, which he created with Vallone, Bartoli, and Hopper;
William S. Cover, 72, of Naperville, also a promoter and manager of Aegis trusts, and the president of Sigma Resource Management, Inc., which provided management services to purchasers of Aegis trusts; and
Michael T. Dowd, 34, of Glenview, also a promoter and manager of Aegis trusts, and he provided management services to purchasers of Aegis trusts through Aegis and Sigma Resource Management, Inc.
* * * *
Two other defendants in this case, David E. Parker, 55, of Williamsville, N.Y., an attorney who was the legal director of the Aegis Management Company, and John C. Stambulis, 71, of Palos Heights, an attorney and a trust counsel of Aegis, both pleaded guilty and testified for the Government at trial. They are awaiting sentencing.
* * * *
All six defendants were also convicted of tax fraud regarding their own individual tax returns for the years 1997 through 2000, resulting in a tax loss of more than $1 million.