United States v. Vallone

• Decision Date: 28 September 2012
• Docket Number: 08–4246,08–3759,Nos. 08–3690,08–4076,08–4320,09–1864 & 09–2174.,s. 08–3690
• Citation: 698 F.3d 416
• Parties: UNITED STATES of America, Plaintiff–Appellee, v. Michael A. VALLONE, William S. Cover, Michael T. Dowd, Robert W. Hopper, Timothy S. Dunn, and Edward Bartoli, Defendants–Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

698 F.3d 416

UNITED STATES of America, Plaintiff–Appellee,

v.Michael A. VALLONE, William S. Cover, Michael T. Dowd, Robert W. Hopper, Timothy S. Dunn, and Edward Bartoli, Defendants–Appellants.

Nos. 08–3690, 08–3759, 08–4076, 08–4246, 08–4320, 09–1864 & 09–2174.

United States Court of Appeals, Seventh Circuit.

Argued May 3, 2011.

Decided Sept. 28, 2012.

Stephen L. Heinze (argued), Barry Rand Elden, Attorneys, Office of the United States Attorney, Chicago, IL, for Plaintiff–Appellee.

Richard H. McLeese, Attorney, Chicago, IL, for Defendants–Appellants.

Before ROVNER and WILLIAMS, Circuit Judges, and YOUNG, District Judge.^*

ROVNER, Circuit Judge.

At the conclusion of an eleven-week trial, a jury convicted defendants Michael A. Vallone, William S. Cover, Michael T. Dowd, Robert W. Hopper, Timothy S. Dunn, and Edward Bartoli of conspiring to defraud the United States by impeding and impairing the functions of the Internal Revenue Service (“IRS”) and to commit offenses against the United States, along with related fraud and tax offenses. They were sentenced to prison terms ranging from 120 to 223 months. The defendants appeal their convictions and sentences. We affirm.

I

This is the latest in a series of cases arising out of abusive trusts promoted by The Aegis Company (“Aegis”) and its sister company, Heritage Assurance Group (“Heritage”), both based in Palos Hills, Illinois. See United States v. Wasson, 679 F.3d 938 (7th Cir.2012); United States v. Hills, 618 F.3d 619 (7th Cir.2010), cert. denied,––– U.S. ––––, 131 S.Ct. 2958, 180 L.Ed.2d 249,––– U.S. ––––, 132 S.Ct. 130, 181 L.Ed.2d 51 (2011); United States v. Patridge, 507 F.3d 1092 (7th Cir.2007); United States v. Baxter, 217 Fed.Appx. 557 (7th Cir.2007); Muhich v. C.I.R., 238 F.3d 860 (7th Cir.2001); Bartoli v. Richmond, 215 F.3d 1329, 2000 WL 687155 (7th Cir.2000); see also United States v. Richardson, 681 F.3d 736 (6th Cir.2012); United States v. Welti, 446 Fed.Appx. 784 (6th Cir.2012); United States v. Ellefsen, 655 F.3d 769 (8th Cir.2011); Richardson v. C.I.R., 509 F.3d 736 (6th Cir.2007); United States v. Diesel, 238 Fed.Appx. 398 (10th Cir.2007); United States v. Tiner, 152 Fed.Appx. 891 (11th Cir.2005).

Heritage was formed in 1990 by Michael Richmond as the Illinois offshoot of a like-named California firm. Defendants Michael Vallone and Robert Hopper joined the staff of Heritage shortly thereafter. Defendant Edward Bartoli, an attorney with degrees from both Notre Dame and Harvard, later became affiliated with Heritage as its legal counsel. Heritage was in the business of selling living trusts for estate planning purposes. These trusts were marketed to customers through a network of cooperating insurance agents. In 1993, Bartoli put forward the idea of a package of business, family, and charitable trusts that could be marketed to customers as a means of both estate planning and income tax minimization. Bartoli thought that such a package could command a price of $25,000 or more. Vallone and Hopper were amenable to the idea and joined Bartoli in bringing his idea to fruition. They began to promote the concept of a multi-trust system at training sessions that Heritage sponsored for its cooperating insurance agents, and eventually began to sell some trust packages to Heritage clients. By early 1994, however, Vallone and Hopper had fallen out with Richmond and forced him out of Heritage, accusing him of embezzlement. Along with Bartoli, they decided to form a new company, Aegis, to take over marketing of the multi-trust system. Aegis was formed later that same year, and it began to sell multi-trust systems as a way for high-income individuals to minimize their income taxes. Aegis and Heritage continued to share the same building in Palos Hills, a Chicago suburb, as their headquarters.

Although the Aegis system of trusts was portrayed as a legitimate, sophisticated means of tax minimization grounded in the common law, the system was in essence a sham, designed solely to conceal a trust purchaser's assets and income from the IRS, thereby reducing his apparent tax liability and defrauding the United States of revenue to which it was entitled. Pursuant to the Aegis system, “customers appeared to sell their assets to several trusts when, in fact, customers never really ceded control of their assets.” Hills, 618 F.3d at 624.

The trusts were marketed to and implemented for customers across the United States through a network of corrupt promoters, managers, attorneys, and accountants. Although prospective customers who bothered to seek independent advice as to the legitimacy of the Aegis system were routinely warned of its flaws, greed led many to overlook the system's “too good to be true” attributes. Between 1994 and 2003, some 650 individuals purchased Aegis trust packages, at prices ranging from $10,000 to $50,000 or more. The diverse clientele included real estate brokers, doctors, public officials, and a variety of small-business owners. Among the purchasers was a co-founder of the Hooters restaurants chain, Lynn “L.D.” Stewart, who himself was later charged with tax evasion, although the charges were dismissed after his trial resulted in a hung jury. (Others were not so lucky; some Aegis clients were convicted and sent to prison.) The thousands of false income tax returns that were filed based on the use of the Aegis trusts are estimated to have cost the federal government more than $60 million in tax revenue.

The defendants in this case include the progenitors of the Aegis trust along with some of its major promoters. Vallone was the executive director of Aegis; Bartoli, who came up with the idea of the trust system, was the firm's first legal director until 1996, and continued to help manage Aegis thereafter; and Hopper served as the firm's managing director. In 1995, these three, along with Timothy Shawn Dunn, created Aegis Management Company (“Aegis Management”) to provide trust management services and tax advice to individuals who purchased the Aegis trusts. Dunn, a certified financial planner, was a promoter as well as a manager of Aegis trusts; he became the executive director of Aegis Management. William Cover, like Dunn, was a promoter and manager of Aegis trusts. He served as the president of Sigma Resource Management, Inc. and later held the controlling interest in Sigma Resource Management, LLC (collectively, “Sigma”), which also provided management services to purchasers of Aegis trusts. Vallone and Michael Dowd served as directors and officers of Sigma. Dowd came to work at the Palos Hills offices of Heritage and Aegis in 1997, after earning a degree in business finance. In addition to assisting the Aegis principals, Dowd provided management services to trust purchasers through both Aegis and Sigma. David Parker, a New York attorney, served as the legal director of Aegis Management. He assisted in the promotion and management of Aegis trusts as well as the defense of the trust system from government inquiries. John Stambulis, an Illinois attorney, worked in the Palos Hills office of Aegis, and assisted with the creation and defense of Aegis trusts. Both Parker and Stambulis would later plead guilty and testify against the remaining defendants at trial.

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. They were often given materials that purported to document the legitimacy of the system with seemingly thorough and impressive citations to the various legal authorities that supported the trusts. But as one lawyer wrote to a client who sought his advice as to the legitimacy of the system:

This material is full of errors, irrelevancies and partial truths followed by non sequiturs. I know that I must resist the temptation to follow every line or I could spend the rest of my life on this. I will concentrate on how, even if it were 99 percent correct, the claimed tax effects fail. In doing so, I'm not implying that that 99 percent is correct. I'm just skipping over the errors.Gov't Ex. Dunn Office 32, R. 962 Tr. 3395. 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, 64 L.Ed.2d 425 (1980) (quoting Hecht v. Malley, 265 U.S. 144, 146–47, 44 S.Ct. 462, 463, 68 L.Ed. 949 (1924)) (describing Massachusetts Business Trust). A key point distinguishing the Aegis business trust (along with the other trusts making up the Aegis...