Commercial Litigation and Arbitration

Rule 11 and Tax Protestors (or Others Filing Suit in the Face of Unambiguous Law) — “Plaintiffs May Disagree with the State of the Law, But Rule 11 Prohibits Them from Filing Fictional Claims to Protest It”

United States v. Vallone, 2012 U.S. App. LEXIS 20308 (7th Cir. Sept. 28, 2012):

At the conclusion of an eleven week trial, a jury convicted defendants *** 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. ***

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. ***

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.***

In a particularly brazen move, several of the defendants filed lawsuits against both the IRS and a number of its revenue and special agents, among others. Bartoli, Vallone, Hopper, and Dunn filed one such suit on May 8, 1997, in the Northern District of Illinois against (among others) IRS Revenue Agent James Pogue and the Illinois Attorney Registration and Disciplinary Commission ("ARDC"), which had initiated disciplinary proceedings against Bartoli based on his involvement with the trusts sold by both Heritage and Aegis. (We shall have more to say about the ARDC proceeding below.) That suit was assigned to Judge Plunkett who, after dismissing most of the defendants and granting summary judgment to Pogue, imposed Rule 11 sanctions on the four plaintiffs for filing a frivolous lawsuit. See Fed. R. Civ. P. 11. His sanctions opinion, which we later affirmed and adopted on appeal, observed:

At base, the plaintiffs filed this claim because they believe the trusts they promote should be a legal means to avoid paying taxes. They are not. Plaintiffs may disagree with the state of the law, but Rule 11 prohibits them from filing fictional claims to protest it. . . .

Bartoli v. A.R.D.C. of Ill., 1999 WL 1045210, at *3 (N.D. Ill. Nov. 12, 1999) (citations omitted), aff'd sub nom. Bartoli v. Richmond, supra, 2000 WL 687155.

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