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IRS Sued for Engaging in 'Fishing Expedition'

  • A class action lawsuit has been filed against the IRS by two trust planning organizations.
By P. Samuel Foner

On March 31, 2000, the Internal Revenue Service (IRS) raided offices associated with two national membership organizations which provide estate planning help, mostly for old people.

On May 15, the raided organizations announced that they had filed a $500 billion class action lawsuit against the IRS and approximately 50 individual agents.

According to company officials, on that date approximately 30 armed IRS agents entered the Palos Hills, Ill., offices of Heritage America and The Aegis Company.

The IRS agent in charge, Robert Kuschel, served a search warrant for a company named "Aegis Financial Group."

But, says Executive Director Michael Vallone, Aegis Financial Group has no relationship whatsoever to either Heritage America or The Aegis Company.

Vallone told reporters he thinks this attack on Heritage America and The Aegis Company is part of a four year campaign the IRS has been waging against trusts.

According to Vallone, Aegis Financial Group was a corporation of which he was a partial owner from 1996 to 1998, and that Aegis Financial Group was an Indiana licensed mortgage brokerage firm which operated exclusively in Indiana and had no business dealings whatsoever with Heritage America or The Aegis Company.

The lawsuit against the IRS charges violations of the civil rights of some 5,500 members of the organizations, most of whom are senior citizens.

The suit alleges that upon entering the offices of the companies, the agents proceeded-at gun point-to separate the staff into separate rooms and interrogated them for as long as two hours without ever reading them their rights or informing them they were not required to provide information.

Association officials said the IRS then proceeded to carry off all the companies' records which included the paper and computer records of their members.

Vallone said this material contained the names, addresses and phone numbers of all the past and present members of Heritage America and The Aegis Com pany.

It also contained financial information and the private estate planning information of these people including copies of their wills, trusts and other documents such as powers of attorney and living wills.

The suit also states that almost one year after the first raid, on March 29, the IRS staged a second raid in similar fashion on the offices of a representative of Heritage America and The Aegis Company, identified as Homer Richardson.

As in the previous raid, according to Vallone, the search warrant served on Richardson stated it was to procure documents associated with "Aegis Financial Group."

For his part, Richardson said he has never had any association whatsoever with Aegis Financial Group.

Both Heritage America and The Aegis Company have provided their members with services to set up trusts for estate planning, business planning and tax planning.

The Aegis Company has provided educational material and services for its members regarding a type of trust that the IRS regulations call a "Business Trust" (26 CFR ß301.7701-4(b)).

In a written statement, Vallone responded to the IRS raid: "These types of trusts are completely legitimate. They are used by many of the major mutual funds in the United States, such as Fidelity Magellan, Kemper, and Nuveen. However, they can also be used by small business owners.

"The IRS has recognized this in their own regulations. Unfortunately, many companies have improperly promoted the use of business trusts, and so the IRS has stepped in to crack down on the abuse of these trusts.

"What is completely unacceptable is the manner in which the IRS has gone after what they perceive are abusive trusts. They have demonstrated absolutely no discretion whatsoever. It is unconscionable that the IRS would call a business trust an 'abusive trust' when they have recognized it as a legitimate entity in their own regulations since 1965.

"Worse yet, the manner in which they have attacked companies promoting business trusts has demonstrated gross negligence and rampant abuse of their power. Supposedly, they have investigated our involvement with business trusts since 1996, yet they attack us with a search warrant in the name of a completely unrelated company.

"If they are so inept that they don't even know what company they are investigating, how can anyone have any confidence in their determinations?"

He said that the IRS's "absolute rape" of the privacy rights of more than 5,000 Americans -- most of whom have never even heard of a business trust -- "is another example of the terrorist tactics" of a government agency "whose abuse of power demands severe retribution."

The class action lawsuit contains 11 separate counts of violations of Title 42 of the United States Code for deprivation of civil rights, and an additional count under Title 18 which charges that the IRS and its agents violated the federal racketeering laws.

The 56-page complaint was filed on May 8, 2001 in the Southern District of Illinois, case No. 01-289GPM. The attorney for Heritage America, The Aegis Company and their 5,500 members is Stephen McIlwain of Albuquerque, N.M.

For more information, contact: Michael Vallone, executive director of Heritage America and The Aegis Company. Office: 708-974-3232. Fax: 708-974-3294.

About the author

"P. Samuel Foner" is anom-de-plume for Liberty Lobby founder Willis A. Carto.