Abuse of trusts

Rays from the sun burned down on the tan stucco house, shadows dappling across the yard in this pleasant Sacramento neighborhood. It was a day like most this summer, almost crystal clear skies with occasional puffs of soft, white clouds.

This was the kind of day Calvin L. “Cal” Avila relishes. He opened the door to his private refuge, a one-story home where he takes solace from his frequent skirmishes with the Internal Revenue Service. It was a day like many others, and the topic was the IRS, which Avila sees as an aggressive bureaucracy trampling our rights.

Still fiery about the topic, Avila is slowing down. After all, he’s 64 years old now, the divorced father of nine children and 11 grandchildren. Just recovering from a heart attack, he no longer embraces the strain of crisscrossing the country. He’s more of a homebody now.

Still, he’s enthusiastic about his latest challenge: the case of Sacramento insurance agency owner Charles J. “Chuck” Sigerseth, who lives in El Macero. Avila is locking himself into another struggle, one in which the opening round already went to the IRS. But to Avila, the mere mention of the IRS is like waving a red flag before a bull. He wants to go to the mat.

The name of Avila’s company—The Firm—conjures up images from the John Grisham novel of the same name. But Avila laid claim to the name long before Grisham’s best seller was being grabbed off the shelves of America’s bookstores, back in the beginning of his crusade.

Avila has always been defiant in the face of federal government muscle, personified in the faces of IRS agents. Avila conceded that he enjoys being a thorn in the side of the tax agency and he vows to continue to do so on behalf of Sigerseth, who owns Sigerseth Insurance Agency.

Round one went to the IRS when U.S. Tax Court Judge Juan F. Vasquez recently issued an opinion upholding an IRS demand that Sigerseth pay almost $1 million in additional 1995-96 taxes and penalties.

The businessman found himself on the wrong side of an IRS national campaign against what the agency terms “abusive trusts,” which the IRS describes as those that are designed to evade or reduce federal income taxes.

The national enforcement program is nothing new. It burst on the California scene April 3, 1997, and has since spread nationwide. At the time, the IRS blared out warnings to taxpayers, threatening sanctions against Americans who rely on promoters of such trusts—people like Cal Avila.

James Donelson, then IRS chief compliance officer, was quoted in the news release as saying that the IRS was receiving more than 3 million trust returns annually. He went on to promise that the agency would “identify questionable ones for further review.”

“We’ll assess taxes and penalties against the participants and promoters of the trusts we find abusive,” Donelson said, “and seek criminal charges where warranted.”

According to the IRS, an abusive business trust is one into which owners put their assets in exchange for trust units. The trust then pays unit holders or other trusts until little or no tax is due from the business trust, thereby reducing or eliminating the owner’s self-employment taxes.

Sigerseth claimed that nothing could be further from the truth in the case involving him and his wife: “Certainly, I’ll appeal. We don’t believe there is any tax liability of any kind. … Basically, it’s absurd.”

Avila has set up hundreds of trusts like the Sigerseths’ for various clients, although in this case, he wasn’t hired until after Sigerseth had already been snared in the IRS blitz. Sigerseth had already appealed the IRS findings, and Avila is confident the U.S. Court of Appeals will overturn the tax court decision.

“The IRS has no jurisdiction over these trusts,” Avila said. “These are pure trusts. If these trusts are managed properly, the IRS has no authority to audit them. The Kennedys use these. The Rockefellers use these. The IRS tries to intimidate the weak, the unknowing. You don’t see the IRS going after the Rockefellers.”

Lest someone misinterpret his words, Avila stresses that Sigerseth is not one of the weak ones. The pair plans to stand strong in face of the IRS demands.

“He’s not weak,” Avila said. “We’re just not going to give in because the IRS has no authority to audit him. They have to follow proper assessment procedures. There is a lot of case law on this. The Supreme Court has said the books and records of a pure trust are not subject to review or subpoena.”

The IRS and Judge Vasquez don’t agree with Avila’s interpretation. And Vasquez has the authority to make life miserable for anyone perceived to be an errant taxpayer. Yet Avila has made a career out of challenging the federal government’s authority.

Although he is serving as Sigerseth’s legal adviser and spokesman in this case, Avila is not registered to practice law before the court. Avila attended law school, but stopped short of becoming a lawyer. Frankly, Avila said, he developed an aversion to the law profession.

“If I was a member of the bar, I’d have to play their dirty game,” the 210-pound former Marine spat out. “If he (Sigerseth) chose me as counsel by contract, I am his counsel … I’ve been doing this for 27 years. I’ve set up hundreds of them (trusts). Not one of them has been cited.”

Among the three Sigerseth trusts Vasquez cited in his opinion was one named Trust Management Services that “engaged in marketing abusive trusts and providing services to investors in abusive trusts,” something Sigerseth denied in an interview. He said Avila was the trustee.

Instead of appearing for the trial last fall, the judge’s opinion said, “petitioners filed a document with the court continuing to make protester type arguments. Based on these type of arguments, petitioners asserted that they were not liable for any taxes.”

“Petitioners’ insistence on making protester type arguments even after we have summarily dismissed them indicates an unwillingness on the part of petitioners to respect the tax laws of the United States,” the opinion added.

In dismissing the position of Avila and Sigerseth as a tax protest, Vasquez seemed to be lumping them in with the Freemen of Montana, the “constitutionalist” movement and other right-wing groups who question the federal government’s authority to collect income taxes.

Indeed, Sigerseth sought to use his trust to avoid paying taxes on his income. The Sigerseth Family Trust’s state purpose was: “The exclusive use of [Sigerseth’s] lifetime services and all of his earned remuneration accruing therefrom, from any current source whatsoever, so that Charles J. Sigerseth can maximize his lifetime efforts through the utilization of his Constitutional Rights; for the protection of his family in the pursuit of his happiness through his desire to promote the general welfare, all of which Charles J. Sigerseth feels he will achieve because they are sustained by his religious beliefs.”

The opinion also said that a document filed November 24 after the scheduled date for the trial argued that the IRS had failed to prove Sigerseth and his wife, Francesca, “owed any taxes, and this court, in any event, lacked jurisdiction with regard to the dispute.”

While Avila takes issue with the court’s dismissal of Sigerseth as a tax protester, he does parrot many of the arguments that tax protesters make against the IRS.

“How can he say ‘like a tax protester’ if he (Sigerseth) just asked some simple questions?” Avila said. “Anyone who challenges the IRS is automatically labeled tax protester.”

As he continued to rail against the IRS, Avila questioned the agency’s legitimacy, claiming that it was never sanctioned by Congress and so it can’t legally do what it does.

“It would have to be formed by Congress,” Avila argued. “It would have to have a charter. If it had a charter, it would have to be incorporated into the Federal Register. It never was.”

Avila noted that the IRS has never targeted him for action because the trusts he has established for clients of his company are all within the tax laws written by Congress and the IRS Code. Avila said his company not only creates trusts for clients, but also handles “estates and different tax issues. … I fight the IRS.”

“They won’t come after me,” boasted Avila, who said he had conducted seminars around the nation to promote trusts. “I’m high profile with them. I sit right across the desk from them.”

Avila said trusts date back to the very founding of the United States when former Virginia Governor Robert Morris created the first one for Patrick Henry. And he challenged the notion that Sigerseth’s trusts were any different, or that they were “abusive,” as Vasquez and the IRS labeled them.

“What is abusive about them? You put your assets in a trust to protect them. There’s nothing abusive about it,” he said. “They have not offered any evidence whatsoever. They assessed the tax without following their own procedures.”

Vasquez criticized Sigerseth for failing to provide the IRS with documents in the case and defying a court order to do so. Avila claimed that would have dissolved Sigerseth’s rights under the federal Privacy Act.

“We are not required to do that,” he maintained. “There can be no discovery until a case is filed against Mr. Sigerseth. They just said, ‘You owe us money,’ and that’s all there’s to it. The Privacy Act bars disclosure. He has a right to his personal matters.”

Again, Vasquez disagreed. In his opinion, the judge ruled Sigerseth had to pay an additional $15,000 penalty for deliberately filing a petition with the tax court in an effort to delay payment of the taxes.

In addition, the opinion said, Sigerseth pursued “a position in this court which is frivolous or groundless” as well as failing “to pursue available administrative remedies.”

“Petitioners are deemed to admit that they invested in abusive trusts and that they refused to cooperate or provide documents to respondent during the examination of petitioners’ 1995 and 1996 federal income tax returns,” Vasquez wrote.

Besides $830,461 in additional 1995-96 taxes, Vasquez also upheld the IRS decision to impose $166,903 in penalties for failing to file accurate tax returns for those two years.

Once Vasquez signs a decision based on the opinion, the couple will have 90 days to file an appeal to the U.S. Court of Appeals. While Sigerseth said he plans to appeal, Avila said the next course of action will have to be studied.

What is certain as of this moment is that Sigerseth lost Round One. But, Avila said, it wasn’t a knockout blow, and that there are other rounds to be fought.