RICO Complaint Against AIG Tax Scheme

      LOS ANGELES (CN) – American General Life Insurance urged dozens of small business owners to buy voluntary employee beneficiary association plans, or VEBA plans, that the Internal Revenue Service has ruled are “illegal tax avoidance schemes,” businesses claim in a federal class action.
     Lead plaintiff Ulti-Mate Connectors sued American General Life Insurance (AIG) and nine other defendants on Wednesday, alleging RICO violations, fraud, unfair competition, false advertising, aiding and abetting and other counts.
     According to Ulti-Mate, for more than a decade AIG has offered unlawful VEBA plans, which it calls “specialized whole life insurance policies.”
     A high-level AIG executive allegedly told the plaintiffs’ financial planner that the plans allow small business owners to make tax-deductible payments, and that they could dip into the plans, tax-free. When the financial planner inquired about the legality of plans, the planner was assured the program was aboveboard, the complaint states.
     “The problem is that the Internal Revenue Service (IRS) has repeatedly ruled that VEBA plans like the ones defendants established, promoted and administered do not comply with federal tax law, determinations that have been consistently upheld by federal courts. At all relevant times, defendants were well aware of the non-compliant nature of their programs,” the lawsuit states.
     As early as 2001, the IRS informed AIG that the programs were illegal, Ulti-Mate claims, but it and the other defendants continued to offer the program.
     Ulti-Mate claims that small business owners learned “unpleasant truths” after the U.S. Department of Justice took legal action last year to enjoin program administrator/defendant Sea Nine Associates and the firm’s employee, defendant Kenneth Elliot, from marketing the VEBA program. California has since suspended Sea Nine’s operations, the lawsuit states.
     In time, Ulti-Mate says, owners realized that the plans were the “same or substantially similar” to tax-avoidance schemes, that their life insurance premium payments were not tax-deductible, that the claim that they could withdraw money tax-free was “false,” and that the plaintiffs were “victims ensnared in this long-running scheme.”
     “With their high fees and low cash values, the policies have few advantages once stripped of their supposed tax advantages,” the 48-page complaint states.
     Further, Ulti-Mate says, defendants concealed from the plaintiffs’ financial planner a 2004 letter issued by tax attorneys that found the programs were unlawful.
     Without that crucial information, the business owners made $914,696.74 in contributions to the VEBA program, according to the complaint. After an IRS audit, they were forced to pay $362,904.91 in penalties, interest, and back taxes, the lawsuit states.
     “AIG had worked closely with the other defendants on these programs since 2001 or 2002, supplied some of the most critical marketing materials used to market these programs, and sold many policies,” the complaint states. “At all relevant times, AIG knew that plaintiffs and members of the class were induced by defendants’ conduct to believe that purchasing these policies through a VEBA program provided the significant tax advantages described elsewhere in this complaint,” the lawsuit states.
     Named as defendants are AIG, Sea Nine, Innovative Private Strategies & Insurance Services, I.P.S. Private Advisors, Lalat Pattanaik, Laban Pattanaik, Elliot doing business as Kae, Kae Consulting, Vista Barranca, and Peter Mordin.
     The plaintiffs seek punitive damages, restitution, rescission and costs.
     They are represented by Tyler Meade, with Meade & Schrag, of Berkeley.
     AIG spokesman Jon Diat declined to comment.

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