In part 1, we give you a PDFT Quick Update.
In part 3, we cover the Legal Arguments.
1. Is there sufficient evidence to justify abatement of the orders of this Court,
and additional discovery, and a hearing on the validity of the MOU?
2. Did Hoyt's conflicts of interest destroy his authority to bind the investor
partnerships to the MOU and to represent them before this Court?
3. Did Hoyt and Respondent perpetrate a fraud on the court by not advising the Court
of Hoyt's incapacity to act on behalf of the investor partnerships?
4. Were the investor partners and partnerships harmed by the actions of Hoyt and
Respondent in connection with the MOU?
5. What discovery is necessary in advance of an evidentiary hearing?
A. THE HOYT CATTLE BUSINESS
The Hoyt cattle business operated through a complex structure of organizations.
[NOTE 1 - This Court made detailed findings of fact describing the business in
Bales v. Commissioner, 58 TCM 431 (1989).]
At the bottom were the investors, most of whom were financially unsophisticated persons
attracted by an investment opportunity that did not require a large outlay of cash. (The
contributions came largely from tax refunds resulting from loss carry backs of the first
year of participation.) At the top was Hoyt who was on both sides of all
inter-entity transactions and most transactions between partners and entities as
attorney-in-fact for partners.
During 1980 through 1986 (the years affected by the MOU) the investors were limited
partners in scores of limited partnerships (the investor partnerships) of which Hoyt was
the managing partner and the tax matters partner (TMP). Hoyt prepared the
partnership agreements that governed the investor partnerships. Hoyt required the
investors to sign subscription agreements that gave him exceptionally broad powers of
attorney. In addition to signing notes and other documents on behalf of the partners
and partnerships, Hoyt also prepared partnership and individual partner tax returns.
The investor partnerships purchased cattle from other Hoyt entities, typically Hoyt &
Sons Ranches (Ranches). Although Ranches was owned by other members of the Hoyt
family, it was controlled by Hoyt. Each partnership investor was personally obligated
on the promissory notes with which the partnerships purchased cattle from Ranches. Hoyt
executed these notes as attorney-in-fact for the investor partners.
After purchasing cattle, the investor partnerships entered into sharecrop agreements with
another Hoyt entity (usually W. J. Hoyt Sons Management Co.) for management of the cattle.
the managing general partner of Management Co., so he signed the sharecrop agreements on
its behalf as well as for the investor partnerships. Although the partnerships'
payments for management of the cattle came from calves born to managed cattle, the
investor partners were also liable for these obligations under Debt Assumption Agreements
they had signed at the time they signed the subscription agreements.
B. HOYT'S CONFLICTS OF INTEREST
Hoyt was perhaps the ultimate fiduciary. His duties and obligations in that role were
fearsome. Respondent knew all of this in minute detail. As the representative of the
investor partnerships, Ranches, and Management Co., Hoyt was on both sides of every
transaction. He acted for both buyer (investor partnerships) and seller (Ranches) in
cattle purchase transactions, and for both cattle owner (investor partnerships) and
manager (Management Co.) in the sharecrop agreements. Hoyt, on behalf of the Hoyt
family, controlled the entities that sold and managed the cattle. Tax benefits Hoyt
secured for the investor partners resulted in tax liabilities to the Hoyt family: his
conflict of interest was plain.
Respondent's criminal investigations of Hoyt (described below) created further incentives
for Hoyt to reduce his own liability even though the result, contrary to his fiduciary
duties, was to increase
In addition, Respondent assessed or threatened to assess tax preparer penalties against
Hoyt. These penalties gave Hoyt yet another reason to benefit himself at partnership
expense. In fact, the
penalties were ultimately abated, apparently as a quid pro quo for Hoyt's agreement to
extend statutes of limitations.
Hoyt's conflicts of interest made him incapable of representing the investor partnerships
in negotiations with Respondent. The conflicts of interest invalidated Hoyt's
authority to bind the partnerships under the MOU. The conflicts meant Hoyt was not a
proper representative of the
partnerships before this Court, and his acting in such capacity regardless of the
conflicts deprived the partnerships of due process.
Respondent was well aware of Hoyt's conflicts. A July 1989 Fraud Referral Memorandum
stated that Hoyt had "grossly violated his fiduciary responsibilities to his
investors" and that his "conflict of interest is profound." (Movants'
Exhibit H) This comment did not even cover the conflicts created by Respondent's
investigation of Hoyt.
C. IRS INVESTIGATION OF HOYT
Hoyt's businesses were the subject of IRS audits as early as the 1970s; criminal
investigation of him began in 1983 or 1984. In 1986, the Respondent's Criminal
Investigation Division (CID) referred his case to District Counsel, recommending
prosecution for preparation of false and fraudulent income tax returns. The District
Counsel referred the case to the Department of Justice (DOJ). Although the DOJ
declined to prosecute, the criminal investigation continued. In 1989, the DOJ
approved the assistance by the CID in a grand jury investigation of Hoyt. That
investigation ended in 1991. (Movants' Exhibit F).
In the course of its investigation the Respondent documented numerous violations by
Hoyt, including: (Movants' Exhibit H)
* Falsifying tax returns
* Overstating the value of cattle sold to partnerships
* Overstating the number of cattle available for depreciation
* Improperly preparing several thousand K-1s
* Improperly negotiating refund checks as a tax preparer
* Preparing false and backdated documents
Respondent's CID now claims it can locate no records of this investigation, and Regional
Counsel's office claims to have retained no records. (Movants' Exhibit F) There
appear to have been further
[NOTE 2 - The partnerships cannot provide details, however, because they have been
denied access to Respondent's records of its criminal investigations of Hoyt], and Hoyt
testified he was never told that the investigations had ended (Hoyt Depo at pp 2017-2018;
In 1991, Respondent asked Hoyt to agree to extend the limitations period for assessment of
taxes on the investor partnerships. Hoyt asked in return for relief from his own tax
return preparer penalties. Although Respondent claims to have declined this
"deal," it then allowed the limitations period to expire for Hoyt's tax return
preparer penalties without pursuing the penalties - a curious course of action in light of
Hoyt's 1992 stipulation to liability for such penalties. (See Section D,
pages 10-11 below.)
In 1995, US postal inspectors and the FBI simultaneously raided four Hoyt office locations
in Burns, Oregon, and seized two or three hundred boxes of business records. That
Respondent may have had some role in this raid is suggested by the fact that the search
warrants used by FBI and postal inspectors were almost identical in content to subpoenas
or summonses Respondent had issued to Hoyt earlier that year.
Throughout the years of criminal investigations, Hoyt remained the TMP of all the investor
partnerships, continued to act on the partnerships' behalf, continued to act as
attorney-in-fact for the partners, and took actions intended to bind both the partnerships
and the individual investor partners. Despite its knowledge of Hoyt's conflicts of
interest and its documentation of his misconduct, Respondent did not seek to remove him as
TMP or revoke his enrolled agent status. There is evidence that this failure was a
deliberate decision by Respondent, taken because Respondent feared the difficulty of
dealing with more than 100 entities with no common partner and no one who knew the entire
Currently before the Court is Respondent's motion to remove Hoyt as TMP based on the 1997
W.J. Hoyt Sons Ranches MLP (MLP) and Management Co. bankruptcies and the November 30, 1998
federal indictment of Hoyt for mail fraud and conspiracy. Several statements made by
Respondent in support of that motion are worth noting. For example: "Because
Mr. Hoyt serves as the representative of nonparticipating partners, IF IT IS DEMONSTRATED
THAT HE IS NOT ADEQUATELY REPRESENTING THE ABSENTEE LITIGANTS . . . the Court should
remove Mr. Hoyt from his position as tax matters partner." (IRS Memo at p 6)
Although Respondent in its argument for Hoyt's removal seems to rely primarily on the
implications of and publicity generated by the bankruptcy cases and the criminal charges,
it recognizes a TMP's status as a fiduciary (IRS Memo at p 2 citing Lambda), and suggests
that "not acting in the best interest of the partners" is cause for a TMP's
removal. (IRS Memo at p 6) It is ironic that only now does Respondent seek to remove
Hoyt as TMP, while it has known since 1984 (at the
latest) that Hoyt's conflicts of interest prevented him from adequately representing the
partners. Further, as Respondent points out, Hoyt has not yet been convicted of any
crime. The indictment's allegations add nothing to what Respondent's investigations
of Hoyt disclosed, and what Respondent has known about Hoyt since at least 1989.
Similarly, Respondent did not disbar Hoyt as an enrolled agent until 1997, although in
doing so it relied on facts dating as far back as 1985.
D. EVENTS LEADING TO THE MEMORANDUM OF UNDERSTANDING
In 1992, settlement negotiations were underway between Hoyt and Respondent. Several
investor partners became concerned that Hoyt would not fairly represent the investors'
interests in the negotiations, and they formed a Settlement Committee of their own.
The Settlement Committee hired a Sacramento lawyer, Mark Drobny, to represent them in
discussions with Respondent.
Respondent insisted that as part of any settlement Hoyt must make certain
concessions. Drobny's letter to Raymond Spillman of July 22, 1992, (Movants' Exhibit
B) set forth four of Respondent's prerequisites to continuing negotiations:
* Hoyt would agree not to advise partners on Tax Court litigation,
* Hoyt would surrender his enrolled agent status,
* Hoyt would stipulate to personal liability for civil tax preparer penalties, and
* Hoyt would promise never to promote tax shelters in the future.
Two days later, on July 24, 1992, Hoyt agreed in writing to all these conditions.
(Movants' Exhibit D) Rather than take advantage of these concessions, however,
Respondent's reaction was to immediately break off discussions with the Settlement
Committee. It continued to deal with Hoyt, but did not hold him to the terms of his
July 24, 1992 offer.
Secret negotiations between the IRS and Hoyt (at which Hoyt was not represented by
counsel) followed the end of negotiations with the Settlement Committee, and culminated in
the May 1993 Memorandum of Understanding. Hoyt never informed the investor partners
of these negotiations, nor did he inform the partners of the MOU itself.
E. THE MEMORANDUM OF UNDERSTANDING
While the MOU (Movants' Exhibit E) addresses numerous issues, the one of most concern to
the partnerships is the stipulated reduction in the number of cattle in service below the
number which, in fact, were in service. The result of this stipulation was to reduce
the amount of income to Management Co. (i.e., Hoyt), decreasing its tax liability, and to
reduce the deductions available to the partnerships, increasing their tax
liability. This stipulation counteracts the result of the Bales
decision, which was to increase Management Co.'s income through its holding that calves
became income to Management Co. on their day of birth rather than at the time they were
Hoyt also agreed in the MOU to a partial disallowance of interest payments made by the
investor partnerships. This concession reduced the tax liability of Hoyt's wife (by
reducing the interest income of Ranches), but, again, increased the tax liability of the
investor partners, who lost the interest deductions.
Another result of the MOU is that Respondent is now assessing tax motivated
transaction interest against individual investor partners. The MOU itself does not mention
penalties, and Respondent has apparently concluded that this silence on the subject allows
it to pursue penalty interest against the partners. (Exhibit 3)
This Court considered and analyzed the MOU at length in the opinions Movants seek to have
vacated. Because Hoyt was acting as TMP, however, the partnerships were unable to
participate in that litigation. The partners who did participate were hampered by
lack of information. The
Court ultimately rejected all Hoyt's arguments. Not surprisingly, neither Hoyt's
conflicts of interest nor the effect of the parties' stipulation to the lower number of
cattle were issues raised in those
F. MLP AND MANAGEMENT CO. BANKRUPTCIES
In 1997, involuntary bankruptcy petitions were filed against W.J. Hoyt Sons Ranches, MLP
("MLP") (successor to Ranches, which began liquidating in 1988), and W.J. Hoyt
Sons Management Co., Ltd.
("Management Co."). The US Trustee's
investigation of the Hoyt empire
in the bankruptcy cases has brought to light facts the investor partnerships did not have
access to at the time of the MOU and related litigation.
[NOTE 3 - A few inside investor partners knew about the MOU, and a few more knew
about the criminal investigations of Hoyt. The information available before the
bankruptcies, however, was sparse and known to a limited number of partners.]
For example, very few investor partners were aware of Respondent's criminal
investigation of Hoyt until discovery in the bankruptcy cases. The partners did not
learn until the
bankruptcies that Hoyt had converted cattle from the investor partnerships to pay off Hoyt
Several million pages of documents have been produced in the course of the
bankruptcies. The transcript of Hoyt's deposition fills 17 volumes.
Bankruptcy discovery has made clear that NO ONE aside from Hoyt and Respondent - knew much
about the operations, and that Hoyt actively
concealed what he knew from his colleagues and the investors. For example,
bankruptcy discovery revealed that in negotiating the MOU, Hoyt misrepresented both the
number of cattle owned by the investor partnerships and the value of cattle.
Finally, the bankruptcy discovery produced evidence that Respondent at a minimum ignored,
and perhaps capitalized on, Hoyt's "profound conflict of interest" when it
negotiated the MOU with him. Additional discovery is necessary for full
understanding of Respondent's role, but the evidence available so far suggests its
complicity or collusion in Hoyt's fraud on the court. At a minimum, the evidence
shows Respondent facilitated Hoyt's fraud on the Court.
In part 1, we give you a PDFT
In part 3, we cover the Legal Arguments.