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In part 1, we give you a PDFT Quick Update.
In part 2, we cover the Issues and Facts.
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LEGAL ARGUMENT

The partnerships join in Movants' argument for vacating this Court's decisions on the MOU.

[NOTE 4 - The partnerships do not address the argument that the Court lacked jurisdiction, however.]

Respondent's Memorandum in Opposition muddied that argument somewhat. In brief, it is this.  Hoyt's conflicts of interest destroyed his authority to bind the partnerships.  Respondent knew of these conflicts, and indeed its own rules should have dictated Hoyt's removal as TMP.  Rather than take steps that would result in Hoyt's removal, however, Respondent chose to negotiate and settle with him, as the purported representative of all the partnerships.

Hoyt and Respondent were the only ones who knew of and appreciated Hoyt's disabling conflicts.  The partnerships, the investor partners, and the Court were kept in the dark about them.  Hoyt's representation of himself to the Court as having authority to speak for the partnerships perpetrated a fraud on the court.  Respondent's knowing failure to advise the Court of Hoyt's conflicts, including those created by Respondent's own investigations of Hoyt, made it a participant in the fraud on the court, perpetrated for convenience at the expense of the partners.

The fraud on the court harmed the partnerships by denying them their rights to due process.  The partnerships, and thus the partners, were also harmed because Hoyt's interests were adverse to theirs while he claimed to be their representative.

Even now, the partnerships' knowledge of what went on between Hoyt and Respondent is inadequate to fully present their case at a new trial or hearing.  Therefore, Amici strongly support Movants' request for discovery of Respondent and others in advance of any evidentiary hearing the Court allows.

A.   HOYT LACKED AUTHORITY TO BIND THE PARTNERSHIPS UNDER THE MOU

When Hoyt negotiated with Respondent and signed the MOU, purportedly on behalf of all the investor partnerships, he had been under criminal investigation by Respondent for years.  The investigations focused both on Hoyt's operation and promotion of the partnerships and on his
preparation of false and fraudulent tax returns again, relating to the partnerships.  Respondent was aware of Hoyt's profound conflict of interest vis a vis his investors.

Because Hoyt was purportedly acting as a fiduciary for the partnerships and partners, these conflicts of interest destroyed his authority.  Transpac Drilling Venture 1982-12 v. Commissioner, 147 F3d 221 (2d Cir 1998), describes a similar situation.

[NOTE 5 - Although Respondent attempts to confuse the issue, Amici (and Movants) rely on Transpac only for the proposition that Hoyt lacked authority to bind the partners.  The fact that Transpac is not a case about jurisdiction, and that it did not arise from a motion to vacate, are immaterial].

In that case, the TMPs under investigation had approved extensions of the limitations period for filing FPAAs.  Other partners objected, and argued that the criminal investigation of the TMPs created a conflict of interest that prevented the TMPs from exercising their fiduciary duty to their partners.  The Court agreed.  It held that TMPs under criminal investigation lacked authority to bind the partnership. Id at 228.

The IRS had argued in Transpac that under Temp. Treas. Reg. Section 301.6231(c)-5T, the TMP retains authority until he or she receives written notification from the IRS that he or she is the subject of a criminal investigation and "that his or her partnership items shall be treated as nonpartnership items."  The Court rejected this argument, reasoning that such a rule would both exacerbate the conflict of interest of the TMP under investigation and, in effect, put the fox in charge of the henhouse.  That is, the IRS might well refrain from taking formal notification steps to keep the upper hand in negotiating with a TMP under investigation.  If these regulations were the exclusive basis for removing a TMP under criminal investigation, the Court said, then the only way in which a criminal investigation could be the predicate for the removal of a TMP would be if the IRS decided (by issuing a letter) to oust the TMP. And this would be so even when it would be in the Service's strong interest to capitalize on a possible conflict of interest by keeping the TMP in place. Id. at 227.

The logic of this reasoning is persuasive and should be applied here.

[NOTE 6 - The Ninth Circuit Bankruptcy Appellate Panel's ruling in re Miller 174 BR 791 (9th Cir BAP 1994), aff'd, 81 F3d 169 (1996), is not to the contrary.  There the court held that a TMP under criminal investigation (in fact, Hoyt) remains the TMP until the IRS gives him written notification as set forth in Temp. Treas. Reg. Section 301.6231(c)-5T.  That court, however, did not distinguish between the issues of whether Hoyt technically retained his TMP designation while under investigation and whether the conflict of interest created by the investigation destroyed his authority to bind the partnerships. Further, the court in Miller did not consider Hoyt's conflicts of interest apart from the criminal investigation].

Under Transpac, this Court should rule that Hoyt's conflicts of interest (including the conflicts created by Respondent's investigations) prevented him from fairly representing the partnerships, and thus his actions did not bind the partnerships although he may technically have been their "TMP."  As the Court in Transpac noted, it would violate the due process rights of partners to allow a TMP with a conflict arising from criminal investigation to act on their behalf.  147 F3d at 227-28 & n. 8. This observation is even more compelling here, where there were significant conflicts of interest in addition to the conflict created by the investigation.  See also Temp. Treas. Reg. Section 301.6224(c)-1T(a) (TMP may bind nonnotice partners to settlement agreement only "in the absence of a showing of fraud, malfeasance or misrepresentation of fact").

The TMP "acts as a fiduciary.  His personal interest, if any, is beside the point."  Computer Programs Lambda, Ltd. v. Comm'r, 89 TC 198, 205 (1987) (cited by Respondent in support of its motion to remove Hoyt as TMP).  Partnership level audits and litigation "cannot operate unless
the tax matters partner is capable of acting on the partnership's behalf regardless of his personal tax posture."  Id.  This statement is consistent with the principle of agency law that an agent's authority
terminates when he acquires adverse interests or otherwise breaches the duty of loyalty to the principal.  Restatement Second of Agency Section 112; see U.S. v. Galindo, 871 F2d 99, 101 (9th Cir 1989).  It is beyond argument that Hoyt long ago ceased to act as a fiduciary to the partnerships (if, indeed, he ever did), that his interests were adverse to the partnerships' from an early date, and that his duty of loyalty was honored only in the breach.

Respondent has raised ratification and waiver arguments, which Movants have answered.  We will add only that the burden is on Respondent to establish these defenses, both of which require that the act be knowing and voluntary.  Given the paucity of information available to even the best-informed of the investor partners, it would be impossible to establish that all the investor partnerships ratified Hoyt's acts or waived his conflicts of interest.

A final point supporting Hoyt's lack of authority is Respondent's inconsistent application of Temp. Treas. Reg. Section 6231(c)-5(T) ("treatment of items as partnership items with respect to a partner under criminal investigation . . . will interfere with the effective and efficient enforcement of the internal revenue laws") and Treas. Reg. Section 301.6231(a)(7)-1(l)(iv) (designation of TMP shall remain in effect until partnership items of the TMP become nonpartnership items).

Hoyt testified that Respondent converted his partnership items to nonpartnership items but never formally notified him of this step. (Hoyt Depo at pp 1014-16; Movants' Exhibit G)  Although formal notice appears to be required under Section 6231(c)-5(T) to convert partnership items to nonpartnership items, Section 301.6231(a)(7)-1(l)(iv) DOES NOT specify that formal notice is required to terminate the TMP designation.  If Hoyt is correct that Respondent treated his partnership items as nonpartnership items, that treatment arguably terminated Hoyt's TMP status even in the absence of formal notice.  Again, further discovery is necessary to develop this issue.

B.   FRAUD ON THE COURT

Amici fully recognize the narrow confines of the criteria for reopening a proceeding.  Amici fully recognize the strength of the Court's interest in finality.  This, however, is a unique case, not only
because of its scope and the high monetary stakes, but also because of the unique role played by Hoyt which kept the partners from having the knowledge they needed to protect their interests in this Court.

At pages 9 and 11 of his Reply Memorandum, Respondent asserts that because "scores" of partners had notice of the proceedings on the MOU or were offered an opportunity to settle with the IRS, the MOU was not a "backroom deal."  There have been more than 4,000 partners who invested with Hoyt.  If less than 100 had any knowledge of the MOU before it was placed before the Court, that number is not significant.  Even attorneys involved in these matters have been unaware of the true facts until after the Oregon bankruptcies.  Attorneys representing individual partners had no ability, within their clients' means, to obtain the facts necessary to determine the true nature of the Hoyt businesses.  The entire might of the United States Government did not bring Hoyt down until 1998, despite 20 years of audits and investigations.

Respondent's argument that it is all the partners' fault is as preposterous as the IRS' apparent strategy to attack partners instead of the promoter for all these years.

The investor partnerships did not raise the issue of Hoyt's conflicts of interest in connection with the MOU because the great majority of investor partners were unaware of both the lengthy IRS investigation of Hoyt and the conflicts that investigation created and brought to light.  Since then, through the MLP and Management Co. bankruptcies, the seriousness of Hoyt's conflicts of interest and breaches of fiduciary duty have become apparent.  Thus, it is appropriate for this Court to abate its prior orders, permit discovery, and schedule an evidentiary hearing on whether to vacate its prior orders.

The Tax Court can reopen a matter that has been finally decided only in certain circumstances, and the most common of these is when there has been a "fraud on the court." Toscano v. Commissioner, 441 F2d 930 (9th Cir 1971).  Fraud on the court is something different than ordinary fraud, but it is hard to define precisely, as the court in Toscano observed. 441 F2d at 933-34. It is best understood by looking at decisions in which courts found such fraud to have occurred.

In Toscano, the Ninth Circuit held that the Tax Court should have granted the taxpayer leave to file a motion to vacate its decision based on the following facts. Toscano had filed joint income tax returns with Ms. Zelasko although, according to Zelasko, they were never married. After the Commissioner assessed deficiencies against Toscano and his "wife" (Zelasko did not learn of this action), Toscano filed a joint petition for redetermination (again without Zelasko's knowledge).  The Ninth Circuit held that this last act "carried the fraud into the Tax Court" thus perpetrating a fraud upon the court. 441 F2d at 935. Note that in Toscano it was enough that Toscano alone had misrepresented Zelasko's status to the court and thereby deprived Zelasko of her day in court. Complicity or collusion of the IRS was not a factor in the Court's ruling.

Hoyt's actions are much like Toscano's signing the MOU and bringing it into court although he had agreed to it without the investor partners' knowledge, under pressure from Respondent, at a time when he was under criminal investigation.

[NOTE 7 - Respondent claims Hoyt was not under criminal investigation at the time he signed the MOU.  As Movants pointed out, however, Hoyt BELIEVED he was still being investigated.  Indeed, on June 24, 1998, Hoyt testified that "I don't think that investigation has ever been closed.  In my mind it's never been closed since that started in 1983." (Hoyt Depo at p 2018; Exhibit 2).  The circumstances the US government raid on Hoyt's Burns offices in 1995 are evidence that this was a continuation of the investigation which Respondent admits lasted until 1991.  Furthermore, given Respondent's claim to have no records of the investigation, its argument is disingenuous at best.  Unless Respondent can produce records verifying its claim, its assertion that no criminal investigation was underway in 1993 should be disregarded.]

Hoyt signed the MOU in breach of his fiduciary duty to the investor partnerships, and by bringing the MOU into court he "carried the fraud into the Tax Court."  Finally, Respondent participated in the fraud. Respondent knew, as this Court and the investor partnerships did not, the full extent of Hoyt's conflicts of interest and breaches of fiduciary duty, yet it never advised the Court of these problems.

The court in Toscano heeded Ms. Zelasko's assertion that as a result of Toscano's fraud she had never really been before the court. 441 F2d at 934.  Rather, Toscano had purported to represent her interest in stipulating to joint deficiencies.  If she could prove these allegations, said the Court, Zelasko should have the chance to present her case.

Here, although the investors initially granted broad authority to Hoyt to represent them, by 1993 Hoyt's authority had been destroyed by his conflicts of interest.  Thus, the partnerships were not represented in the negotiation and execution of the MOU or in the litigation over the meaning of the MOU.  Like the court in Toscano, this court should allow the investor partners an opportunity to present and prove their position.

The Toscano court relied on a Supreme Court decision, Hazel-Atlas Glass v. Hartford Empire Co., 322 US 238, 64 S Ct 997 (1944).  Hazel-Atlas involved a patent Hartford had obtained with the help of a spurious "scholarly" article, which had in fact been written by a lawyer for Hartford.  Later Hartford sued Hazel for infringement of the patent and prevailed at the Circuit Court level.  Proof of Hartford's deception came to light some ten years later during the course of another suit, and Hazel moved to set aside the old patent infringement ruling against it.

The Supreme Court, ruling in favor of Hazel, held that Hartford's actions had constituted a fraud on the court: "a deliberately planned and carefully executed scheme to defraud not only the Patent Office but the Court of Appeals."  322 US at ___, 64 S Ct at 1001.  As in Hazel-Atlas, the partnerships here were ignorant of the underlying facts constituting the fraud until court proceedings some years later (the bankruptcies). In this case, as in Hazel-Atlas, the Court's rulings rest on a false foundation here, Hoyt's "authority" to represent the partners in signing the MOU and in presenting it to the court.

See also Pasternack v. Commissioner, 478 F2d 588 (DC Cir 1973), in which the court held that a Tax Court default judgment should be vacated because the Commissioner had failed to advise the Court of pending settlement negotiations.  Rather than reaching a "fraud on the court" analysis, the court in Pasternack concluded that the taxpayer's letter to the Tax Court requesting reconsideration and information about appeal rights should be treated as a timely notice of appeal.

"We are much troubled," said the Court, "by the selective nature of the presentation of the situation by Government counsel, given the absence of counsel for the taxpayer."  478 F2d at 592.

Respondent relies on Senate Realty Corp. v. Commissioner, 511 F2d 929 (2d Cir 1975), in which the Court ruled there had been NO fraud on the Tax Court when a lawyer for one party exceeded his authority in stipulating to a judgment.  In that case, the Court observed, there was no claim that the lawyer had "made any misrepresentation of the facts in issue, that he had any improper motive, that the IRS cooperated with him in deceiving the Court, or even indeed that the compromise itself was unreasonable."  Id. at 931-32.  Further, the Court noted there had been no "evil intent, deceit or collusion," and that the lawyer had not taken advantage of the client in settling the dispute.  Id. at 933.

All the factors absent in Senate Realty are present here. Hoyt took advantage of the investor partnerships and deceived them about his dealings with Respondent.  Hoyt's motives were improper, in that he sought to benefit himself at the partnerships' expense, in breach of his fiduciary duties.  The settlement Hoyt agreed to in the MOU was unreasonable.  Respondent participated in the fraud on the court.  In contrast to Senate Realty, and according to its analysis, this is a textbook case for reopening a judgment on the basis of fraud on the court.

To vacate its prior ruling, the Court need not find collusion between Hoyt and Respondent.  It is enough that, as in Toscano, a person purporting to represent others before the court (i.e., Hoyt), by concealing crucial facts from the court, effectively deprived those he represented of their day in court. Here, however, both Hoyt and Respondent perpetrated a fraud on the court.

The situation is analogous to one in which the parties to a civil case present to the court a settlement for approval without informing the court that the attorney for one of the parties has been disbarred during negotiation of the settlement.  While greatly inconvenient, especially after months of complex negotiations, the defect in the settlement would render it void.  Failure to report that fatal defect is a fraud on the court.

C.   THE PARTNERS WERE HARMED BY THE MOU

As set forth in the recital of facts, the MOU increased the investor partners' tax liabilities while reducing the liabilities of Hoyt, his family, Ranches and Management Co.  Had the investor partnerships been represented in negotiations with Respondent by someone truly defending their interests, it is safe to say that any resulting agreement would not have been so favorable to Hoyt and so harmful to them.

If such negotiations had not produced a settlement, then at a minimum the investor partnerships would have had the opportunity to litigate these issues and present their arguments to this Court.

The investor partnerships and partners were denied this right. They were harmed not only by the provisions of the MOU itself, but by the denial of due process.  They should have the opportunity to be represented by a competent representative, to have their case presented, and their interests represented, to this Court.

D.   THE PARTNERS HAVE NO ADEQUATE REMEDY

Hoyt is insolvent and the subject of a Bankruptcy Court Judgment in excess of $1 billion.  Respondent enjoys extensive immunity and severe limitations on the damages that can be awarded against the IRS.  Any suit against the government or its agents would have to get around statute of limitations defenses that would be asserted.  The only pragmatic hope for partners is to set aside the orders approving and implementing the MOU.

E.   MOVANTS REQUIRE DISCOVERY TO PREPARE FOR ANY HEARING

The need for discovery is clearly demonstrated by Exhibit 4 in which the IRS Service Center in Cincinnati, Ohio determined that an investor's deductions for MOU years (1984, 1985, 1986) were not to be adjusted. This determination appears to contradict the factual stipulations of the MOU.  It suggests there was no need to compromise for that partnership in those years.  Exhibit 4 may support the partnerships' and partners' allegations that certain personnel in the Western Region and Sacramento offices of the IRS were biased.

In the course of bankruptcy discovery, the partnerships have learned much of what Hoyt knew and did.  Important pieces of information are still missing, however, most of them relating to the actions and knowledge of the Respondent.

To learn the extent of Respondent's involvement in the fraud on the court, the parties need to depose personnel (1) who were involved in negotiating the MOU with Hoyt, or (2) who were involved in negotiations with the Settlement Committee on both sides, (3) who decided what evidence to submit to this Court when the MOU was presented for approval, and (4) who had knowledge of the scope and determination of the criminal  investigation of Hoyt.

In addition, the parties need evidence from Respondent that will reveal (1) the extent of Respondent's knowledge of Hoyt's conflicts of interest; (2) whether Respondent ever made a decision to withhold information from the Tax Court; (3) how Respondent's records of the criminal investigation of Hoyt came to be "lost"; and (4) whether Respondent ever exchanged favors with Hoyt in settlement negotiations.

Finally, the parties need to learn from members of the Settlement Committee and its lawyer whether they would have entered into an agreement with Respondent on the terms of the MOU.

The partnerships' lack of information has been at the heart of their problems.  The many issues of fact require an evidentiary hearing for proper resolution.  See Dufresne v. Commissioner, 26 F3d 105, 107 (9th Cir 1994).  Because Respondent has not been forthcoming with evidence relevant to its position, fairness requires that the Court allow discovery in advance of such a hearing.

F. IRC SECTION 6103 RESTRICTIONS ON DISCLOSURE DO NOT ABSOLVE
RESPONDENT.

1.   NON-TAX INFORMATION AND SELECTIVE DISCLOSURE

In his Reply Memorandum, Respondent, for the first time, raises the code's prohibition on disclosure of tax information to explain its nonfeasance.  Should the Court wish to consider this issue, nothing in Section 6103 or the regulations prevented Respondent from using confidential return information ABOUT HOYT or his entities in proceedings to disbar him as an enrolled agent or remove him as TMP. In fact, the IRS records discovered in the Bankruptcy proceeding show the IRS did reveal the fact of Hoyt's criminal investigation to partners who were witnesses it wished to interview.

In truth, the IRS has, in the Hoyt matters, hidden behind Section 6103 over the years when it was convenient to do so, and has distinguished or ignored these provisions at times when it was beneficial to do so.  The reality is that the IRS could have pointed out to Chief Judge of this Court all of Hoyt's conflicts of interest. (His conflicting roles as representative of opposing parties in transactions, and the potential benefits to Hoyt's family at the expense of partners are not subject to the strictures of Section 6103 at all.)

The IRS could divulge that Hoyt was not qualified to act as a fiduciary in any capacity as TMP, as enrolled agent, or as agent for the investors or their partnerships without running afoul of  Section 6103 by simply disclosing non-tax information and acting publically to remove and disbar him. The  notion that Section 6103 prohibits the IRS from disclosing to the Court that a party to an MOU is a suspected crook strains credulity beyond the breaking point.

2.   PUBLIC FORUM

Due to the restrictions set forth in I.R.C. Section 6103, Respondent alleges that he could not have disclosed to this Court the criminal or tax return preparer investigations of Jay Hoyt.  However, as Respondent admitted in this objection, certain facts concerning the criminal investigation were already in the public forum.  To the extent such information was in the public forum, Respondent could have revealed the criminal investigation of Jay Hoyt during the partnerships' Tax Court proceedings.  Lampert v. United States, 854 F.2d 335, 336 (9th Cir.1987) relying on Nixon v. Warner Communications, Inc., 435 U.S. 589, 597 (1978).  The fraud perpetrated on this Court by Respondent includes Respondent's failure to reveal any facts concerning the criminal investigation to this Court at the time the MOU was at issue, even though facts concerning the criminal investigation were already in the public forum.

3.   I.R.C. SECTION 6103(h)(4)(C)

Respondent ignores the exception to the prohibition under I.R.C. Section 6103(h)(4)(C) when claiming that I.R.C. Section 6103 prohibited Respondent from revealing the criminal and tax return preparer investigations to this Court.  That section states:

(4) Disclosure in judicial and administrative tax proceedings.  A return or return information may be disclosed in a Federal or State judicial or administrative proceeding pertaining to tax administration, but only - (C) if such return or return information directly relates to a transactional relationship between a person who is a party to the proceeding and the taxpayer which directly affects the resolution of an issue in the proceeding;

Both the criminal and tax return preparer investigations concerned Jay Hoyt's activities regarding the investor partnerships. The same investor partnerships are parties to the above-entitled Tax Court proceedings.  The tax return preparer investigation related to the investor partnerships' returns for 1987, 1988, and 1989.  Again, these same partnerships are Petitioners in the above-entitled matters. There is an obvious transactional relationship between the above-entitled Tax Court proceedings and the IRS investigations of Jay Hoyt's partnership activities. See Mindell v. United States, 693 F.Supp. 847 (C.D. CA 1988); Nevins v. United States, 71A AFTR 2d 93-3067 (D.C. KA 1987); Guarantee Mutual Life Co. v. United States, 42 AFTR 2d 5915 (D.C. NE
1978).

The investigations of Jay Hoyt also "directly affects the resolution" of the investor partnership proceedings.  When a partner is both investigated concerning his partnership activities and is also the TMP of the partnerships, then the investigations directly impact the resolution of issues in the investor partnership proceedings.  The disclosures concerning the investigations need not be necessary to the resolution of the proceeding, but only need to directly affect the resolution of an issue in the proceeding.  First Western Government Securities, Inc. v. United States, 796 F.2d 356, 360 (10th Cir. 1986).

The inability of the TMP to adequately represent the partnerships and the individual partners clearly affects the resolution of issues in the proceedings.  Therefore, Respondent was not prohibited by I.R.C. Section 6103 from disclosing to this Court his investigations of Jay Hoyt.

CONCLUSION

This Court should enter an order abating immediately the November 1996 opinions, setting a date for an evidentiary hearing, and permitting discovery in advance of that hearing.

Dated: March 17, 1999

COBB, WOODWORTH & HOLLOWAY
___________________________________
MONTGOMERY W. COBB
Tax Court No. CM0535
400 Sovereign Building
710 SW Madison Street
Portland, Oregon 97205
Tel: 503-226-0088

In part 1, we give you a PDFT Quick Update.
In part 2, we cover the Issues and Facts.

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