MONTGOMERY W. COBB
October 8, 1998
VIA FEDERAL EXPRESS

Mr. W. Val Oveson, National Taxpayer Advocate Internal Revenue Service
1111 Constitution Avenue, NW
Room 3017 - C:TA
Washington DC 20224

RE: Hoyt Partnerships

Dear Mr. Oveson:

The partners in the Hoyt investor partnerships need your assistance to obtain relief from financial ruin.¹ Each partner has (with extremely few exceptions) been assessed for taxes and penalties beyond their lifetime means. They deserve your help and extraordinary relief because they have been victimized, not only by an investment scheme gone bad, but also by the Sacramento, CA office of the IRS. The IRS, whether deliberately or not, assisted Mr. Hoyt in perpetuating the investment scheme long after it should have been stopped. ²The IRS abused its collection powers. The IRS attacked the investors rather than stopping the promoters. The IRS failed to effectively prosecute criminal and civil penalties that would have put Mr. Hoyt out of business. The IRS violated its own procedures. The IRS caused delays that have greatly increased the liability of the investors.
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Footnotes
^1.This law firm represents the investor partnerships in Tax Court and Bankruptcy Court. The partners are represented by 23 lawyers, whose names and contact information are attached. This letter is written with the knowledge of those lawyers and the Assistant United States Trustee in the Hoyt bankruptcy proceedings (see below) although I do not presume to speak for them. You are invited to contact them. I recognize some of the facts asserted here may be difficult to accept. All of the attorneys involved are mainstream practitioners. We have all had to experience the attitudes of the Sacramento IRS personnel and see the evidence presented here to recognize the predicament of our clients.

^2.A brief history and factual background are appended to this letter.
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THE STAKES
This financial disaster has affected some 3600 partners in at least 40 states. Hundreds of partners are presently the subject of collection activities in which the IRS seeks millions. The IRS holds millions in frozen refunds. The disputed deductions in the pending Tax Court cases exceed one billion dollars. The disputed late filing penalties alone exceed $2.4 million.
The disputed issues include:
1. Depreciation deductions which the IRS has arbitrarily reduced to zero.
2. Basis for depreciation (value and numbers of cattle).
3. Validity of late filing penalties.
4. Validity of extensions of statutes of limitations.
5. Validity of the 1993 Memorandum of Understanding.
6. Wrongful levies.

The courts cannot provide relief in time to save the partners from ruin. The political process, while available, is unpredictable. Your offices are the partners' best hope for prompt and fair resolution.
THE IRS FIASCOS
The abuses described below have resulted in great harm to innocent investors while enabling Mr. Hoyt to continue to accurately claim he could keep the IRS at bay, lending the appearance of legitimacy to his claims to tax expertise (Hoyt depo, p. 1008). Investors were thus led to believe in Mr. Hoyt while the IRS convincingly demonstrated its incompetence and malice toward Hoyt investors. These abuses are the result of personalization of disputes due to emotional involvement of Sacramento IRS personnel who have become too close to these matters over the years. These abuses demonstrate the need to remove these issues from this region's jurisdiction for negotiation.

The Settlement Fiasco
During 1992 a committee of Hoyt investor partners was formed to resolve the numerous tax issues then pending and to put a final end to the partners' troubles with Claimant and the IRS (Att .³ 10). On July 22, 1992, there was an exchange of fax letters between Mr. Drobny, the committee's attorney, and Mr. McDevitt of the Sacramento office of the IRS (Atts. 10 and 11). The committee was frustrated with the IRS refusal to negotiate reasonably. The IRS was insisting that, as a condition of a global settlement, Mr. Hoyt agree to personal concessions in addition to resolving partnership issues. Amazingly, the committee persuaded Mr. Hoyt to agree in writing (Att. 12) to all the IRS demands-
1. Mr. Hoyt would refrain from advising partners on Tax Court litigation.
2. Mr. Hoyt would surrender his enrolled agent's license.
3. Mr. Hoyt would agree never to promote tax shelters again.
4. Mr. Hoyt would agree to civil penalties to be assessed against him personally under IRC 6701.
Even more amazingly, the IRS failed to take this opportunity to be rid of Mr. Hoyt, end the victimization of investors and finally resolve all the tax issues.
Instead, the IRS broke off negotiations with the committee. The IRS then turned around and began negotiations with Mr. Hoyt behind the investor partners' backs. The IRS negotiated with Mr. Hoyt alone (Hoyt depo, pp. 1019-1020, 1023-1024). He was not represented by counsel (Hoyt depo, p. 121 7). Neither the partners nor the partnerships had a representative present - except of course Mr. Hoyt.

Mr. Hoyt, however, was not able to act as a fiduciary for the partners because he had massive conflicts of interest:
1. He knew he had been under criminal investigation since 1984 (Atts. 5, 22, 24, Hoyt depo, pp. 1008-1014, 2013-2015, 2017-2019, 2032, 2046-2048) and needed to curry favor with the government. Incredibly the IRS now claims the CID records of that criminal investigation of Mr. Hoyt were "not retained" (Att. 22), although some records have been found in Mr. Hoyt's files (Atts. 1, 4, 6, 7, 8).

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Footnotes

³ "Att" refers to the attachments accompanying this letter. "Hoyt depo" refers to the transcript of Mr. Hoyt's deposition in the Bankruptcy Court, excerpts of which accompany this letter.

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2. He needed to cooperate with the IRS to obtain relief from tax preparer penalties which had been assessed or threatened. This conflict is further demonstrated by the fact that the penalties against him were abated, apparently as a quid pro quo for agreeing to extensions of the statutes of limitations (Compare Att. 24 with Hoyt depo, pp. 1022, 2064-2065, 2099-2104, 3075-3076, 3079-3086 where Mr. Hoyt admits he demanded a deal on the penalties in exchange for the extensions of the statutes of limitations, and Atts. 18 and 19).

3. He had been on both sides of every cattle sale transaction which was the basis for the disputes between the IRS and the Hoyt entities.

4. He and his family stood to gain from concessions of tax issues which hurt investor partners.
The Second Circuit Court of Appeals recently held that agreements signed by a tax matter partner with such conflicts of interest are void. Transpac Drilling Venture v Commissioner, 147 F3d 221 (2d Cir 1998).

Mr. Hoyt nevertheless purported to act in a fiduciary capacity to bind the partners. The IRS was fully aware of all of these conflicts. The IRS had been auditing Mr. Hoyt and his businesses since the 1970's (Hoyt depo, p. 2029). The IRS had litigated a large case against Mr. Hoyt (and lost key issues, compare Att. 20 with Att. 44). The decision in that case, Bales v Commissioner (Att. 44) had issued 3 1/2 years before. Nevertheless, the IRS, through a phalanx of attorneys, (Hoyt depo, pp. 1023-1024) "negotiated" a settlement with the unrepresented Mr. Hoyt that bound all the partners for tax years 1983 through 1986 (and loss carrybacks to 1980). That settlement was the now infamous Memorandum of Understanding of 1993 ("MOU") (Att. 3). The MOU has devastated the investor partners who now face tax and interest bills of hundreds of thousands of dollars each (See Att. 23, partner's bill for more than $300,000).

This MOU is the basis for current collection activity against Hoyt partners.

The MOU was one sided and unfair to the partners. For example, the MOU does not mention any penalties. Nevertheless the IRS has assessed tax motivated transaction penalty interest against individual partners who had no voice in the negotiations. Interest now amounts to about 3/4 of the liability of the partners. Needless to say, the partners would not have agreed to any settlement which allowed tax motivated transaction assessments when the partnerships had won that issue in the Bales case which held the Hoyt cattle business was not a sham and had a legitimate business purpose. The failure to address the penalty issue in the MOU is the direct result of overreaching by the IRS and the absence of competent counsel representing the partnerships.

The MOU also stipulated to a lower number of cattle for depreciation than actually existed. This resulted in a greater tax burden on investor partners, but eased the burden on Mr. Hoyt by reducing the number of calves treated as income to Management Company, in which Mr. Hoyt held a 15% interest and was the only general partner. Obviously, the investor partners would not have agreed to that provision either.

The Failure to Remove Hoyt Fiasco
The IRS has the power to remove a Tax Matters Partner and has the authority to "disbar" an Enrolled Agent. Treas. Reg. SS 301.6231(c)-5T. The IRS had ample evidence of facts which easily met the criteria for removing Mr. Hoyt from both of these positions. The IRS had that evidence at least by 1989 (Atts. 1, 4, 6, 15, 17 and 22) and probably well before that. When the IRS finally acted in 1997 to disbar Mr. Hoyt as an enrolled agent, it relied on facts dating from 1985 (Hoyt depo, pp. 2020-2021). In fact, the administrative law judge who heard the case had no trouble issuing an order disbarring Mr. Hoyt.

Nevertheless the IRS did nothing for at least 8 years (Hoyt depo, pp. 1014-1017, 1021, 1024-1025, 2019, 2022, not removed as enrolled agent until 1997, never notified that partnership items changed to non partnership items, never tried to remove him as tax matters partner, never questioned his capacity to negotiate the MOU), costing the partners dearly in lost investments and increased tax liability.

The IRS still has done nothing to remove Mr. Hoyt as Tax Matters Partner.
Mr. Hoyt still has never been charged with the crimes documented in Att. 1.

The W4 Alteration Fiasco
Beginning in 1994 the IRS added a weapon to its attack on Hoyt partners. The IRS began to alter the withholding allowances of partners by "adjusting" the allowances to "single, zero" (see Att. 32). The Hoyt partners were and are financially unsophisticated. Almost all of them are wage earners. In fact, the only way most of them could invest was by acquiring the cash through tax savings (such as those offered by the Hoyt scheme). The IRS realized it could strangle the investors financially by altering their wage withholdings. If you are tempted to see this as a way to cut off Mr. Hoyt's cash flow, consider that the IRS did not stop at eliminating withholding attributable to Hoyt tax deductions. The IRS eliminated all withholding, even for partners who were married and had dependent children.

This is a blatant violation of the IRS manual for its "Questionable W4 Program." See Treas. Reg. SS 31.3402(f)(2)-l (g)(5)(ii); IRM, Audit Section 4299 (Nov. 22, 1989); Att. 31, pp. 1-3, 13-14, 28-34 and 48-49.

In addition to punishing partners, there was a second improper purpose for this abuse: the partners were directed to an agent in the Sacramento office of the IRS (Att. 32), when they called about their withholding alteration, who then gave them a threatening pitch to sign a settlement agreement on terms favorable to the IRS.

The Frozen Refund Fiasco
In the early 1990’s, the IRS began, on a large scale, to freeze any refunds claimed by or due to anyone known to be a Hoyt investor or on whose tax return appeared any income or loss related to a Hoyt entity. In violation of its own rules (Att. 31, pp. 1-3, 13-14, 28-34 and 48-49), the IRS froze not only the portion of the refund attributable to Hoyt investments, but all the claimed refund (Id.). In the absence of a legally permissible purpose, the IRS took this action for illegal reasons including punishing partners and coercing them to settle on terms favorable to the IRS.

The Late Filing Penalty Fiasco⁴
In February 1994, the IRS began a concerted program of assessing late filing penalties against Hoyt partnerships. I emphasize "partnerships" because this was an obligation of the entity, not the partners (See Atts. 33, 34). The partners were only secondarily liable by virtue of their status as general partners (Att. 33). This fact is significant in analyzing the "collection" tactics of the IRS for these penalties.

The IRS made no attempt to collect from the partnerships or execute on partnership assets (other than to levy a few other Hoyt bank accounts). This is so even though there was a bankruptcy case pending which gave the IRS a golden opportunity to control and sell partnership assets (the explanation would be lengthy and is omitted).

Instead, the IRS went after certain partners to collect the late filing penalties without first determining whether the late filing penalties were valid, and sometimes without valid notice or due process. The IRS was bold enough to announce its illegal selective enforcement strategy: "we will only look to the partners who continue to participate in the Hoyt program" (Att. 32). The express intent was to pressure partners into settling on terms favorable to the IRS (Att. 32).

Invalid Penalties
Some of the late filing penalties were assessed solely because of a typographical error on a request for extension or on a tax return, which the IRS seized upon as an excuse to refuse to recognize the extension or the filing of the return. Examples of this are shown in Atts. 36, 37, 38, 39, 40 and 41. Late filing penalties were assessed for partnerships that did not exist in that tax year (Att. 35). The IRS has refused to abate many of these wrongful penalties and has tried to execute on them against partners (Atts. 36-41 ).

Selective Enforcement
The IRS has targeted only partners who were "active" in the Hoyt businesses (Att. 33)
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Footnote
^4. This information is Limited by the IRS refusal to provide an accounting of levies and funds collected.
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In fact, the IRS prioritized partners who were involved in management under contract to a Hoyt entity and other higher profile partners. Attachment 43 illustrates this tactic. Although 282 partners of the partnerships shown in Att. 43 were available and potentially liable for the tax years in question, only those in the dark lined boxes were levied. The Molts worked in the Burns, Oregon, office of Hoyt (Hoyt depo, p. 857). The Georges worked at Laguna Tax Service, a Hoyt entity in Elk Grove, CA. Darrell and Linda Smith worked in the Burns office of Hoyt. Tom James managed the Hoyt "Borrow a Bull" program. The Blackburns worked on Hoyt records and document management. No effort was made to put the late filing penalties on the Automated Collection System (ACS) (Att. 45 and 46). With millions in frozen refunds available, these late filing penalties would have disappeared literally overnight if placed on the ACS.

Instead, the late filing penalties were used as a weapon to coerce partners into settlements favorable to the IRS and to punish partners. This tactic was successful in part as shown in the "IRS Stl Date" column of Att. 43.

Wrongful Levies
The IRS has levied on partners' assets without proper notice and without any basis. For example, after a confrontation with an IRS collection agent in which the agent learned the partners were doing some work in the Elk Grove, CA office of Hoyt (they were residents of Florida), the partners found their car being taken from the parking lot of the Elk Grove Hoyt office (Att. 35 and 36). The IRS was forced to return the car when it turned out there was no prior assessment against those partners on which to base the levy and no final notice of intent to levy had been received by them for the more significant amount on which the car was taken (Att. 35 and 36).

REQUEST FOR ASSISTANCE
As attorney for the partnerships, I ask that you intercede on behalf of all partners in these partnerships. Litigation of these issues will not provide timely relief because Tax Court cases take years to resolve and because the IRS does not abide by the decisions of the Tax Court. The IRS continues to disregard the Bales decision. The partners will be destitute before these cases can be litigated. Bankruptcy is of no assistance to the partners because the tax years 1987 forward have not been resolved or assessed. Taking bankruptcy now would, in nearly all cases, preclude relief on future assessments. The Federal District Courts have jurisdiction only over certain issues and cannot provide injunctive relief or relief from taxes or penalties (except late filing penalties) unless the partner can pay the tax. The District Courts will take more than a year to resolve the matters within their jurisdiction - even without appeals.

The Hoyt businesses have now been shut down. The assets have been sold. The bankruptcy of the Hoyt businesses is proceeding. There is not enough money in the bankrupt estate to provide relief to partners. The partners have now been made aware of the true nature of the Hoyt investment program and the failure of the business.

There are meaningful issues in more that 700 cases pending in Tax Court that now need to be resolved without Mr. Hoyt's participation and without the participation of those in the IRS who have become too close to these matters and lost their objectivity. The IRS will never collect the amounts it now claims from partners, much less any future amounts.

These facts cry out for settlement. No meaningful negotiations can occur with the Sacramento IRS personnel. We have tried. No meaningful negotiations can occur with the Western Region. We have tried. Even with the assistance of the office of the United States Trustee, we have been unable to start to negotiate a global settlement. In fact, the IRS has falsely blamed the United States Trustee for calling off negotiations (Att. 42). In fact, it is the IRS who refused to negotiate after indicating it would hold global settlement talks in Portland, OR.

Despite the newly discovered evidence that Mr. Hoyt was not qualified to sign the MOU; despite repeated requests from the U. S. Trustee and counsel for the partners and partnerships; despite clear evidence of Mr. Hoyt's conflict of interest; and despite the now documented criminal investigations of Mr. Hoyt before he signed the MOU and continuing to the present day; the IRS has refused to temporarily abate collections, abate interest, or enter into settlement negotiations. Mr. Hoyt, while his partners suffer extreme hardship, enjoys the benefits of being apparently judgment proof, beyond the reach of collection activities.

RELIEF SOUGHT
The following relief is needed immediately:

1. Stay all collection activity for a reasonable time to allow negotiations to occur.
2. Hold mediated global settlement negotiations, the IRS to be represented by a national level official with complete settlement authority, the partners to be represented by their designated counsel and representatives.

Thank you for your kind attention and assistance.

Very truly yours,
COBB & WOODWORTH
Montgomery W. Cobb
MWC-obs

Cc:
Speaker Newt Gingrich
Neal G. Jensen, Assistant US Trustee
Partners' Attorneys
Partnerships' Defense Fund Trust
Rep. Bill Redmond
Sen. William Roth
Sen. Ron Wyden, attn Terrie Piro