Hoyt Fiasco: $103M Heist + Kevin Brown's
Victim information, evidence, rules of law, IRS viewpoints
|Why did the IRS lead prosecuting attorney in the Hoyt case quit in disgust?|
The Hoyt Investors are very grateful for Kathleen Nilles, whose voice that has rung out on Capitol Hill and other places of influence to tell the story of the Hoyt Fiasco. Here is a statement she submitted to lawmakers:
STATEMENT OF KATHLEEN M. NILLES, ESQ.
IN CONNECTION WITH ITS HEARINGS
I am a tax lawyer practicing in Washington, D.C. I have been involved in federal tax law for 15 years. Following law school, I worked for five years as a tax associate in private practice. Then I served as tax counsel to the Committee on Ways and Means, U.S. House of Representatives. As Ways and Means Tax Counsel, I was responsible for advising the Committee on tax compliance issues, including IRS penalties and interest.
Since leaving Government service in early 1995, I have represented a variety of clients as a tax partner in the law firm of Gardner, Carton & Douglas. I currently represent the Partnership Defense Fund Trust, an organization formed to defend the interests of individual investors in the partnerships described below.
In connection with the Finance Committees review of the penalty and interest provisions in the Internal Revenue Code, I would like to bring to the Committees attention a situation which has drastically affected the lives of thousands of taxpayers throughout the country. It is the kind of situation that this Committee attempted to address in the Internal Revenue Service ("IRS") Restructuring and Reform Act of 1998. To date, however, the IRS has failed to incorporate Congressional intentboth in its published guidance and in its actual administration of the tax law. Thus, I would urge Congress to consider whether stronger legislative measures are needed.
The Situation of the Individual Taxpayers Who Invested in Hoyt Partnerships
From 1977 through 1997, approximately 3,000 individuals and couples throughout the United States were induced to invest in one or more of over 100 separate partnerships set up by Walter J. Hoyt, a nationally recognized cattle breeder.
Twenty years later, many of these investors are confronting a fate much worse than the mere loss of their original investment in these now bankrupt partnerships. Pursuant to a complex fraud in which the partnerships' promoter inappropriately allocated a limited number of cattle among several partnerships resulting in excess deductions, many Hoyt investors have received tax, penalty and interest assessments totaling twenty to fifty times their original investment.
As a result of factors beyond their control, these individual investorswho are largely middle-class wage earnersnow face IRS liabilities of $200,000 to $500,000. The enormity of these liabilities has caused great emotional distress and threatened many investors' financial and retirement security.
The Hoyt partnerships, although fraught with fraudulent misrepresentations and bookkeeping irregularities, were not a typical tax shelter. Mr. Hoyt and his family were nationally recognized cattle breeders. In the years 1984 to 1994, the cattle operations owned between 4,000 and 10,000 head of cattle. The cattle were kept on ten to twelve separate ranches owned by Hoyt partnerships with a combined acreage totaling over 500,000 acres, as well as on other leased land. The Hoyt investors could not have individually discovered the fraud. Indeed, it took IRS auditors and federal prosecutors years to develop sufficient evidence to verify their longstanding suspicions.
An IRS employee, with substantial experience on this case, recognized that the investors were "unwitting victims" of Walter J. Hoyt's fraud. Appeals Officer William McDevitt filed a statement in 1997 in which he described the taxpayers as "unwitting victims," "unsophisticated in tax matters," and "confused by the" Tax Court's 1989 decision in Bales v. Commissioner.1/ The Bales case held that the partnerships were bona fide businesses and seemed to confirm most of Hoyt's assertions and theories.2/
For several years after the IRS Criminal Investigation Division first began to investigate the Hoyt operations, Walter J. Hoyt was allowed to continue to conduct business as usual, to promote more partnerships, and to retain his role as the Tax Matters Partner ("TMP") for the approximately 118 separate partnerships he formed and promoted. In addition to failing to remove him as TMP, the IRS failed to take any of the following possible actions against him:
Notwithstanding the Bales decision in October 1989, the IRS continued auditing the Hoyt partnerships, disallowing all claimed deductions and making adjustments consistent with the position that the partnerships constituted abusive tax shelters.
In 1993, the IRS and Mr. Hoyt as TMP settled the 1981 through 1986 partnership tax years. The settlements meant that essentially all claimed deductions and losses allocated to the investors from the partnership returns would be disallowed, while substantial income to the Hoyt family was minimized.
The individual partners first received notice of their 1981 through 1986 personal tax liabilities from the settlement (via Form 4549 computational adjustment notices) beginning in 1998. However, the National Taxpayer Advocate and the IRS Chief Operating Officer issued a Stay of Collection on February 2, 1999. The 1987 through 1996 tax years remain unresolved, with the selected dockets for the 1987 through 1992 tax years having been tried and awaiting an opinion of the Tax Court.
Recent Congressional Focus on the Hoyt Partnerships
Statement of W. Val Oveson, National Taxpayer Advocate, Internal Revenue Service, before the Subcommittee on Oversight, Committee on Ways and Means (January 27, 2000) (emphasis added).
[Webmaster's note: This Webmaster's note is not part of Ms. Nilles' document, but is important to make at this point. Mr. Oveson, whose
actions have helped the defrauded investors, still misunderstood a key point when he made
this remark. The investors never had use of the government's money.
Oversight Subcommittee Chairman Amo Houghton highlighted the Hoyt investors' situation in his Opening Statement at that same hearing to illustrate the heavy burden of compounded interest on tax liabilities that take years to resolve:
Statement of Congressman Amo Houghton (R-NY), before the Oversight Subcommittee of the Committee on Ways and Means (January 27, 2000).
Congressional Mandate to Expand Offer in Compromise Criteria
Consideration of factors such as equity and public policy represents a significant expansion of the traditional grounds for settling tax cases. Formerly, offers-in-compromise were limited to two situations: (1) doubt as to liability and (2) doubt as to collectibility.
IRS Proposed Regulations on Expanded Offer in Compromise Tests
Temp. Reg. § 301.7122-1T(b)(4)(i) through (iii).
The regulations provide specific factors for determining when the first and third prongs are satisfied, but no specific factors are provided for determining when the second prong"exceptional circumstances"may be satisfied. Unfortunately, the temporary and proposed regulations only offer two examples of cases of "exceptional circumstances:"
Temp. Reg. § 301.7122-1T(b)(4)(iv)(E) (examples 1 and 2).
The regulations provide a third example that involves embezzlement of payroll withholding taxes. This example could be viewed as illustrating equitable considerations in the case of a victimized taxpayer. However, the example is classified as a financial hardship example because paying the accumulated taxes, penalties and interest would cause the taxpayer's business to fail. Temp. Reg. § 301.7122-1T(b)(4)(iv)(D) (example 4).
In practice, the IRS continues to view "exceptional circumstances" with the same narrowly focused lens as it always has. In the IRS view, the overriding factor is the taxpayer's ability to pay (i.e., financial hardship). This exclusive focus on financial factors to the exclusion of equitable considerations is evidenced in a recent letter from the IRS Chief Counsel's Office to Representative John M. McHugh (R-NY) in response to his inquiry about how the IRS planned to deal with Hoyt investor partners facing large interest accumulations:
Letter of Deborah A. Butler, Assistant Chief Counsel (Field Service), Internal Revenue Service to The Honorable John M. McHugh (June 4, 1999). Thus, although Congress specified in the 1998 RRA that the IRS should consider equity and public policy and to resolve "longstanding cases" by foregoing penalties and interest, neither the Treasury Department nor the IRS has shown any inclination to provide for significant interest abatement based on equitable considerations or exceptional circumstances.5/
In 1998, Congress determined that interest abatement should be part of the new offer-in-compromise procedures in certain situations. As noted above, Congress directed the IRS to take into account factors like "equity" and "public policy." However, two years later, the IRS has yet to develop reasonable guidelines to facilitate offers in compromise that give proper attention to these factors.
If the IRS continues to exhibit resistance to Congressional intent, Congress may want to revisit the issue in a legislative context. The Joint Committee on Taxation staff has recommended that abatement of interest be utilized if a "gross injustice" would otherwise result if interest were to be charged. It is anticipated that such authority would be used infrequently. Although I believe that the IRS already has the authority to address situations of gross injustice under the expanded offer-in-compromise authority of RRA 1998, enactment of a new statutory remedy may be necessary.
1/Statement of Appeals Officer William McDevitt, Appeals Supporting Statement (Dec. 23, 1997).
2/In Bales v. Commissioner, T.C. Memo 1989-568, the Tax Court found that a Hoyt cattle partnership was not an abusive tax shelter; however, the Court also held that certain deductions for expenses in excess of the partners' actual investment should be disallowed.
3/From the late 1970s until 1997, Mr. Hoyt used his continued Enrolled Agent status as proof that he was a legitimate tax advisor. The IRS finally removed Mr. Hoyt's Enrolled Agent status in 1997 and as TMP in 1999.
4/Note: Although Mr. Oveson's statement generally describes the situation of the Hoyt investors, the Hoyt partnerships do not fit the definition of a tax shelter (i.e., an organization whose major or exclusive purpose is to shelter income).
5/At the Ways and Means Oversight Subcommittee hearing on January 27, 2000, Treasury Tax Legislative Counsel Joseph Mikout testified: "...Treasury's position remains that it is appropriate that situations involving abatement of interest be narrowly drawn."
Friday, October 09, 2020
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