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• Tape one, Side one
• Tape one Side two
• Tape two, Side one
• Tape two, Side two

MR. MACDONALD: This is part two of a two-sided tape. And nothing was discussed while the tape was changed; is that correct?

MR. JOHNSON: That's correct.

MR. CULY: Now, to clarify an issue you referenced, Mr. Johnson, the fact that there was a dollar valuation figure of six million dollars or so.

MR. JOHNSON: Expert witness report…

MR. CULY: And I understand we were talking about cattle count this in terms of arriving at the…

MR. OGROD: Count and valuation, actually.

MR. CULY: Are you accepting then that Mr. Daily is the sole determiner then of the number of animals that existed and the value of those animals for purposes of dealing with these issues?

MR. JOHNSON: No, because we had other sources of information for numbers of cattle and an idea of what was there. We were going to have contracted Ron Daily to begin with if we didn't have some idea that there was some problem with the numbers of valuation being put on the return to other information we had. And also when you start looking at the number here 200 million dollars. Now, let's say if Ron Daily's valuation per animal is way off. He's got 6.2 million well we're not even close. I mean he's not even—if he came up with 100 million I'd say well maybe you shouldn't be doing this PFN freeze because now we're getting close to the two for one thing.

MR. BUCK: I guess one of the things however just what I look at looking at it upside down is I don't think his count— there are so many variables that would have to come into being adjusted into his account that I don't see how you can possibly use that—I can see there are other things that you might be able to do two, but I don't see how you can possibly take his valuation after counting the animals and that's two without taking into consideration animals that might have sold and taken off.

MR. OGROD: Well, this is part of what you request. You request that from the person himself. Give me a listing of the count in 1992 for each particular partnership. Show me how many this partnership has. Where are they? Who are they?

MR. BUCK: I understand that. Now, let me ask a specific question. Did Ron Daily, and I don't remember—a lot of stuff has gone through my head since the cattle case trial, but what was his average value of animal, do you remember?

MR. JOHNSON: He broke two down by category, you know, bulls, heifers.

MR. BUCK: Mostly cows though is what's out there. Does he have that on that list?

MR. JOHNSON: Yeah, he's got cows, heifers. He's got cows and he's got the average.

MR. BUCK: That's fine. I just…

MR. JOHNSON: His average for the cows, which are about percent of what he counted, was the high was $869.21.

MR. BUCK: That was his average?

MR. JOHNSON: That was his high average.

MR. BUCK: I want to know what was his average? Was he used into his…

MR. JOHNSON: He just has a high and a low.

MR. CULY: What determined the 6 million dollar figure? The high or the low.

MR. JOHNSON: I've taken the high.

MR. BUCK: So, what's the high for—I see the highest animal value is $1,200, two looks like for bulls.

MR. JOHNSON: It's $1,600 for bulls, actually it's 90 bulls.

MR. BUCK: The reason I bring that up is because prior to his valuation the only valuation that you have that has any authority is the court's determination that 4,000 not as the value but the values they were sold for was reasonable and in that he looked and thought 4,000 looked good. And I guess my concern is that it's pretty arbitrary, I know a couple years has passed since that—well, maybe two years came out—two years passed between that court's determination and the cattle count? When was the cattle count made.

MR. JOHNSON: '92,'93.

1MR. BUCK: So, I guess actually about five or six years have passed since the information that led him to make that determination.

MR. MACDONALD: The judge's decision was April.

MR. BUCK: My point is that it seems pretty arbitrary to say okay the judge says 4,000 two years ago, we're going to totally disregard that. To me, if I was doing this I would have to look at—here's what they declared they purchased the animal for and you guys have had access to those Bills of Sale for a long time. And if I purchase an animal for 8,000 and that's my basis that I begin doing depreciating that animal and now I look and I count the animals and I see that, you know, that only half the animals there are there and my basis then— to me, I understand how you could use the numbers very easily because clearly your starting point—but what you've done essentially is thrown out everything except the initial tax return total number all added together and…

MR. OGROD: $4,000 figure, I'm going to have to know each partnership in 1992, that this particular partnership how many cattle does this partnership have in 1992? How many actually are there and try to determine a value.

MR. BUCK: See I understand that but I just—to me there seems to be a lack of maybe—there is a step missing when you go from I don't have the information here's what came out of a tax court case, I don't have the information between here and now but I'm going to take it but if it's anywhere close to what it was in the tax court case then we're not even close to being abusive but I'm going to disregard that and I jump right into abusive. I think that's a real stretch.

MR. JOHNSON: I think maybe this will help you in this area. I got a letter from—this is from Dan Dismeux, a copy was sent to Margaret Martin on March 5th, 1992, prior to Ron Daily doing the count. And there is various locations given—this is information that Mr. Hoyt had given I understand to Mr. Dismeux and the letter went from Mr. Dismeux to Margaret Martin the District Counsel. Various locations, number of cattle at each location and the total number of cattle, this is April 1st, 1992, 19,800. Now, if you say 4,000 times that— let's say 20,000 times that you've got 80,000,000.0,000,000 you're still—we have over 200,000,000 on the return.

MR. BUCK: That's not 200 percent though.

MR. JOHNSON: What's two times—80,000,000.

MR. BUCK: 200,000,000 is not 200 percent of 80,000,000.

MR. JOHNSON: Then you get to the locations though. I interviewed at these various locations—I had a tape recorder like we have going here and I asked ranch managers, "Can we confirm these numbers?" They couldn't. One instance I've highlighted here was the Leather's Ranch and I was told that was Steve's cattle. He was Share Cropping supposedly for the ranch, for the farmers, the partnerships. When they interviewed Steve Hoyt in Mr. Kramer's office, Mr. Kramer was there, he didn't even know where the Leather's Ranch was. He said no he doesn't share crop cattle for any Hoyt partnership. The cattle he's got were something he has with his brother-in-law and they weren't even purebred Shorthorn. Yet they show up in in list.

MR. MACDONALD: I believe what you're referring to is correspondence from Mr. Dismeux.

MR. JOHNSON: Right.

MR. MACDONALD: And I note that it's marked as an Exhibit E. Do you know what that was an exhibit to?

MR. JOHNSON: I think it's prior—I think it was something for the years 1980 through '86 as far as the stipulations were represented. And also there was not in this one but it was an earlier list, a similar number that came up and it was another ranch probably get his name but in the area was supposed to have 300 and some share crop cattle but interviewing him he never had any share crop cattle from anybody Mr. Hoyt or anybody else. The other thing is being operated independently of any other financing or other bank.

MR. CULY: Did you interview everyone at every location that's listed in Mr. Dismeux's letter or did you just indicated?

MR. JOHNSON: Some of these are—if you look like Green Valley Ranch and Riley Creek Ranch these are the various ranches around Burns at the time where the the main operation was so we interviewed ranch managers.

MR. CULY: Did you verify the accuracy of Mr. Dismeux's information on those locations.

MR. JOHNSON: Well, that's what we're trying to do is verify the accuracy of this. And whether or not—when they say number of cattle it doesn't include small cows at side or adult cattle only. What are we talking about? And we went through that process in detail and somewhere I've got a summary

of that.

MR. MACDONALD: You mentioned the name Steve. Is that Steve Hoyt?

MR. JOHNSON: Yes.

MR. CULY: Do you have a problem with providing us with a copy of that Mr. Desmeux letter.

MR. JOHNSON: And prior to me being privy to these all of these interviews were done in the summer and they have adjacent to them B.L.M. property, probably 95 or more percent of them property. So we go to B.L.M. and we get the permits, how many permits does he have for that location? And the ranch managers, their numbers coincide with the B.L.M. which is smaller number than shown on this report.

MR. OGROD: Getting back to Mr. Buck's question with regards to jumping from one to the other and no, I had—speaking from experience before we went through it I know that gross oversimplification. Yeah, one of the things which we have available is a court decision. That's one of the things you have available. Another thing is we have available is B.L.M. We have so many permits which means so many animals, equates to so many animals. You also have information that you've obtained from ranch managers. You have a bunch of information that you try to obtain. First of all, you don't just jump, you try to obtain and you go to court and try to get a court order and try to get it through a summons and try to get it through an enforcement of a court order through a contempt of court proceedings. After going through a lot of efforts it's much, much more involved procedure than that. It takes months and years to go through all that procedure. And then when you get through with this then we have to use that which is made available and not just one necessarily one particular item.

MR. BUCK: I have a memory that there was a contempt that a judge said you've got everything you need. You were not successful on that contempt attempt.

MR. JOHNSON: This contempt hearing was January of '93, when Mr. Hoyt stopped counting.

MR. MACDONALD: If my memory is correct each of those findings, first the judge gave some instructions as to what was to be done without finding that there is a violation of any—and then there was a second hearing before Judge Tanner but I think it was passed to another judge and determination. I understand now the process I think it's gone through.

MR. BUCK: You used the term—this is kind of out of context but while I'm thinking about it—you used the term freeze code a couple of times. Can you tell me what a Z Freeze is? I've seen the term but I've been unable to find a definition of that, and the CCH doesn't print out all the manual. Does that ring a bell with you?

MR. JOHNSON: I've heard the term but I…

MR. BUCK: So, it's not related to these cases then?

MR. JOHNSON: I don't know—no, the freeze code here is what shows up in the transcript as an 810 so…

MR. MACDONALD: So, it's fair to say then that this process that we've talked about is what led you then to examining the W-4 Program as it relates to these partners.

MR. JOHNSON: Right, because what happened after the first—and I think we've discussed this maybe not in this meeting but in the past—the very first year we did the freeze, Ogden Service Center notified me and said yeah we've got all these freezes but there is a lot of substantial overwithholding. And I said what do you mean and similar to what we've got here, just as an example, they faxed me a document saying that here are some more potential W-4 losses that, you know, might be interested in. I can't really show you those.

MR. MACDONALD: Is it layman language, is it fair to say that what happened next was the freeze program was looked at and someone said hey, the freeze program is being only partially affected because the partners are—have significantly high withholdings and therefore we're really not

being able to freeze the funds so we need to take a second step. The second step is then to reduce the amount of withholding.

MR. JOHNSON: Right. And also I got some promotional literature about this time we received and it was from Hoyt's office and it was talking—and it was not signed or anything and said here's the pitch in 500 words or less and part of that was they make out a new W-4 form for you claiming their cattle as exemptions and it goes down a couple paragraphs and highlighted here's the reason why you can get away with this venture. Not all of our tax dollars go for bonds, dollars or federal highways. Cattle industry feeds the nation. Investing tax dollars in beef on hoof is patriotic. And there's numerous other letters.

MR. MACDONALD: Can we examine that part right. Did you find that there was anything wrong with our client calculating what benefit he may receive from his investment, this is in the purest state, and then adjusting his withholding by the benefit he may receive in that investment as far as the impact of his tax obligation? Do you understand my question?

MR. JOHNSON: Not entirely but…

MR. MACDONALD: Okay, let me rephrase my question. In the abstract, if an individual says at the end of the year I can make a prediction because of my partnership arrangement with ABC that I am going to have overpaid the Government therefore I am going to increase the amount of withholding. That, in a raw sense, did you find anything erroneous about that.

MR. JOHNSON: No, we didn't find anything.

MR. MACDONALD: So, in the raw sense, the letter that you just read me in the purest form is not erroneous nor is it misleading nor is it contrary to law.

MR. JOHNSON: No. I think we all adjust our W-4's for our homeowners deductions and any other deductions which is the way it should be done. In this case we have the PFNs.

MR. MACDONALD: That's what I want to make sure. When you read that to me I want to make sure that in it's purest form, you did not find that that in and of itself was not erroneous or a violence of law. In it's purest form that is correct. The problem is we now have to look at that and you said to yourself now we have to go back and look at the actual reality of what's happening if I can verify the number and valuation and then see if that's what I said. Earlier you have a program that you think is only partially effective because the taxpayer is screening the program by increasing the withholding. Therefore, you have to attach the withholding to have the impact that you want to have, is that fair.

MR. JOHNSON: We have people claiming 28 exemptions and you know maybe if it wasn't for the Hoyt investment made maybe six or eight. I'm not saying that's common but that's one of the extreme cases.

MR. CULY: Are they automatically being reduced back to what they—let me rephrase that. Are you excluding any deductions for the Hoyt investment and calculating back what somebody—what you feel somebody should be entitled to by way of W-4 allowances.

MR. JOHNSON: Let me explain what happens. I get a notification—let's talk about Emerson.

MR. MACDONALD: And I think Emerson is a good example for us right now because from what we have said and you mentioned that may be entitled to a deduction from home interest expense, etc. The notice he receives says we have taken your W-4 and we have taken your marital status as single even though we know he's married and we've taken your allowance allowances to zero even though we know he exists with a wife. And the difficulty that I have is that I look at what you've done is it took the very extreme position using what Mr. Emerson or a tax credit may be entitled to. And that's what you have to explain to me.

MR. OGROD: The problem that I have is that you're kind of putting that on me or us.

MR. MACDONALD: Take it for the IRS, not for you personally, take it for the IRS. The service then, in exercising the W-4 Program did not allow the taxpayer the benefit of the fact he was alive and entitled to his own self as a deduction, if he was married, did not allow him or give respect to that marital relationship which impacted his ability to have a deduction, did not give consideration to any interest income that he may have reported, but simply took him to single and zero.

MR. OGROD: I don't know what opportunity they were given because…

MR. CULY: Gentlemen, I'm going to tell you, you can't both speak at the same time and have a record. So, let's try to have some kind of coordination when we speak.

MR. MACDONALD: So, what I would like to have now is an explanation as to under what authority and what the justification was for doing that to the taxpayer.

MR. OGROD: The W-4 Program as established by Detroit what they are supposed to do. I'm going to explain how it's supposed to work, rather than any particular example. They are supposed to write or correspond to the taxpayer and ask them information. And then using what is made available to them they will, of course, exclude that any losses on particular partnerships, that they will do. Now, I do not know what information they were or were not given by him. I don't know if he told them he had kids or this or that. But their routine if they don't get adequate correspondence, their routine is to reduce an individual to single zero.

MR. CULY: May I interrupt for just a second David? How do you—how does the Detroit Computer Center identify the individuals with whom they are going to question on the W-4 Program?

MR. JOHNSON: Okay, let me get into that. I said earlier Ogden Service Center, like they've done here just recently, sent me a fax. And here you've got potential, more potential W-4 situations. I will take that—I don't take it as face. I say okay, in this case—four just faxed to me just this week faxed in July 15, of 1997. I rejected all four of these. What I do when I get that information I scrutinize—I take what you call a ret view which is computerized version of return just taxable income and payments gives itemized deductions and all that and I go through and I say okay, is even claiming maybe a few additional exemptions due to the Hoyt investment, a third within 70 percent. I'm not going to bother.5 to 70 percent.

MR. CULY: Can I go back just to understand the foundation of what you're saying. You received recently a memorandum from a district office or a service center.

MR. JOHNSON: Ogden Service Center.

MR. CULY: That asked you to look at some W-4 withholding certificates to evaluate them in terms of the number of exemptions claimed thereon. Let me ask you this. Were those specifically related to the Hoyt operation.

MR. JOHNSON: Yes, because these are the returns that are coming in with the refund freezes. Remember, I said earlier under the revenue procedure we're required—the service center is required to make sure the refund being frozen is only that attributable to the tax shelter. In the process of doing that they factor in what they consider underwithholdings.

MR. CULY: I understand that. Now, do you get these from more than one source, more than just the Ogden Service Center.

MR. JOHNSON: A couple years ago I used to get them from various service centers now it's all centralized out of Ogden the last couple of years.

MR. CULY: Now, is it—are you assuming the sole responsibility of evaluating those W-4s that are questionable, if I'm using the terminology correctly, that are referred to you by the Ogden Service Center relating to the Hoyt investors?

MR. JOHNSON: In the last year and a half I have done the double-checking on this in more detail even than I did four years ago when the program first came into effect. The last two years we've made the criteria even higher before we refer them to the Detroit Service Center. In other words, we went through refuse on every one of these people before sending them on to Detroit to make sure that we don't have someone we're adjusting their W-4 when it's a minor amount or just because they're a Hoyt partner maybe they have substantial withholdings. It's not automatic. And so based upon that, again, we just don't arbitrarily just because I get something from Ogden, say okay, I'm going to write it up, it's going out the door.

MR. CULY: I'm not suggesting anything is arbitrary at all. Don't take that as even a suggestion. What I'm trying to determine is who has the responsibility, who is doing what and what is the procedure.

MR. JOHNSON: My procedure, and I'll take the responsibility, I'm the one to validate and check to make sure whatever gets referred to Detroit is something that should be referred to Detroit and not just arbitrarily just go through it without any screening process through the district.

MR. CULY: All of the referrals relative to the Hoyt partners then to the Detroit Center are approved or done by you.

MR. JOHNSON: They're screened through me.

MR. CULY: Okay, so that none get sent to Detroit unless you've either approved of them or analyzed them yourself and given specific instruction.

MR. JOHNSON: For the record, the last two years, first year went through—I mean it was four years ago, there was such a rush of them and having not done this before we were probably a little loose with getting some in and we got a lot of calls and when the tax was called it was get on them and say how many children do you have over the phone and accept it word for word for itemized deductions and children and so on, the amount and both husband and wife worked how many exemptions do you want your wife to claim how many do you want to claim.

MR. CULY: When you do this referral to the Detroit Center, do you—does the referral automatically trigger a single zero reaction or do you actually make a specific adjustment to the W-4 yourself and inform the Detroit Center to implement that particular adjustment?

MR. JOHNSON: The program automatically goes single zero. And, in fact, I've sent to them—and that's what I've been doing the last couple of years—I even sent them a statement saying this person is entitled in this case married filing jointly with five exemptions for Emerson is now six. And this summary is sent to them on December 19. And here Emerson's facts we got from Ogden right here on the Emerson's. So, and so I would check this out and here is what I actually sent to Detroit. I sent them for the Emersons, I did send them this computation. Saying okay gross wages, exemptions and took a standard deduction on the prior most reason return filed.

MR. CULY: Are you referencing the 1996 tax return.

MR. JOHNSON: No, this would be in '95, so I was probably looking at the '94 return for this action. No, based upon the '95 return. This was done in December of '96, so the '96 return wasn't even filed yet. Now they're entitled—I did a recent—I made a note of that on the fax that they gave me and they're entitled to six. Also, for the record, I wanted to make it clear, too that this is a fax which I received on Emersons and the date of the fax is October 31st of 1996. And that's, you know, prior to two weeks or so before the trial in San Francisco. And I had—this is not the only one, I received probably seven or more at one time and I just set them aside because we're too busy getting ready for the trial in San Francisco. And it wasn't until the middle of December when I had to go through these seven or eight or more.

MR. CULY: Was that your thought for retribution for testifying, is that what you're suggesting?

MR. JOHNSON: No, just the fact that allegation was made and I don't even recall when that letter apparently came in with that too just to counsel. I was off that Friday Jill Paige got it and she says, "Did you do an action on Emerson W-4?" And I didn't even recall Emerson testifying he wasn't in the courtroom the first week except for like a half hour on Friday. And I said yeah, I got on the computer and I said yeah we did and then she read the letter and I said—I didn't have any knowledge of him testifying. In fact, I understand there were some other taxpayers that testified as well. I haven't read their transcript and I don't even know who they would be, what their names are.

MR. MACDONALD: With respect to what you've told us I have a question. You said that you used to receive the information as to who ought to be considered for the W-4 Program in various centers throughout the United States nearly all come from Ogden. Is that because all Hoyt matters are referred to Ogden for processing regardless of whether the taxpayer.

MR. JOHNSON: That's correct. All of what you call linkage of the separate partnerships, they're all controlled out of Ogden.

MR. MACDONALD: So, if I'm a taxpayer and I'm in New York and I submit my 104O, too my district was just forwarded to Ogden for handling.

MR. JOHNSON: Well, they do the controls there. I don't know how they get the physical return. I know Tom Genaro is the person in Ogden.

MR. MACDONALD: What's his name.

MR. JOHNSON: Tom Genaro. He does the PFN review to make sure that the refund that's being frozen is for the Hoyt tax shelter only.

MR. MACDONALD: So, in Mr. Emerson's case then and the next question that pops in my mind, if, in fact, laying aside the Hoyt partnership he was entitled to a refund of whatever amount, would I contact him or Tom and say hey, you have an error here. You didn't allow this taxpayer the amount of refund disassociated with the Hoyt partnership.

MR. JOHNSON: Right.

MR. MACDONALD: That's who you would contact.

MR. JOHNSON: Right and so…

MR. MACDONALD: Can you spell his name?

MR. JOHNSON: G-e-n-a-r-o.

MR. CULY: And he is at the Ogden Service Center

MR. JOHNSON: Right. His phone number 801-629-1087.

MR. BUCK: I will represent I think some of the frustration that has obviously come from some of these partners as you have described how the W-4 Program is supposed to work. I'll tell you—I'll represent to you how it's working in at least some cases. You're—you apparently are making a referral to Detroit with apparently a recommendation this is what they should get. They're immediately taking it down to single zero. They're skipping all their steps and when the taxpayer does happen to call them to try to make the conversation to help establish what he has they tell him to call you. So then they make the phone call to you which apparently you then call right back to Detroit and told them what you already told them and you know that round about way it seems like we could skip a few steps here. I also just for my own information, if you could show me or tell me and maybe you're the wrong person to do this I have looked everywhere and I'm not saying I can't find it but I cannot find any authorization as the W-4 Program is laid out to taking it to single zero prior to doing any other act.

MR. JOHNSON: Dave, you got some regulation there?

MR. OGROD: I thought that was in Regulation 31—402(F)(2)-1G. And basically the IRS can change the W-4 if…

MR. BUCK: That's right. But it doesn't say it could start outdoing single zero without making any inquiry.

MR. OGROD: I am going to have to—I'm going to have to speculate just exactly why their procedure is what it is.

MR. MACDONALD: Before you speculate—I want to make sure, though it has not been your recommendation to Detroit in every case to go to single zero.

MR. JOHNSON: None of the cases.

MR. MACDONALD: None of the cases.

MR. JOHNSON: No, in fact, the program is actually in fact they use a pattern letter and the pattern letter has single and zero on the pattern letter.

MR. BUCK: Do you tell me that's in direct violation of the code. Right up front that's a violation of the code.

MR. JOHNSON: Not really when you start thinking about the situation like right now I have 13 taxpayers I might have to refer to Detroit. And we're looking at right now middle of July by the time I get these things out it might be September so let's say during the year nine months out of the year they're claiming 20 or more—even if they have single zero for now until December, you're still not going to catch up.

MR. BUCK: In any one day, I am entitled to my rights under the code which clearly says that I am authorized to get as many allowances or exemptions as I am entitled to. And if I'm entitled to one because I am breathing I don't care what happened any time up to that day, the code says I'm entitled to at least one.

MR. JOHNSON: It says that on your 1040, it doesn't say you can claim a person.

MR. BUCK: You cited it. You cited it in your letter. The number of withholding exemption such as 3402(F)(2)(A) the number of withholding exemptions claimed by an employee shall in no event exceed the number to which he is entitled. And further in that very same section it describes what I am entitled to including myself.

MR. JOHNSON: But the law also requires enough withholding so if you have a situation where you had a business practice and instead of making estimate tax payments you W-2 wages, some people say I'm going to claim single zero and fuss that $500 a month taken out of my check because I want to make sure my income income from my job over here is covered so that's proper withholding.

MR. BUCK: The fact of the matter is I am breathing and I, by virtue of the fact that I have claimed allowances clearly at least claim myself so the minute you take away everything including myself you have violated the code.

MR. OGROD: Single.

MR. BUCK: No, you're at single zero. I get one. Single being not married, okay. If I'm married—if the face on my tax return says...

End of tape one, side two

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Beginning not later than 1982, and continuing to the present, the defendants, led by Walter J. Hoyt III (Jay Hoyt), conspired to defraud thousands of Investors out of more than $100,000,000....

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