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MR. MACDONALD: This is tape two, side one. There's been no
discussion in the interim.
MR. BUCK: Just to cut it short, you know where I'm going and I'm
probably talking to the wrong guys. I'm just letting you know that that letter is probably
a violation of the code in the context of where we're at. And we all know who rules here.
MR. OGROD: Like we all said, you know, that's not our...
MR. CULY: You are not recommending, in any case, that single zero be
the appropriate kind of exemption for any of the Hoyt partners. Let me ask you this then,
is a more fundamental question in my mind is who is making that determination and under
the guise of what authority?
MR. JOHNSON: Okay, the program itself and I've talked to the people
who manage the program in Detroit, even set up the program they go to Chief Counsels
office, the attorneys and Chief Counsel. And that's where these code sections are referred
to and the facts and from there they develop a program and somewhere in their program
they've decided that put them to single zero until we get a response and…
MR. CULY: Let me understand what you say when you're using words
because words are the way we communicate and when you say program am I to understand that
means the Questionable Form W-4 Program or are you referring to something else.
MR. JOHNSON: No, this is at the Detroit level.
MR. CULY: Well, is there one at the Detroit level and one at the
Fresno level and one at the Washington level or are we talking about one program?
MR. JOHNSON: There is one program. It's in Detroit and it used to be
done at individual service centers. About four years ago they consolidated so it's all
done in Detroit. That's the W-4 Program.
MR. CULY: Now, I have a copy of what I understand to be the
Questionable W-4 Program Procedure.
MR. BUCK: Let me interrupt because what you just said may change
what your direction because this was the latest I could find and this was dated 10-30 as
of '92. Now, are you telling me that this is no longer the W-4 Program in the manual?
MR. JOHNSON: That's about the time they changed. One thing by title
alone they have you call that the Questionable W-4 Program. Questionable W-4 Program is
any return—W-4 where there are 10 or more exemptions being claimed and the employer
is required to notify IRS.
MR. BUCK: That's not what that says but continue.
MR. JOHNSON: That's the questionable—that is the definition of
Questionable W-4. What we—what Detroit Computer Center also monitors is what we call
non-questionable and that's where the code sections and the regulations I gave faxed to
Mr. Culy came from is a memorandum that came out of Chief Counsel's Office to Detroit on
what they said what's the authority for having this program and what's defined as a
non-questionable W-4 where the IRS can adjust a W-4 where maybe there is less than 10 but
maybe it's still questionable.
MR. BUCK: So, you're saying there is a non-questionable W-4 Program
because that's not in the manual. You're not going to find that in the manual.
MR. JOHNSON: That's probably why they went to Chief Counsel's Office
to say do we have an authority to even have a program that is a non-questionable W-4.
MR. MACDONALD: The question I have, you indicated it is the program
and Mr. Culy asked you what program you had referenced to. When they receive a "Hoyt
partner" is there a subprogram that relates to the "Hoyt partner."
MR. JOHNSON: No.
MR. MACDONALD: To your knowledge.
MR. JOHNSON: To my knowledge, no.
MR. OGROD: Not to my knowledge.
MR. JOHNSON: They have—it's—in fact, they have staffing
errors a lot like the service center, you know, is trained to paperwork and it's not like
Hoyt.
MR. MACDONALD: And to be quite candid, the street rumor is that even
the Ogden Service Center has its rooms as the corral where all the Hoyt partnerships are
put in.
MR. OGROD: Because 90 percent of the returns are California.
MR. MACDONALD: I appreciate that.
MR. CULY: Let me understand that Hoyt is supporting the Ogden
Service Center at least to the extent of '90 percent. You guys got some job security here.
You got to figure out how far to push up to that line.
MR. MACDONALD: So, I can envision that when we receive—there
will be a directive whether you know it's there or not. I can see it envisioned and my
question is down that it's there that there could be a directive that when Mr. Johnson
sends over a Hoyt partner when it comes up on your screen this is the path you follow as
opposed to what you may follow for simply Doug Macdonald and his comes up.
MR. JOHNSON: In fact, I discussed it with one of the supervisors
about a month ago and they have been able to track down, I don't know if it was Emersons
or somebody else's actual letter they had sent out to Mr. Emerson, I believe it was, and
they had a hard time finding it because they said we should start putting it—if we're
going to have problems and have counsel ask for these letters we should probably file the
Hoyt letters in separate area so we can retrieve them faster so even there it implies to
me and even when they file the letters— they have in the past, as far as knowing and
just filing with everyone else's and not just Hoyt.
MR. MACDONALD: Do you understand what the question rises in my mind
whether or not in terms of what you tell me. You say I review the return, I take a look at
what the person is, I send out my recommendation. It is not our intent to take away from
the individual taxpayer more than what she has lawfully allowed and you make—and it
doesn't happen. We get a letter that says we know you are married but you are now single
zero and I understand your explanation of saying well, it depends on when it may come out
in the year I may be able to go back and tell you these this particular letter was
initiated on 1-21-97. That makes your philosophy and explanation of why it happens that
way fall apart.
MR. JOHNSON: Why question—the first time I got involved in
discussions with the Detroit Computer Center I talked too, he's no longer in that
department but talked to at the time was John Corman he was like a manager overseeing that
whole operation. And I asked him that same question I said well, single zero why do we
have—what's the reason if we see that they're married can we just go and look him at
that. He said no, the way the policy is set up they all go under single zero.
MR. BUCK: That doesn't make it right.
MR. JOHNSON: And then they respond to the questionairre then we'll
readjust it accordingly.
MR. BUCK: That's not the Questionable W-4 Program.
MR. MACDONALD: So, if I understand in effect that notwithstanding
your efforts to give them instructions as to what the taxpayer should be rated at in his
W-4 ignore your work and just go to single zero policy.
MR. JOHNSON: Now, that's their policy. And here, again, I respect
their authority to run the W-4 Program. If they do it nationwide and that's their
specialty and they have a reason and I—maybe this is you know an assumption I made
and I still probably make today that knowing what I would do in these cases before I would
take some any action I would get some—ask a question at all whether or not this
should be done. I would go to District Counsel and if necessary they go to Chief Counsel
and says do we have any authority to do something.
MR. BUCK: Do you ever talk to the person, would you?
MR. JOHNSON: To what?
MR. CULY: The taxpayer?
MR. BUCK: In other words, you talked about what you would do before
you would make any changes, you would go up your line but I would think there would be
some obligation to go to the taxpayer.
MR. OGROD: You're right. Normally, they correspond somewhat.
MR. BUCK: And I—just to make a point just to cover a point
before we continue, this is a letter that he received.
MR. CULY: This is a copy for you guys to refer to.
MR. BUCK: And at the very top it doesn't say Non-Questionable W-4
Program, it says Questionable W-4 Program. That's what they're doing. There is in the
manual unless it's been changed in the last five years, a plan by which you do step one
through ten before you make any changes under this plan. Okay, there is nothing in there
that talks about—unless they've got another plan that's outside of the manual that
isn't even in the manual. Now, I also recognize the impact of your following or not
following the manual but I think if the IRS is going to say these guys fall under the W-4
Program as we lay it out in the manual they at least ought to make an attempt—and I'm
very interested to find out if they're treating other people who are not Hoyt related in
the same way. If they're going out and basically ignoring all steps of the Questionable
W-4 Program and just taking single zero. Because that single zero—even if they had a
mandate somewhere to do single zero, under the plan they are not supposed to do it after
they've sent two non—there is— they have to mail two letters, they have to set
up an appointment, it's got to be within 60 days, a whole laundry list of things they are
supposed to do before they make any decisions.
MR. JOHNSON: There is something else they got involved with. I don't
know the details of it but I remember early on talking about what they call fast-tracking
and I—and that—
MR. BUCK: That's not in the code—that's not in the manual that
I was able to find. And I got—what I looked at was the most recent edition that I
could find of the Internal Revenue Manual so I won't make any claim with respect to what I
saw that might have been changed since that was published but as it stands right now if
that is unchanged they don't even come close—there is not even an attempt, not even
lip service other than the title Questionable W-4 Program.
MR. CULY: Let me ask Mr. Johnson, this particular letter that I've
handed you that was sent to Mr. Emerson is dated January 21st, 1997. And it appears to
bear the signature from a John Miller and references if you have any questions call C.D.
Thompson at a telephone number indicated thereon. Is it the policy, as far as you
understand it, that the taxpayer is directed to call a representative of the IRS at a
local district area.
MR. JOHNSON: No, I think this, again, was a pattern letter. And I
guess they sign—I don't know if the computer signs—in this case, it looks like
that C.D. Thompson is in different print.
MR. CULY: Yes.
MR. JOHNSON: And so she is the contact person to make, I guess, the
adjustments to that. What they had requested of me about a year and a half ago with the
Hoyt cases because they didn't feel some of the people either had the time or the
sophistication to check out what the withholdings should be in detail. They just told the
people if you've got Hoyt cases W-4 Program contact—just tell the person, the
taxpayer to contact Norm Johnson and he will then be happy to discuss with the taxpayer,
go back to Detroit and say allow a married filing with so many exemptions.
MR. CULY: What authority does C.D. Thompson have in this respect?
MR. JOHNSON: I think in this case they have to have someplace to
contact point for some reference.
MR. CULY: Does this person have directions to refer these
specifically to you because it's a Hoyt…
MR. JOHNSON: I think all of them do because—I think they're
being instructed—because I've never talked to C.D. Thompson and I don't know if
that's a pseudoname or what the situation—but I don't know who C.D. Thompson is
and…
MR. MACDONALD: You referred to C.D. Thompson in the feminine gender.
That was just a guess.
MR. JOHNSON: I think all but one person I talked to in
Detroit—John is the only man I think I've talked to in Detroit.
MR. CULY: You don't know this person whose name is C.D. Thompson?
MR. JOHNSON: No, I have never.
MR. CULY: Do you have any recollection of talking with Mr. Emerson
personally?
MR. JOHNSON: I talked to Mr. Emerson back—because this is not
the first W-4 action—on March 14 of 1994, and this was when he was married to
Roseanne. And this is a copy that I faxed to Detroit and Tom Coin and saying okay, Mr.
Emerson is married with three children and then he elected to have the wife have the one.
MR. CULY: So, at that time he had been—he had received a
similar letter to the one that we have here that said he was single zero and he had
somehow been referred to contact you and then you instructed the Detroit Service Center to
change it to married three.
MR. JOHNSON: And then I sent him a confirmation letter on March
16th, which was two days later saying what I had done. You know this is a letter to inform
you of the action taken, married three. And that was back—again that was March 16th
of '94.
MR. CULY: Are you aware that he has received a more recent single
zero letter similar to the one we just referenced?
MR. JOHNSON: And that's what we just talked about. I said I got the
referral and the fax date on the referral from Ogden, that was October 31st of 1996.
MR. CULY: What generated that referral.
MR. JOHNSON: Again, it would be the PFNs when they screen them and
in the screening process they determine whether or not it's initial determination they
make saying there are underwithholdings. And at this time they felt there was
underwithholdings. There was almost $40,000 wages and less than $500 withheld in his and
$### she earned with $### withholdings.
MR. CULY: Can you tell me in that study that you just indicated, are
there any other factors taken into consideration other than just the amount of withholding
and the gross earnings from wages.
MR. JOHNSON: They factor in—they go in and they have a place on
their database they determine because they sent me a copy that said right here that says
underwithholdings. And what they have determined to be underwithholdings. And what they do
is they just remove the Hoyt partnership loss, based upon removal of the partnership loss
we determine the tax and then look at the withholdings and say are they underwithheld?
MR. CULY: Did they take into consideration other Schedule E
Deductions that might occur on their tax returns the previous year?
MR. JOHNSON: As far as I know I was talking to Tom Genaro on
this—they just look at the Hoyt partnership loss, say okay if we subtract that from
taxable income or add that amount back into taxable income, redetermine the tax, do we
have underwithholdings here?
MR. CULY: What happens when there is income reported from the Hoyt
partnership and then there is loss reported in perhaps a different partnership, is the
income picked up and the expense disallowed?
MR. JOHNSON: I think that came into play more this last year where
there's really there wasn't much of a factor but recently I've noticed that there is
usually, like in Emerson's case there is capital gains and maybe what it was here—
that's what I use. I actually go in and say okay, most of these people are wage earners
for the most part, most of the capital gains is probably the Hoyt so siding the two
against one another to form that…
MR. CULY: And then you calculate out what you believe to be the
appropriate number of exemptions based after that adjustment?
MR. JOHNSON: Right. And then that's just to make the determination
whether or not it's going to be referred or not.
MR. CULY: Referred to Detroit Center.
MR. JOHNSON: Right. And so if the guy is 25, 2800, $3,000 even under
that's not material enough.
MR. CULY: But the point of your exercise is that you automatically
disregard any Hoyt deductions or any deductions that result from the Hoyt partnership
investment.
MR. JOHNSON: If there is a schedule—if there is a partnership
loss, then sometimes a Schedule F loss, but that comes from Hoyt, that part is disallowed
but if there is income or capital gains income…
MR. CULY: You offset that.
MR. JOHNSON: I offset that because it's only appropriate.
MR. CULY: But you don't take into consideration any adjustment for
any other Schedule E deductions that an individual taxpayer may have who may be in another
partnership that has a loss.
MR. JOHNSON: I haven't seen that to be the case at least not
material, they may have a small loss or something like that. What I do then also when
I—second sheet here and it's talking about exemptions, I factor in their the itemized
deductions whether they're married filing jointly, how many children they have.
MR. CULY: Their Schedule A deductions you factor in.
MR. JOHNSON: Right, right.
MR. CULY: And if they have $10,000 worth of Schedule A how do you
adjust that in terms of number of allowances, do you take four?
MR. JOHNSON: Well, you take the standard deduction and do the
division on that plus…
MR. CULY: Do you add four if there's $10,000.
MR. JOHNSON: Depends on what the standard deduction is—if the
standard deduction is six, in a case like that you'd probably get five—not five but
if they have two they'll probably only get three more for the $10,000 standard deduction.
You can't divide 10,000 by 2500.
MR. CULY: And then add that to the number of actual exemptions?
MR. BUCK: When you say can't you mean you won't—you can but
four times.
MR. JOHNSON: Even if you take a standard deduction, let's say you
don't have—you're renting and you don't have and then—if you're married and
you…
MR. BUCK: I understand but my question was I was clarifying, you
choose not to because of other reasons not because you cannot physically divide—that
answer…
MR. JOHNSON: That is correct. I mean just consider what I would do
in a situation like that.
MR. CULY: I'd like to take Mr. Emerson as an example but…
MR. MACDONALD: What I want to emphasize is I listen to you, if
you're to receive a report that all your referrals from Detroit went single and zero that
very well could be contrary to your actual recommendation.
MR. JOHNSON: Well, see this again was brought up way back about four
and a half years ago when we first had the W-4 Program and my question was that you put
them all to single zero. Why, because that's the way the program is designed.
They all go to single zero and so and they use the pattern letters.
And then we start discussing this again the fact that you have some people adjustments
towards the end of the year that they're claiming let's say ten more exemptions than they
should have for ten months out of the year. When you look at the big picture single zero,
even if it takes two months to adjust back to what they should have it's—I don't
think…
MR. MACDONALD: If you do it in October you fall two months later
then you're out of step. And particularly out of step in this case Mr. Emerson in a letter
dated 1-21-97, it's out of step.
MR. JOHNSON: But also when you consider the fact that the letter
tells and there is a questionnaire that's sent out with the letter telling people to
contact us and that's why in my fax to you you noted that I had not received any
communications from Mr. Emerson or yourself, anybody else that would represent him saying
that he would like this thing altered from single zero. And if he had made the call I
would gladly do it.
MR. MACDONALD: That's why we're here.
MR. BUCK: Part of the problem is that that's okay except that's that
not—that's not what the manual says is supposed to be done saying well we have a way
to fix this does not fix the fact that it was done incorrectly in the first place as far
as I can tell.
MR. OGROD: Right, realize our authority isn't necessarily…
MR. JOHNSON: I don't know what Mrs. Emerson's authority was to claim
other than directions she might have gotten from Mr. Hoyt's office is that she was
claiming married with nine exemptions.
MR. CULY: Aren't you making an unlawful tax disclosure when you tell
me something about Mrs. Emerson?
MR. JOHNSON: Aren't they filing joint returns?
MR. CULY: I don't have authorization from her attorney and, in fact,
I only have one for her husband. Are you accepting that so that I can discuss their joint
return then?
MR. BUCK: I guess so.
MR. MACDONALD: We're really trying to understand how this program is
supposed to function because as is self-evident, what we learn with respect to this
particular person is going to help us guide others to help you so that we don't have what
is perceived as an abuse on the part of the service.
MR. JOHNSON: I do have a question which brings up the—the Power
of Attorney is just in Mr. Emerson's name?
MR. CULY: Yes.
MR. JOHNSON: They're still married I take it?
MR. CULY: Yes.
MR. JOHNSON: Well, again, on the married filing with six exemptions,
that would have to be—if she's still working that would have to be decided.
MR. MACDONALD: I understand that.
MR. JOHNSON: She's going to have to get involved somewhere.
MR. MACDONALD: We understand that.
MR. CULY: It was an expeditious thing. We could only get that was
intended not to be.
MR. MACDONALD: A general observation I have, too, is you have a
folder here made with Mr. and Mrs. Emerson. Do you have similar documents for each
referral that you have made to the Detroit Center bundled and grouped like you have the
Emerson.
MR. JOHNSON: No, because what I have on all of them is in order to
make an adjustment like the one you saw earlier, I keep these in alphabetical order so
that tells me—and just because it's a fax that I'm doing it—I got the computer
program to do this so I just usually mail it. In this case, I think I did fax it back then
but currently what I do is I mail these to Detroit in this format. That's after they've
contacted me.
MR. MACDONALD: From Ogden Service Center.
MR. JOHNSON: No, after the taxpayer has contacted me.
MR. MACDONALD: Oh, after. I'm sorry.
MR. JOHNSON: If Mr. Emerson would come here and say I want five
and…
MR. CULY: One more question that I had and I seem to gather from the
information that you sent me in your fax is that you have, at least the implied authority
to make whatever changes that you deem are appropriate and direct the Detroit Computer
Center to make those changes; is that a fair understanding.
MR. JOHNSON: Right.
MR. CULY: So, with respect to every Hoyt partner that is changed to
single zero, they must come through you in order to change that status; is that correct.
1MR. JOHNSON: Currently, and that's the way it's been for the
probably the last year and a half.
MR. CULY: Is there some reason, and Tim raised this question
earlier—is there some reason why the Detroit Center is not following your
recommendation after you've reviewed the facts of each individual case instead of
automatically going to single zero thus delaying the process for whatever time it takes
for the taxpayer, the partner, to get back to the service center and then get the referral
back to you in order to catch your ear and then have you direct the service center to make
the change that you've previously directed them to make? I'm having trouble understanding
that logic.
MR. JOHNSON: And only—it's—I guess they feel that we have
a program, we have probably thousands, hundreds of thousands of these nationwide and we
don't want to take the effort to just change treat Hoyt any different. And also we have a
problem with allocation. So, if I say, in this case, we have six exemptions. How should I
divide the six exemptions? Sometimes you think oh we'll just do it based upon the ratio of
their earnings but I have situations where by the time the person calls me it's likely
they have a baby and now they're down to one income and the wife isn't working and now he
says he wants to take all the exemptions.
MR. CULY: Which they just increased by one.
MR. JOHNSON: Right, that's right, true. And I allow that, too, and
not ask them for a birth certificate.
MR. OGROD: Up to put all of them on his wages rather than having
half of them wasted.
MR. CULY: Do you have any other purpose in directing them to return
the calls back to you to take—in other words, putting the initiative over on the
partner or taxpayer to come back to you with their reasons supporting why they believe
that they're entitled to more exemptions other than to verify their current status when
they make the phone call?
MR. JOHNSON: No, there isn't.
MR. CULY: Do you ever tell these people that they shouldn't be
involved in the Hoyt investment in any way, shape or form?
MR. JOHNSON: A lot of times the phone conversation will extend
beyond the W-4 because the taxpayer themselves, a lot of times they say hey, this is the
first chance I've had to talk to someone within the IRS and they want to start discussing
the W-4 beyond the W-4 I'll discuss is it with them.
MR. CULY: But you don't initiate any discussion that goes beyond the
scope of just the W-4 questions that they might raise?
MR. JOHNSON: I would never start the conversation with say by the
way are you in this thing...
MR. MACDONALD: Yeah, get out of the Hoyt program because if you
don't you're going to be hounded until you do.
MR. JOHNSON: But if they call and they start talking about why are
you taking such action and I say well, we believe this is the situation and we have that's
why we took the PFN action to begin with.
MR. CULY: What do you tell them when you make this kind of
statement, we believe what, for example.
MR. JOHNSON: The valuation of the cattle is not what should
be—the actual cattle valuations that we've seen and counted are overstated on the tax
return.
MR. CULY: So, you tell them that the animals they're claiming
deductions for…
MR. JOHNSON: That's our position. We say that's why we're in court
and that's why it's being decided in court, that's our position. Then also more so than
not, instead of getting to the IRS so much is I figure the courts can decide
that—Section 469 and also that risk which let's say the judge makes a decision on the
court case a year and a half from now. We have one year's item to raise that as
a—called a to raise those issues.
MR. CULY: That risk and the material just—what do they need to
do? If I'm going to ask you a question here I'm going to ask you, what does Mr. Emerson
need to do to convince you that he will take responsibility for the at risk…
MR. JOHNSON: That's not a requirement of getting his W-4 adjusted.
MR. CULY: That has nothing to do with the adjustment at all to his
W-4?
MR. JOHNSON: Not at all.
MR. CULY: But it has something to do with whether or not you're
going to allow the Hoyt deductions, correct.
MR. JOHNSON: Some around the—I mean, it's just something you
consider. The fact that the case the partnership has gone to trial regardless of even
let's say the judge Solomon splits the loss down the middle. Does that mean it's over at
that point? Not necessarily.
MR. CULY: What's over?
MR. JOHNSON: In other words, it's decided that's the end of whether
or not—let's say someone claimed a $100,000 loss on their return and it was decided
at the partnership level that 50,000 of the loss are disallowed. Should the taxpayer feel
comfortable that that $50,000 is secure?
MR. MACDONALD: In terms of an allowable deduction?
MR. JOHNSON: Right.
MR. MACDONALD: And you're saying should not.
MR. JOHNSON: He should not be consider is it being secured even the
50,000 because there is another hurdle to consider here and that is…
MR. CULY: At risk and…
MR. JOHNSON: And that's something that is really he should be
concerned about.
MR. CULY: Unless the Court makes a determination on that issue.
MR. JOHNSON: They can't at the partnership level.
MR. CULY: They can at the individual partner level.
MR. OGROD: That's right, exactly.
MR. CULY: So, we have to go back in and try every one of them on an
individual partner level?
MR. BUCK: Because we kind of have gotten far afield from your
letter. And one of the things one of the things that we started talking about is that we
have kind of a chain of command of authority, a chain of authority I guess would be a
better term. And the fact of the matter is, if any revenue procedure or any manual
instruction that was in conflict with a code or regulation is not valid and now whether we
have to go through some other kind of procedure to find that or not, point being to
shortcut what I'm saying here is the regulation that you've cited here essentially gives
the basis on which the service can change a W-4 or cause a W-4 to be changed and the part
that you cited which makes me believe that that's essentially your basis is if there is a
materially incorrect statement; is that correct?
MR. JOHNSON: The material incorrect statement is based upon
Government Procedure 8484.
MR. BUCK: Your determination of the abusiveness of valuation.
MR. JOHNSON: Because 469 wasn't written until two years after that.
MR. BUCK: My reading of the cases in the apparent intent behind this
regulation is to catch guys who say wages are not income or to check, you know, the
guy—typical type protest arguments you've heard a million times. I don't want to
support the military in this country therefore I'm claiming all these deductions to that's
my fortune to the military budget. I mean—I didn't see any cases that did not refer
to it in that context. Having said that, the next step is the fact that the very same
regulation further subsection in that regulation gives the example of a partnership loss
which we talked about briefly and you don't have any problem with that concept essentially
what you are doing by using the revenue procedure is becoming the tax court in advance of
the tax court making a determination. Because you are saying that they base—the
statement says materially incorrect statement. My statement is based on the tax return I
filed putting myself in the position of the taxpayer, and so based on that tax return
until that tax return is proven not to be correct, that's not a materially incorrect
statement.
MR. JOHNSON: That is under the circumstances the way this is going
because to begin with we have the PFN. If we didn't have the PFN there wouldn't have had
the W-4 action.
MR. BUCK: The PFN—all that stuff is irrelevant if you can't get
past the regulation
End of tape two, side one
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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....
