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MR. MACDONALD: Tape two, side two. Nothing has
been said during the change of the tape.
MR. JOHNSON: Okay, I'm going to try to pick up where the tape
stopped. Again, in situations we have taxpayers claiming exemptions, again let's say like
for the cattle. That in itself just means that their partnership loss whether it's
anticipated but the fact is when the District Director— and if he doesn't just
arbitrarily sign these even goes to the Chief of Compliance regional level, talks to
District Counsel looks at the whole thing. It's not a revenue agent making these
decisions, that we're going to do a refund freeze and then have on the other side and say
okay we'll just, in essence, freeze action by increasing our..
MR. BUCK: By following the law…
MR. JOHNSON: When you have one being saying no you shouldn't even be
claiming this loss on this particular tax shelter under 1040 doesn't mean you should also
claim it on your W-4 because the W-4 is also a tax return.
MR. BUCK: Now until I guess my—and we're like a dog chasing our
tail here.
MR. MACDONALD: What came first, the chicken or the egg on that one?
MR. BUCK: The regulation is very clear. The regulation does not
matter what came first. The regulation allows you to anticipate loss in a partnership.
MR. JOHNSON: And as a Hoyt partner your estimated loss in a year are
partnership.
MR. BUCK: And what basically you're saying is that District
Director's determination allows him to ignore the regulation because in the end the
determination is you're disregarding something that the court may or may not disregard
down the road. I mean isn't that—the bottom line isn't that what's happening here?
MR. MACDONALD: The reality of it is is what was mentioned in the
beginning. They have the PFN program they put in place that wasn't effectively working
because the way the Hoyt partners were reporting the deductions on their W-4s therefore,
they had to go to the Questionable Program in order to prevent those proceeds from coming
into the hands of the partner. And then subsequently being questioned as to whether or not
the revenue could be collected at a later date.
MR. BUCK: If at any stage any of those is in conflict with the
regulation then requires you to make any kind of determination at the agency level that
this return is not validbecause these—these deductions are not going to be allowed
when we get to the tax court procedure. Then what you've, in essence, done is taken the
place of the tax court and ruled two years in advance or three years in advance of the tax
court. How can you shake your head? Because let's lay it out here. If just—for the
sake of argument, two years down the road the tax court determines that every loss that
they claimed was valid and that every at risk rule and passive activity consideration
is—does not effect it—this is obviously just for the sake of argument, then what
you have in essence done has inserted yourself into the process—you the IRS, not you
Norm Johnson or Dave Ogrod—and has essentially taken on the role of the tax court.
And it's your opinion. It's still your opinion. Whatever evidence you have at this point
it's still your opinion that has yet to be determined by the tax court.
MR. OGROD: We have to obtain the evidence that we can, yes. And if
there is something that would affect the tax court two years from now yeah, that's what we
need right now.
MR. MACDONALD: And the question that I brought up and Norm, you
mentioned it earlier and I was listening for it because the little work that I've been
able to do I haven't been successful at it. You made the inference that with respect to
the W-4 Program or an individual, one may make some kind of district court challenge to
that. Do you have a cite for that?
MR. JOHNSON: Well, tax is district court and not a tax court.
MR. MACDONALD: So, since it's being withheld as an employment tax,
if we disagree with you on behalf of Mr. Emerson, you're saying that because it's an
employment tax the district court may be immediately available to us.
MR. JOHNSON: That's the same thing…
MR. MACDONALD: Do you have a reference or cite for that for me.
MR. OGROD: I may have to get you that.
MR. MACDONALD: Are we talking super refund here?
MR. JOHNSON: Comes under the super refund, refund identification
freeze claimed as allowances.
MR. MACDONALD: Okay.
MR. OGROD: Like I say you may want to talk to Alan Stains about
that. He'll get you a little bit better attorney cites than we could.
MR. MACDONALD: What I'm looking for is just a direction on that.
I'll do my own work but in things that I had looked at I had not picked it up but also,
quite honestly, I had not thought of it in terms of an employment tax which has been paid
as opposed to a withholding for the purpose of 1040 tax.
MR. JOHNSON: Well, you're aware that some of these did go to court.
Judge Jones, U.S. District Court in Oregon.
MR. MACDONALD: No, I'm not aware of that.
MR. JOHNSON: W-4 action and the judge wrote a 17-page brief. It was
there again similar to Mr. Buck's argument.
MR. MACDONALD: Yes, but I think that was challenging whether or not
that was a jeopardy assessment. That's the focus that was taken there. The focus was not
taken in the sense that you had said director employment tax.
MR. JOHNSON: I think it was characterized by I think Montgomery
Cobb, an attorney illegal jeopardy assessment that was referred to. And it was dismissed
to subject matter jurisdiction not necessarily just jurisdiction. Judge Jones did write a
17- page brief explaining that in the—on these cases to the district court again.
MR. MACDONALD: That's what my—because what you were saying is
if the district courts can have subject matter jurisdiction, it can take the subject
matter jurisdiction over the issue that is employment tax. And see, I'm learning. You're
teaching me something. And it's a perspective I haven't looked at. So, if you could just
find some reference to that and point me in the direction, I'll go do the labor to read.
You don't have to do my work for me.
MR. JOHNSON: Again, this is probably so—I don't think you'll
find a situational case like this.
MR. MACDONALD: Surprise. Are you saying this is unique?
MR. JOHNSON: Even PFNs—I don't know anywhere in the country
they're still doing Pre-Filing Notification Freezes because after the 1986 reform act, you
know…
MR. MACDONALD: All the tax shelters went kapooey. Which is
interesting because those tax—those programs are designed to burn themselves out,
this is not.
MR. JOHNSON: We don't even have a tax shelter coordinator in the
office any more. That's all that's past tense. So, you know, that's why the fact that we
had to dustoff the old manuals and say well, gee, we still have a way to do this.
MR. CULY: If we're off the subject, I'd like to go back. A thought
that's intriguing me is that you indicated that you are taking a position of disallowing
all of the deductions for the Hoyt partners for the existence of cattle, is that a
misstatement?
MR. JOHNSON: No, what—you're talking from a standpoint of..
MR. MACDONALD: W-4.
MR. JOHNSON: And let's use Mr. Emerson as a example— well, the
example I gave also is if someone takes a $60,000 partnership loss but they have $20,000
capital gain, I would take the net of that $40,000.
MR. CULY: I understand that. I guess my point is I'm trying to
reconcile that disallowance in terms of allowing the deductions or the allowances under
the W-4 for what you've indicated to me was the basis of your Pre-Filing Notification
Freezes and that's the cattle count that was done by Mr. Daily. So that, in essence,
proved to you that there was the existence of at least some animals whether it be the
amount that Mr. Hoyt claims or it doesn't be the amount Mr. Hoyt claims in terms of all of
the investor partnerships.
MR. OGROD: But we do not know who owns the cattle.
MR. CULY: So, without some verification from the individual taxpayer
as to his ownership of specific animals then you're automatically just disallowing any
claim for deduction for ownership of those animals.
1MR. JOHNSON: That's what the refund freeze does. It just—so,
by allowing something for some cattle let's say you know exist because we're not saying
they don't exist period, I would then be—I don't have the authority to circumvent the
District Director and system Regional Commissioner of Compliance Division is saying oh
we're going to allow part of the loss but you're giving us instructions on signing PFN
letters.
MR. CULY: Who was giving you these instructions?
MR. JOHNSON: The letter itself Pre-Filing Notification letter says
freeze, you shouldn't claim a loss period under this partnership.
MR. MACDONALD: Notwithstanding the PFN letter, if I were to take my
return, if I was Mr. Emerson, and lay aside the Hoyt deductions that I was claiming, I
still should be able to obtain from you the refund that otherwise I would be entitled to.
Who shall I address that to?
MR. JOHNSON: Tom Genaro. And if you have problems you can contact me
and I'll talk to Tom.
MR. MACDONALD: Because what I'm going to do is I'm going to talk to
Mr. Emerson, I'm going to say let's get a computer out and let's run your return and I'm
going to come back to you in two days and say here's a refund he was allowed otherwise
would be allowed, please see that he gets it.
MR. JOHNSON: And I'll tell you right. The only place there could be
a dispute in this area—handle what Ogden does. I send PFNs they only back out the
partnership loss. They don't give credit for capital gains that might be—theyonly
look at the loss from the tax shelter. So, they would say that right netted out that they
don't…
MR. CULY: They're picking up the income and disallowing the loss.
MR. JOHNSON: PFN is a refund freeze of a loss. And they are not to
assume that income was not good. Maybe the income was something that was earned and
correctly stated. We're just saying we're going—the PFN is only saying we don't want
you to claim the loss. Doesn't say anything about the income. So, they only address it
from the standpoint we're going to rule the loss and then look at…
MR. MACDONALD: In terms of making a reconciliation of that because
the Bales case took three years to get a decision out and I don't think how long but who
would we address that to? Address that to you?
MR. JOHNSON: Well, if you wanted to. You'd have to…
MR. MACDONALD: You see the inequity of that or you wouldn't have
done that. And that I might say address that to you and then you fight for us or what
happens.
MR. OGROD: Well, first you have to go to town.
MR. JOHNSON: I'd have to go to Ogden and say well, okay do you
have—they have counsel there that address that lives in that district and they're
going to have to address their district counsel in order to say—unless you want a
court fight you better get some authority if not, these attorneys are willing to go to
battle for this. That's something again the final call would have to be—be the Ogden
and you don't have to go to every service center. Now, it's done in Ogden.
MR. CULY: But it has to be done on a case by case basis.
MR. JOHNSON: I think once they decide it whether or not they're
going to run the program and decide we're going to fully consider income from the same
shelter and let it to I don't see why they have to be uniform. We're supposed to do
things, you know, fair manner where nobody gives special preferences because they squeak
the wheel more than the next person.
MR. MACDONALD: I have a question that I wanted to address in terms
of what you talked about with reference to the Questionable W-4 Program and some more
benign character of that. Part of the information that was provided in Section 682 A, if
an individual claims allowance on exemption certificate has no reasonable basis thus
decreases their withholding, they shall be penalized $500. And yet you have not penalized
anybody $500. Is that just the graciousness of your heart or are you actually saying there
is—there maybe a reasonable basis but we're just doing this more benign approach to
the Questionable W-4 Program, what's happening there.
MR. JOHNSON: I was asked by Detroit to assess these and they gave me
the call then and I made the call and told the manager about it and they said after that
we went along with it. I said right now I really let's just try to get the situations
where there is compliance. I don't want to penalize the taxpayers. Let's just—we've
never done this before it's not like—probably weren't even aware that they were
exposed to such a penalty. So, I said let's just go for the compliance let's not, you
know, make this really worse.
MR. CULY: What do you mean when you say let's go for compliance?
MR. JOHNSON: In other words, instead of compliance and slapping the
hand, a penalty.
MR. CULY: What do you mean by compliance? Disregard the deductions
that you're claiming for the Hoyt investments? Is that what you mean by compliance?
MR. JOHNSON: The excess exemptions. The excess exemptions. Excess, I
mean the ones that were when cattle investor—when you become an investor you are
being told to, like the promotional letter states, change your W-4 allowing additional
exemptions.
MR. MACDONALD: That went to my original question, which referenced
that letter. Laying aside the dispute that exists, you do not find that letter to be a
quote what's the language they use here—that there is no reasonable basis for that
representation. Laying aside the dispute there is a reasonable basis for the
representation, they can increase the number of exemptions.
MR. JOHNSON: PFN in place.
MR. MACDONALD: Now, does the PFN in place then say to you that there
is "no reasonable basis" even though you have not assessed the penalty.
MR. JOHNSON: Yes, the PFN was—we wouldn't even be here today
discussing this if it wasn't for the PFN because we wouldn't have done the W-4.
MR. MACDONALD: Now, then initially, who made the decision for the
PFN.
MR. JOHNSON: Again, I was—that had to be done through the
channels.
MR. MACDONALD: Down who it was though? I appreciate how the channels
work but down who it was? That looked at this and said, ah, we have a PFN. We need to go
forward with it. Who made that initial decision, down.
MR. OGROD: Some people have to sign off on it.
MR. MACDONALD: Well, I recognize that. But someone put it in motion,
down who that was?
MR. CULY: Who gives the directive to the service center that you
will do this.
MR. OGROD: The letter authorizing has to be signed by the district
director.
MR. MACDONALD: I mean to pick a name out of—the person I
appreciate who has some ability to direct things is Jill Paige. If Jill was to phone up
Ogden and say by the way, I think the approach we ought to take is PFN or did you phone up
Ogden and say we ought to take a PFN approach to this?
MR. OGROD: No.
MR. MACDONALD: Who initiated it and then who…
MR. JOHNSON: It was initiated in the district office. It's not
initiated at the service center.
MR. BUCK: Don't use the word initiated. Because that's more of a
term of ours than might be the guy who officially initiates. We're interested in what was
the motivation—not motivation. Who was the motivating person to put that forward.
You, yourself, a few moments ago said this wasn't even used any more. So, somebody had to
pull it out and dust it off. And this one actually, you mean abusive tax shelters. And as
this one has not been declared by the Court and has refused to even be considered by the
Court at this time. So, somebody had to pull that out dust it off and say hey, we might
use this, do you know who that was?
MR. OGROD: No, I don't.
MR. MACDONALD: The reason I looked at you that way was your body
language said yeah, I know but I don't think I want to tell you.
MR. OGROD: '92 and I was trying to think at what point in time does
that arrive. It's kind of hard—I'm trying to determine to pick a point in time and I
don't think…
MR. MACDONALD: We have a signature here and the signature is
of…
MR. JOHNSON: In this case, it was back in January 5th of 1996, the
director was still a district at this time it was Gerald F. Swanson. And in the—it
starts off initiator is page Jill Paige. So, what it means is that she's the first one to
sign off. Bottom line manager, in fact, she is the management the group managers the first
level of manager. So that's where it starts in the group, so she would be responsible.
MR. MACDONALD: So, Jill and then it went to him and then on up the
chain.
MR. JOHNSON: Their Chief Examiner then the District Director and
then from there Chief Compliance Officer of the region. And even before director signs she
would although it's not signed off here they would get some concurrence whether verbal or
written from District Counsel.
MR. CULY: Is there a written directive that says you will initiate
the PFN.
MR. JOHNSON: I think you have to look at the facts and circumstances
of the case, whether or not it meets the requirement of Revenue Procedure 8484 and whether
or not from that standpoint is it marginal? Is it, in this case, we felt it greatly
exceeded the requirements of the percentage that Revenue Procedure 8484 Tax Code.
MR. CULY: When you say it.
MR. JOHNSON: The valuation of the cattle.
MR. BUCK: Just a note. You made that determination at about the same
time your lawyers were stipulating that the value was about $4,000 a head for years not
included in the Bales years.
MR. JOHNSON: And that stipulation was signed for someone particular
zoning.
MR. BUCK: I understand that. I just find that interesting that in my
understanding, in my experience that a stipulation even though for settlement purposes
only has got to be agreeable to me or I'm not going to sign it. And so I think there is an
implication that can be made even know you can't carry it from tax year to tax year I
understand that. I just find it interesting that you'll jump all over the $800 figure but
you'll leave alone the $4,000 figure.
MR. OGROD: The two different figures have different purpose. If I
use a $4,000 figure I may do that because it may be academic to go beyond that my
resources. If I send a bill to you which is way beyond your bankruptcy then what will that
accomplish academically. So, having one figure as opposed to the other may end up
being…
MR. BUCK: Just a point I wanted to raise.
MR. CULY: Somewhere the truth lies in what the actual value is.
MR. JOHNSON: And before we leave here today are we going to come to
a decision as to how if you want Mr. Emerson's to get the married filing jointly with six
exemptions?
MR. CULY: I would like to have just what your instructions would be
to me and any clients that I my represent or any of us might represent as to what they
need to do to convince you that they're entitled to the exemptions that they're claiming.
MR. MACDONALD: We do not represent and we can see and they
can—with respect to Mr. Emerson, what I would like to do and I haven't discussed it
with him obviously, but from what you've told me, I'd like to take a computer run of their
tax return without the big deductions and then say what do I have in terms of calculation
of an appropriate amount of withholding to arrive at that point.
MR. CULY: I've already done that.
MR. MACDONALD: And then I'd like to know who I write to to get the
refund.
MR. JOHNSON: Tom Genaro, $2,543, is that about the Hoyt something
return.
MR. CULY: I think something like that. And that's just being
withheld for no—what you would say for no legal basis at this point. Now, let's go
back to my original question. Does that hold true with anyone who may contact us that asks
the question what do I do? Are they still going to be—can we short circuit the
process? If they get a single zero have them call Norm Johnson and have that dealt with
like that instead of going through the district or Detroit Service Center best?
MR. JOHNSON: In essence, that's happening right now because if they
do call the phone number on the letter they get from Detroit, the examiner has apparently
been instructed to just tell them to call Norm Johnson and he'll turn around and call them
and let them know what's going on.
MR. CULY: I'm not so sure the letters haven't put out the word to
call Norm Johnson as well so—okay, I'm pleased to learn then that you will be
accepting telephone calls from anyone that has to do with this W-4 allowance issue.
MR. JOHNSON: And, I have voice mail, too. And if something going on
and call me back I'm in a hurry if they, I guess, in a way if there is some way to let me
know how they would like an allocation, first of all they don't know how many I'm going to
allow.
MR. CULY: It's true. How do they know how to allocate what you're
going to allow?
MR. JOHNSON: Yeah.
MR. OGROD: If they gave us an idea I think we could probably do it.
MR. JOHNSON: But, as you know, I'm going to give them credit for
itemized deductions and marital status.
MR. CULY: You're going to give them credit for everything except
their Hoyt partnership deduction?
MR. JOHNSON: Right.
MR. CULY: Right.
MR. JOHNSON: Right.
MR. CULY: And you're even going to take any income claimed from the
Hoyt operation and offset the deduction before you make that determination?
MR. JOHNSON: That's the way I use that determination before we make
any referrals to Detroit. I don't even have to do that for—all I have to do is to
arrive, look at their itemized deductions and then their marital status and their
exemptions for what they should have on the W-4. Now, see whether or not someone is what I
guess the question—when Ogden tells me someone is underwithheld, instead of just
accepting that for the IRM, my computation factor in the capital gains that come from Hoyt
and back that out and everything and come up with what I think is more conservative, much
more conservative determination whether or not there is an actual underwithholdings and if
there is underwithholdings this is even large enough to bother to send to Detroit.
Because, again, why bother someone that is only 200 bucks a month? I've also had a number
of phone calls, for the record, a number of phone calls from Hoyt partners who don't seem
to mind this. Consider glad because they figure well, no matter what happens down the road
they tell me I feel that's kind of like an escrow account. If I win, I'm going to get it
back plus interest.
If not, I'm not going to owe the Government as much. Plus, the big
factor is interest when you start thinking about making '80's over 300 percent interest.
I'm sure there are a lot of people that were—joined in 1980 or in the 80's that
wished that there had been a PFNS and refund freezes because the interest is over three
times the tax in the 1980 years.
MR. MACDONALD: What they're really saying is we wish there would
have been a way to do say tax credit.
MR. JOHNSON: Yeah, definitely right. But, see you're going fast
we're going hopefully lightening speed on the court case. Even that's going to take two
years before a decision comes out maybe longer.
MR. MACDONALD: How long did it take for the Bales decision? The
fallout for that took ten years.
MR. CULY: There have been—you're understanding of 682 A is that
it's a discretionary call in terms of implementing a penalty?
MR. OGROD: It's one of the actions we have available that's our
understanding.
MR. JOHNSON: There again, fully at this time plus penalty.
MR. CULY: I have nothing else. Thank you, gentlemen.
MR. MACDONALD: Thank you, very much.
End of side two, tape two
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....
