The Hoyt Fiasco: Outline

1. Not a typical "tax shelter."

1. Substantial operations.

1. In the years 1984 to 1994, the cattle breeding operations owned at least between 4,000 to 10,000 head of cattle.
2. The cattle breeding operations employed a peak of 200 and more than 1000 people over the years, including ranch hands, cowboys, and office staff.
3. The cattle were kept on ten to twelve separate Hoyt ranches as well as additional leased land (the number of ranches changed over the years). The combined acreage of Hoyt ranches totaled over 500,000 acres.

B. Jay Hoyt was a nationally recognized cattle breeder.

Jay Hoyt (the promoter) and his family were nationally recognized cattle breeders. The family had been breeding cattle for over 25 years before they began selling the Hoyt partnerships.

C. The Hoyt investors could not have individually discovered the fraud.

1. The fraud was too complex for an average investor to discover.
2. When Hoyt investors went to look at the cattle operations, they saw thousands of cattle, hundreds of employees, and acre upon acre of ranch property
3. While the individual investor knew there were other Hoyt partnerships, they did not know how many. Therefore, when the investor saw thousands of cattle, there appeared to be enough cattle, i.e., enough for the investor’s partnership (ranging between 200 to 500) and for many other partnerships.

D. Tax Court found this was not an abusive tax shelter. Bales.

1. Criminal Case

1. The U.S. Attorney in Oregon has charged Jay Hoyt (and other co-conspirators) with 25 counts relating to Hoyt’s partnership activities.
2. None of the investors are charged in the criminal case.
3. The underlying theme of criminal case is that Jay Hoyt criminally defrauded the Hoyt investors.
4. No criminal tax counts were included because the U.S. Attorney found the IRS investigative materials were inadequate and, in some instances, simply missing.

III. McDevitt Memorandum

1. An IRS employee, with long-term experience on this case, recognizes that the investors were "unwitting" victims of Jay Hoyt’s fraud. Appeals Officer William McDevitt made this statement in his December 23, 1997, Appeals Supporting Statement.

Excerpts from the supporting statement:

The investors in Hoyt’s cattle breeding program are, for the most part, unwitting victims who thought they were participating in a tax-sheltered investment which would provide increased retirement benefits.

…

The typical investors in the Hoyt cattle-breeding program are unsophisticated in tax matters, even though they may earn a substantial salary.

…

After speaking with scores of investors, it is difficult for me to allege that their principal motivation in investing with Hoyt was tax avoidance. Each of the persons with whom I spoke recognized the tax benefits they derived. In fact, Hoyt openly told them about the tax advantages, but convinced them that the program was designed only to defer their ultimate tax liability. The investors were supposed to "shelter" income in the early years of the programs, but after five years, they would sell the offspring from the cattle in their herd, and reap substantial financial rewards, all of which would be taxable.

During the early days of the promotion, Hoyt was able to compare his cattle operation with those legitimate tax sheltered investments as were owned by notable persons such as (former) President Reagan who, when he was the governor of California paid no income tax on his substantial earnings. Such analogies can indeed be persuasive.

Furthermore, many of the investors were middle-aged, preparing to retire from their present employment and looking for some sort of investment which would supplement their pensions. This type of deferred income arrangement suited them perfectly. They would be able to pay less tax for five to seven years, then–just about the time they retired and had a substantial reduction in their earning capacity–they would have a significant cash return on their investment, even after anticipated taxes.

Many of these investors are now confused. The Tax Court’s decision in Bales, which seems to affirm most of Hoyt’s assertions and theories, has added to this confusion. Each time we attempt to provide meaningful information to the investors in an attempt to discredit Hoyt, he promptly begins to wave the Bales decision around and tells the investors that we’re not being entirely truthful.

…

I would suggest that the taxpayers involved in Hoyt’s program have learned a great deal during our recent dealings with them, that many of them are still confused about who – the IRS or Hoyt – is telling them the whole truth; and that they are anxious to comply with the tax laws, if they can just figure out what compliance means. And, as I mentioned above, the Tax Court’s decision in Bales has only added to the investors’ confusion.

…

It seems to me that proposing penalties against these investors would only be likened to pouring salt into their open wounds; and not only that, it would do nothing more than to anger them; it would amount to adding mere numbers to already uncollectible accounts. In other words, it serves no useful purpose and, where we have discretion as to whether these penalties should be imposed, we should exercise that discretion.

Memorandum at pp. 25, 27 – 28. [Emphasis added.]

IV. The IRS failed to take any direct action against Jay Hoyt.

1. The IRS failed to remove Jay Hoyt under Temp. Reg. § 301.6231(c)-5T.

1. The IRS has the authority (and arguably the legal obligation) to remove Tax Matters Partners that are under criminal investigation because the "criminal investigation for the violation of the internal revenue laws relating to income tax will interfere with the effective and efficient enforcement of the internal revenue laws." Temp. Reg. § 301.6231(c)-5T. Jay Hoyt’s removal would have effectively alerted the partners to many of the problems. It is also unlikely that Jay Hoyt would have continued to sell partnerships interests, if he was removed as the Tax Matters Partner each time the IRS began auditing a different partnership. A partner(s), without Jay Hoyt’s conflicts, would have replaced Jay Hoyt and dealt with the IRS. The partners would have at least had the opportunity to discover Jay’s deceptive practices in a timely manner.

 

2. The partnership shelters and tax cases would have ended sooner had Hoyt been removed as TMP, because he would have lost control of the evidence and the case process. Hoyt had little incentive to do anything but keep trying to ‘hide the ball’ from the IRS and the investors. As TMP, he maintained control and the ability to extend statutes of limitations on the case to serve no other purpose but protection against his own personal criminal and civil tax liability (he admits he bartered with taxpayer’s statutes of limitations for leniency on the IRS’ return preparer penalty investigation against him).

 

3. The IRS invited this type of abuse of process because they did not want to remove him and deal with what they considered the "hassle of dealing with possibly 100’s of TMPs." . So, instead, the IRS actually chose to deal with the individual that it believed was guilty of criminal tax fraud (as evidenced by their criminal tax investigation) and of breaching his fiduciary duty as statutory representative of the taxpayers, rather than process the case with the assistance of the innocent partners.

B. The IRS failed to assert tax return preparer penalties against Jay Hoyt

C. The IRS failed to file an injunction against Jay Hoyt as a tax return preparer. I.R.C. § 7407

D. The IRS failed to file an injunction against Jay Hoyt as a promoter of an abusive tax shelter. I.R.C. § 7408

E. The IRS failed to remove Jay Hoyt as an Enrolled Agent.

Of all of the IRS failures, this one is perhaps the most mystifying. The Service allowed Jay Hoyt to continue as an Enrolled Agent until 1997 when it finally disbarred him. Jay used the fact that the IRS took no action against him as a claim to investors that he was legitimate.

1. Why didn’t the IRS disbar Jay Hoyt on April 21, 1986, when CID forwarded its recommendation to District Counsel that Jay Hoyt should be criminally prosecuted?
   
2. Why didn’t the IRS disbar Jay Hoyt on July 31, 1986, when District Counsel forwarded its recommendation to the Department of Justice that Jay Hoyt should be criminally prosecuted?
   
3. Why didn’t the IRS disbar Jay Hoyt on in October or November of 1989, when the Department of Justice approved a grand jury investigation of Jay Hoyt? (The disbarred proceeding did not need to refer to the Grand Jury proceeding to disbar Jay.)
   
4. Why didn’t the IRS disbar Jay Hoyt when it initiated its tax return preparer penalty investigation against him?

V. The IRS failed to provide the available third-party evidence to the investors.

1. Third-party documents existed that supported the Service’s claim that Jay Hoyt was grossly overstating the number of cattle that existed and committing fraud. These documents include loan documents filled out by Jay Hoyt, termination of loans by banks when, after an audit, the bank believed that insufficient cattle existed. The documents were not voluminous, totaling between 10 to 20 pages, and should have been provided to at least the notice partners if not all partners. (There was no disclosure problem with these documents as they related to all partnerships.) The documents include:

1. Denial of Reconsideration of Loan Application from Farm Credit Service, dated August 15, 1986.
   

2. The bank questioned Hoyt’s use of funds, found a "material discrepancy" in cattle numbers, that Hoyt had overly optimistic projections of income, and that there were inadequate records.

3. Application for Loan dated April 1, 1986.
   

4. Hoyt claimed cattle values that were substantially less than the values Jay Hoyt represented to both the investors and the IRS. Also shows significantly fewer cattle than claimed on the partnership returns.

5. Stipulation of Facts filed with the United States Tax Court on May 26, 1993.

Jay Hoyt admitted that he diverted money from the IRA program that was used by other Hoyt entities for operating expensesor by the Hoyt family members for personal expenses.

Jay Hoyt admitted that "no depreciation, investment credit or other deductions or credits based on an allocation of the aforesaid $3,100,000 sales price has any economic substance…"

When the IRS chose to keep Hoyt in the TMP position, while at the same time they also knew he was hiding this evidence from the partners, the IRS essentially assumed a duty to ensure the fair administration of the case, including the right of taxpayers to know the evidence against them.

1. The IRS sent settlement offers out to the individual partners that failed to provide evidence of Jay Hoyt’s fraud. Instead, these settlement offers made allegations of fraud, but provided no support for the allegations. Essentially these IRS documents said, "Believe us, we know."
2. The IRS was aware that the Bales opinion created confusion as, on its face, it looked like a win for the taxpayers. Even knowing this, the IRS still did not provide the individual investors with third-party records that supported the Service’s determination that Hoyt had grossly overstated the number of cattle.
3. Internal IRS documents show that the IRS believed that Jay Hoyt was not providing the required information to the individual investors and that Jay Hoyt was "grossly violating his fiduciary duties." And yet, the IRS still did not provide the third party documents to the individual investors.

IV. Congressional Support Needed.

1. Inquire and support the Ways & Means Subcommittee on Oversight concerning its inquiry on the Penalty and Interest Provisions in the Internal Revenue Code. Note: A hearing was held on January 27, 2000 concerning these issues and Representative Amo Houghton, in his opening statement, specifically stated concerns about the Hoyt partnerships (by specifically referencing a Hoyt partner and describing the Hoyt situation).
2. Public has a keen interest in the fair administration of tax cases. When the IRS acts, whether under a reasonable belief that statutory law has constrained them to so act or if it is an abuse of their power in so acting, if that act unfairly and unnecessarily burdens innocent victims with the penalties and interest, then the public must take action to prevent the injustice.
3. Legislation is necessary to give the IRS the explicit authority, and mandate, to "do equity" in special circumstances like the present case.
4. Support legislation that broadens the Service’s statutory authority to abate interest under I.R.C. § 6404(e).
5. Support legislation that requires the IRS to broadly apply equitable considerations in Offers in Compromise (as intended by Congress in the IRS Restructuring and Reform Act of 1998). This would include situations where innocent taxpayers are victimized by a promoter and the IRS declines to enjoin such activity.
6. Contact the IRS and request that they answer the specific questions in listed Exhibit A.