- Not a typical "tax shelter."
- Substantial operations.
- In the years 1984 to 1994, the cattle breeding operations owned at
least between 4,000 to 10,000 head of cattle.
- The cattle breeding operations employed a peak of 200 and more
than 1000 people over the years, including ranch hands, cowboys, and
- 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
B. Jay Hoyt was a nationally recognized cattle
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.
- The fraud was too complex for an average investor to discover.
- 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
- 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 investors partnership (ranging
between 200 to 500) and for many other partnerships.
D. Tax Court found this was not an abusive tax
- Criminal Case
- The U.S. Attorney in Oregon has charged Jay Hoyt (and other
co-conspirators) with 25 counts relating to Hoyts partnership
- None of the investors are charged in the criminal case.
- The underlying theme of criminal case is that Jay Hoyt criminally
defrauded the Hoyt investors.
- 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
- An IRS employee, with long-term experience on this case,
recognizes that the investors were "unwitting" victims of
Jay Hoyts fraud. Appeals Officer William McDevitt made this
statement in his December 23, 1997, Appeals Supporting Statement.
Excerpts from the supporting statement:
The investors in Hoyts cattle breeding program
are, for the most part, unwitting victims who thought they were
participating in a tax-sheltered investment which would provide increased
The typical investors in the Hoyt cattle-breeding
program are unsophisticated in tax matters, even though they may earn a
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, thenjust about the time they
retired and had a substantial reduction in their earning capacitythey
would have a significant cash return on their investment, even after
Many of these investors are now confused. The Tax
Courts decision in Bales, which seems to affirm most of Hoyts
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 were not being entirely truthful.
I would suggest that the taxpayers involved in Hoyts
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 Courts 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
Memorandum at pp. 25, 27 28. [Emphasis added.]
IV. The IRS failed to take any direct action against
- The IRS failed to remove Jay Hoyt under Temp. Reg. §
- 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 Hoyts 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 Hoyts conflicts, would have replaced Jay
Hoyt and dealt with the IRS. The partners would have at least had
the opportunity to discover Jays deceptive practices in a timely
- 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 taxpayers statutes of limitations for
leniency on the IRS return preparer penalty investigation against
- 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 100s 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
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
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.
- Why didnt the IRS disbar Jay Hoyt on April
21, 1986, when CID forwarded its recommendation to District
Counsel that Jay Hoyt should be criminally prosecuted?
- Why didnt 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?
- Why didnt 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.)
- Why didnt 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.
- Third-party documents existed that supported the Services 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:
- Denial of Reconsideration of Loan Application from Farm Credit
Service, dated August 15, 1986.
The bank questioned Hoyts use of funds,
found a "material discrepancy" in cattle numbers, that
Hoyt had overly optimistic projections of income, and that there
were inadequate records.
- Application for Loan dated April 1, 1986.
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.
- 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
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
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.
- The IRS sent settlement offers out to the individual partners that
failed to provide evidence of Jay Hoyts 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."
- 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 Services determination
that Hoyt had grossly overstated the number of cattle.
- 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.
- 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).
- 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.
- Legislation is necessary to give the IRS the explicit authority,
and mandate, to "do equity" in special circumstances like
the present case.
- Support legislation that broadens the Services statutory
authority to abate interest under I.R.C. § 6404(e).
- 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.
- Contact the IRS and request that they answer the specific
questions in listed Exhibit A.