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Phantom Cow Final Edition

JANUARY, 1999

Partners in Search of Truth formed in November 1993 to organize a network of individuals who invested in Hoyt & Sons Partnerships; develop a mechanism to share information; and raise funds to support legal and legislative remedies to try protecting Hoyt's victims from financial ruin.

Over the next two and a half years, the volunteers in this group--using contributions from around 350 supporters--published Phantom Cow and pursued a two-pronged effort. The legal effort funded the Statute of Limitations argument in the Guy Miller case before the Federal Bankruptcy Court and an appeal of its negative decision before the U.S. Ninth Circuit Court.

The political effort encouraged letter-writing campaigns to our representatives in the United States Congress. Neither effort was successful at that time. None of the problems have gone away and more people than ever have been financially ruined through IRS' collection actions. Additional groups of Hoyt contributors have received collection notices and face the same fate.

Most of the volunteers who undertook organizing PIST, publishing Phantom Cow and pursuing the legal cases are exhausted and want to get on with their lives. This letter, sent to the full 2400-name list as it existed in 1994, is our final effort. With it, the funds contributed by supporters are exhausted, and the group itself is disbanded. This final letter has been withheld many months pending certain developments. The following should be of broad interest and may benefit many.

HOYT INDICTMENT AND ARREST
In June 1995, U.S. Postal Inspectors and FBI agents seized records from Hoyt's Burns headquarters, based on a search warrant alleging mail fraud and interstate transportation of stolen property. A federal grand jury, which heard the case, issued a 25-count mail fraud and conspiracy indictment against Hoyt and four others: David Cross, Darrel Smith, David Barnes and April Barnes.

On Monday, November 30, 1998, Hoyt, Cross and Smith were arrested in Burns, OR; David and April Barnes were arrested in CA. All were released on their own recognizance. According to the FBI and U.S. Postal Inspectors, the indictments were the result of a five-year investigation in OR, WA, CA and ID. The charges cover from 1982 to the present. Conviction could result in up to 5 years in jail and/or a fine of $250,000 on each count.

The case is expected to go to trial in Portland, OR in late 1999. ( http://www.sacbee.com, business section of December 5, 1998, has the full story). Incredibly, the IRS continues to deal with Hoyt as tax matters partner for the partnerships!

TRANSPAC DRILLING v THE IRS COMMISSIONER
Transpac was the name of limited partnerships formed to explore oil and gas ventures. The 71 partnerships each contained between 30 to 50 limited partners. In 1983, IRS began to audit the partnerships, and in 1985 launched a criminal investigation.

The tax matters partners (TMPS) were served with grand jury subpoenas in 1986, and later agreed to cooperate with the IRS and FBI. But while these events were going on, the IRS continued its audits, and sought and obtained extensions of the statute of limitations from these TMPS. The Tax Court finally removed the TMPs in 1990. Some of the limited partners argued that extensions granted by the TMPs were invalid due to a conflict of interest. The Tax Court found for IRS against the taxpayers, and the taxpayers appealed.

On June 26, 1998, the US Second Circuit Court of Appeals found that Tax Matters Partners (TMP) could NOT validly execute extensions of the three-year statute of limitations while under criminal investigation by the IRS." As a result of being placed under criminal investigation by the IRS (and hence becoming subject to pressure by the IRS), the TMPs labored under a conflict of interest and were disqualified from binding the partnerships." (Citation: 1225 DTR K- 13, 1998)

This is the same issue as was raised in the Guy Miller case. Unfortunately, the Bankruptcy Court and the Ninth Circuit Court refused to look beyond the 906 closing agreement. They determined the 906 closing agreement could not be voided and failed to look at the validity of the extensions of the statute of limitations granted by Hoyt beginning in 1986 as tax matters partner. The IRS initially began investigating Hoyt for criminal fraud in 1984.

ALEXANDER v. THE UNITED STATES
Alexander was a limited partner in Columbia Building, LTD, Alexander filed a timely 1984 tax return which included income from his partnership. In 1988, IRS mailed him an administrative adjustment, which resulted in increased tax liability. They also enclosed an IRS Form 870-P settlement agreement, which barred any "claim for refund or credit based on any change in the treatment of partnership items."

Alexander signed the agreement and a year later IRS assessed a deficiency, which he paid. Other partners had taken the case to Tax Court and the case was decided in their favor since the statute of limitations for assessing any deficiency had expired before the adjustments were issued. Alexander filed a timely claim for refund, which IRS denied. Alexander then sued in district court, but lost. He appealed.

 On February 15, 1995, the U.S. Fifth Circuit Court of Appeals found that Thomas Alexander could sue the United States (the Service) for a refund of federal income taxes assessed and collected after the expiration of the statute of limitations even though he signed a binding settlement agreement, the 870-P form.

The Court found that although Alexander had signed a settlement agreement, he had not waived his right to a refund. Had the closing agreement specifically barred the refund, Alexander would have had no case. (Cite'. Alexander v. United States, KTC 1995-23, 5th Circuit) This was a complicated case and appeared to be narrow in scope.

Although the 870-P form used in this case is similar to the 906 used by the IRS in the Hoyt cases, it is not the same. The relevance of this case to Hoyt partners who signed a 906 agreement with the IRS is unknown at this time. Most of the earlier Hoyt partners who settled were forced into bankruptcy and many are still engaged with the bankruptcy court. Most Hoyt partners who settled with the IRS and paid taxes and interest did so well over three years ago, and thus the period to file a timely request for refund has expired.

PHILLIPS VS. COMMISSIONER
Curtis Berner currently is pursuing a case in tax court before Judge Stanley Goldberg arguing that the IRS should have removed Hoyt as tax matters partner while he was under criminal investigation. A 906-settlement agreement had not been signed in this case.

The case still has not been fully submitted for review and decision, but should be heard sometime in 1999, The Second Circuit Court decision in the Transpac may be of significant importance in this case and for other Hoyt partners who have not signed a settlement agreement with the IRS.

RICHARD POOLEY'S CONTINUING EFFORTS
In 1997, Richard Pooley wrote a comprehensive and well-crafted letter to the members of the Senate Finance Committee, which has oversight of the IRS. In it he detailed the allegations of IRS' failure to act to stop Hoyt's schemes, its actions in dealing with Hoyt which were fatal to the interests of the investors, and evidence of collection abuse, in which certain IRS officers vowed to conduct a "search and destroy" mission against Hoyt investors.

This letter went to the Committee prior to its public hearings into allegations of IRS abuses, which led to the new law governing how IRS may operate. Although he received a pro forma response some months later, none of the information he submitted was acted upon.

HOYT PARTNERSHIP BANKRUPTCIES
Hoyt filed for Chapter 11 bankruptcy on Hoyt & Sons Ranch Properties in May 1995. This bankruptcy is nearing completion with the sale of 10 ranches containing thousands o acres of grazing land, a feed lot, an office building, etc. In addition, Hoyt sold some 5,500 head of cattle between June 1996 and July 1997 as part of this bankruptcy. Some creditors got back a fraction of what they were owed.

Others, including most partners, got little or nothing. Attorneys representing former Hoyt partners connected to the Louisiana default judgment case against Hoyt forced the Hoyt Master Limited Partnership and the Management Company Partnerships into an involuntary Chapter Seven bankruptcy in June 1997.Neal Jensen was appointed Attorney for the Trustee of the Bankruptcy.

Between April and June 1998, Mr. Jensen had all the remaining cattle (less than 1000) and sheep sold which netted approximately $700,000. He is continuing to search for and liquidate the remaining assets to pay creditors but expectations are that it will take another year or two to finish. In order to preserve assets, Hoyt's Burns and Elk Grove offices have been closed and the staff laid off.

As with the Ranches bankruptcy, creditors' claims far exceed the amount gathered from sale of assets. Those former partner who are part of the Louisiana default judgment have no greater claim to reimbursement than any other creditor, including other partners. Because of IRS' involvement and tax claims against the Partnerships, Jensen is trying to negotiate a global settlement to bring an equitable end to all Hoyt issues.

OTHER HOYT PARTNERSHIP NEWS
Montgomery (Monty) Cobb of Cobb & Woodworth, LLP, of Portland, Oregon is now representing the Partnership's interest (not individual partners) in the two Chapter Seven bankruptcy cases. He previously appeared in Hoyt Tax Court cases tried in San Francisco and Las Vegas in 1996 and 1997.

Cobb will be negotiating with Neal Jensen in an attempt to preserve the assets of the partnerships for the partners. He is working wit Jensen in attempting to achieve a final and complete settlement with IRS on all Hoyt matters. He has received information from Jensen's investigation of Hoyt's operation which caused him to write cautionary letters to those partners who were still involved. In January 1998, he obtained Hoyt' resignation as the managing general partner for all partnerships.

With Jensen's concurrence, he retained Gary and Peggy Blackburn to assist in document organization an Dave and April Barnes to arrange the sale of cattle, sheep, equipment, etc. All proceeds from the sale of assets are under the jurisdiction of the Bankruptcy Court, Perhaps the most important task Cobb has undertaken is to join with Neal Jensen in attempting to negotiate a global settlement with IRS to resolve all issues, close out all years and put an end to the tax court cases.

GLOBAL SETTLEMENT WITH IRS
Back in January 1992, IRS mailed settlement offer proposals to all investors in Hoyt partnerships for tax years 1980-86. Many of the partners already had docketed cases before the Tax Court for 1980-1982. IRS offered an 'out-of-pocket' settlement of all years from 1980 to the most recent year a partner had been involved with Hoyt.

It was a take it or leave it, all or nothing offer. A Hoyt Partners' Settlement Committee, formed with the concurrence of Jay Hoyt, negotiated directly with IRS on behalf of all the partners. They proposed a settlement in which partners would pay back the tax in a roil-up of the tax consequences of the investments into a single, non-recent year.

This approach is known as a burnout, and would have significantly reduced the interest assessed while requiring the partners to pay all back taxes. it would also have put Hoyt out of business in 1992. IRS staff appeared to be seriously negotiating with the committee but then abruptly ended negotiations in the fall of 1998, over six years later, Neal Jensen, Attorney for the Trustee in the Hoyt bankruptcies, Monty Cobb, attorney for the partnerships' interests and others who represent former partners tried to arrange a conference with national IRS officials to try to negotiate a global settlement.

It appeared the time finally was right for such an effort to succeed. The latest information is that Sacramento IRS again torpedoed the negotiations. Based on the Transpac case, it would appear none of the extensions of the statute of limitations Hoyt signed from 1983 to 1990 or later were valid However, if a settlement with IRS ever is reached, what will be the effect on those people who settled in 1992 or later and signed a settlement agreement?

It is too late for them to file for a refund, because the three-year period has passed. We firmly believe that any global settlement must also provide for equitable treatment for these earlier partners who did not have the benefit of recent precedent setting decisions.

TAX COURT CASES
Hoyt partners in the 1980-1986 tax court case who opted to accept Hoyt's Memorandum of Understanding (MOU) with IRS rather than IRS' 'out of pocket' offer and hoped that Hoyt's 'repossessions and "redistribution' of partnership shares and expenses would shield them from the IRS lost their case in tax court. IRS started sending them bills in March 1998.

Because of the nature of the case, the interest on these bills was figured at the "tax motivated" interest rate, which was about 25 percent higher than the regular interest rate charged to those who settled. Attorneys for partners in two or three regions of the country are trying to have the MOU thrown out. Cases for the 1987-1993 years went to tax court in late 1996 or early 1997, but have not yet been decided. Cases from 1994 forward have not yet gone to tax court.

A SPECIAL THANKS TO JOYCE HEARD
All Hoyt investors owe a special debt of gratitude to Joyce. She has spent hundreds of hours and much of her own personal funds to provide vital information to the U.S. Attorneys and private attorneys pursuing Hoyt. Her efforts to inform key legislators of the Hoyt disaster have been Herculean.

She is in contact with people ail over the country and has fought long and hard for justice for Hoyt's victims, The small amount we were able to reimburse her for some of her out-of-pocket costs are negligible compared to the work she has done for all of us. THANKS, Joyce!

Even though the committee has gone out or existence, Joyce is continuing her efforts. If you want to find out what the future brings as the Hoyt fiasco is finally played out, or if you want to contribute information which could be useful, write to Joyce Heard, 2444 Turner, Ceres, CA 95307 and enclose a stamped, self-addressed envelop (SASE). She has committed to respond.