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23 Facts | Background | Conflict of interest | Current collection activity
Memorandum of understanding | Pending proceedings

Despite Mr. Hoyt's known conflict of interest, IRS entered into the Memorandum Of Understanding (MOU) with Mr. Hoyt in May of 1993, governing tax years 1983 through 1986. That MOU had no binding effect in subsequent years and there was no closing agreement. At the time Mr. Hoyt and Respondent signed the MOU,  Respondent had documented in its files the following:

1. Mr. Hoyt had falsified tax returns.

2. IRS was assessing Mr. Hoyt with Section 6701 penalties for 7,000 to 10,000 K-1s he had prepared.

3. IRS assessed Mr. Hoyt with many Section 6695(f) penalties for negotiating refund checks as a tax preparer.

4. Mr. Hoyt overstated the value of cattle sold to partnerships.

5. Mr. Hoyt overstated the number of cattle available for depreciation.

6. The FBI and the U. S. Attorneys were investigating Mr. Hoyt for criminal prosecution for preparing fraudulent tax returns, back-dating documents, and filing false documents.

7. Mr. Hoyt knew he was the subject of a criminal investigation; an IRS special agent interviewed him and read his rights to him. This gave rise to a conflict of interest.

8. Mr. Hoyt had offered to settle pending tax cases in a way which was favorable to him and his family, but prejudicial to the investor partners.

9. IRS believed Mr. Hoyt had engaged in "sham transactions."

10. IRS knew Mr. Hoyt was the TMP of all the Hoyt entities and partnerships.

11. IRS knew Mr. Hoyt was an Enrolled Agent.

12. Mr. Hoyt promoted himself and his investment program by asserting the program was legitimate because IRS had never taken steps to remove him as TMP or as an Enrolled agent.

13. IRS knew Mr. Hoyt was recruiting new investors constantly and was preparing and filing their tax returns claiming large deductions of a kind IRS had already determined to disallow.

14. IRS knew Mr. Hoyt possessed signed powers of attorney from each investor allowing him to act with extraordinarily broad authority; thus the IRS knew the investors probably had no idea of the specific facts of their investments or of their tax liabilities.

15. Counsel did not represent Mr. Hoyt during the negotiation of the MOU, and there were no other parties at the table. Mr. Hoyt alone represented the interests of all of the partners in those negotiations. IRS, however, was represented by multiple attorneys.

16. From all of this, IRS knew Mr. Hoyt had conflicts of interest: pitting his own interests against those of the investor partners to whom he owed a fiduciary duty.

17. Nevertheless, IRS continued to honor Mr. Hoyt's purported authority to act as TMP and to bind the investor partners. IRS knew Mr. Hoyt was motivated to act for the benefit of himself and his family at the expense and peril of the investor partners, and they knew this is what he did.

18. IRS nevertheless entered into the MOU with Mr. Hoyt. The MOU provides for a much lower number of depreciable cattle than the evidence and the Bales case would support. The effect of the MOU was to reduce income to Ranches, owned by Mr. Hoyt's wife and siblings, while depriving the investor partners of the tax deductions from thousands of cattle which were actually available for depreciation.

19. IRS did not inform the Tax Court that Mr. Hoyt was not qualified to remain as TMP. IRS did not inform the Court that Mr. Hoyt was not qualified to act as a fiduciary to bind his partners to the terms of the MOU. IRS did not inform the Court that Mr. Hoyt had conflicts of interest in entering into the MOU.

20. IRS has now begun to execute on the MOU pass-through liability of individual investor partners. The assessments include massive amounts of assessed tax motivated transaction interest which have accrued while IRS dickered with Mr. Hoyt. The MOU makes no provision for assessment of tax motivated transaction penalty interest. These assessments reach up to the $300,000 range for investors whose net worth does not remotely approach that amount.

21. Contemporaneously with the negotiations leading to the MOU, IRS entered into extensions of the statutes of limitations for several tax years (including the years affected by the MOU). This increased the tax liability of partners, by allowing interest to mount on taxes resulting from the loss of deductions IRS knew it was going to disallow in full because IRS had a written Hoyt "Audit Plan" requiring that all deductions be adjusted to zero.

22. Apparently in exchange for the extensions granted by Mr. Hoyt, IRS allowed the statutes of limitations on preparer penalties against Mr. Hoyt to lapse and abated many penalties assessed against him.

23. IRS took full advantage of an unrepresented TMP it believed was a crook with known conflicts of interest, to inflict maximum tax consequences on investors oblivious to their plight.

BACKGROUND

The Hoyt cattle businesses consisted of many businesses operating throughout the West. Walter J. Hoyt III (Jay Hoyt), the primary promoter, was an IRS Enrolled Agent and the tax matters partner and managing partner for the cattle owning partnerships and management company.

During the years on which taxes are now being billed (1980-1986), the Hoyt family, through their business entities, sold cattle to partnerships ("the partnerships") who then entered into a sharecrop agreement with another Hoyt family-owned entity. The basic concepts were:

A. A partnership agreement providing for ownership of cattle;
B. A sharecrop agreement with another entity for management of the herd;
C. Use of promissory notes to purchase cattle;
D. Payment for management with calves born to the managed cows;
E. Use of tax savings to generate cash flow;
F. A contractual obligation for the managing entity to increase herd size.

The Hoyt entities guaranteed fertility and registry of cows and bulls to support higher prices. The Hoyt management entities ("Ranches" or "Management Co.") received calves born to the partnership cows as management fees and "interest." Hoyt commingled the cattle owned by the partnerships into a large or "universal" herd maintained in multiple locations.

Each partner became obligated on the full recourse promissory note payable by the partnership to ranches. Each partner (obligated on the full amount of the note) assumed a "primary" obligation to establish basis for depreciation deductions. These obligations were for substantial amounts (e.g.: Hansen=$200,000, Davenport $160,000, Emerson $205,000).

A subscription agreement, signed by each investor-partner, also contained a power of attorney authorizing Jay Hoyt to take actions binding the other partners (including incurring debt). Jay Hoyt, as de facto attorney for the partners, executed the notes from the partnerships to ranches. The authority for this action was in the subscription agreements.

Hoyt measured the herds of 29 of the partnerships for the Bales case in 1985, and determined them to contain 6500 head of adult females alone. Ranches' listing of the cattle sold to partnerships through 1986 showed approximately 21,000 animals. IRS has contended there were no cattle, and at other times contended there were only small numbers of cattle.

The Hoyt Shorthorn cattle had values averaging $4000 per head in 1986 according to Dr. Hunsley of the American Shorthorn Association. Hoyt stipulated that value to IRS in a settlement Memorandum of Understanding of May 20, 1993, but IRS later disputed that value and has contended the cattle had values ranging from $500 to $2000 per head.

Each partnership claimed basis in its breeding herd in the amount paid for the cattle comprising the herd (Tr 973-974, 985).

Each investor partner's initial contribution came mostly from the tax refund the partner received from the loss carryback of the first year of participation. The investor partners are almost exclusively of average economic status, without tax or investment expertise. They saw this as an attractive opportunity to invest without expending large amounts of cash up front.

MEMORANDUM OF UNDERSTANDING and CONFLICT OF INTEREST

The Hoyt businesses had been the subject of audits since the early 1970s. By 1984, IRS was investigating Mr. Hoyt to establish criminal wrongdoing in connection with his business operations and preparation of tax returns for the partnerships and individual partners. By 1989, there was a grand jury proceeding in the investigation.

IRS made no effort to remove Mr. Hoyt as TMP or to disbar him as an Enrolled Agent. IRS did not inform partners that Mr. Hoyt was the subject of a criminal investigation by CID (except for a very few, whom IRS wanted as witnesses).

In 1992 a "settlement committee" of investor partners negotiated with IRS for a final global settlement that would have included Mr. Hoyt's resignation from the business and his Enrolled Agent status. Mr. Hoyt signed a letter of intent agreeing to all the terms demanded of him personally by IRS. IRS refused to consummate the settlement.

PENDING PROCEEDINGS

The section below was written in the late 1990s. All of the cases have since been settled. But this gives you an idea of how very screwed up this mess was.

There are more than 700 Hoyt cases now pending before the U. S. Court on partnership matters for tax years 1987 through 1994. The Oregon Bankruptcy proceeding involves all of the Hoyt entities, including all the investor partnerships, either as bankrupt entities or as parties to adversary proceedings.

A few partners individually have cases pending before the Tax Court. The most relevant of those is Phillips v Commissioner, Docket No.9354-96, in which IRS represented to the Court that neither the CID nor the Regional Counsel's office retained any records of the criminal investigation of Mr. Hoyt.

The investigation is not complete. Mr. Hoyt's deposition now consists of 17 volumes of testimony taken over several weeks. It continue after the information can be analyzed. An estimated 8 million pages of documents have been retrieved and are now being cataloged and indexed. The depositions of key Hoyt personnel are scheduled for October, 1999. The Bankruptcy Analyst from the U.S. Trustee's office and the undersigned reviewed additional records discovered in Burns, Oregon during August of 1998.

Meanwhile, the U. S. Trustee has shut down the Hoyt operation, and payments from partners have stopped. The livestock have all been sold. The equipment and real estate of the Hoyt operation have been liquidated. There is almost nothing left to distribute to creditors--including investors. The investors have permanently lost the money they paid to Hoyt entities.

Please read Monty Cobb's letter to National Taxpayer Advocate.

Questions, problems? Want to render assistance?
Write to hoyt @mindconnection.com (paste this address into your e-mail program, and delete the space).

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