This case arises from the debtor's involvement in several partnerships formed by Walter J. Hoyt, III
Over a period of approximately 30 years, Hoyt
formed numerous partnerships to own, breed and manage sheep and cattle.
used these partnerships as illegal tax shelters in order to take tax deductions, claim tax credits, and defraud his
was under investigation by the IRS
and other government government.
was eventually convicted for conspiracy, mail fraud, bankruptcy fraud, and money laundering.
is currently serving a lengthy sentence in federal prison.2
The debtor first met with a Hoyt
representative in December 1985, and signed three subscription agreements to join Hoyt
partnerships.3 A fourth subscription agreement was signed by Hoyt
in the debtor's name.4 The debtor continued in these partnerships until 1994.5 Hoyt was designated as the Tax Matters Partner ("TMP") in all of the Hoyt partnerships.6 Generally, the IRS
has three years from the later of the date the partnership return was filed or three years from the last day for filing the return for the year to issue a notice of Final Partnership Administrative Adjustments ("FPAA").7 An
2 See U.S. v. Hoyt
, 47 Fed.Appx.
834, 836 (9th Cir. 2002).
3 Trial Transcript of October 19, 2006 at p. 173-176; Exhibits A, B and C. 4 Trial Transcript of October 19, 2006 at p. 176-178; Exhibit F. 5 Trial Transcript of October 19, 2006 at p. 180.
6 The partnerships in this case are subject to the provisions of the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), 26 U.S.C. § 6221-6234, which governs administrative and judicial proceedings related to partnership income tax.
Prior to the enactment of TEFRA, these proceedings were conducted at the level of the individual partner.
Under TEFRA, a TMP is "the partner designated to act as a liaison between the partnership and the [IRS] in administrative proceedings, and as the representative of the partnership in judicial proceedings.
Associates v. CIR, 295 F.3d 280, 281-82 (2nd Cir. 2002).
As TMP Hoyt was in charge of all correspondence with the IRS
regarding the tax problems of the partnerships.
The debtor claims that this allowed Hoyt
to perpetuate his
7 26 U.S.C. § 6229(a).
partnership over the amount of a gain or a loss and is the equivalent of a statutory notice of deficiency that the IRS
would send to an individual or a corporation.8 The three year time period for issuing a notice of FPAA can be extended with the consent of the TMP.
signed extensions for the partnerships that the debtor was involved with between February 1991 and March 1993 for the tax years 1987, 1988 and 1989.9 The extensions gave the IRS
until December 31, 1993 to issue notices of FPAA.
In late 1993 the IRS
sent notices of FPAA to Hoyt
, the TMP for the partnerships for the tax years 1987 through 1989.10 The parties agree that the notices of FPAA sent for the years 1987 through 1989 were timely only if the extensions granted by Hoyt
for those tax years were valid.
sent timely notices of FPAA to Hoyt
for the tax years 1990 through 1993 without needing any extensions.11 Upon the mailing of an FPAA, the TMP for the partnership has 90 days to file a petition challenging the FPAA with the tax court.12 Hoyt
filed timely petitions in tax court contesting all of the FPAAs for the partnerships for the years 1987 through 1993.13 All of those petitions are still being litigated in the tax court,
In response to the timely filed FPAAs, Hoyt
filed tax court petitions contesting the FPAAs.
The debtor does not contest that the FPAAs were timely but instead contends that the tax court petitions filed by Hoyt
were invalid because Hoyt
was operating under a disabling conflict of interest when he
filed the petitions.
In the instant case the debtor contends that the IRS
had a duty to remove Hoyt
as the TMP, which duty it failed, and thus, the IRS's actions in failing to remove Hoyt
as TMP until 2003 are such that the petition was invalid and the statute of limitations was never suspended.
The debtor argues that O'Neill does not apply here because the TMP in O'Neill was automatically removed by statute when he
filed for bankruptcy; the removal as TMP triggered ineligibility to file a tax court petition on behalf of the partnership, and thus, the ineligibility to file the tax court petition was based on the fault of the TMP, not the IRS
Here, the petitions filed by Hoyt
are still pending before the tax court, so no final assessment has been made.
The burden of proof, therefore, now shifts to the taxpayer to show that the extensions signed by Hoyt
River City Ranches #1 involves a different group of Mr. Hoyt's partnerships that were apparently quite similar to the partnerships with which the debtor had become involved.
In River City Ranches #1 Hoyt
had extended the periods for which the IRS
could make adjustments for the partnerships, and the partnerships argued that the extensions were invalid because Hoyt
executed them while disabled by conflicts between his
interests and those of his
The partners appealed a decision by the Tax Court on the grounds that the Tax Court improperly denied discovery pertinent to the Circuit's holdings in the Hoyt cases in the absence of contrary controlling decisions by the Fifth Circuit.
29 Madison Recycling Associates v. C.I.R., 295 F.3d 280, 286 (2nd Cir. 2002); Amesbury Apartments, Ltd. v. Commissioner, 95 T.C. 227, 240-41, 1990 WL 128878 (1990).
's actions constituted a disabling conflict was not before the Ninth Circuit, the court had found on a previous occasion that a TMP may lack the capacity to bind his
partners and the partnership when the TMP operates under a conflict of interest.30 The River City Ranches #1 court found it possible that such a conflict could exist between Hoyt and the partners in his
The extensions of the limitations periods within which the IRS
could issue Adjustments may have been against the partners' interests but in Hoyt's interest.
The sooner the IRS
issued the Adjustments, the more difficult it would be for the IRS
to defend them.
Additionally, because the partners had in fact claimed tax benefits they were not entitled to, it was in their interest for the Adjustments to be issued sooner rather than later, even if the IRS
could successfully defend the Adjustments.
Delay would mean even greater penalties and interest when eventually the back-taxes were levied.
Finally, it was in the partners' interest to receive the strong indication, which the Adjustments provided, that Hoyt
was looting the partnerships.
The Tax Court noted that such measures by the IRS
led some partners to withdraw from other partnerships and to challenge Hoyt's management of them-by means that included a civil fraud suit.
Hoyt's interests appear to have run in the opposite direction-toward delaying as long as possible any threat to the house of cards he
had constructed and kept standing since 1971.
The extensions he
signed would, and did, forestall the issuance of Adjustments that would have contributed to tensions with his
partners and threatened his
management of the partnerships.
Facing the threat of a potential and then an actual IRS
headcount that would prove his
crimes, Hoyt might well have found it in his
interest to offer any concession to the IRS that did not harm him personally, in the hope that it would put off the day of reckoning.31
Here, the debtor argues that because Hoyt
was under criminal investigation by the IRS
from July 28, 1989 to October 2, 1990 and again from August 31, 1993 to October 7, 1993, the IRS
had a duty to remove Hoyt
contends that it has no duty to remove the TMP simply because a criminal investigation has commenced, and further points out that even if it had such a duty, the extensions were all signed between February 1991 and March 1993- a gap in time between the two different IRS criminal investigations of Hoyt
Knowledge that Hoyt
had once been a criminal was not knowledge that he
was acting criminally in a different partnership.
Suspicion that he
might have been did not trigger a duty to inform persons who might thereby be harmed."35
Thus, this court holds that the IRS
had no duty to remove Hoyt
as TMP even though the IRS
had opened several criminal investigations into Hoyt
's activities, and the IRS
had suspicion that Hoyt was engaged in fraudulent activities.
This court does not agree, however, with the IRS's contention that Hoyt
was not operating under a disabling conflict of interest when he
signed the extensions.
2. One who must exercise a high standard of care in managing another's money or property."41 This court denied the summary judgment motion and took evidence to determine whether Hoyt
was acting as a fiduciary should when he
signed the extensions for the partnerships in this case.
At trial, the debtor introduced persuasive evidence to show that Hoyt
was not acting as a fiduciary to his
First, the de