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Wrong Walter Hoyt?

Walter J. Hoyt

Agent

Internal Revenue Service

Email: w***@***.gov

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I agree to the Terms of Service and Privacy Policy. I understand that I will receive a subscription to ZoomInfo Community Edition at no charge in exchange for downloading and installing the ZoomInfo Contact Contributor utility which, among other features, involves sharing my business contacts as well as headers and signature blocks from emails that I receive.

Internal Revenue Service

P.O. Box 60755

Santa Barbara, California,93160

United States

Company Description

The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record that is located in the designated disaster area. As such, taxpayers need not contact the IRS requesting relief. In some instances, the IRS will also waive la...more

Background Information

Employment History

Tax Matters Partner

DGE


Affiliations

Hoyt Corporation

Founder


Web References(13 Total References)


07.04.13 Martinez Banko 02-15471

www.pearsonmerriam.com [cached]

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. Hoyt used these partnerships as illegal tax shelters in order to take tax deductions, claim tax credits, and defraud his partners. Although Hoyt was under investigation by the IRS and other government government. Hoyt was eventually convicted for conspiracy, mail fraud, bankruptcy fraud, and money laundering. He 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. Madison Recycling 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 fraudulent schemes. 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. Hoyt 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. The IRS 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 are invalid. 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 partners. 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). whether Hoyt'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 partnerships: 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 as TMP. The IRS 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 partners. First, the de


Hoyt Fiasco: Timeline

www.mindconnection.com [cached]

Walter Jason (Jay) Hoyt III and father sued by First Security Bank of Elk Grove for allegedly submitting fraudulent loan applications in the late 1960s.
Bank was awarded $113,000. Hoyt passes test and becomes enrolled agent of IRS. He prepares tax returns of investors through his tax office, and assigns them cattle-raising expenses as deductions to generate big tax refunds. 1980: Audit shows that Hoyt has 1,000 fewer cattle than he has sold to investors. Hoyt blames the shortage on venereal disease, but decides to not replace the missing cattle. By 1982, the shortage is almost 3,000. IRS, suspecting fraud, begins annual audits of Hoyt partnerships. 1981: Internal Revenue Service begins investigation of Hoyt Partnerships. 1982: Hoyt appoints himself as tax matters partner for all his partnerships. The number of cattle-breeding partnerships has grown to 24. Hoyt files to sell Individual Retirement Account securities as Hoyt & Sons Ranch Properties in Oregon., but doesn't answer regulators' questions so isn't licensed. 1983: Even though Hoyt is not licensed to sell securities in Oregon, he sells the Burns-area Durkee Ranch to Ranch Properties (IRA) investors for $3.1 million - a significant profit from the $1.8 million his brother Ric bought it for a year earlier. Hoyt remains Tax Matters Partner and retains Enrolled Agent status . 1986: IRS attorneys again recommend to Department of Justice that Hoyt be prosecuted for assisting in preparation of false and fraudulent returns. Despite those concerns, IRS also allows him to remain as enrolled agent and tax matters partner for all partnerships . Hoyt goes to trial in tax court. Afterward, he sends letters to investors telling them not to worry about outcome of the case, but agrees in court documents after trial that partners were not "at risk" of losing property. That meant partners would face huge penalties. To boost the supposed value of his cattle, Hoyt allegedly arranges several "shill" sales at auctions. Hoyt either pays money or trades cows to offset the cattle sales prices. Tax Reform Act of 1986 passes and affects partnerships, so that only "active" partners can deduct expenses. Hoyt sends letter interpreting the new tax law, misleading investor-partners and telling them they only need to talk among themselves or recruit new partners to satisfy the new requirements. 1987: Hoyt operation reaches its peak, with cattle on more than 500,000 acres, a fleet of 42 trucks and about 200 employees. Justice Department declines to prosecute Hoyt. 1988: Hoyt family signs agreement to liquidate Hoyt & Sons Ranches and divvy up more than an estimated $3 million worth of investor-bought assets including cattle, trucks, farm machinery and even money. IRS notifies Hoyt he is under investigation for preparing fraudulent tax returns, but drops threat of penalty in return for Hoyt's cooperation in conducting audits of partnerships. The number of Hoyt partnerships has climbed to 72. 1989: US Tax Court issues decision in Bales case, in which the Judge said Hoyt partnerships in 1977 through 1981 were not shams and legal under the laws of the time. The decision is hailed as a victory by Hoyt, who begins sending copies of the decision in packets to investors. 1990: Oregon securities examiners get complaint about possible violations relating to Hoyt IRA plan. 1991: Federal judge orders Hoyt to allow IRS to perform cattle and sheep counts and inspect his cattle records. 1992: IRS makes settlement offer to all Hoyt investors based on concessions by Hoyt in Bales case. This letter is the first indication to most investors that the big "win" in Bales case was for Hoyt, not for individual partners. Sales efforts continue unabated. Hoyt produces 39-page booklet entitled "Harvesting Tax Savings by Farming the Tax Code." 1992: Investor Rodney Moore leads 162 investors in suit against Hoyt in Sacramento, alleging securities fraud and racketeering. Committee gets agreement from Hoyt that he will pay fines and shut down partnerships. Settlement would have resulted in $25 million in revenue collection but IRS lawyers refuse to sign. 1993: IRS cattle count, when finished, shows that Hoyt owned 4,764 mature breeding cows, and 7,903 total. In contrast, a count by a Hoyt worker indicated Hoyt owned 26,205 cattle. Hoyt signs stipulation of facts with IRS, agreeing that some investor money raised through IRA did not go to ranch improvements and was used for family and other expenses. Hoyt remains Tax Matters Partner and retains Enrolled Agent status . 1993: Hoyt signs memorandum of understanding admitting investors deducted expenses for too many cows from 1981 to 1986. That makes them responsible for millions in taxes and penalties, yet reduces the Hoyt family's tax liability by millions. Nothing more is heard of IRS criminal investigation. 1993: U.S. Postal Inspector receives word that Hoyt may be operating a fraud based on selling livestock partnerships. FBI joins inquiry. 1994: IRS begins seizing bank accounts and putting liens on houses of Hoyt investors. Hoyt settles lawsuit filed by ex-worker by giving away more than 500 investor cattle. IRS files liens in Deschutes County for $10 million, and for $1 million in Oregon City. The agency seizes Hoyt's Burns hilltop home, valued at $342,000, to sell at auction. 1995: Hoyt and his relatives submit the top bid for the Burns home at auction, bidding $60,100. The family never moved out. Hoyt files Chapter 11 bankruptcy for IRA fund, believing it would allow Hoyt to reorganize his debts and keep the ranch property. A Louisiana court approves a $11 million judgement filed against Hoyt by 13 investors. 1996: Hoyt ordered to repay $1.3 million for defaulting on loan payments. IRS liens against Hoyt have climbed to $63.6 million. Hoyt testifies in "Durham Farms" tax court case that herd size is 17,000 to 18,000. 1997: Louisiana investors, who have not yet been paid the $11 million, file involuntary bankruptcy against Hoyt cattle partnerships. More than 1,000 investor cases are pending in tax court. Hoyt conceals more than $1.6 million in investor payments from bankruptcy trustee. Also, Hoyt worker sends letter telling investors to send checks to new Hoyt entity, allegedly to prevent the money from reaching bankruptcy trustee. Finally, Hoyt's IRS enrolled agent license revoked. He remains the tax matters partner for virtually all partnerships . 1998: Hoyt claims 11,090 cattle still belong to the Hoyt partnerships, but he reveals in a deposition that most are owned by other people. Hoyt sends letter telling few remaining partners to pay more or face losing cattle. Trustee auctions about 1,100 Hoyt cows near Fresno. The cows, which Hoyt has sold to his investors for $4,000 or more apiece, sell for about $700 each. Hoyt continues shifting money and assets between varied businesses. Bankruptcy trustee closes Hoyt office and combines all Hoyt livestock and operating entities into one single case, which finally shuts him down. Grand jury indicts Hoyt and others for conspiracy, mail fraud and money laundering. Hoyt and four others arrested. IRS removes Hoyt as tax matters partner from some partnerships. Judge says investors can't write off any cattle-raising expenses for 1987 to 1992, because it is unclear whether Hoyt even had the cattle to sell them. Federal judge tells IRS and partnership attorneys to work out final settlement. Several hundred cases still are pending in tax court. Hoyt family agrees to turn over home in Burns and $119,624 in cashiers checks as part of bankruptcy settlement. 2001: Walter J. Hoyt III and 2 co-defendants are found guilty of mail fraud, money laundering and conspiracy. To date, Hoyt has not been arrested for any tax related criminal charges. He remains the tax matters partner for most of the partnerships . Hundreds of investors face huge tax bills they have not hope of being able to pay. Walter J. Hoyt has been convicted of fraud and will go to jail. Currently there are 1,000 cases pending in tax court. The IRS has refused to negotiate an equitable settlement even when the request came from the presiding judge. The tax court case are completely unnecessary. Investor/Partners do not challenge the fact Hoyt prepared fraudulent partnership tax returns and deduction taken should not be allowed. The tax court cases are addressing the punitive interest and penalties assessed by the IRS.


Hoyt Fiasco: Lobbyist Statement

www.mindconnection.com [cached]

From 1977 through 1997, approximately 3,000 individuals and couples throughout the United States were induced to invest in one or more of over 100 separate partnerships set up by Walter J. Hoyt, a nationally recognized cattle breeder.Twenty years later, many of these investors are confronting a fate much worse than the mere loss of their original investment in these now bankrupt partnerships.Pursuant to a complex fraud in which the partnerships' promoter inappropriately allocated a limited number of cattle among several partnerships resulting in excess deductions, many Hoyt investors have received tax, penalty and interest assessments totaling twenty to fifty times their original investment.As a result of factors beyond their control, these individual investors,who are largely middle-class wage earners,now face IRS liabilities of $200,000 to $500,000.The enormity of these liabilities has caused great emotional distress and threatened many investors' financial and retirement security.The Hoyt partnerships, although fraught with fraudulent misrepresentations and bookkeeping irregularities, were not a typical tax shelter.Mr. Hoyt and his family were nationally recognized cattle breeders.For several years after the IRS Criminal Investigation Division first began to investigate the Hoyt operations, Walter J. Hoyt was allowed to continue to conduct business as usual, to promote more partnerships, and to retain his role as the Tax Matters Partner ("TMP") for the approximately 118 separate partnerships he formed and promoted.In addition to failing to remove him as TMP, the IRS failed to take any of the following possible actions against him:The IRS failed to file an injunction against Mr. Hoyt as a tax return preparer.See IRC § 7407. The IRS failed to file an injunction against Mr. Hoyt as a promoter of an abusive tax shelter.See IRC § 7408. The IRS failed to disbar Mr. Hoyt from practice before the IRS as an "Enrolled Agent."3/ Notwithstanding the Bales decision in October 1989, the IRS continued auditing the Hoyt partnerships, disallowing all claimed deductions and making adjustments consistent with the position that the partnerships constituted abusive tax shelters.In 1993, the IRS and Mr. Hoyt as TMP settled the 1981 through 1986 partnership tax years.


Van Scoten v. Commissioner

www.pearson-merriam.com [cached]

The adjustments are the result of petitioners' involvement in a partnership organized and promoted by Walter J. Hoyt III (Mr. Hoyt).Mr. Hoyt's father was a prominent breeder of Shorthorn cattle, one of the three major breeds of cattle in the United States.In order to expand his business and attract investors, Mr. Hoyt's father had started organizing and promoting cattle breeding partnerships by the late 1960s.Before and after his father's death in early 1972, Mr. Hoyt and other members of the Hoyt family were extensively involved in organizing and operating numerous cattle breeding partnerships.From about 1971 through 1998, Mr. Hoyt organized, promoted to thousands of investors, and operated as a general partner more than 100 cattle breeding partnerships.Mr. Hoyt also organized and operated sheep breeding partnerships in essentially the same fashion as the cattle breeding partnerships (collectively the investor partnerships or Hoyt partnerships).Each of the investor partnerships was marketed and promoted in the same manner.Beginning in 1983, and until removed by this Court due to a criminal conviction, Mr. Hoyt was the tax matters partner of each of the investor partnerships that are subject to the provisions of the Tax Equity & Fiscal Responsibility Act of 1982, Pub.L.97-248, 96 Stat.324.As the general partner managing each partnership, Mr. Hoyt was responsible for and directed the preparation of the tax returns of each partnership, and he typically signed and filed each return.Mr. Hoyt also operated tax return preparation companies, variously called "Tax Office of W.J. Hoyt Sons", "Agri-Tax", and "Laguna Tax Service", that prepared most of the investors' individual tax returns during the years of their investments.Petitioners' 1991 return was prepared in this manner and was signed by Mr. Hoyt.From approximately 1980 through 1997, Mr. Hoyt was a licensed enrolled agent, and as such he represented many of the investor-partners before the Internal Revenue Service (IRS) until he was disenrolled as an enrolled agent in 1998.Beginning in February 1993, respondent generally froze and stopped issuing income tax refunds to partners in the investor partnerships.The IRS issued prefiling notices to the investor- partners advising them that, starting with the 1992 taxable year, the IRS would disallow the tax benefits that the partners claimed on their individual returns from the investor partnerships, and the IRS would not issue any tax refunds these partners might claim attributable to such partnership tax benefits.Also beginning in 1993, an increasing number of investor- partners were becoming disgruntled with Mr. Hoyt and the Hoyt organization.Many partners stopped making their partnership payments and withdrew from their partnerships, due in part to respondent's tax enforcement.Mr. Hoyt urged the partners to support and remain loyal to the organization in challenging the IRS's actions.Mr. Hoyt and others were indicted for certain Federal crimes and a trial was conducted in the U.S. District Court for the District of Oregon.The District Court described Mr. Hoyt's actions as "the most egregious white collar crime committed in the history of the State of Oregon."Mr. Hoyt was found guilty on all counts, and as part of his sentence in the criminal case he was required to pay restitution in the amount of $ 102 million.Before investing in the Hoyt partnerships, petitioners did not consult with anyone other than members of the Hoyt organization and investors in Hoyt partnerships -- for example, they did not consult with cattle ranchers, independent investment consultants, or independent tax advisers -- concerning either the partnerships or the tax claims made by the partnerships.Prior to investing, petitioners received promotional materials prepared by the Hoyt organization.Petitioners relied on these promotional materials which, in general, purported to provide rationales for why the partnerships were good investments and why the purported tax savings were legitimate.One document on which petitioners relied, entitled "Hoyt and Sons -- The 1,000 lb.Tax Shelter", provided information concerning the Hoyt investment partnerships and how they purportedly would provide profits to investors over time.The document emphasized that the primary return on an investment in a Hoyt partnership would be from tax savings, but that the U.S. Congress had enacted the tax laws to encourage investment in partnerships such as those promoted by Mr. Hoyt.Mr. Hoyt touted the Bales opinion as proof that the Hoyt partnerships were legal, and that the IRS was incorrect in challenging their tax claims.Paragraph 5 of the power of attorney form, which differed from the prior form, provided Mr. Hoyt with the authority to execute:The Hoyt organization also portrayed employees of the IRS as incompetent and claimed that they were engaging in unjust harassment of Hoyt investors.In January 1992, prior to the time petitioners signed their 1991 return, respondent mailed Hoyt investors, including petitioners, a letter regarding the application of section 469 (relating to passive activity loss limitations).That same month, Mr. Hoyt mailed a letter to investors, including petitioners, setting forth arguments that Hoyt investors materially participated in their investments within the meaning of section 469.In this letter, Mr. Hoyt stated that respondent's assertions in the preceding letter were incorrect, and that the investors should do what was necessary to participate in their investment at least 100 or 500 hours per year, depending upon the circumstances, in order to meet the section 469 requirements.Mr. Hoyt stated that the time investors spent in recruiting new investors, as well as "reading and thinking about these letters", would count toward the material participation hourly requirements.Finally, in this letter Mr. Hoyt emphasized that "The position of your partnership is that it is not a tax shelter", because tax shelters "are never recognized for Federal income tax purposes."By letter dated February 11, 1992, respondent mailed petitioners a notice stating:In Mr. Hoyt's letter misleading and/or inaccurate premisesHoyt has used Revenue Rulings 56-496, 57-58, and 64-32 asThe 1991 return was prepared by one of Mr. Hoyt's tax preparation services and was signed by Mr. Hoyt.Mr. Hoyt signed the return on April 10, 1992, and petitioners signed the return on April 14, 1992.As part of their initial investment in the Hoyt partnerships, petitioners provided Mr. Hoyt with the authority to sign promissory notes on their behalf.The power of attorney forms which petitioners signed granted Mr. Hoyt the authority to incur personal debts on petitioners' behalf, debt that Mr. Van Scoten believed petitioners would be required to repay in the event something went wrong with the partnership.In addition to the promissory notes, the power of attorney forms granted Mr. Hoyt the power to control numerous aspects of petitioners' investment without prior consultation with petitioners.Petitioners claimed the tax benefits from the partnership losses based solely on the advice that they received from the promoters of the investment and from other Hoyt investors.P etitioners first argue that they should escape the negligence penalty because they relied in good faith on various individuals with respect to the Hoyt investment: Mr. Hoyt and other members of the Hoyt organization, tax professionals hired by the Hoyt organization, and Mr. Van Scoten's father, Edward Van Scoten.Petitioners' reliance on the Hoyt organization to prepare the returns was not objectively reasonable because Mr. Hoyt and his organization created and promoted the partnership, they completed petitioners' tax return, and they received the bulk of the tax benefits from doing so.For petitioners to trust Mr. Hoyt or members of his organization to prepare their return under these circumstances was inherently unreasonable.B. Deception and Fraud by Mr. HoytPetitioners next argue that they should not be liable for the negligence penalty because they were defrauded and otherwise deceived by Mr. Hoyt with respect to their investment in the Hoyt partnerships.In this regard, petitioners first argue that the doctrine of judicial estoppel bars application of the negligence penalty because the U.S. Government successfully prosecuted Mr. Hoyt for, in general terms, defrauding petitioners.Despite the inapplicability of the judicial estoppel doctrine in this case, we note that respondent's position herein is in no manner contradictory to the position taken by the United States in the criminal conviction of Mr. Hoyt.In a vein similar to their judicial estoppel argument, petitioners further argue that Mr. Hoyt's deception resulted in an "honest mistake of fact" by petitioners when they entered into their investment.


www.pearsonmerriam.com

The adjustments are the result of petitioners' involvement in a partnership organized and promoted by Walter J. Hoyt III (Mr. Hoyt).Mr. Hoyt's father was a prominent breeder of Shorthorn cattle, one of the three major breeds of cattle in the United States.In order to expand his business and attract investors, Mr. Hoyt's father had started organizing and promoting cattle breeding partnerships by the late 1960s.Before and after his father's death in early 1972, Mr. Hoyt and other members of the Hoyt family were extensively involved in organizing and operating numerous cattle breeding partnerships.From about 1971 through 1998, Mr. Hoyt organized, promoted to thousands of investors, and operated as a general partner more than 100 cattle breeding partnerships.Mr. Hoyt also organized and operated sheep breeding partnerships in essentially the same fashion as the cattle breeding partnerships (collectively the investor partnerships or Hoyt partnerships).Each of the investor partnerships was marketed and promoted in the same manner.Beginning in 1983, and until removed by this Court due to a criminal conviction, Mr. Hoyt was the tax matters partner of each of the investor partnerships that are subject to the provisions of the Tax Equity & Fiscal Responsibility Act of 1982, Pub.L.97-248, 96 Stat.324.As the general partner managing each partnership, Mr. Hoyt was responsible for and directed the preparation of the tax returns of each partnership, and he typically signed and filed each return.Mr. Hoyt also operated tax return preparation companies, variously called "Tax Office of W.J. Hoyt Sons", "Agri-Tax", and "Laguna Tax Service", that prepared most of the investors' individual tax returns during the years of their investments.Petitioners' 1991 return was prepared in this manner and was signed by Mr. Hoyt.From approximately 1980 through 1997, Mr. Hoyt was a licensed enrolled agent, and as such he represented many of the investor-partners before the Internal Revenue Service (IRS) until he was disenrolled as an enrolled agent in 1998.Beginning in February 1993, respondent generally froze and stopped issuing income tax refunds to partners in the investor partnerships.The IRS issued prefiling notices to the investor- partners advising them that, starting with the 1992 taxable year, the IRS would disallow the tax benefits that the partners claimed on their individual returns from the investor partnerships, and the IRS would not issue any tax refunds these partners might claim attributable to such partnership tax benefits.Also beginning in 1993, an increasing number of investor- partners were becoming disgruntled with Mr. Hoyt and the Hoyt organization.Many partners stopped making their partnership payments and withdrew from their partnerships, due in part to respondent's tax enforcement.Mr. Hoyt urged the partners to support and remain loyal to the organization in challenging the IRS's actions.Mr. Hoyt and others were indicted for certain Federal crimes and a trial was conducted in the U.S. District Court for the District of Oregon.The District Court described Mr. Hoyt's actions as "the most egregious white collar crime committed in the history of the State of Oregon."Mr. Hoyt was found guilty on all counts, and as part of his sentence in the criminal case he was required to pay restitution in the amount of $ 102 million.Before investing in the Hoyt partnerships, petitioners did not consult with anyone other than members of the Hoyt organization and investors in Hoyt partnerships -- for example, they did not consult with cattle ranchers, independent investment consultants, or independent tax advisers -- concerning either the partnerships or the tax claims made by the partnerships.Prior to investing, petitioners received promotional materials prepared by the Hoyt organization.Petitioners relied on these promotional materials which, in general, purported to provide rationales for why the partnerships were good investments and why the purported tax savings were legitimate.One document on which petitioners relied, entitled "Hoyt and Sons -- The 1,000 lb.Tax Shelter", provided information concerning the Hoyt investment partnerships and how they purportedly would provide profits to investors over time.The document emphasized that the primary return on an investment in a Hoyt partnership would be from tax savings, but that the U.S. Congress had enacted the tax laws to encourage investment in partnerships such as those promoted by Mr. Hoyt.Mr. Hoyt touted the Bales opinion as proof that the Hoyt partnerships were legal, and that the IRS was incorrect in challenging their tax claims.Paragraph 5 of the power of attorney form, which differed from the prior form, provided Mr. Hoyt with the authority to execute:The Hoyt organization also portrayed employees of the IRS as incompetent and claimed that they were engaging in unjust harassment of Hoyt investors.In January 1992, prior to the time petitioners signed their 1991 return, respondent mailed Hoyt investors, including petitioners, a letter regarding the application of section 469 (relating to passive activity loss limitations).That same month, Mr. Hoyt mailed a letter to investors, including petitioners, setting forth arguments that Hoyt investors materially participated in their investments within the meaning of section 469.In this letter, Mr. Hoyt stated that respondent's assertions in the preceding letter were incorrect, and that the investors should do what was necessary to participate in their investment at least 100 or 500 hours per year, depending upon the circumstances, in order to meet the section 469 requirements.Mr. Hoyt stated that the time investors spent in recruiting new investors, as well as "reading and thinking about these letters", would count toward the material participation hourly requirements.Finally, in this letter Mr. Hoyt emphasized that "The position of your partnership is that it is not a tax shelter", because tax shelters "are never recognized for Federal income tax purposes."By letter dated February 11, 1992, respondent mailed petitioners a notice stating:In Mr. Hoyt's letter misleading and/or inaccurate premisesHoyt has used Revenue Rulings 56-496, 57-58, and 64-32 asThe 1991 return was prepared by one of Mr. Hoyt's tax preparation services and was signed by Mr. Hoyt.Mr. Hoyt signed the return on April 10, 1992, and petitioners signed the return on April 14, 1992.As part of their initial investment in the Hoyt partnerships, petitioners provided Mr. Hoyt with the authority to sign promissory notes on their behalf.The power of attorney forms which petitioners signed granted Mr. Hoyt the authority to incur personal debts on petitioners' behalf, debt that Mr. Van Scoten believed petitioners would be required to repay in the event something went wrong with the partnership.In addition to the promissory notes, the power of attorney forms granted Mr. Hoyt the power to control numerous aspects of petitioners' investment without prior consultation with petitioners.Petitioners claimed the tax benefits from the partnership losses based solely on the advice that they received from the promoters of the investment and from other Hoyt investors.P etitioners first argue that they should escape the negligence penalty because they relied in good faith on various individuals with respect to the Hoyt investment: Mr. Hoyt and other members of the Hoyt organization, tax professionals hired by the Hoyt organization, and Mr. Van Scoten's father, Edward Van Scoten.Petitioners' reliance on the Hoyt organization to prepare the returns was not objectively reasonable because Mr. Hoyt and his organization created and promoted the partnership, they completed petitioners' tax return, and they received the bulk of the tax benefits from doing so.For petitioners to trust Mr. Hoyt or members of his organization to prepare their return under these circumstances was inherently unreasonable.B. Deception and Fraud by Mr. HoytPetitioners next argue that they should not be liable for the negligence penalty because they were defrauded and otherwise deceived by Mr. Hoyt with respect to their investment in the Hoyt partnerships.In this regard, petitioners first argue that the doctrine of judicial estoppel bars application of the negligence penalty because the U.S. Government successfully prosecuted Mr. Hoyt for, in general terms, defrauding petitioners.Despite the inapplicability of the judicial estoppel doctrine in this case, we note that respondent's position herein is in no manner contradictory to the position taken by the United States in the criminal conviction of Mr. Hoyt.In a vein similar to their judicial estoppel argument, petitioners further argue that Mr. Hoyt's deception resulted in an "honest mistake of fact" by petitioners when they entered into their investment.


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