Hoyt Fiasco: $103M Heist + Kevin Brown's
Victim information, evidence, rules of law, IRS viewpoints
|Why did the IRS lead prosecuting attorney in the Hoyt case quit in disgust?|
The partnerships join in Movants' argument for vacating this Court's decisions on the MOU.
[NOTE 4 - The partnerships do not address the argument that the Court lacked jurisdiction, however.]
Respondent's Memorandum in Opposition muddied that argument somewhat. In
brief, it is this. Hoyt's conflicts of interest destroyed his authority to bind the
partnerships. Respondent knew of these conflicts, and indeed its own rules should
have dictated Hoyt's removal as TMP. Rather than take steps that would result in
Hoyt's removal, however, Respondent chose to negotiate and settle with him, as the
purported representative of all the partnerships.
A. HOYT LACKED AUTHORITY TO BIND THE PARTNERSHIPS UNDER THE
[NOTE 5 - Although Respondent attempts to confuse the issue, Amici (and Movants) rely on Transpac only for the proposition that Hoyt lacked authority to bind the partners. The fact that Transpac is not a case about jurisdiction, and that it did not arise from a motion to vacate, are immaterial].
In that case, the TMPs under investigation had approved extensions of the
limitations period for filing FPAAs. Other partners objected, and argued that the
criminal investigation of the TMPs created a conflict of interest that prevented the TMPs
from exercising their fiduciary duty to their partners. The Court agreed. It
held that TMPs under criminal investigation lacked authority to bind the partnership. Id
[NOTE 6 - The Ninth Circuit Bankruptcy Appellate Panel's ruling in re
Miller 174 BR 791 (9th Cir BAP 1994), aff'd, 81 F3d 169 (1996), is not to the
contrary. There the court held that a TMP under criminal investigation (in fact,
Hoyt) remains the TMP until the IRS gives him written notification as set forth in Temp.
Treas. Reg. Section 301.6231(c)-5T. That court, however, did not distinguish between
the issues of whether Hoyt technically retained his TMP designation while under
investigation and whether the conflict of interest created by the investigation destroyed
his authority to bind the partnerships. Further, the court in Miller did not consider
Hoyt's conflicts of interest apart from the criminal investigation].
Respondent has raised ratification and waiver arguments, which Movants have answered. We will add only that the burden is on Respondent to establish these defenses, both of which require that the act be knowing and voluntary. Given the paucity of information available to even the best-informed of the investor partners, it would be impossible to establish that all the investor partnerships ratified Hoyt's acts or waived his conflicts of interest.
A final point supporting Hoyt's lack of authority is Respondent's inconsistent application of Temp. Treas. Reg. Section 6231(c)-5(T) ("treatment of items as partnership items with respect to a partner under criminal investigation . . . will interfere with the effective and efficient enforcement of the internal revenue laws") and Treas. Reg. Section 301.6231(a)(7)-1(l)(iv) (designation of TMP shall remain in effect until partnership items of the TMP become nonpartnership items).
Hoyt testified that Respondent converted his partnership items to
nonpartnership items but never formally notified him of this step. (Hoyt Depo at pp
1014-16; Movants' Exhibit G) Although formal notice appears to be required under
Section 6231(c)-5(T) to convert partnership items to nonpartnership items, Section
301.6231(a)(7)-1(l)(iv) DOES NOT specify that formal notice is required to terminate the
TMP designation. If Hoyt is correct that Respondent treated his partnership items as
nonpartnership items, that treatment arguably terminated Hoyt's TMP status even in the
absence of formal notice. Again, further discovery is necessary to develop this
B. FRAUD ON THE COURT
At pages 9 and 11 of his Reply Memorandum, Respondent asserts that because "scores" of partners had notice of the proceedings on the MOU or were offered an opportunity to settle with the IRS, the MOU was not a "backroom deal." There have been more than 4,000 partners who invested with Hoyt. If less than 100 had any knowledge of the MOU before it was placed before the Court, that number is not significant. Even attorneys involved in these matters have been unaware of the true facts until after the Oregon bankruptcies. Attorneys representing individual partners had no ability, within their clients' means, to obtain the facts necessary to determine the true nature of the Hoyt businesses. The entire might of the United States Government did not bring Hoyt down until 1998, despite 20 years of audits and investigations.
Respondent's argument that it is all the partners' fault is as preposterous as the IRS' apparent strategy to attack partners instead of the promoter for all these years.
The investor partnerships did not raise the issue of Hoyt's conflicts of interest in connection with the MOU because the great majority of investor partners were unaware of both the lengthy IRS investigation of Hoyt and the conflicts that investigation created and brought to light. Since then, through the MLP and Management Co. bankruptcies, the seriousness of Hoyt's conflicts of interest and breaches of fiduciary duty have become apparent. Thus, it is appropriate for this Court to abate its prior orders, permit discovery, and schedule an evidentiary hearing on whether to vacate its prior orders.
The Tax Court can reopen a matter that has been finally decided only in certain circumstances, and the most common of these is when there has been a "fraud on the court." Toscano v. Commissioner, 441 F2d 930 (9th Cir 1971). Fraud on the court is something different than ordinary fraud, but it is hard to define precisely, as the court in Toscano observed. 441 F2d at 933-34. It is best understood by looking at decisions in which courts found such fraud to have occurred.
In Toscano, the Ninth Circuit held that the Tax Court should have granted the taxpayer leave to file a motion to vacate its decision based on the following facts. Toscano had filed joint income tax returns with Ms. Zelasko although, according to Zelasko, they were never married. After the Commissioner assessed deficiencies against Toscano and his "wife" (Zelasko did not learn of this action), Toscano filed a joint petition for redetermination (again without Zelasko's knowledge). The Ninth Circuit held that this last act "carried the fraud into the Tax Court" thus perpetrating a fraud upon the court. 441 F2d at 935. Note that in Toscano it was enough that Toscano alone had misrepresented Zelasko's status to the court and thereby deprived Zelasko of her day in court. Complicity or collusion of the IRS was not a factor in the Court's ruling.
Hoyt's actions are much like Toscano's signing the MOU and bringing it into court although he had agreed to it without the investor partners' knowledge, under pressure from Respondent, at a time when he was under criminal investigation.
[NOTE 7 - Respondent claims Hoyt was not under criminal investigation at the time he signed the MOU. As Movants pointed out, however, Hoyt BELIEVED he was still being investigated. Indeed, on June 24, 1998, Hoyt testified that "I don't think that investigation has ever been closed. In my mind it's never been closed since that started in 1983." (Hoyt Depo at p 2018; Exhibit 2). The circumstances the US government raid on Hoyt's Burns offices in 1995 are evidence that this was a continuation of the investigation which Respondent admits lasted until 1991. Furthermore, given Respondent's claim to have no records of the investigation, its argument is disingenuous at best. Unless Respondent can produce records verifying its claim, its assertion that no criminal investigation was underway in 1993 should be disregarded.]
Hoyt signed the MOU in breach of his fiduciary duty to the investor partnerships, and by bringing the MOU into court he "carried the fraud into the Tax Court." Finally, Respondent participated in the fraud. Respondent knew, as this Court and the investor partnerships did not, the full extent of Hoyt's conflicts of interest and breaches of fiduciary duty, yet it never advised the Court of these problems.
The court in Toscano heeded Ms. Zelasko's assertion that as a result of Toscano's fraud she had never really been before the court. 441 F2d at 934. Rather, Toscano had purported to represent her interest in stipulating to joint deficiencies. If she could prove these allegations, said the Court, Zelasko should have the chance to present her case.
The Supreme Court, ruling in favor of Hazel, held that Hartford's actions
had constituted a fraud on the court: "a deliberately planned and carefully executed
scheme to defraud not only the Patent Office but the Court of Appeals." 322 US
at ___, 64 S Ct at 1001. As in Hazel-Atlas, the partnerships here were ignorant of
the underlying facts constituting the fraud until court proceedings some years later (the
bankruptcies). In this case, as in Hazel-Atlas, the Court's rulings rest on a false
foundation here, Hoyt's "authority" to represent the partners in signing the MOU
and in presenting it to the court.
"We are much troubled," said the Court, "by the selective
nature of the presentation of the situation by Government counsel, given the absence of
counsel for the taxpayer." 478 F2d at 592.
Respondent relies on Senate Realty Corp. v. Commissioner, 511 F2d 929 (2d Cir 1975), in which the Court ruled there had been NO fraud on the Tax Court when a lawyer for one party exceeded his authority in stipulating to a judgment. In that case, the Court observed, there was no claim that the lawyer had "made any misrepresentation of the facts in issue, that he had any improper motive, that the IRS cooperated with him in deceiving the Court, or even indeed that the compromise itself was unreasonable." Id. at 931-32. Further, the Court noted there had been no "evil intent, deceit or collusion," and that the lawyer had not taken advantage of the client in settling the dispute. Id. at 933.
All the factors absent in Senate Realty are present here. Hoyt took
advantage of the investor partnerships and deceived them about his dealings with
Respondent. Hoyt's motives were improper, in that he sought to benefit himself at
the partnerships' expense, in breach of his fiduciary duties. The settlement Hoyt
agreed to in the MOU was unreasonable. Respondent participated in the fraud on the
court. In contrast to Senate Realty, and according to its analysis, this is a
textbook case for reopening a judgment on the basis of fraud on the court.
The situation is analogous to one in which the parties to a civil case
present to the court a settlement for approval without informing the court that the
attorney for one of the parties has been disbarred during negotiation of the
settlement. While greatly inconvenient, especially after months of complex
negotiations, the defect in the settlement would render it void. Failure to report
that fatal defect is a fraud on the court.
C. THE PARTNERS WERE HARMED BY THE MOU
If such negotiations had not produced a settlement, then at a minimum the investor partnerships would have had the opportunity to litigate these issues and present their arguments to this Court.
The investor partnerships and partners were denied this right. They were
harmed not only by the provisions of the MOU itself, but by the denial of due
process. They should have the opportunity to be represented by a competent
representative, to have their case presented, and their interests represented, to this
D. THE PARTNERS HAVE NO ADEQUATE REMEDY
E. MOVANTS REQUIRE DISCOVERY TO PREPARE FOR ANY HEARING
In addition, the parties need evidence from Respondent that will reveal
(1) the extent of Respondent's knowledge of Hoyt's conflicts of interest; (2) whether
Respondent ever made a decision to withhold information from the Tax Court; (3) how
Respondent's records of the criminal investigation of Hoyt came to be "lost";
and (4) whether Respondent ever exchanged favors with Hoyt in settlement negotiations.
The partnerships' lack of information has been at the heart of their
problems. The many issues of fact require an evidentiary hearing for proper
resolution. See Dufresne v. Commissioner, 26 F3d 105, 107 (9th Cir 1994).
Because Respondent has not been forthcoming with evidence relevant to its position,
fairness requires that the Court allow discovery in advance of such a hearing.
F. IRC SECTION 6103 RESTRICTIONS ON DISCLOSURE DO NOT ABSOLVE
In truth, the IRS has, in the Hoyt matters, hidden behind Section 6103 over the years when it was convenient to do so, and has distinguished or ignored these provisions at times when it was beneficial to do so. The reality is that the IRS could have pointed out to Chief Judge of this Court all of Hoyt's conflicts of interest. (His conflicting roles as representative of opposing parties in transactions, and the potential benefits to Hoyt's family at the expense of partners are not subject to the strictures of Section 6103 at all.)
The IRS could divulge that Hoyt was not qualified to act as a fiduciary in any capacity as TMP, as enrolled agent, or as agent for the investors or their partnerships without running afoul of Section 6103 by simply disclosing non-tax information and acting publically to remove and disbar him. The notion that Section 6103 prohibits the IRS from disclosing to the Court that a party to an MOU is a suspected crook strains credulity beyond the breaking point.
2. PUBLIC FORUM
3. I.R.C. SECTION 6103(h)(4)(C)
Both the criminal and tax return preparer investigations concerned Jay
Hoyt's activities regarding the investor partnerships. The same investor partnerships
are parties to the above-entitled Tax Court
proceedings. The tax return preparer investigation related to the investor
partnerships' returns for 1987, 1988, and 1989. Again, these same partnerships are
Petitioners in the above-entitled matters. There is an obvious transactional
relationship between the above-entitled Tax Court proceedings and the IRS investigations
of Jay Hoyt's partnership activities. See Mindell v. United States, 693 F.Supp. 847
(C.D. CA 1988); Nevins v. United States, 71A AFTR 2d 93-3067 (D.C. KA 1987); Guarantee
Mutual Life Co. v. United States, 42 AFTR 2d 5915 (D.C. NE
The inability of the TMP to adequately represent the partnerships and the individual partners clearly affects the resolution of issues in the proceedings. Therefore, Respondent was not prohibited by I.R.C. Section 6103 from disclosing to this Court his investigations of Jay Hoyt.
Friday, October 09, 2020
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