April 23, 1999

The Honorable Barbara Boxer
United States Senator
Attn: Paula March
1700 Montgomery Street, Suite 240
San Francisco, CA 94111

Re: Hoyt partnerships

Dear Senator Boxer:

My firm represents [Hoyt partners] and appreciates your contact on their behalf with the Internal Revenue Service. I also thank you for your February 12, 1999 response to my January 25 letter. However, it appears that you were misled concerning the trial of the "Hoyt partnerships." Only twenty-three of the approximately eight hundred pending cases were tried in November 1996. The pending cases involve the years 1987 through 1994 and approximately 118 different partnerships. To our knowledge, there are no "agreements to be bound" to the result of the tried cases in any of the pending cases. Therefore, none of the pending cases are controlled by the tried cases. It is a decision by the Service not to consider or negotiate the remaining pending cases while awaiting the Tax Court opinion; not a jurisdictional problem.

However, we are not asking for your assistance in pending cases. Instead, we are greatly concerned that the Internal Revenue Code does not provide any means to make the Service responsible for its part in this sad affair, irrespective of what may happen in Tax Court. For example, the tried cases did not address the interest abatement issue. As I stated in my January 25^th letter, we have requested interest abatement due to the Service's failure to remove Jay Hoyt when he was under criminal investigation. We believe that you could review the interest abatement provisions of 26 U.S.C. § 6404(e) and make legislative changes that would direct the Service to abate interest in situations such as those confronting the Hoyt investor partners.

We believe the Service's own regulation required that it remove Jay Hoyt once the Service began investigating him criminally. Treas. Reg. 301.6231(c)-5T. It is unconscionable, considering IRS’s knowledge of Jay Hoyt’s improper conduct, that the IRS failed to remove Jay Hoyt as the Tax Matters Partner. This is especially true in light of the fact that the IRS was aware that the individual partners had no knowledge of Jay Hoyt’s improper conduct, but only knew of an apparent "win" in a Tax Court case. Again, this issue was not tried in the cases presented to the Tax Court in November 1996, but is an independent issue currently pending the Service's decision.

We believe that the Service's failure to remove Hoyt qualifies as a ministerial act under IRC §6404(e), allowing the IRS to abate interest on the proposed tax deficiencies. Interest accounts for approximately 75% of the balance due on the bills the Hoyt partners are currently receiving. Interest abatement would have a dramatic impact on whether or not the Hoyt partners will be forced into bankruptcy. However, as you might know, the Service has narrowly defined what actions it believes qualifies for interest abatement.

Congress noted this problem when it recently expanded the IRS’s authority to abate

interest and stated:

However, in practice, the relief is quite limited due to the IRS’s definition of what comprises a "ministerial act." The IRS regulations are so narrowly written and tightly administered that nearly all IRS delays are excluded from relief.

House Ways and Means Subcommittee on Oversight, 104^th Cong., 2d Sess., Explanation of the Taxpayer Bill of Rights II (Comm. Print 1995).

Even under the expanded version (which does not apply to the Hoyt partnerships' years), the Service is narrowly defining what qualifies as interest abatement. Concerned about this narrow definition, W. Val Oveson, National Taxpayer Advocate, issued a directive to the Service that stated the new interest abatement regulations are too restrictive. Taxpayer Advocate Directive 1998-1 (1999 TNT 5-35). The Service's insistence on continuing to apply narrow definitions for interest abatement purposes bodes ill for the Hoyt partners interest abatement requests.

I will not restate the facts that I presented to you in the January 25, 1999 letter, however, your assistance remains greatly needed. It is our understanding that the National Taxpayer Advocate is attempting to obtain jurisdiction of this matter. We request that you write to the Commissioner of the Internal Revenue Service and request that the Taxpayer Advocate be given jurisdiction of the Hoyt partnership cases.

Furthermore, the Service's response to you only addresses the promoter's actions and not the contributory actions of the Service. The Service failed to take many available actions that would have effectively stopped Walter J. Hoyt ("Jay Hoyt"). Specifically, the Service failed to enjoin Jay Hoyt as allowed by I.R.C. § 7408 and failed to remove Jay Hoyt as Tax Matters Partner when the Service began investigating him criminally as provided in Treas. Reg. § 301.6231(c)-5T. Both or either of these actions would have prevented further tax losses to the government, as well as the financial ruin of thousands of taxpayers who became victims of fraud.

The Service's responses to you (and other senators) fail to specifically address many questions concerning the Service's failure to take action, including:

1. The Service's failure to remove Jay Hoyt as Tax Matters Partner when the Service was investigating him criminally. Treas. Reg. 301.6231(c)-5T requires removal in such situations and provided the Service authority to do so. Tragically, the Service's investigation began in 1983. Early removal of Hoyt as the Tax Matters Partner would have dramatically reduced the investor partners' tax liabilities and the resulting fiscal drain on the government.
2. The Service's failure to enjoin Jay Hoyt (or even make any attempt to enjoin him) from selling abusive tax shelters under I.R.C. § 7408.
3. The Service's failure to assess tax return preparer penalties against Jay Hoyt, even though these penalties were investigated by the Service.
4. The Service's failure to inform the Tax Court that when Jay Hoyt signed the partnerships' settlement agreement for the years 1981 through 1986, he was under investigation by the Service for tax return preparer penalties concerning the same partnerships.
5. The Service's failure to inform the Tax Court that during the course of audit of the 1981 through 1986 years, Jay Hoyt had been under criminal investigation by the Service. The Service's criminal investigation concerned Hoyt's activities in promoting and managing the selfsame partnerships that the Service was auditing.
6. The Service's failure, when filing the settlement with the Court, to inform the Tax Court that the settlement would be financially beneficial to Jay Hoyt and his family, but would create significant tax liabilities for the investor partners. (Jay Hoyt purported to represent the partnerships during these negotiations, but obviously failed to do so. However, there was no other partner representative present and, significantly, Jay Hoyt chose not to be represented by an attorney during the negotiations.)
7. The Service's decision to settle the partnership cases through Jay Hoyt knowing full well the extent of his conflict of interests and criminal activity relating to the operation of the partnerships.
8. The failure to inform Jay Hoyt that the Service's criminal investigation had terminated in 1990. The Service's investigation began approximately in 1983 and the Service notified Jay Hoyt of its instigation. However, the Service never notified Hoyt that the investigation had terminated. Therefore, even after the criminal investigation had terminated, Jay Hoyt operated under the assumption that it was still ongoing. (It is the Service's position that the investigation terminated in 1990. However, there is evidence that it might have been ongoing in 1992 and maybe later.) This failure served to perpetuate Hoyt's conflicts of interest and incentive to ingratiate himself with the Service at the cost of the individual partners.

We request that you investigate these failures. We further request that you determine how best the Service can be held liable for these failures, rather than allowing the Service to place all the blame on Jay Hoyt or the innocent investor partners.

For additional information, I have attached our "Response to IRS 'General Information Regarding Hoyt Partners.'" We have documents to support any statement made in our response and this letter. We would be happy to provide the additional documentation for your review. We are also enclosing a copy of the Amicus Brief written by the partnership attorney, Montgomery Cobb. This brief accurately portrays the factual background of these cases and the impact that the Service's failures had and has on these cases.

Again, we request that your assistance by:

1. Reviewing the interest abatement provisions and making legislative changes to require the Service to take responsibility for its actions;
2. Contacting the Commissioner and requesting that the National Taxpayer Advocate be given jurisdiction of the Hoyt partnership cases; and
3. Investigating the Service's failures in this case and determine how the Service can be held responsible for its failures.

If you have any questions, please contact me at the above telephone number.

Sincerely,
Terri A. Merriam