VIA FEDERAL EXPRESS

Mr. W. Val Oveson, National Taxpayer Advocate
Internal Revenue Service
1111 Constitution Avenue, NW
Room 3017 - C:TA
Washington, DC 20224

RE: HOYT PARTNERSHIPS

Dear Mr. Oveson:

The IRS has now admitted: "It's easier to go after the people who have been duped than to go after the promoters of the [Hoyt] scheme" (IRS spokesperson Bill Steiner, quoted in the Portland, Oregon "Willamette Week," Att. 1, p. 8). Newly discovered documents discussed below show that the IRS deliberately kept Hoyt in business by entering into the MOU negotiations with Mr. Hoyt on the same day Mr. Hoyt signed a stipulation that he had engaged in misconduct. The IRS admits the partners are innocent of tax avoidance: "The investors in Hoyt's cattle were unwitting victims...it is difficult for me to allege that their principal motivation in investing with Hoyt was tax avoidance." (Att. 2, p. 25, William McDevitt, Appeals Supporting Statement, December 23, 1997).

Still, the IRS continues to demonstrate its cavalier attitude toward "the people that have been duped." The IRS refuses to abate Tax Motivated Transaction penalties or interest. We have not been able to make any significant progress in resolving the Hoyt partners' plight during the past year. Speed of resolution is now just as important as fairness of resolution. We have made significant discoveries of new evidence since our October 8, 1998 report (Att. 3) to you on the Hoyt cases. We ask that you consider these developments in your decision making and fact finding.

In acknowledging that the Hoyt partners were "duped" the IRS admits these partners were innocent. But the IRS continues to stonewall all efforts at a final and overall resolution of the Hoyt partners' tax liabilities. The IRS even refuses to allow designation of a speedy forum or mechanism for final resolution. Now that the Hoyt operations are out of business for good, Mr. Hoyt has been indicted, and no new tax benefits are being claimed by partners, this adversarial stance toward partners is inappropriate and counter productive.

The partnerships now realize that many of the positions asserted by Mr. Hoyt in the Tax Court will have to be conceded by the partnerships. These matters can be resolved now. The IRS adversarial stance is costly, not only to the Hoyt partners, but also to the government. All we need is a forum other than the Tax Court (where resolution will take many years) and a cooperative attitude. The IRS should recognize its responsibility to act fairly toward innocent Hoyt partners, especially because its own conduct contributed to the length of the partners' plight and to their tax, interest and penalty liability.

The following additional facts and evidence have been developed since our last report (Att. 3) to you.

The Failure-to-Remove-Hoyt Fiasco.
We have now discovered documents which conclusively demonstrate that the IRS could have easily removed Mr. Hoyt as Tax Matters Partner (TMP) and as an enrolled agent, but deliberately did not do so, and instead made a deal with him which purports to bind partners. The IRS entered into the Memorandum of Understanding (MOU) (Att. 4) negotiations with Mr. Hoyt on the same day he admitted to serious misconduct in a formal stipulation later filed with the Tax Court (Att. 5).

The IRS made the deal with Mr. Hoyt in 1993 and 1994 that expressly allowed him to continue as TMP even though his partnership items were converted to non-partnership items. (The documents are attached as Att. 4, Att. 5, and Atts. 6A, 6B, 6C, 6D, 6E.) On May 10, 1993, Mr. Steven J. Mopsick, District Counsel, signed a stipulation with Mr. Hoyt in which Mr. Hoyt admitted: (1) overvaluing property, (2) claiming deductions for transactions which had "no economic substance," (3) claiming transactions for tax purposes which were "non-arms length" (Att. 5). Despite that stipulation, another IRS attorney, Margaret Martin, in 1994 signed notices of settlement which provided, "Such partnership items became nonpartnership items as of the date of the settlement agreement. Walter J. Hoyt, III's status as Tax Matters Partner has not terminated. Temp. Treas. Reg. 301.6231(a)(7) - 1T(1)" (Atts. 6A, 6B, 6C, 6D, 6E, emphasis added).

This settlement included the infamous "MOU" which purported to resolve the tax years from 1980 through 1986 (Att. 4). The date of the stipulation signed by Mr. Mopsick and Mr. Hoyt (May10, 1993) is referenced in the MOU (Att. 4, p. 1) as are the MOU negotiations which took place on that date. In other words the stipulation and the notices of settlement were part of the improper deal with Mr. Hoyt after the IRS broke off negotiations with the partners' settlement committee. You will recall that those negotiations with the partners' settlement committee were terminated by the IRS even though the committee had obtained Mr. Hoyt's written agreement to submit to penalties, and to cease tax shelter promotion activities (Att. 3).

These newly found documents prove that the MOU is invalid because Mr. Hoyt had conflicts of interest known to the IRS which breached his fiduciary duty to the partners and the partnerships. (See Att. 3 at pp. 2-5).

Mr. Hoyt himself raised the issue of conflict of interest in a letter to the IRS dated January 18, 1994 (Att. 7) after some partners protested the deal. Amazingly, the IRS response was to offer Mr. Hoyt an opportunity to accept the MOU individually (Att. 8).

The stipulation and settlements affected both central management entities and investor partnerships (Atts. 4, 5, 6A, 6B, 6C, 6D, 6E). Mr. Hoyt could have been removed as TMP from all of those entities.

In response to our previous allegation that the partners' desperate situation was caused in part by the IRS failure to remove Hoyt as TMP or as an enrolled agent, the IRS has asserted that it could not have done so, citing various regulations. One of the criteria for removal of a TMP is the conversion of partnership items to non-partnership items. 26 USC 6231(b); Treas. Reg. 301.6231(a)(7)-1(l)(iv). That criterion was met, but the IRS deliberately agreed not to remove Mr. Hoyt as TMP when he settled his own items with the IRS. The IRS' criminal investigation of Mr. Hoyt also provided sufficient legal and factual predicate for his removal as TMP. Treas. Reg. 301.6231(c)-5T. And certainly, the May, 1993 stipulation (Att. 5) to wrongdoing should have compelled the IRS to not only remove him as TMP, but also revoke his enrolled agent status.

The IRS either failed or refused to seek an injunction preventing promotion of the tax shelter and the preparation of false returns under 26 USC 7407 and 7408.

On December 21, 1998, the IRS finally moved to remove Mr. Hoyt as TMP in a few of the pending Tax Court cases (Att. 9). The IRS contended in its motion that, given the criminal indictments (Att. 10), Jay Hoyt was not fit to serve as TMP. Clearly, the IRS believed long before the indictments (and as early as 1983) that Mr. Hoyt acted criminally with respect to his promotion and operation of the partnerships. And, as a matter of law, the indictment was an unnecessary condition to the IRS' removal of Jay Hoyt. Treas. Reg. 301.6231(c)-5T. In any event, petitioners and the partnerships had requested the IRS assistance in identifying a replacement TMP for Mr. Hoyt well before the Motion and welcomed the IRS Motion to Remove him. Petitioners conceded the motion (Att. 11) and petitioners, the partnerships and participating partners are now finally able to work with the IRS toward replacement of Mr. Hoyt in the remaining Tax Court cases. That, however, seems to be the only assistance the IRS is willing to render.

Another document (Att. 12, letter by IRS attorney Garelis dated December 19, 1985) now demonstrates that the IRS believed in 1985 (1) that Mr. Hoyt had overvalued assets for depreciation, (2) had not transferred cattle purportedly sold to unwitting investor partnerships, (3) transactions were "shams," (4) transactions were not arms length, (5) bills of sale were amended retroactively, and (6) cattle represented to be registered shorthorns were not.

Had the IRS removed or enjoined Mr. Hoyt in 1985 or earlier when it first possessed the necessary information, investors would have been alerted, Mr. Hoyt's claims of invincibility would have been disproved and millions of dollars would have been saved. The IRS cannot plausibly deny its responsibility for contributing to this disaster.

A Possible Coverup.
District Counsel Mopsick contended in a letter dated February 28, 1991 (Att. 13), that there was no IRS criminal referral or investigation of Mr. Hoyt at that time. The IRS has continued to maintain that stance to the present, insisting that the Criminal Investigation Division (CID) investigation stopped by 1991 (Att. 14). However, an October 24, 1994 letter from a California Attorney General (Att. 15) states that he was assured after September of 1992 that the U.S. Attorney in Oregon, the CID, and the U.S. Postal Inspector were "actively pursuing their investigation for violations of mail and wire fraud, money laundering, and fraud against the United States Government." The California Attorney General expressly relied upon that assurance in closing his own investigation (Att. 15). In fact he concluded that the Federal investigation would result in an indictment (Att. 15).

This 1994 letter (Att. 15), combined with the June 5, 1995 raid on Hoyt's Burns headquarters by the FBI and the Postal Inspector, casts grave doubt on the assertions of the IRS that Hoyt was no longer under criminal investigation after 1991. The continuing investigation further implicates the IRS in negligently or deliberately allowing Hoyt to continue as TMP and as an enrolled agent, when there was more than enough evidence to remove him; failing to enjoin his activities; and failing to accept a settlement that would have ended the Hoyt cattle and sheep investment program in 1993. The denial that there was a continuing investigation suggests an effort to hide that culpability. The IRS assertion to the U. S. Tax Court that the records of the CID investigation were not "retained" (Att. 14) is preposterous. Multiple copies of such records must have existed. If they no longer exist, in the face of simultaneous parallel investigations, the implications are ominous and obvious.

Irrational Resistance to Settlement.
We recently again attempted to propose at least a forum for settlement or expedited resolution of the now 1100 pending Tax Court cases (Att. 16). The overture was summarily rebuffed (Att. 17), as were all prior overtures from any party or the U.S. Trustee in the Bankruptcy. Even proposals merely aimed at finding a forum for discussion are mindlessly rejected in an adversarial tone (Att. 17) despite the fact, now well known to the IRS and its attorneys, that petitioners will no longer assert many of the positions previously taken by Hoyt, and despite written assurance that we now recognize that the most significant facts are no longer in dispute. That is especially true following the deposition of Mr. Hoyt's brother, Ric Hoyt, who testified under a grant of immunity conditioned upon his testifying truthfully and fully cooperating in the Bankruptcy. His testimony clearly demonstrates that significant facts were concealed from partners (Att. 18).

Mr. Hoyt is no longer the managing partner of the partnerships. He is no longer the TMP of some of the Tax Court cases. After the extensive discovery in the Bankruptcy, in which the IRS has participated, we suspect the primary partnership level tax issues left are legal, not factual. The goal now is to resolve the tax problems of innocent investors who have been shocked by the facts revealed in the Bankruptcy, the indictment, and the IRS admission that Hoyt was unfit as their representative. The IRS's aggressive adversarial posture now serves no purpose and only serves to delay and drive up costs. The IRS will not collect any more money by delaying. The partners are almost certainly all beyond their ability to pay already.

The irrational adversariality of the Sacramento IRS office has prompted attorneys for a large group of partners to attempt to have the cases transferred away from Sacramento Appeals (Att.19). The IRS responses have been curiously filled with misstatements and irrational assertions. The most absurd assertion is that the cases cannot be settled because the court has not yet decided the cases (Att. 20, p. 1). That assertion, however, is no anomaly. It has been repeatedly raised by the IRS.

This assertion is absurd for two reasons: First, as every experienced Judge and attorney knows, cases are best settled when the outcome is not known; second, the tried cases were not binding on the parties in the remaining 1100 cases. It is doubtful any court would bind the partnerships under these circumstances where the person who controlled the litigation is now under indictment, disbarred as an enrolled agent, has resigned as managing partner, and has been removed or has resigned as TMP. The result in the tried cases is not representative of the result in any future case where more credible witnesses will be presented and where extensive discovery has occurred, significantly changing the available evidence. In fact the IRS has filed a motion with the Tax Court in the tried cattle cases alleging that fraudulent evidence was placed in the record. To now contend that the partners should be bound in future cases by that record is self contradictory or disingenuous.

There is a better reason still, however, why the IRS should engage in a meaningful process to resolve these cases: time. The 1100 cases will take years to resolve in the courts. Settlement or some other dispute resolution process will take care of them in months. There is no legitimate reason for any sincere party under these circumstances to prolong the ordeal for all sides.

Requested Assistance.
In our letter to you of October 8, 1998, we asked for your help. The partners are grateful to you and wish to thank you for interceding and obtaining a stay of collection. We also understand that an investigation of the Hoyt situation is underway by the Treasury Department Inspector General's office. We believe you were instrumental in that investigation and thank you for those efforts as well.

To date neither this office, the attorneys representing individual partners, the U.S. Trustee in the Bankruptcy nor the Trustee of the Partnerships' Defense Fund Trust (PDFT) has been contacted in the investigation or by your office. All of us have significant information and documents, and the ability to facilitate resolution. We fear that some resolution will be announced from Washington or Sacramento that will not take significant issues into account. Furthermore, if a resolution is reached without the participation of those in whom the partners have confidence, there may be resistance which could be avoided. We all want finality, not further contentiousness. We ask to participate in the process. Our participation will improve the chances of finally putting the Hoyt cases to rest. After all they have seen, the partners will be skeptical of any solution proposed by the government after a unilateral investigation.

Please allow us to assist you and the Inspector General.

Very truly yours,
COBB, WOODWORTH & HOLLOWAY
Montgomery W. Cobb

MWC:pab

Attachments

cc: 
Senator William V. Roth, Jr., Attn: Bruce Strauss (w/atts.)
Senator Ron Wyden, Attn: Terrie Piro (w/atts. 2, 5, and 6A,copies of additional attachments upon request only)
Thomas Blatchford, Deputy Inspector General, Investigations (w/atts.)
John M. Dalrymple, IRS, Chief Operations Officer (w/atts.)
Mr. Robert Geraghty, IRS (w/atts.)
Mr. Milton Joe Carter, IRS (w/atts.)
Gary L. Blackburn, PDFT (w/atts.)
Neal G. Jensen, AUST (w/atts.)
Partner Attorneys (w/atts. 2, 5, and 6A, copies of additional attachments upon request only)