Hoyt Fiasco: $103M Heist + Kevin Brown's Criminal Cover-up
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     Why did the IRS lead prosecuting attorney in the Hoyt case quit in disgust?

The Hoyt Fiasco: The Norm Johnson Tapes

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You are one Tape one, Side one.

MR. CULY: For the record, we are tape recording a meeting. The time is approximately 10:00 a.m..; The date is 3 July 17th, 1997. We are—we being myself, Michael Culy, am an attorney. I am representing Mr. Thomas Emerson in connection with the matter currently the subject of this meeting. Present with me is Mr. Timothy Buck, an attorney, my associate, Mr. Douglas MacDonald, also an attorney and my associate in this matter. I will represent that the other two gentlemen in the room, whom I understand to be Norman Johnson, Internal Revenue Agent.

MR. JOHNSON: Correct.

MR. CULY: And Mr. David Ogrod; is that correct? Is that the correct pronunciation? And the purpose of this meeting is to generally discuss the subject of the adjusting of W-4 Forms by the I.R.S. in connection with various Hoyt partners and specifically as it relates to Mr. Thomas Emerson.

I will represent, for the record, that I have a signed Power of Attorney, a Declaration of Representative authorizing myself, Mr. Buck and Mr. MacDonald to discuss tax matters relating to Thomas Emerson whose Social Security Number is ###-##-####. And I have a specific Power of Attorney that allows for me—for us to discuss the W-4 subject Withholding Certificates, the matter identified as 2806 (C)(G) of 81969 as it relates to 1997. I have a 2848 signed by Mr. Emerson authorizing the same three attorneys to discuss tax matters related to his income tax return Form 1440 for the years 1996, 995, 1994, 1993, 1992, and 1991. And I will show this to Mr. Johnson so that he can verify the validity and the accuracy of my representations.

MR. JOHNSON: That's correct, they're all signed for all the years stated.

MR. CULY: It is—this meeting is being tape-recorded pursuant to an earlier discussion between Mr. Johnson and myself that took place on July the 2nd of 1997. And Mr. Johnson at that time indicated it would not be necessary to make the formal request in writing as is required by—I think it's required by the Internal Revenue Service Regulations. I'm not sure whether it's a regulation or code section but I believe Mr. Johnson acknowledges the fact that I sent a confirming letter dated July 2nd; is that true, Mr. Johnson?

MR. JOHNSON: That's true.

MR. CULY: Do you have any problem with proceeding with this matter being tape-recorded as indicated?

MR. JOHNSON: Not at all. In fact, I prefer it.

MR. MACDONALD: Mr. Culy, I'd like also the record to reflect that the Internal Revenue Service apparently has provided their own tape recorder and are likewise tape recording these proceedings.

MR. CULY: Thank you. That is correct. Let this record also reflect that I spoke with Jill Paige on or about July 7th of this year discussing with her another subject at which time I questioned her and asked her if she was going to be able to attend this meeting. And she indicated that because of a personal commitment, I think it was her father's birthday or something of that nature, that she would not be able to make1 it.

However, the purpose of bringing this subject up is that she questioned me concerning what the subject matter of the discussion would entail and I requested at that time information concerning the authority of the Government with respect to what I believe to be the practice of adjusting the W-4 Forms of the Hoyt partners, and specifically Mr. Emerson, as it relates to the authorizations we have, but more importantly as it relates generally to all of the Hoyt partners.

Mr. Johnson then faxed me on July the 8th, a two-page document, first page of which was a cover page that had some comments on it referencing the authorities and the second page referencing the various code sections. And in one case offers an actual citation of the case in the United States District Court. I have that fax with me dated July 8th. Do you have that Mr. Johnson?

MR. JOHNSON: Yes, I do.

MR. CULY: And is my statement accurate, for the record.


MR. CULY: What I would like to do—we're here generally just to find out some information. I don't want to make this an inquisitional type thing but more an informational thing—activity if we possibly can. Mr. Ogrod, may I ask you what your role is here today? Is it to assist and provide answers to the questions that we might have or…

MR. OGROD: Yeah, I think basically two different individuals can try to explain the same thing. They use different language so one person might be able to clarify a little bit by the language that they use.

MR. CULY: For the record, Mr. Johnson, would you please tell me what your official title is? I'm not really certain I understand your title. And a little bit regarding your duties as it might relate to this W-4 Program.

MR. JOHNSON: I'm assigned to the Hoyt case. I've been on this case over six years. And besides doing a little of the computer analysis in various aspects of this case, one of them is Pre-Filing Notification Freezes which also expanded itself into a W-4 action and we're going to get into that. Let me go back and add that David Ograad also, probably more so than I've done, has researched just in the last year or so and has been giving copies of the entire law areas that are cited in synopsis form on the fax I gave you on July 8th. And that's one of the reasons why I'm here too because I don't think you could discuss that in detail if it really came up in a legal sense.

MR. OGROD: And at the time we set up the meeting I wasn't aware that Mr. MacDonald was going to be here and I understand that you don't have a tax background practice so I copied down some of the code sections and some of the appropriate things from our library. I didn't know what availability you had of that. I didn't realize you had access to a tax library.

MR. CULY: Well, I appreciate that. I appreciate your being here from the standpoint—he's assuming that you have a tax background but he's assuming I don't have a tax background and that's okay, too. But any way, Mr. Johnson, could you tell us a little bit more about your role with respect to this particular subject as well as your involvement in the Hoyt litigation project; is that a fair title to apply?

MR. JOHNSON: No, it's not a project, it's ongoing. I've been largely responsible for doing the computer analysis. And actually, we have expert witnesses or we get information from American Shorthorn Association or American Sheep Association doing the analysis, doing the computer work, doing the computer work and when it comes to what partners are in what investment, whether they are also departments are settling. And I was responsible when they did settle through examiner district office to prepare the Form 906, draw the private coordination of 906's, which are Close-Out of Exam with Appeal and vice versa. It's the actual assignment of the cases themselves when it comes to the partnerships. I am probably much a secondary duty. I really don't get involved in actual audit of the partnership returns. It's—I assist the other agents also because a lot of times they are doing things of great magnitude and then when it comes to using a computer this really helps them because you're dealing with so much documentation, so many tax payers, so many years and there is no possible way to even come close to keeping this stuff straight unless you have some computer knowledge and background to keep the databases up to date. That's where I come into the picture.

MR. CULY: Do you have direct dealings with the partners of the Hoyt operation as tax payers filing tax returns?

MR. JOHNSON: Well, for instance, when we do the Pre-Filing Notification Freezes, which are done, I hink the last four or five years, my phone number—assignment of District Director with the concurrence of Assistant Regional Commissioner of Compliance and the letter goes out and my phone number and my name will be on there, if there are any questions to call me. So, I get the phone calls.

MR. CULY: You're the contact person.

MR. JOHNSON: Uh-huh. And that's the way it's been for all the years.

MR. CULY: For my benefit, can you explain what you mean by the Pre-Filing Notification Freezes?

MR. JOHNSON: Okay. Under, I think it's Revenue Procedure 84-84, we have…

MR. CULY: Excuse me, did Mr. Ograad furnish a copy of that?

MR. OGROD: You have two revenue procedures in there, one is 8378, which basically relates to the Pre-Filing Notifications and then you have 8484, which relates to the W-4 action. And 8378 basically establishes in there that there is a criteria that we use for issues of a pre-filing notification.

MR. CULY: Why don't you just give me one.

MR. OGROD: One of those is fully-onsidered to be highly likely overevaluation issue. And we have to use the information which is provided to us. We can't use speculation or what somebody might say or hearsay evidence. We actually have to do so. That's what we did. We actually went out and counted livestock. And because of the count and valuation of the livestock, the IRS made a determination that there was an overevaluation issue.

MR. MACDONALD: Can I interrupt just a minute? Would you please say your name on the record because somebody is going to transcribe this and they're going to be guessing as to whose voice is whose.

MR. OGROD: David Ogrod.

MR. MACDONALD: Thank you Dave. It's just that I've had the opportunity to have a secretary come back and say, "whose voice is this?" And you have somebody that is going to be recording yours and will not know my voice, so I'll say this is Doug MacDonald so they'll be able to recognize my voice also.

MR. JOHNSON: But under that remedy procedure the 8378, it's established that if there is a 200 percent overevaluation that the IRS makes that determination based upon the evidence that they're able to obtain, keeping in mind that it's not always that easy to obtain evidence. What the IRS does is they issue letters to individuals stating that refund claims will be denied. So if an individual files a tax return, claims a loss on a partnership they will deny their claim for refund. Now, along with that the other remedy procedure that we have there is 8484. Again, if the IRS makes a determination that it's highly likely that there is a gross overevaluation then W-4's can be adjusted. The remedy procedure itself refers to Code Section 6111, which gives a basic definition of what is a tax shelter. Basically says that in a period of five years, if the deductions are more than what they consider to be credits are more than twice the amount of "money that is contributed" then that's considered to be a tax shelter. The fact that it's considered a tax shelter does not in any way mean that it's a bad thing or bad investment or whatever and we try to make that clear to people when we talk with them. If it doesn't come through then sorry. The fact that it's a tax shelter means that the tax return itself falls into a different category. That's it.

MR. BUCK: Excuse me, Mr. Ogrod, what are you—what revenue procedure are you talking about right now?

MR. OGROD: 8484.

MR. BUCK: Okay, I'm looking at 8484 and it says, this very first line of this revenue—okay, that's about the sixth page of that document. This revenue procedure describes the abusive tax shelter detection program and so I don't think we're just talking about tax shelters here.

MR. OGROD: You're not only talking about that. There's more than one thing in this particular revenue procedure. It's very common with revenue procedures that there are several things within this.

MR. CULY: Can you point out where you're referring the application is other than to an abusive tax shelter?

MR. OGROD: In this particular revenue procedure it basically gives the definition of what we consider to be tax shelter that is being reviewed and we look at that particular "tax shelter" and then we consider to be "an abusive tax shelter" if we consider it to have a gross overevaluation. That's what I'm pulling out of here.

MR. BUCK: So, I guess in the end result—I would take—from that is that if using or referring to Revenue Procedure84, if any action is actually taken at that point then you have determined that it is an abusive tax shelter?

MR. JOHNSON: For the record, can I read just two paragraphs out of an internal memorandum, which is signed by the District Director and these are standard for all the years. And it says…

MR. CULY: Excuse me, do we have a copy of that within the documents that Mr. Ograad provided?

MR. JOHNSON: No, we don't. Because normally the IRS does not—internal memorandums we don't send them out unless there's some special approval.

MR. CULY: That's fine. I just thought you'd clarify for the record just what we're referring to and what you're reading from so that it's accurate.

MR. JOHNSON: It says pursuant to IRM 4227.74 (5) approval from the Chief Compliance Officer is required for the issuance of the PFN letters, that's what we're talking about here. A copy of the written approval is required to be mailed by the Ogden Service Center to the Investor Service Center in which the freeze code is to be established. Next paragraph Revenue Procedure 84-84, 1984-2CB, which I'm citing Section 3, states the requirement for taking pre-filing action is warranted where it is highly likely that there is; one, a gross valuation overstatement; two, a false or fraudulent statement with respect to the tax benefits to be secured by holding an interest in the tax shelter entity arrangement. It is our determination that the "highly likely standard" as it applies to the valuation of partnership assets has been established.

MR. BUCK: I guess the question I get back to then is this Revenue Procedure 8484, which you stated you're relying upon, states very clearly in the very first paragraph that you can—it doesn't state that you looking at a partnership is a determination that it's abusive but it does say that you'll detect and identify those returns that claim benefits from abusive tax shelter promotions before processing and before refunds are paid and then you will reduce the refund of investors when appropriate. That tells me nothing more than it is since it's determined to detect abusive tax shelters that any actions taken under 8484 after you've done your analysis is a confirmation that you've determined that it is an abusive tax shelter despite any other memos that you might get. This is a revenue procedure not—I guess, maybe it should be asked what takes priority because this is not statutory or regulatory.

MR. CULY: Referring to the revenue procedure.

MR. BUCK: And I guess this is a question just for my own information. How—where does a revenue procedure fall in the order of what you guys look at? Obviously, your first priority is to follow the code and then you interpret the code by using the regulations. And then so any revenue procedure which is in direct word for word conflict with the code obviously has no authority. So, where do you guys look at your chain of command in these kind of things, you know, taking into account the revenue procedures and internal memorandums and things like that? Because I know the manual also has to fit in there somewhere.

MR. JOHNSON: Right, that's why they have people specialize in these various code sections which write these revenue procedures and the IRM and they're all approved and these are all done at the national office.

MR. BUCK: I guess my question is if I'm looking at something in the IRM and I'm looking at something in a revenue procedure and they don't necessarily—they're not necessarily mutually exclusive but for—I'll give you a straight out example. You guys have characterized the W-4 changes, not under Revenue 8484 but under the question of the W-4 Program that's what's on every letter. Now, if I look at the Internal Revenue Manual and I read what the W-4 Program is and how it works and I also look at Revenue Procedure 8484, and I see that this is really what you're operating out of and you haven't really followed the W-4 Program as it's laid out, what has more authority?

MR. OGROD: The W-4 Program itself is a little more inclusive than a particular part of it and one of the things that you have in there is the requirement for employers to maybe send in anybody that's claiming more than ten exemptions. So, that's a portion of what Detroit will handle.

MR. BUCK: So, I guess my question—I'll get right down to basics. If the W-4 Program says that I must go through—I, as a revenue agent in whatever department happens to be handling this stage of the W-4, am required to go through steps one through ten before I can make a change. And a revenue procedure over here says that you can make that determination kind of separate from the W-4 Program and make a change and then a change is made following this rule but with this label, which one has priority? Which—what are we, as advocates for our clients, supposed to be able to look at and say okay they're either doing it right or they're not doing it right.

MR. OGROD: I think you're going to have to look at more than just that. One of the things which I feel that you have is you have not only the revenue procedures but you have code sections and regulations. And they're all supposed to work in concert. They're all supposed…

MR. BUCK: And we know that they don't always.

MR. OGROD: And you have to try to take of all of them kind of together because a revenue procedure will refer to those code sections and then the code sections will refer back to other code sections. So, it's taking one particular portion of one thing.

MR. BUCK: Well, that's true except if you say that I am going to penalize you under Section A B C of the Penalty Sections and you actually have no basis for that penalty, you're actually using something else to penalize them, that's incorrect. So, if you tell me that you're going to perform an act under the Questionable W-4 Program and you're actually doing it under something else, I think the taxpayer has a right to have it done in the open, so to speak, because I think that's a bit clouded when you say it's a W-4 Program and it's


MR. MACDONALD: I think in reading through the W-4 Program and listening to what you're telling me, you told me you made a determination under an abusive tax shelter regulation prior to stepping out of the W-4 Program. And under that regulation you're saying what we're going to do is do a withhold of any refunds that may be due under the determination and you have not yet broached the W-4; is that correct? Is that what I hear you telling me?

MR. JOHNSON: Make one thing clear also. On Procedure484, it goes on to the mechanics of this. Let's say someone does take a deduction for a tax shelter loss and because of that tax shelter loss they are claiming a $10,000 refund. Without the tax shelter loss they still were to get, let's say a $3,000.00 refund. The service center has to; one, set the freeze code saying that it goes to the unit and they check this out and recalculate the terms. Say okay, this guy is still entitled to a $3,000.00 refund. They don't withhold—they don't freeze the full $10,000. They're only permitted to freeze the amount that's attributable to the refunds coming from the tax shelter.

MR. MACDONALD: So, generally speaking, then if I were to generally speak of Hoyt partners to include specifically Emerson, and advise you that he has received no refund irregardless of his participation in a Hoyt partnership, I would interpret that from what you've told we that somewhere there is a glitch in the mechanics of your system because he should have received that refund which was attributable to all of the matters with the exception of the Hoyt partnership.

MR. JOHNSON: Not necessarily. Let's say if he didn't have enough withheld—let's say some people, even if they work…

MR. MACDONALD: All things being equal.


MR. MACDONALD: Yeah, assuming—making the assumption that withholdings were adequate to pay tax in excess of that which was obligated or due, laying the Hoyt partnerships aside, under the program you described to me you should still receive at least that portion of the refund that is not related to the tax shelter entity in which he participates; is that correct?

MR. JOHNSON: That's correct.

MR. OGROD: The same rights as anybody else, you, me or anybody. And if my tax return goes to the service center and a refund is not generated then I have a right to ask to break it down.

MR. BUCK: I have another question in terms of what you told me and what I've heard and I want to make sure my hearing is correct in terms of what you're telling me. Part of the determination that you make has to do with 200 percent overevaluation. In making that determination you referenced cattle count.

MR. OGROD: That's correct.

MR. BUCK: Are you making the determination, under the program, to not allow the refund to go forward because you have A, made a determination that whether cattle are there or not or whether the sheep are there or not, there's a 200 percent overevaluation or is it B, that you do not believe that the livestock are there at all, or is it a combination of the both?

MR. OGROD: Okay, I understand that you have the Power of Attorney Form that we were presented with was for Mr. Emerson and I believe he was in cattle.


MR. CULY: Whatever you feel comfortable and doesn't exceed the bounds of the Power of Attorney.

MR. MACDONALD: As always I don't have the same restriction that you have. But the point—what I heard you say though is that the initial starting point under the program is looking at overevaluation. I also heard you say count.

So, what I was trying to figure out to understand exactly what you were telling me is that you have made the determination in terms of the evaluation, in terms of the belief that there are not livestock present or a combination of both.

MR. JOHNSON: We have—never have—I don't know of anybody in the IRS, including myself, who has ever told a partner the cattle or sheep don't exist period. I'm sure it's at least a couple thousand, even if it's downscale. I don't know what the number is I've never even been out there but I've never told anybody and neither has Dave or anybody else I know of ever said to a partner they don't exist period. That would be a fabrication or else somebody was hearing wrong or misinterpreted our phone conversation. And that's one thing to make clear on the record.

MR. MACDONALD: Let me give you an example of what's going through my mind in relationship to the Bales case. The Court made a determination that in 1986, the reasonable valuation of the cattle was $4,000 per head. So, if I had one animal at $4,000 per head that would not be an overevaluation. If I had two at $8,000 total that would not be an overevaluation. If I had one but showed that one to be $8,000 then that could be a one hundred percent overevaluation. If I had one and showed it to be $12,000.00 then I would be at 200 percent overevaluation. But that's what I was trying to figure out. Were you looking at what was reported in terms of the 1065 and the Depreciation Schedule of the cattle or were you doing that in conjunction with what you believed to be the number of cattle present divided into that number to determine where the overevaluation was?

MR. OGROD: Getting back to this concept of information which is available to us.

MR. BUCK: I appreciate that.

MR. OGROD: On the tax return itself, a deduction is basically for depreciation. And looking at the tax return itself you cannot tell on that particular tax return that there are supposed to be 500 animals that generate that particular number.

MR. MACDONALD: That's why I asked the question.

MR. OGROD: So, we're looking at that specific deduction itself. We're trying to determine what it was that would generate that deduction for that partnership. And if we feel that that specific item that generated that was overvalued, yes based upon what we—MR. BUCK: Don't you have some obligation to be able to specifically articulate how you got to a 200 percent overevaluation into this?

MR. JOHNSON: That's why we didn't even do a refund freeze until we had contracted Ron Daily to count the cattle. It wasn't until—years prior to that, as you know, we were doing the audits and we had various information, we talked to B.L.M. and we had a good idea what was out there. But at the same time we never did refund freezes until we had someone to say that if necessary—because we could take the U.S. District Court on a refund freeze saying we shouldn't have frozen it. So, we had—we felt after we had a count, contractor count, we had something to support that. Giving you an idea though—I think some of the years I have in front of me…

MR. MACDONALD: Can I interrupt you for a minute to let you know what I've heard because it's really important to me. I heard you say that after Ron Daily did his count…


MR. MACDONALD: You took the measure of the number of livestock that he had, compared that to the Depreciation Schedules and came to a determination of whether or not there was a 200 percent overevaluation; is that correct? Is that a fair statement of what you just told me?

MR. JOHNSON: That's correct because we didn't do a refund freeze prior to that. And that's one reason…

MR. BUCK: So, you would have to compare then the sales price…

MR. JOHNSON: We looked at the depreciable basis based on the partnership returns—and giving you an idea, for instance, in 1990, total basis on—this is for cattle, was $200,309,138.00, that's for 82 entities.

MR. CULY: What did you base that on?

MR. JOHNSON: This was based upon…

MR. CULY: On the returns filed?

MR. MACDONALD: You referenced a letter earlier that you read from. Would it be possible to have a copy of that letter so that we can identify it with the tape? And would it be possible to take this document and describe it on the tape so that when we go back we can reference what you've looked at?

MR. OGROD: Well, one other thing, getting back to your particular example, you said as an example…

MR. MACDONALD: Okay, can we do that?

MR. JOHNSON: I can give you a copy of the schedule but the letter is not a letter, it's actually a memorandum which the District Director to do the PFN action…

MR. MACDONALD: Which basically you read?


MR. MACDONALD: And you said that so could we have a copy of that?

MR. JOHNSON: Let me call and ask Jill Paige. It's pretty generic…

MR. MACDONALD: The other thing I was thinking of is that you and I may one day sit down again at a table like this and say what did we say and what did we look at and what did I read. And if we both have it it's very comfortable for us to know what we did.

MR. OGROD: Getting back to your original example where you said if I have one cow and it's 8,000 or whatever. First of all, that's probably the basic that you have to do is we have to take a particular return and identify an animal as yours.

MR. MACDONALD: And that's what Norm Johnson was just going to do for me. He was looking at his schedule and he was going to give me exactly what he had. So, if you'd do that.

MR. JOHNSON: Well, these are just partnership returns and that's the depreciation. Here what I've highlighted is basis, and there is the number of entities. So, for some reason, if some return was filed a little later and it's not included—well, I don't know which one it would be, but it tells you for 1990, for instance, I'm looking at 82 investor cattle partnership entities and the total basis for depreciation purposes, the basis is over like 200.3 million dollars.

MR. MACDONALD: All right. And then do you have a cattle count to go with that?

MR. JOHNSON: Cattle count—Ron Daily—here it is. It's a summary, just for a summary, I think he had a high and a low and his high was 6.2 million.

MR. MACDONALD: No, but that's his—so, you would have divided the 6.2 million into the 200 million dollar basis to come to a determination of an individual. You then would have compared that with the Bales case to see if you have a 200 percent overevaluation?

MR. OGROD: You use that method in the absence of specific information. Specifically state that this figure or these cattle here belong to this partnership. If you had that information, if you had information that said this particular partnership has 200 cattle and these are the 200 on 1992 at the date that you do a count, which we requested that information and did not receive. But if we had that specific information then we could go back to what you…

End of tape one, side one

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Beginning not later than 1982, and continuing to the present, the defendants, led by Walter J. Hoyt III (Jay Hoyt), conspired to defraud thousands of Investors out of more than $100,000,000....

Last updated: Friday, October 09, 2020

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