Opinion ID: 167170
Heading Depth: 2
Heading Rank: 2

Heading: The Van Scotens and Their Investment

Text: 8 Mr. Van Scoten has an associate's degree in electricity and Mrs. Van Scoten completed one year of college. During the year in issue, Mr. Van Scoten worked as an equipment salesman, and Mrs. Van Scoten worked as a respiratory therapist. 9 The Van Scotens first learned of the Hoyt partnerships in 1988 from Mr. Van Scoten's father, Edward Van Scoten (Edward). Edward has a bachelor's degree. He served in the Air Force for approximately 21 years, after which time he taught at a community college and worked for an electronics corporation. He had limited experience with dairy farms—he spent his childhood living on or near dairy farms, and as a teenager and for one year, during his Air Force career, he worked on a dairy farm. He also had some investment experience with mutual funds, employee profit sharing, insurance, and real estate. 10 Edward invested in a Hoyt partnership in December 1983. He first learned about the Hoyt organization from his nephew, who had already invested in a Hoyt partnership. In making his own investment, Edward relied upon information obtained from his nephew and the Hoyt organization. He did not seek outside advice, such as advice from an independent investment or tax advisor. After making his investment, Edward spent one summer working on a Hoyt ranch where he drove a truck hauling hay bales. He also attended monthly Hoyt partnership meetings over a period of several years starting in the early 1990s. 11 Before investing, Mr. Van Scoten spoke to Edward about the Hoyt partnerships on a regular basis. 1 His father told him that: 12 the partnership involved cattle; in particular, what [Edward] called `Borrow-A-Bull.' That entailed investing money into the partnership, buying what I presumed was a percentage of a group of cattle, and from there, after a number of years or after the initial investment, then we would receive a return on our investment. 13 I Tr. at 29. Edward also told him that he had seen cattle and numerous trucks bearing the Walter J. Hoyt logo and insignia. When asked by his son whether the investment made sense, Edward responded that it did. Mr. Van Scoten trusted his father's advice. 14 Prior to investing, the Van Scotens received various promotional materials prepared by the Hoyt organization. The Van Scotens relied on these promotional materials which, in general, provided rationales for why the partnerships were good investments and why the purported tax savings were legitimate. 15 One document on which the Van Scotens relied, entitled Hoyt and Sons-The 1,000 1b. Tax Shelter, provided information concerning the Hoyt partnerships and how they 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 and refunds, but that the U.S. Congress had enacted the tax laws to encourage investment in partnerships such as those promoted by Mr. Hoyt. The document stated that an investment in cattle [is arranged] so the cash required to keep it going is only about seventy five percent of an investor's tax savings, while the other twenty-five percent of the tax savings is a thirty percent cash return. R. Ex. 407-P at 15. That is, partners were required to remit seventy-five percent of the Federal tax refunds they received to the Hoyt organization and were permitted to retain the remaining twenty-five percent. This arrangement purportedly provided protection to investors: If the cows do die and the sky falls in, you have still made a 30% cash return, and no matter what happens, you are always better off than if you had paid the money in taxes. Id. 16 A section of the document that was devoted to a discussion of audits by the IRS stated that the partnerships would be branded as a potential `abuse' by the Internal Revenue Service and will be subject to automatic audit. Id. at 80. In a section of the document titled Tax Aspects, the following warning was given: 17 If you must have a tax man give you specific personal advice as to whether or not you belong in the cattle business, stay out.... Don't have anything to do with any aspect of the cattle business without having a good tax pro working with you all the time, and don't waste much time trying to learn tax law from a Partnership Memorandum. 18 Id. at 57. 19 The document then dedicated numerous pages to explaining the tax benefits of investing in a Hoyt partnership and why investors should trust only Mr. Hoyt's organization to prepare their individual tax returns. Among these benefits, the document explained: If a Partner needs more or less Partnership loss to be special [sic] allocated to him for any year, it is arranged quickly within the same office, without the Partner having to pay a higher fee while an outside preparer spends more time to make the arrangements. Id. at 79. Finally, the document warned that there remained a chance that [a] change in tax laws or an audit and disallowance by the IRS could take away all or part of the tax benefits, plus the possibility of having to pay the tax along with penalties and interest. Id. at 39. 20 Before investing, Mr. Van Scoten also received from the Hoyt organization a copy of the Tax Court's opinion in Bales v. Commissioner, 58 T.C.M. (CCH) 431, 1989 WL 123005 (1989). Bales involved deficiencies asserted against various partnerships marketed by Mr. Hoyt. The Tax Court found in favor of the investors on all issues, concluding that the transaction in issue should be respected for Federal income tax purposes. Id. 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. Mr. Van Scoten testified that he understood the Bales opinion to mean basically, that a partnership either similar to ours or like it was [sic] it had gone to court and the Bales had won the case. As far as the details about it, I don't know. I Tr. at 30. 21 Mr. Van Scoten had no experience in cattle ranching or investing. Despite this, he did not personally investigate the Hoyt partnerships or consult with competent independent professionals—for example, he did not consult with cattle ranchers, independent investment consultants or independent tax advisers—concerning the legitimacy of the business or the accuracy of the tax benefits being touted. Rather, Mr. Van Scoten relied on the advice of his father and the information he received from the Hoyt organization before investing. 22 On January 7, 1991, 2 the Van Scotens signed several documents in order to invest in a Hoyt partnership known as Durham Shorthorn Breed Syndicate 1987-C (DSBS 87-C). 3 Included in these documents were various power of attorney forms, which authorized Mr. Hoyt to act on the Van Scotens' behalf for practically all DSBS 87-C matters. One particular power of attorney granted Mr. Hoyt the authority to sign recourse promissory notes on the Van Scotens' behalf. 23 When Mr. Van Scoten signed the various partnership documents and power of attorney forms, he believed that they would be required to repay the recourse promissory notes signed on their behalf by Mr. Hoyt. He also believed the investment would produce a profit and provide retirement income. 24 The Van Scotens made substantial cash payments to the Hoyt organization during the years 1991 through 1997. In a summary of such payments prepared by the Van Scotens, they estimate that the total amount of these payments exceeds $40,000. These payments included the remittance of their tax refunds, the payment of quarterly and monthly installments on their promissory notes (even after they stopped receiving refunds from the Commissioner), special assessments imposed by the partnership, and contributions to purported individual retirement account plans maintained by the Hoyt organization. 25 During and after the year in issue, the Van Scotens received numerous documents purporting to show both the legitimacy of the Hoyt partnerships and the legality of the tax claims being made by the Hoyt organization. The Van Scotens trusted these documents and believed and relied upon what the Hoyt organization told them. 26