Originally created 03/11/01

Herds of investors roped into scheme



The bitter sense of relief reached a continent away when Oregon cattleman Walter Hoyt was convicted on 52 counts of mail fraud, bankruptcy fraud and money laundering last month. Dozens of area residents who invested in Mr. Hoyt's bogus ranch operations thought perhaps their long personal nightmare was nearing a close.

The Internal Revenue Service says think again.

Despite Mr. Hoyt's conviction, the IRS is still disallowing the deductions people thought they had invested legitimately in Mr. Hoyt's various tax shelter partnerships. The IRS not only wants the back taxes, it has assessed the Hoyt victims with huge penalties and interest.

Most of the 4,000 people in 41 states who took part in the investments, including about 60 in the Augusta area, have lost their retirement savings.

In all, the 61-year-old rancher bilked his victims out of more than $100 million, selling cattle that didn't exist.

"We wouldn't have come near this thing if we'd known the truth," said Barnwell resident Richard Walta, who got involved with Mr. Hoyt in 1992. "We went to meetings for a whole year before deciding to invest. We couldn't see any evidence that this was anything other than a completely legitimate operation."

Mr. Hoyt formed investor partnerships and appointed himself the tax matters partner, giving him total control over tax issues.

He prepared investor tax returns and earned huge refunds by claiming write-offs on money-losing ranch operations. Investors were required to give 75 percent of the money to the operation in exchange for big returns in 10 to 15 years when the herds were sold.

"He showed me actual checks cut by the U.S. Treasury," Mr. Walta said. "He was an enrolled agent - he had the IRS's stamp of approval on him."

Despite Mr. Hoyt's IRS-enrolled agent status - a top certification for non-IRS employees who pass IRS tax tests - the government agency had suspected Mr. Hoyt of wrongdoing as early as 1980, when it began annual audits of the partnerships.

The IRS never prosecuted despite years of mounting evidence, such as overstating herd numbers and fudging farm expenses.

The 52 counts of fraud Mr. Hoyt was convicted of resulted from FBI and U.S. Postal Inspector investigations. To date, Mr. Hoyt has not been arrested for any tax-related criminal charges.

Representatives from the IRS wouldn't comment on why Mr. Hoyt was allowed to continue his operation for so many years, though some IRS employees have been outspoken in the past.

"It's easier to go after the people who have been duped than to go after the promoters of the scheme," said Bill Steiner, IRS spokesman, quoted in Willamette Week, July 18, 1999.

Mr. Hoyt remained an enrolled agent of the IRS until 1997, even though an IRS investigation revealed in 1993 Mr. Hoyt sold phantom cattle, lied about the herd's size and used investors' money for family and other expenses.

While Mr. Hoyt prospered, his investors suffered. In 1995, Mr. Walta began receiving official letters from the IRS threatening large penalties with interest for his involvement with the Hoyt ranch.

When he tried to pull out of the investment, Mr. Hoyt threatened him with their contract - by cutting out early, Mr. Walta would owe Mr. Hoyt $350,000.

"So I either have the IRS on me or Hoyt with his contract," Mr. Walta said. "I knew I couldn't pay that contract. Everyone else was staying in, so like a good little cow I stayed in the herd."

The stress resulted in five heart attacks in the span of a year. Mr. Walta is now disabled, his right artery completely blocked.

He has developed an almost manic fear of the mailman.

"Whenever I hear the mail drop in the door slot, sometimes I just want to run out the back door," he said. "I want to leave it forever. I never know when I'll find one of those three-letter envelopes - IRS."

The stress factor

Jack Witters and his wife, Doris, seem comfortable together in their middle-class Beech Island home. It isn't immediately obvious that their once-promising financial future was crushed under the boot heel of an Oregon cattle baron.

Look closer, and the pain is evident.

"I haven't even kept track of the money we've spent on attorneys," Mrs. Witters said. "We had $13,000 in bonds we had to cash. It's cost us our health, our marriage, our financial future - it's incredible what the government can do. I still can't believe this is happening to us."

Mr. Witters got involved with Mr. Hoyt in 1982 as a way to fund his retirement and plan for his family's future. He figured that, because everyone at his job was involved, it had to be legitimate.

In 1992 he received a letter from the IRS demanding payment of back taxes on his Hoyt investments from 1979 to 1986. Mr. Hoyt had claimed expenses on Mr. Witters' tax return for three years prior to his sign-up date and pocketed the money.

When Mr. Witters tried to sever his ties with the Hoyt ranch, Mr. Hoyt threatened him with hundreds of thousands of dollars in penalties for pulling out early.

So, Mr. Witters remained. The guilt and stress began working at his health. Initially, he tried to keep it from his wife, but the rock that was the IRS and the hard place that was Mr. Hoyt continued to squeeze the life out of him.

In 1994, Mr. Witters went completely bald from stress, losing every hair on his body. It grew back snow white six months later before returning to its original color..

Mr. Witters suffered a heart attack in 1997, a year after declaring bankruptcy.

"It'll change your life, the way you look at things, having a heart attack," Mr. Witters said. "My health, it's something I'll never get back. There's nothing I can do about it. It's gone now. I can just move forward."

Moving forward includes nursing a marriage wracked by financial woes.

"I left him last year over it - I was gone for six months," Mrs. Witters said. "It's not the money - what's money when you love someone? It's that he can't forgive himself. It's his own guilt that's eating him up."

The IRS' settlement offer is $100,000 - about $75,000 of which is penalties and interest, Mr. Witters said. It's a sum he can never hope to settle - he couldn't even pay the interest.

He will have to file bankruptcy again this year.

"When I filed the first bankruptcy, I thought I was done," Mr. Witters said. "But it doesn't end. My credit is ruined. If the IRS would settle for what I owe in taxes, I wouldn't file for bankruptcy and they would get their money. But it's almost as if they don't want it - they're after something else."

"It's not as if we were trying to get away with anything," Mrs. Witters said. "We're just ordinary American citizens trying to make it. Now we have nothing - no savings, no stocks, nothing for our kids ... And who speaks for us? No one. No one wants to take them on."

Getting together

In a Martinez restaurant on Washington Road, more than 30 Hoyt investors from Alabama, Georgia and South Carolina share stories of disgust, sorrow and anger. They call themselves the CSRA Partnership Group, and they meet about once every month for support and updates on several legal fronts.

The group includes teachers, energy workers, custodians, marketing executives, small-business owners, retirees - Mr. Hoyt didn't discriminate.

North Augusta tax attorney Arthur Shealy dispenses legal advice to the group. He says the IRS collections will most likely stay on hold for six more months, depending on the status of each particular partner. That's good news for the few members who have thus far managed to staved off bankruptcy.

Mr. Shealy encouraged the group to get active, go to Washington, continue to write their congressmen - let them know the circumstances of their debt to the government.

"This is a clear example of how a black-hearted bureaucracy ignored basic human rights for the sake of administrative convenience," he said. "The IRS needs to recognize its mistake and show some humanity."

Kathleen Nilles is a partner in the law firm Gardner, Carton & Douglas in Washington. The firm is representing the Partnership Defense Fund Trust, an ad hoc organization maintained by hundreds of Hoyt victims throughout the country, including many in the Augusta area.

The paid lobbying group is providing legislators with information on how the IRS mishandled the Hoyt case in order to establish a higher profile for the case on Capitol Hill. Ms. Nilles said the firm met with various lawmakers Friday and was expected to meet with more Monday.

"We're going to try to acquaint them with the fact that a U.S. district court in Portland has found that Hoyt did mislead investors and they were innocent victims with no idea that the cattle didn't exist," she said.

"We can't ask members of Congress to intervene in a pending IRS matter. Members of Congress don't want to get involved with that. But since this involves so many people throughout the states, they can look at the IRS' overall handling of this matter, see if they have taken the right approach."

Ms. Nilles said in a fair settlement the IRS would abate the interest and penalties and the investors would repay only the disallowed deductions.

"Penalties are associated with wrongdoing - and none of these people did anything wrong," she said. "None of these people had any use of the money Hoyt took, so why should they be forced to pay interest? Really, it almost seems unfair to make them repay the deductions - these people have been hurt."

Mr. Witters said he would like to be optimistic, but that part of him has been crushed forever.

"Because of the Gestapo tactics of the IRS, I don't think there's anything anyone can do," he said. "Hoyt will get what he deserves. It's too bad we can't prosecute the IRS, too. They knew about this and let us walk into it."

Tax shelter red flags

The IRS said taxpayers can spot a fraudulent tax shelter scheme by its sales pitch:

"Never pay taxes again"

If you have income, you have to pay taxes. Transferring assets or assigning income to another entity won't remove that responsibility.

"Deduct the cost of your personal residence"

Non-deductible personal living expenses don't become deductible by assigning assets or income to a trust, partnership or other entity.

"Deduct the cost of your child's education"

This too is considered a non-deductible personal living expense.

"The IRS doesn't want you to know about this"

This statement is often used by scam artists to convince you their shelter is legitimate despite what the IRS says.

"This is so new, your CPA doesn't know about it yet"

Promoters of legitimate tax shelters should not discourage participants from seeking objective, professional advice.

"Multiple trusts, partnerships or foreign entities are involved"

Some schemes use multiple entities with no apparent business purpose to make money hard to trace.

Source: IRS

Reach John Bankston at (706) 823-3352 or jbanks15@hotmail.com.