The tax shelter that wasn't

In the early '80s, Hanford nuclear workers who owed their livelihoods to the splitting of the atom put their faith in a vestige of the Old West: purebred, shorthorn cattle.

First just a few workers, then dozens invested with Oregon rancher and tax whiz Walter Jay Hoyt as cattle fever spread across Hanford and beyond to nearly 300 residents of the Tri-Cities area.

In the deal, investors gained years of big tax write-offs from the money-losing effort to care for the animals and hoped for big payoffs when the cattle finally were sold as breeding stock.

Today, many of these investors are nearing retirement, but instead of payoffs, they are stuck with worthless partnerships in what is alleged to be one of the biggest cattle scams in U.S. history.

Hoyt and four business associates are accused in a 1999 federal criminal indictment of defrauding more than 4,000 investors nationwide by selling shares in more than 30,000 cattle that existed on paper, but not on the range. Hoyt has denied all criminal charges.

For the hundreds of investors, owning a worthless share in Hoyt's operation is a disappointment. The bigger source of pain is the Internal Revenue Service. The agency is pursuing them as participants in the alleged scam, which the indictment says siphoned off more than $100 million. Most of that money represented investor tax savings that otherwise would have gone to the U.S. Treasury.

In the eyes of the IRS, Hoyt's investors - even if they were unaware of any fraud - are liable for back taxes plus interest and huge penalties.

"I feel like we were twice-victimized," said Glenn Burnett, a 47-year-old Richland construction worker. "Once by Hoyt and once by the IRS."

Investors say they funneled most of what they saved in taxes back to Hoyt. And while most are willing to pay those taxes now, they want the IRS to ease the interest and penalties, which in some cases have pushed the amount owed to more than four times the original tax liability.

Some have handed over most of their life savings to settle with the IRS. Others emptied their bank accounts and when that wasn't enough wound up in personal bankruptcy. Roughly half the investors have yet to settle.

In the suburban enclaves of Pasco, Kennewick and Richland, split-level homes, jet boats and motor homes are all fair game for seizure as the IRS demands payments generally ranging from $100,000 to more than $1 million.

A lien on the house

Glenn Burnett is disabled from a workplace injury that ruptured three disks in his lower spine.

Since 1995, he's struggled to get by on about $20,000 a year from Social Security and disability checks. He has been through a personal bankruptcy. He now spends most of his days cooped up in his house, his pain dulled by a steady flow of morphine from a pump implanted in his body.

And Burnett has yet to settle with the IRS. He bought into Hoyt's partnership in 1984 and stayed in through 1990. The IRS has assessed him more than $150,000 and keeps a lien on his house.

"Once I told the agents: `What do you want me to do? Put a gun to my head and blow myself away so now you win?' I didn't get an answer."

John Wunderlich, a Richland electrician, was an early and enthusiastic Hoyt recruit and used the partnerships to save on his taxes for 12 years.

In February, he retired from 20 years at the Washington Public Power Supply System at Hanford and hopes for a leisurely life of duck hunting, steelhead fishing and travel.

But his future is uncertain. He has yet to get a final accounting of his debt to the IRS.

"I don't have a clue what it might be," Wunderlich said. "But it could wipe me out completely."

Another early Hoyt recruit, engineer Gary Blackburn now of Portland, also faces a massive tax bill. Between 1981 and 1986, he was able to use the partnership to get federal tax refunds of $75,000. He sent most of that money to Hoyt. Now with interest and penalties, he faces a bill of more than $330,000.

Blackburn says his finances are wrecked: "I just work day to day."

Investor attorneys say the IRS has badly bungled the Hoyt case. Even in the mid-'80s, court documents indicate, the IRS had evidence of tax fraud by Hoyt. Yet the agency failed to shut Hoyt down, allowing him to rope in thousands of new investors.

To add weight to their contention, the attorneys point out that the agency's collection practices also have drawn critics from within the IRS.

"Investors in Hoyt's cattle-breeding program were, for the most part, unwitting victims of Jay Hoyt's fraud," wrote William McDevitt, an IRS appeals officer in a Dec. 23, 1997, memorandum obtained under the federal Freedom of Information Act by two investor attorneys, Wendy Pearson and Terry Merriam, both based in Seattle.

"It seems to me that proposing penalties against these investors would only be likened to pouring salt into their open wound. . . . It would do nothing more than to anger them. It would amount to adding mere numbers to already uncollectible amounts. In other words, it would serve no useful purpose," McDevitt wrote.

IRS actions in the Hoyt case also have been the focus of an internal review by National Taxpayer Advocate Val Oveson, whose post was created in 1998 as part of legislation to reform the IRS. Last year, as Oveson began his review, the agency declared a temporary halt to new collection efforts in this case.

Oveson and other IRS officials declined to comment about Hoyt investors. But in court filings and correspondence, they repeatedly have defended IRS actions. Rather than strike an overall deal with all the investors who still owe money, they prefer to evaluate each case to determine whether financial hardships justify easing of penalties.

As for Hoyt, he and his five business associates face a 54-count federal grand-jury indictment that charges them with fraud, perjury, money laundering and other criminal acts.

U.S. Justice Department prosecutors say Hoyt and the other defendants made false representations to lure investors. "Their tax deductions were based on the existence of real cows - and the indictment says those cows didn't exist," said Allan Garten, an assistant U.S. attorney in Portland.

Hoyt declined to talk to the Seattle Times. His attorney, Charles Wiseman, said Hoyt maintains there were plenty of cows to cover all the investors, and that he denies all charges of criminal conduct.

In correspondence with investors, Hoyt repeatedly blamed many of his problems on the IRS.

Cowboy with a head for finance

To Tri-City investors, Jay Hoyt always looked the part of the cowboy. He dressed in a western-cut suits, bolo ties and leather boots. Plus, there was substance behind the image.

Hoyt was born in 1939 and grew up in central California in a large ranching family. They raised shorthorns, sturdy, stocky animals used by pioneers to plow fields and pull wagons. The family earned a national reputation for improving the breed.

Hoyt and other family members built on that reputation and in the '70s moved to Burns, Ore., to expand the family ranching operations.

Hoyt learned in boyhood how to rope a steer and brand a cow. But he displayed his greatest skill in finance, mastering the intricacies of the tax code. He earned federal Internal Revenue Service accreditation as an enrolled agent, which meant he had completed an IRS examination demonstrating "special competence" in tax matters. He was authorized to fill out other people's returns but more importantly to then represent them in dealings with the agency.

It was Hoyt's peculiar genius to turn ranch tax shelters - once largely the domain of doctors, lawyers and rich politicians such as former President Reagan - into investment opportunities for working people.

He began selling shorthorn partnerships in the late '70s, offering to turn blue- and white-collar workers into investors for an initial payment as low as $25. That payment gave workers a stake in partnerships that owned "units" of cattle.

Investors would claim losses on rearing the cattle, and then Hoyt would fill out the tax returns that gained the refunds. He also required that 75 percent of each refund be funneled back into the partnerships.

Hoyt used the money to run his ranch operations, which in turn allowed investors to claim a new round of losses the following year. They all hoped for a profit as the herds matured and were sold seven to 15 years down the line.

So long as there were enough cattle to cover all the partnerships, the tax shelters could be considered legitimate under the rules of that era. Hoyt told investors the tax shelters helped subsidize ranchers so they could produce cheap meat for consumers.

Teachers, seamen, firefighters and even low-paid ranch hands all bought in.

But Hoyt achieved some of his biggest sales success in the nuclear-power-plant industry.

Some of his first partnerships sold to workers at the Rancho Seco power plant outside Sacramento. Then, as these workers moved to other nuclear facilities, they helped spread the partnerships across the country.

One of these workers, Andy Anderson, moved to Hanford to help build the Washington Public Power Supply System nuclear plant. It was one of five plants initially planned for the Northwest, and the only one to be completed, in a financial fiasco that resulted in the largest public bond default ever in the United States.

As Anderson recruited new Hoyt partners, this plant also became ground zero for the cattle-investment debacle in Washington.

Some workers signed on right away; others waited a few years and were finally won over as their fellow workers boasted of the big savings on federal income taxes.

"Andy would say: `You'd better get into this; I just got my refund check,' " said Larry Harrold, an engineer at the power plant who eventually joined a Hoyt partnership.

Anderson said he never took commissions from Hoyt to bring in new recruits. But other workers said they did get commissions of $250 per recruit, and the money added incentive to find more partners.

Every year around tax time, Hoyt and several of his business associates would show up in the Tri-Cities to fill out tax returns and sign up new investors. They would also invite investors down to Burns for annual ranch tours, rodeos and steak barbecues.

For nuclear workers used to the confines of Hanford, where chain-link fences ring high-security buildings, Burns was a change of pace.

The small town of 5,000 sits in the middle of a vast stretch of high desert lands of the Great Basin. Mills process pine cut from the Blue Mountains to the north. But Burns' main claim to fame has always been ranching, and the town clings fiercely to that heritage.

Cowboy paintings hang in the county courthouse. And you might see a cowpoke clad in chaps and spurs grabbing a sandwich at the gas stations on the edge of town.

Back in the '80s, the Hoyts were the dominant ranchers in Burns. Hoyt & Sons Ranch Properties owned 12 ranches and leased five more, covering more than 76,000 acres, according to federal-court records. Hoyt also held permits to graze an additional 410,000 acres of federal lands.

More than 200 people worked on these spreads, making Hoyt one of the biggest employers in the Burns area. Investors also pitched in at times, mending fence, shoveling manure and performing other chores. While they were there, they could saunter into the barns to check out prize calves, breeder cows and bulls.

But no one at that time knew the total number of cattle sold to investors. Hoyt records later obtained by the Justice Department indicate he needed to have 38,000 cattle. The actual herd size never exceeded about 5,000, according to the indictment.

IRS eyed Hoyt in the '80s

Even in Hoyt's heyday, the IRS had ample evidence of trouble in the ranching empire.

As early as 1984, the Internal Revenue Service examination division launched a criminal investigation of Hoyt, and by 1986 had recommended that he be prosecuted for assisting in the preparation of false and fraudulent income-tax returns, according to a stipulation that the agency filed in U.S. Tax Court. Federal prosecutors declined to pursue an indictment, but by 1989 the Justice Department had approved another grand-jury investigation of Hoyt.

Yet all through the '80s, the IRS never acted to disbar Hoyt as an enrolled agent qualified to represent investors before the government, even though agency rules call for such action if false or misleading information is submitted to the Treasury.

And all through the '80s, the IRS made no broad effort to freeze the investor tax refunds. New money kept flowing to Hoyt from the tax savings claimed by his many partners nationwide.

In 1989, IRS officials did go to tax court to disallow the Hoyt write-offs, saying the ranching partnerships were not legitimate. But the write-offs - not cattle fraud - were the focus of the case, and a judge eventually ruled the partnerships had a legitimate business purpose.

Hoyt hailed the ruling as a victory and included copies of the judge's decision in recruitment packets sent to new investors.

Still, in the early '90s, many investors were getting edgy as the IRS began to question Hoyt's cattle count. They wanted to quit the partnerships. According to the indictment, Hoyt tried to keep them in through intimidation tactics, threatening investors with lawsuits and saying early withdrawal from the partnerships would result in big tax bills.

By the mid-'90s, however, even those investors who had stuck with Hoyt started to get hit with huge tax bills, resulting from a partial settlement Hoyt had negotiated with the IRS. Investors were angry, confused and mistrustful; some would eventually begin talking to the FBI.

In 1994, Hoyt came to the Tri-Cities to try to quell the investor rebellion.

The meeting at the Red Lion Inn in Pasco started out orderly enough, as investors politely raised their hands to ask questions. But many didn't like the answers. Soon they were screaming and shouting. Hoyt stopped the meeting and left town.

"I knew then we were in a world of hurt," said Wunderlich, the Richland electrician.

Cattle baron to truck driver

Most of the Tri-City investors would like to forget about Hoyt. But those who haven't settled with the IRS live in fear.

They dread the daily trip to the mailbox that may bring the latest batch of collection notices from the IRS. They wonder whether they'll have enough money to make it through retirement, or to have anything to pass on to their families.

Oveson, the national taxpayer advocate, is now more than a year into his review of IRS actions in the Hoyt case. But he has yet to announce any findings, and collections could resume at any time.

Meanwhile, litigation clogs the federal courts. More than 800 Hoyt-related cases are winding through tax courts around the country.

Then there are bankruptcy cases, the civil suits and the criminal indictment scheduled to bring Hoyt and his associates to trial next year in U.S. District Court in Portland.

Also named in the indictment are David and April Barnes of Herald, Calif.; David Cross, Phyllis King and Darrel Smith, all of Burns, Ore.

Down in Burns, all of the Hoyt ranches have been sold in bankruptcy proceedings. The workers have been laid off, and many are in financial turmoil. Most had let Hoyt fill out their tax returns. They are being dunned by the IRS.

It's still unclear just what happened to all the money - estimated in the indictment at more than $100 million - that Hoyt and his associates collected from investors. Investor attorneys say the figure is more likely $400 million.

Many people say the expenses of running far-flung ranch operations soaked up most of the money. Others say that with so much money - so loosely controlled - at least some must be tucked away in foreign bank accounts.

As for Hoyt, his passport has been seized so he doesn't flee the country. But he's still a hard man to find. His wife, Betty, says he works as a long-distance trucker, returning home to Burns just a few times a month.

And unlike some of his investors, Hoyt - at least for the moment - still has his house.

The federal government seized it in 1995 and then sold it at auction. The Hoyt family came up with the winning bid.

The 4,097-square-foot cedar-sided home, a mansion compared to most of the houses in Burns, sits high on a bluff just north of town, with sweeping vistas of pine-studded mountains and fields full of cattle.

Hal Bernton's phone message number is 206-464-2581. His e-mail address is hbernton@seattletimes.com