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were victims of a theft.12
Respondent disputes that equitable estoppel or the Rod
Warren Ink case should be applied to override section 165(e) and
allow the partnerships theft loss deductions for the years at
issue. Respondent asserts that petitioners have failed to
establish: (1) The IRS misled the partnerships and their
partners about Jay Hoyt’s fraudulent activities against them; and
(2) the partnerships and their partners reasonably relied to
their detriment on the IRS’s alleged failure to stop and disclose
Jay Hoyt’s promotion of the cattle and sheep partnerships at an
earlier date. Additionally, respondent adds that the Court of
Appeals for the Ninth Circuit requires “affirmative misconduct”
by the Government as a threshold matter before deciding whether
the traditional requirements of equitable estoppel are met.
Respondent disputes that there was affirmative misconduct by the
IRS.
B. Discussion of Applicable Law
1. Section 165 Theft Loss
Section 165 generally allows a taxpayer to deduct losses
12 In this connection, Jeffrey Hull (the postal inspector
who investigated Jay Hoyt and later worked with the prosecution
team) testified that the criminal case focused on the cattle
partnerships and not the sheep partnerships. Mr. Hull explained
that his investigation had focused upon the cattle partnerships
since they represented the majority of the investor partnerships,
and that he and others saw no point in having to address
collateral issues concerning the sheep partnerships.
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