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organization. Before and after the year in issue, petitioners
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 Hoyt
organization also portrayed employees of the IRS as incompetent
and claimed that they were engaging in unjust harassment of Hoyt
investors. Petitioners trusted these documents and believed and
relied upon what the Hoyt organization told them.
III. Petitioners’ Federal Tax Claims
On petitioners’ original joint Federal income tax returns
for the years 1984 and 1985, they reported adjusted gross income
of $39,315 and $52,048, respectively. After petitioners invested
in the Hoyt partnerships in 1986, they filed a Form 1045,
Application for Tentative Refund, on which they claimed tentative
refunds for the years 1984 and 1985, based upon a claimed net
operating loss (NOL) carryback of $79,171 from 1987. This form
reflects originally-reported tax liabilities for these years of
$6,299 and $8,886, respectively, and tax liabilities of zero in
both years after applying the claimed NOL carryback. Petitioners
reported the following on their joint Federal income tax returns
in the respective taxable years:
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