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Petitioners filed a tax return for 1986, the initial year of
their investment, using a tax return preparer affiliated with the
Hoyt organization. Petitioners claimed a partnership loss for
1986 that purportedly reduced their tax liability to zero for
that year. Relatively soon after filing their 1986 return, in
October 1987, respondent notified petitioners that respondent
believed that the partnership loss was not allowable and that
respondent was holding the refund that petitioners had requested.
Despite this warning, petitioners continued with their
investment, and they took no steps to verify the legitimacy of
Mr. Hoyt’s organization, the Hoyt partnership, or the tax claims.
For the next year, 1987, Mr. Hoyt’s organization switched
petitioners from the partnership named in the IRS warning letter
to a different partnership. As instructed by the Hoyt
organization, petitioners also began reporting the bulk of the
Hoyt-related losses as losses from farming activities rather than
from partnerships. For 1987, the claimed Hoyt-related losses
purportedly reduced petitioners’ tax liability to $462.
Also in 1987, petitioners filed the Form 1045 on which they
claimed the carryback of the general business credit, purportedly
reducing their 1984 tax liability from $7,586 to $142, and their
1985 tax liability from $7,326 to $484. By 1988, petitioners
were claiming the Hoyt losses entirely on Schedules F. These
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