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extensions of the limitations period for the partnerships unless
the IRS delayed assessing the preparer penalty until the FPAAs
were issued also indicated that Hoyt was allowing his personal
interests to interfere with his fiduciary duty to the
partnerships.
As early as mid-1989, the IRS suspected that Hoyt had not
purchased the sheep reportedly owned by the partnerships, in
breach of his fiduciary duty to the partnerships. By February
1993, the ongoing inspection and livestock count confirmed
respondent’s suspicion that Hoyt had greatly overstated the
number of breeding animals the partnerships claimed to own and
had grossly overvalued the livestock upon which the partnerships
were claiming tax benefits. By February 1993, as a result of the
count and inspection, respondent possessed sufficient evidence to
support the issuance of prefiling notices and freezing tax
refunds claimed by partners. Beginning in February 1993,
respondent generally froze and stopped issuing income tax refunds
to partners in the cattle and sheep partnerships and issued
prefiling notices to the investor-partners advising them that,
starting with the 1992 taxable year, the IRS would: (1) Disallow
the tax benefits that the partners claimed on their individual
returns from the cattle and sheep partnerships; and (2) not issue
any tax refunds these partners might claim attributable to such
partnership tax benefits. Respondent did not directly inform the
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