INVESTORS IN TAX SHELTER SCHEME REBUFFED BY COURT.

                 IN THE UNITED STATES DISTRICT COURT

[3] This is an action for violation of constitutional rights under Bivens v. Six Unknown Named Agents of the Federal Bureau of Narcotics, 403 U.S. 388 (1971), brought by 99 investors in several tax shelters ("the Hoyt Partnerships"). The defendants are Walter J. Hoyt, who promoted, sold and managed the Hoyt Partnerships, and 23 employees of the Internal Revenue Service ("federal defendants ") who began investigating the Hoyt Partnerships in the early 1980s.

[4] The plaintiffs allege that the federal defendants were aware of and exploited Hoyt's conflict of interest with the plaintiffs when Hoyt, the subject of a criminal investigation, agreed on behalf of the Hoyt Partnership to audit adjustments which facilitated the IRS's tax cases against the investors while enhancing Hoyt's legal position. As a result, plaintiffs assert, the federal defendants obstructed plaintiffs' Fifth Amendment due process right to be heard and their First Amendment right of access to courts.

[5] The federal defendants move to dismiss the complaint and defendant Hoyt's cross-claim. Hoyt has not responded to the motion to dismiss his cross-claim.

FACTUAL BACKGROUND

[6] Hoyt was a cattle breeder in Burns, Oregon who sold millions of dollars worth of tax shelters to investors. He did so by making each investor his partner, then assigning the investor a portion of his cattle operation's expenses. The investor claimed those expenses as a tax deduction. Hoyt was the tax matters partner ("TMP") for the Hoyt Partnerships. A TMP has the authority to represent the partnership to the IRS and, in some matters, to bind the other partners. See 26 U.S.C. section 6224(c)(3)(A). As TMP, Hoyt prepared the investors' individual tax returns and those of the Hoyt Partnerships; he assigned each investor deductions sufficient to enable that investor to claim a refund of all taxes paid for the previous three years. When the investors received their tax refunds, they sent 75% of the refund to Hoyt and kept the rest.

[7] The scheme collapsed because Hoyt had overstated both the number and the value of his cattle. The losses Hoyt claimed for the investors far exceeded the actual expenses of his cattle operations.

[8] In 1984, the IRS Criminal Division began a fraud investigation against Hoyt, but was continually frustrated in its attempts to unravel Hoyt's business operations or to seize any of his assets. The IRS was more successful against the investors. The investors' deductions were disallowed and they became liable for unpaid taxes. Many of the investors then filed for bankruptcy. Hundreds of Hoyt-related cases are pending in the United States Tax Court.

[9] Plaintiffs allege that the federal defendants took no action to remove Hoyt as the TMP, despite the obvious conflict of interest, and contrary to treasury regulations and the Internal Revenue Code. Nor, they allege, did the IRS take any action to enjoin Hoyt's continued promotion of the partnerships to plaintiffs and others, or to inform the investors that Hoyt was defrauding them. Rather, until 1995, the IRS audit teams allowed the refunds claimed by Hoyt on behalf of the Hoyt Partnerships to encourage additional investment. The audit teams would then audit new partnerships for which refunds had been allowed and assert tax adjustments that, together with penalties and interest, exceeded the tax that would have been due from the investors absent their participation in the Hoyt Partnerships.

[10] The complaint also alleges that while concealing information about the criminal investigation of Hoyt from the plaintiffs and the Tax Court, the federal defendants worked exclusively through Hoyt to audit and process the tax cases against the plaintiffs, sending notices to Hoyt, requesting documents from him, and meeting with him as the partnership representative to discuss adjustments. Using the investigation of Hoyt as leverage, the federal defendants obtained concessions such as waivers of limitations periods which prejudiced the plaintiffs, in return for agreements not to pursue penalties against Hoyt. Plaintiffs allege that Hoyt eventually entered into stipulated settlements with the IRS which were favorable to Hoyt personally but detrimental to themselves.

[11] In January 1998, Hoyt resigned as managing partner of the Hoyt Partnerships, but did not resign as TMP until September 1999. In June 1999, a grand jury indicted Hoyt for bankruptcy fraud, mail fraud and money laundering; he has not, however, been prosecuted by the IRS.

[12] In summary, the gravamen of plaintiffs' complaint is that Hoyt's exposure to criminal prosecution created a disabling conflict of interest because all the time Hoyt was under investigation, he continued to represent the plaintiffs as TMP. Plaintiffs assert that the federal defendants exploited this conflict when they took enforcement actions against the plaintiffs.

STANDARDS

[13] Under Rule 12(b)(6), dismissal for failure to state a claim is proper only when it appears to a certainty that the plaintiffs can prove no set of facts in support of their claim that would entitle them to relief. Conley v. Gibson, 355 U.S. 41, 45 (1957); Alliedsignal, Inc. v. City of Phoenix, 182 F.3d 692, 695 (9th Cir. 1999). For purposes of the motion to dismiss, the complaint is construed liberally in favor of the plaintiffs, and its allegations are taken as true. Jensen v. City of Oxnard, 145 F.3d 1078, 1082 (9th Cir. 1998).

[14] A complaint may be dismissed as a matter of law either for lack of a cognizable legal theory or for insufficient facts under a cognizable legal claim. Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 534 (9th Cir. 1984).

DISCUSSION

[15] The federal defendants argue that the complaint should be dismissed because 1) plaintiffs have an alternative remedy under the Internal Revenue Code; 2) plaintiffs have not alleged facts which would support claims for violation of the First and Fifth Amendments; and 3) even if there were no alternative statutory remedy and the complaint sufficiently alleged violations of the First and Fifth Amendments, the federal defendants are entitled to qualified immunity.

[16] I conclude that under the circumstances of this case, the defendants are entitled to qualified immunity.

[17] Public officials are entitled to qualified immunity from "liability for civil damages insofar as their conduct does not violate clearly established statutory or constitutional rights of which a reasonable person would have known." Harlow v. Fitzgerald, 457 U.S. 800, 818 (1982). The qualified immunity analysis is identical under section 1983 and Bivens. Wilson v. Layne, 119 S.Ct. 1692, 1696 (1999); Graham v. Connor, 490 U.S. 386, 394 n. 9 (1989).

[18] When a public official claims qualified immunity for constitutional violations, the district court must first determine whether the plaintiff has alleged deprivation of a constitutional right. County of Sacramento v. Lewis, __U.S.__, 118 S.Ct. 1708, 1714 n. 5 (1998). If so, the court proceeds to a two-part analysis, determining first whether the right was so "clearly established" as to alert a reasonable officer to its constitutional boundaries, and second whether a reasonable officer could have believed his conduct lawful given the circumstances and the information possessed at the time. See Washington v. Lambert, 98 F.3d 1181, 1192 (9th Cir. 1996); Hunter v. Bryant, 502 U.S. 224, 227-28 (1991) (per curiam). Plaintiffs have failed to meet the first prong of this test, not having shown the violation of a constitutional right.

[19] In Wages v. IRS, 915 F.2d 1230, 1232 (9th Cir. 1990), a taxpayer alleged that IRS audits and collection practices had violated her First, Fourth, Fifth, Seventh, Eighth, Ninth, and Fourteenth amendment rights by depriving her of liberty and property through extortion, theft, fraud and coercion. The court held:

     We have never recognized a constitutional violation rising from

[20] Other authority establishes that plaintiffs have not made out a claim under the First Amendment. The First Amendment provides that "Congress shall make no law . . . abridging . . . the right of the people . . . to petition the Government for a redress of grievances." The protections afforded by the Petition Clause have been limited by the Supreme Court to situations in which an individual's associational or speech interests are also implicated. WMX Technologies Inc. v. Miller, 197 F.3d 367, 372 (9th Cir. 1999), citing McDonald v. Smith, 472 U.S. 479, 482-85 (1985) (right to petition "cut from the same cloth" as the other expressive rights embodied in the First Amendment); United Mine workers of America v. Illinois State Bar Ass'n, 389 U.S. 217, 222-23 (1967)(Petition Clause protected union providing collective legal services to members because services were undertaken to secure meaningful access to courts, which in turn implicated First Amendment associational interests); NAACP v. Button, 371 U.S. 415, 430-31 (1963)(NAACP's financing of litigation was form of political expression protected under Petition Clause). In WMX, the Ninth Circuit held that the Petition Clause was not implicated in plaintiff's application to obtain a use permit for a proposed landfill.

[21] Plaintiffs have not alleged the infringement of either associational or speech-related rights by the federal defendants. Absent such allegations, they cannot make out a claim for violation of the Petition Clause.

[22] I find nothing praiseworthy in the IRS's cynical use of a TMP tainted by conflicts of interest to obtain advantages against the plaintiffs in tax cases. If the plaintiffs' allegations are accurate, the federal defendants' conduct brings discredit upon the IRS and upon the United States. However, I can discern no legal basis for a Bivens claim under the factual circumstances of this case.

CONCLUSION

[23] The federal defendants' motion to dismiss the plaintiffs' claims (doc. #11) is GRANTED. The federal defendants' motion to dismiss Hoyt's cross-claim (doc. #19) is also GRANTED.

[24] IT IS SO ORDERED.

[25] Dated this 19th day of October, 2000.

                                   James A. Redden