Camacho v. US

• Citation: 190 BR 895
• Decision Date: 29 December 1995
• Docket Number: No. A94-052 CV (JKS).,A94-052 CV (JKS).
• Parties: John and Barbara CAMACHO, Plaintiffs, v. The UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Alaska

190 B.R. 895 (1995)

John and Barbara CAMACHO, Plaintiffs, v. The UNITED STATES of America, Defendant.

No. A94-052 CV (JKS).

United States District Court, D. Alaska.

December 29, 1995.

George R. Lyle, Guess and Rudd, Anchorage, Alaska, for Plaintiffs John and Barbara Camacho.

Robert J. Branman, Trial Attorney, Tax Division, United States Department of Justice, Washington, DC, and Robert C. Bundy, United States Attorney, Anchorage, Alaska, for United States.

AMENDED DECISION¹

SINGLETON, Chief Judge.

I. Jurisdiction

The Government appeals from a decision by the bankruptcy court which invalidated readjustment of the tax returns of John and Barbara Camacho ("Camachos") to reflect earlier adjustments to the returns of certain partnerships in which the Camachos were indirect partners. See 26 U.S.C. §§ 6221-6233 (providing for a single unified audit and judicial proceeding in which all items of partnership income, loss, deduction, or credit affecting partnership tax liability would be uniformly adjusted at the partnership level). The Government also complains of the bankruptcy court's decision that John Camacho's "permanent fund dividend," which was levied pre-petition but delivered to the Government post-petition, became "property of the estate" subject to turnover. 11 U.S.C. § 542. The Camachos cross-appeal, presenting four issues. The Camachos first assert that the bankruptcy court erred in dismissing their fifth cause of action, which alleges that the Government is bound by its settlement agreement with the Camachos, or is estopped from denying such settlement, reached in connection with the 1984 assessments against the Camachos arising out of their investment in Utah Bioresearch. Second, the Camachos assert that the bankruptcy court erred in concluding that the Government's levy on John Camacho's 1992 permanent fund dividend was valid because the levy included liabilities other than the Camachos' 1984 tax year. Third, the Camachos assert that the bankruptcy court erred in refusing to award damages (including attorney's fees) pursuant to 11 U.S.C. § 362(h). Finally, the Camachos assert that the bankruptcy court erred in refusing to award attorney's fees pursuant to 26 U.S.C. § 7430.

The bankruptcy court had jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334(a) (the district court shall have jurisdiction over all cases arising under Title 11); 28 U.S.C. § 157(a) (authorizing a general reference of bankruptcy matters to bankruptcy court); Misc. General Order No. 503 dated May 17, 1985 (referring all Title 11 cases and proceedings to the bankruptcy judges for the district of Alaska); and 11 U.S.C. § 505 (authorizing the bankruptcy court to determine the amount or legality of any tax).² This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(E). This Court has jurisdiction over the appeal pursuant to 28 U.S.C. § 158(a).

II. Scope of Review

The bankruptcy court's findings of fact will be upheld unless "clearly erroneous." In re Park-Helena Corp., 63 F.3d 877, 880 (9th Cir.1995); In re Alcala, 918 F.2d 99, 103 (9th Cir.1990). The bankruptcy court's conclusions of law and rulings on mixed questions of law and fact will be reviewed "de novo." United States v. McConney, 728 F.2d 1195, 1202-04 (9th Cir.1984) (en banc) (discussing judicial review of questions of law and fact); In re Downtown Properties, Ltd., 794 F.2d 647 (9th Cir.1985); In re Markair, Inc., 172 B.R. 638 (9th Cir. BAP 1994).

III. Facts and Procedural History

In 1983, the Camachos invested in a tax shelter partnership, Certainty Investment Club Partnership, which later changed its name to Senate Investment Club Partnership ("Club"). Club in turn invested in two additional partnerships, Union Energy Drilling Fund ("Drilling") and Sente Equipment, Ltd. ("Equipment"). In tax code parlance, Drilling and Equipment are referred to as toptier or source partnerships because their income and losses were distributed to Club, which is referred to as a pass-through partnership because the Drilling and Equipment income and losses pass through Club to its partners, the Camachos, who are referred to as indirect partners to Equipment and Drilling. See 26 U.S.C. § 6231 (providing a definition for each of these terms except top-tier partnership). Equipment and Drilling each filed partnership tax returns for the 1983 and 1984 tax years. The K-1 schedules that were filed by Equipment and Drilling showed Club's 99% ownership in each partnership. Drilling claimed an ordinary loss in excess of $3.5 million for 1983, whereas Equipment claimed an ordinary loss of nearly $2 million in 1983 and over $2.5 million in 1984. As a result of the Equipment and Drilling losses, Club in turn claimed approximately $4.5 million in ordinary losses in 1983 and approximately $2.4 million in ordinary losses in 1984. These losses were distributed to the partners of Club, including the Camachos, and were used by them to offset ordinary income on their tax returns in 1983 and 1984.

On October 22, 1990, the Secretary sent a delinquency notice and an intent to levy to the Camachos at their last known address in Hawaii.³ The Secretary did not levy at that time. Thereafter, on September 1, 1992, the Government sent a notice of intent to levy to the Camachos with respect to their 1984 tax liability. On September 23, 1992, the Government served a notice of levy on the State of Alaska Department of Revenue, Permanent Fund Division.⁴ This levy applied to a number of delinquent taxpayers, including the Camachos.

Equipment, Drilling, and Club were all subject to the unified partnership audit procedures established in 26 U.S.C. §§ 6221-6233 (TEFRA). The partnerships were audited and the Government was required to mail to certain of their partners ("notice partners") a notice of the beginning of the audit, referred to as Notices of Beginning of Administrative Proceedings ("NBAP"). Once the audit is complete, the Government must send the notice partners notice of its proposed adjustments to the return, referred to as the Notice of Final Partnership Administrative Adjustment ("FPAA"). Club attempted to litigate the Drilling and Equipment audits, but its attempt came too late. See, e.g., Sente Inv. Club Partnership of Utah v. C.I.R., 95 T.C. 243, 1990 WL 129305 (1990). The tax court rejected Club's claim, finding that any dispute about the Drilling and Equipment audits would have had to have occurred at their respective partnership levels and not at Club's level. Id.⁵ It appears that the Camachos were given the required notices of the Club audit. It is undisputed that the Camachos were not given personal notice of the Drilling and Equipment audits.

In the bankruptcy court, the Camachos argued that they were entitled to notice of the Drilling and Equipment audits under 26 U.S.C. § 6223.⁶ The bankruptcy court agreed in part.⁷ It concluded that the Secretary was required to adopt regulations providing a means for indirect partners to assure that they would be given notice of agency action regarding top-tier or source partnerships in which they were indirect partners. The Secretary had adopted regulations, but those regulations had not won final approval in time to be utilized by the Camachos, had they wished to do so. Consequently, the bankruptcy court concluded that, until such time as the regulations went into affect, the Secretary was required to research each top-tier partnership to determine who its partners were, and if it discovered that a given top-tier partnership had one or more pass-through partners, then the Secretary was required to research the return of each pass-through partnership to determine its partners. Furthermore, if some of the indirect partners were themselves pass-through partnerships, the Secretary was required to research their returns ad infinitum until such time as all indirect partners were identified and notified.

IV. Analysis

A. The Government's Appeal

The bankruptcy court held that the Secretary's failure to more expeditiously enact regulations required the Secretary to research top-tier partnership returns to discover pass-through partnerships and then research each level of pass-through partnership returns in order to assure that any indirect partners its research disclosed would be given personal notice of top-tier partnership audits. In the bankruptcy court's view, the failure to enact regulations necessitates a modification of Congress' intent, which was that the indirect partners are required to take responsibility for their derivative interests in the partnership property of top-tier partnerships and must give the Secretary special notice if they intend to be included as notice partners when top-tier partnerships are audited. This Court considered and rejected this argument in Walthall v. United States, 911 F.Supp. 1275 (D.Alaska 1995).

The heart of the argument is that indirect partners are somehow handicapped, in the absence of the regulations, in achieving a place on the Secretary's mailing list regarding top-tier partnerships in which they are indirect partners. The Court concluded that this was not so. Under the plain meaning of section 6223, indirect partners will be "notice partners" if, and only if, they, or someone on their behalf, separately notifies the Secretary of their interest in the top-tier partnership and of their desire to be notified of top-tier partnership audits. Thus, an indirect partner reading the statutes would know that unless special notice was given to the Secretary in some form, indirect partners must rely on the tax matters partner of the pass-through partnership for notice and an opportunity to participate in audits of top-tier partnerships. The Secretary's failure to promulgate more timely regulations prevents an argument that a particular manner of giving the Secretary notice was insufficient, but it does not appear that the Camachos were even aware of the existence of Drilling and...