The Camachos initiated this adversary proceeding seeking a determination of their tax liability under 11 U.s.c. § 505(a)(l). Their adversary complaint contains six causes of action. The first four pertain to their involvement in Sente Investment Club Partnership of Utah. The fifth pertains to their involvement in a partnership called Utah Bioresearch. The sixth pertains to the IRS's post-petition seizure of John Camacho's permanent fund dividend.

      The defendant (IRS) has not answered. Instead, it has filed a motion to dismiss or for summary judgment with reference to the third, fourth and fifth causes of action in the adversary complaint, and a motion for summary judgment with reference to the first and second causes of action. The Camachos have filed a cross motion for summary judgment on the first and third causes of action. The sixth cause of action, regarding the seizure of the permanent fund dividend, is not at issue in these motions.

      After reviewing the motions, oppositions, and replies, together       3 ABR 447  with the entire record in this case, I have concluded the Camachos are entitled to partial summary judgment on the third cause of action. The IRS's motion to dismiss the fourth cause of action will be granted. The Comachos will be given leave to amend the fifth cause of action.

Analysis

A. Sente Investment Club Partnership, -- First, Second, Third and Fourth Causes of Action.

      In November, 1983, the Camachos became partners in Sente Investment Club Partnership of Utah ("Club), a Utah general partnership with over 100 partners. The Camachos ownership interest in Club was greater than 1%. At about the same time, Club became a limited partner in Sente Equipment, Ltd. ("Equipment"), a Utah limited partnership. Club was a 99% partner in Equipment. The Camachos were "indirect partners" in Equipment by virtue of their partnership interest in Club. 26 U.S.C. § 6231(a)(10). Club was a "pass-thru" partner in Equipment. 26 U.S.C. § 6231(a)(9).

      In 1985, the IRS started an audit of Equipment's 1983 and 1984 returns, under then recently enacted provisions of the Internal Revenue Code found at 26 U.S.C. § 6221 et. seq. After the audit was completed, the IRS disallowed losses claimed on Equipment's 1983 and 1984 returns. The disallowed losses flowed through to the Camachos.

      The Camachos contend the IRS failed to comply with the notice procedures required by 26 U.S.C. § 6223(a) because it failed to send a Notice of Beginning of Administrative Procedure ["NBAP"] to the proper parties. Section 6223(a) provides:

      (a) Secretary must give partners notice of beginning and completion of administrative proceedings. The Secretary shall mail to each partner whose name and address is furnished to the Secretary notice of ---

      (1) the beginning of an administrative proceeding at the partnership level with respect to a partnership item, and

      (2) the final partnership administrative adjustment resulting from any such proceeding.

A partner shall not be entitled to any notice       3 ABR 448  under this subsection unless the Secretary has received (at least 30 days before it is mailed to the tax matters partner) sufficient information to enable the Secretary to determine that such partner is entitled to such notice and to provide such notice to such partner.

      The IRS did not serve an NBAP on Equipment or its TMP. The IRS contends it served NBAPs on Club in April and June, 1986, but the Camachos dispute this assertion. The parties have stipulated that the IRS did not mail NBAPs or FPAAs [notice of final partnership administrative adjustment) to the Camachos or the other indirect partners regarding the audit of Equipment.

      Under the circumstances of this case, I find that the IRS failed to comply with the notice provisions of § 6223. First, the IRS contends § 6223(a) only required it to serve Equipment's partners (i.e., Club) with notice. This simplistic argument overlooks the statutory definition of partner applicable to § 6223(a), which includes not only partners in the partnership, but "any other person whose income tax liability under subtitle A is determined in whole or in part by taking into account directly or indirectly partnership items of the partnership." 26 U.S.C. § 6231(a)(2). Indirect partners, such as the Camachos, are included in this definition of partner. In fact, the IRS has previously advanced this definition of partner, with success. See Costello v. U.S. Government, 765 F.Supp. 1003, 1007 (C.D. Cal. 1991).

      The IRS also asserts that it was not required to provide notice of the Equipment audit to indirect partners because it had not been provided "additional information" pursuant to § 6223 (c), which       3 ABR 449  provides:

      (c) Information base for secretarys notices, etc. For purposes of this subchapter --

      (1) Information on partnership return. --Except as provided in paragraphs (2) and (3), the Secretary shall use the names, addresses, and profits interests shown on the partnership return.

      (2) Use of additional information. ---- The Secretary shall use additional information furnished to him by the tax matters partner or any other person in accordance with regulations prescribed by the Secretary.

      (3) Special rule with respect to indirect partners. ---- If any information furnished to the Secretary under paragraph (1) or (2) ---

      (A) shows that a person has a profits interest in the partnership by reason of ownership of an interest through 1 or more pass--thru partners, and

      (B) contains the name, address, and profits interest of such person,

then the Secretary shall use the name, address, and profits interest of such person with respect to such partnership interest (in lieu of the names, addresses, and profits interests of the pass-thru partners).

      The names, addresses and profit interests of Equipment's indirect partners were not reflected on its 1983 or 1984 tax returns. However, the IRS had obtained this information by not later than June 3, 1985, in conjunction with the audit of Equipment. Notwithstanding its possession of this information, the IRS argues it could serve Club, rather than the indirect partners, with the NBAP. Section 6223(c) doesn't give the IRS this option.

      The IRS attempts to circumvent the mandate of § 6223(c) by arguing that "additional information" regarding Equipment's indirect       3 ABR 450  partners hadn't been provided to it "by the tax matters partner or any other person in accordance with regulations prescribed by the Secretary." The IRS says it was Club's responsibility, as the pass-thru partner of Equipment, to serve NBAPs on the indirect partners, pursuant to § 6223 (h) ⁽¹⁾. I disagree. At the time the IRS served NBAPs regarding the Equipment audit, regulations specifying how "additional information" would be provided to the Secretary hadn't been enacted. The applicable regulations became effective in March, 1987, almost a year after the IRS says it served NBAPs on Club. Further, § 6223(c) requires the IRS to serve indirect partners in lieu of the pass-thru partner if it has received the necessary information from any person. The IRS had the information it needed in order to serve notices on the indirect partners of Equipment in June, 1985, almost a year before it says it served NBAPs on Club. The requirement that a pass-thru partner also serve notices it receives from the IRS on indirect partners does not absolve the IRS of its responsibility to properly give notice.

      Based on the limited circumstances of this case, I find that the IRS failed to properly notify the Camachos of the Equipment audit. Because the regulations referred to in § 6223(c) hadn't been enacted at       3 ABR 451  the time of the Equipment audit, their requirements for providing information to the IRS have no impact on the Camacho's situation. The IRS had all the information it needed in order to provide notice to Equipment's indirect partners. The IRS should have served the notices required by § 6223(a) on Equipment's indirect partners. It failed to do so. Accordingly, I will grant partial summary judgment in favor of the Camachos on the third cause of action.

      In their fourth cause of action, the Camachos contend the IRS should be estopped from denying that the Equipment assessments should be abated. They allege the IRS had agreed to abate the assessments. They say they detrimentally relied on oral and written statements of the IRS regarding the pending abatement, because they postponed filing bankruptcy, which enabled the IRS to file additional tax liens against them.

      Because I have found for the Camachos on the third cause of action, their estoppel argument is redundant. Moreover, the Camacho's allegations are insufficient to establish a claim of estoppel against the government.

It is well settled . . . that the government may not be estopped on the same terms as a private litigant.

      Our court has held that "'where justice and fair play require it, estoppel will be applied against the government." . . . Before the government will be estopped, however, two additional elements must be satisfied beyond those required for traditional estoppel. First, "[a] party seeking to raise estoppel against the government must establish 'affirmative misconduct going beyond mere negligence; even then, 'estoppel will only apply where the governments wrongful act will cause a serious injustice and the publics interest will not suffer undue damage by imposition of the liability." .

B. Utah Bioresearch - Fifth Cause of Action.

      In their fifth cause of action, the Camachos allege the IRS had agreed to settle disallowed losses resulting from their investment in Utah Bioresearch 1984, Ltd. ("Bioresearch") by permitting them to deduct their investment in the year it was made. The Camachos say the IRS should be bound by this settlement or that the IRS should be estopped from denying that there was a settlement. Alternatively, the Camachos argue that they should be permitted to amend their complaint to allege that the Bioresearch assessment against them is also invalid.

      Viewing the allegations in the fifth cause of action in a light most favorable to the Camachos, I find them insufficient to support a showing that the parties had entered into a binding settlement. Further, for the same reasons stated above with reference to the fourth cause of action, I find the allegations insufficient to establish an estoppel claim against the IRS. However, the Camachos will be granted leave to amend their complaint, only as to the fifth cause of action, to pursue their claim that the Bioresearch assessment against them is invalid. Therefore,

IT IS ORDERED:

      1. The Camacho's cross-motion for summary judgment on the first and third causes of action is granted, in part. The Camachos are granted partial summary judgment on their third cause of action.

      2. With reference to the United States' motion to dismiss or for summary judgment filed August 16, 1993:

a. The motion is denied as to the third cause of action;

b. The motion is granted as to the fourth cause of action and the fourth cause of action is dismissed, with prejudice; and

c. The motion is denied, without prejudice, as to the fifth cause of action.

      3. The Camachos are granted leave to amend their complaint, with reference to the fifth cause of action only. The Camachos shall file their amended complaint within thirty days of the date of this order. The United States shall file its answer to the complaint within       3 ABR 453  fifteen days of service of the amended complaint.

      4. The United States' motion for summary judgment on the first and second causes of action, filed September 20, 1993, is denied.

      5. A final order and judgment shall not be entered in this case until the conclusion of trial. This order is interlocutory and not subject to appeal.

      6. The following dates are set:

a. TRIAL is scheduled for the trial period beginning OCTOBER 3, 1994, at 9:00 A.M. through OCTOBER 12, 1994, in Courtroom 2, 605 West Fourth Avenue, Anchorage, Alaska. The court has set more than one trial at the same time. The court will monitor the calendar as the trial date approaches so that parties can be advised of the exact time when they can expect to go to trial. This trial, however, may trail other matters set at the same time.

b. WITNESS LISTS shall be filed by AUGUST 19, 1994, giving the name and address of each witness which the party intends to call on direct or rebuttal (if known).

c. DISCOVERY closes on SEPTEMBER 9, 1994. All discovery shall be served so that timely responses will be due no later than this date.

d. EXHIBITS will be marked, listed, and exchanged seven days (including weekends and holidays) before trial. An Exhibit List (but, not the exhibits themselves) shall be filed with the court by each party. Plaintiff's exhibits shall be identified numerically and defendant's shall be identified alphabetically. The in-court recorders can advise about marking if there are multiple parties. Sufficient copies of the exhibits will be available (unless impracticable) for the court, the witness and the parties.

All exhibits shall be tabbed and placed in binders which contain a listing of the exhibits. Exhibits which do not fit in the binders may be offered separately.

Any party objecting to the admission of any exhibit exchanged under the preceding paragraph must file a list of those exhibits objected to and the grounds for objection two business days before the trial. If no objection, the court will consider the exhibit as admitted unless the court decides       3 ABR 454  not to automatically admit the exhibit at the trial.

e. DISPOSITIVE MOTIONS shall be filed no later than AUGUST 31, 1994.

f. PROPOSED FINDINGS OF FACT AND CONCLUSIONS OF LAW shall be filed no later than one week before trial by each party.

g. Failure to abide by this order may constitute a default.

DATED: July 5, 1994.




BY THE COURT
DONALD MacDONALD IV
United States Bankruptcy Judge

N O T E S:

      3 ABR 450  1. 26 U.S.C. § 6223(h) provides:

(h) Pass-thru partner required to forward notice.

      (1) In general. -- If a pass-thru partner receives a notice with respect to a partnership proceeding from the Secretary, the tax matters partner, or another pass--thru partner, the pass-thru partner shall, within 30 days of receiving that notice, forward a copy of that notice to the person or persons holding an interest (through the pass-thru partner) in the profits or losses of the partnership for the partnership taxable year to which the notice relates.

      (2) Partnership as pass-thru partner. -- In the case of a pass-thru partner which is a partnership, the tax matters partner of such partnership shall be responsible for forwarding copies of the notice to the partners of such partnership.