Whether the IRS must turn over to the Debtor's Chapter 7 Trustee the funds in the Debtor's Bank Account which were distributed by the Bank to the IRS postpetition pursuant to a prepetition tax levy without providing the IRS with Adequate Protection as to its Tax Lien in the Proceeds of the Debtor's Bank Account?

The Supreme Court in Whiting Pools expressly rejected the assertion that the IRS should be treated differently than other secured creditors when it stated:

Although Congress might have safeguarded the interests of secured creditors outright by excluding from the estate any property subject to a secured interest, it chose instead to include such property in the estate and to provide secured creditors with "adequate protection" for their interests. §363(e), quoted in n. 7, supra. At the secured creditor's insistence, the bankruptcy court must place such limits or conditions on the trustee's power to sell, use, or lease property as are necessary to protect the creditor. The creditor with a secured interest in property included in the estate must look to this provision for protection, rather than to the nonbankruptcy remedy of possession.

****

When property seized prior to the filing of a petition is drawn into the Chapter 11 reorganization estate, the [ IRS '] tax lien is not dissolved; nor is its status as a secured creditor destroyed. The IRS , under §363(e), remains entitled to adequate protection for its interests, to other rights enjoyed by secured creditors, and to the specific privileges accorded tax collectors. Section 542(a) simply requires the [ IRS ] to seek protection of its interests according to the congressionally established bankruptcy procedures, rather than by withholding the seized property from the debtor's efforts to reorganize.

Whiting Pools [83-1 USTC ¶9394], 103 S. Ct. at 2313 and 2317.

As Collier on Bankruptcy properly concludes:

The Supreme Court's holding in Whiting Pools confirms that a creditor in possession of collateral that the trustee may use, sell, or lease under section 363 must turn over the collateral to the trustee after commencement of the case, but may demand adequate protection as a condition precedent to turnover. This is consistent with the requirement of section 363(e) that at any time on request of a creditor, the court shall prohibit or condition the use, sale, or lease of property as is necessary to adequately protect the creditor's interest in the property.

Collier on Bankruptcy, ¶542.01, pp. 542-11-12 (15th ed. Rev. 1997). (emphasis in original).

The Court has previously concluded that the proceeds of the Bank account in the sum of $1,928.00, are property of the Estate pursuant to §541(a). The IRS has filed a secured proof of claim versus the Debtor's estate in the sum of $1,311,145.23 to which the Trustee has no objection. Because this is a Chapter 7, and not a Chapter 11 reorganization, and the Trustee is not operating the Debtor's business pursuant to §721, it would appear at first blush, that the Trustee's §542(a) Turnover Complaint should be denied, as §542(a) requires that the IRS only turn over property of the estate if it is not of inconsequential value and not burdensome to the estate. The tax lien of the IRS far exceeds the amount of the proceeds of the Bank account. However, §724(b) can create value for an estate in property that is over encumbered and that absent §724(b) would be abandoned. So long as the amount of the avoided tax lien exceeds administrative costs, the property has value to the estate. In re K & C Mach + Tool Co., 816 F.2d 238, 247 (6th Cir. 1987).

Although §724(b), provides for the subordination of the IRS ' tax lien to claim allowed under §507(a)(1)-(a)(7), the fact remains that the tax lien retains its status as a secured claim. Section 724(b) merely alters the scheme of distribution. In re Dannell, 834 F.2d 1263, 1268 + N. 10 (6th Cir. 1987). It remains to be seen after all estate assets are liquidated and the claim process has been completed as to whether §724(b) shall be applicable in this case. See In re K.C. Mach. + Tool Co., 816 F.2d at 245. (§724(b) merely mandates a particular method of distribution of what property is left in debtor's estate at the time of distribution).

The Trustee is thus correct that pursuant to §724(b), the IRS ' tax lien in the proceeds of the Bank account could be subordinated and made available to him to pay claims arising under §§507(a)(1)-(a)(7). Thus, the Debtor's estate may have a legitimate interest in the proceeds of the Bank account if it eventually turns out after all assets are administered and all allowed claims are determined, that there are not sufficient estate funds on hand to pay all §§507(a)(1)-(a)(7) claims versus the Debtor's estate without utilizing the proceeds of the Bank account.

However, the cases are legion, that because §542(a) expressly refers to §363, before a secured creditor is required to turnover property of the Debtor's estate, the Trustee must first provide the IRS with adequate protection as to lien interest. See cases cited by the IRS set out in pp17-18 of this Memorandum Opinion. See also, In re Young, 193 B.R. at 526, supra (collecting cases). This he did not do. Thus, the Trustee has no right to the turnover of the funds in question until the IRS is adequately protected as to its lien rights by the Trustee.

This leaves the Court with the perplexing problem of whether it can enter a dispositive final order in this Adversary Proceeding based upon the USA's Motion for Summary Judgment, and yet preserve the Trustee's potential right in the future to utilize the proceeds of the Debtor's Bank account pursuant to §724(b), if necessary, after all estate assets have been fully administered and liquidated, and all duly filed claims have been finally allowed or disallowed.

The Court concludes that it shall enter an Interlocutory Order pursuant to Fed. R. Civ. P. 56(d), which provides that if a summary judgment is not rendered on the whole case for the relief asked, and a trial is necessary, the Court shall, if practical, ascertain what material facts exist without substantial controversy, and what material facts are actual and in good faith controverted, and thereupon make an order specifying what facts appear without substantial controversy.

It is therefore,

ORDERED that the proceeds of the Calumet National Bank Account in the sum of $ 1,903.01 is property of the Debtor's Estate pursuant to §541(a). And it is further,

ORDERED, that said proceeds are subject to a prepetition lien by virtue of the Notice of Levy by the IRS dated April 30, 1996 . And it is further,

ORDERED, that by virtue of the Notice of Levy issued by the IRS to the Bank on April 30, 1996 , the IRS had prepetition constructive possession of the funds in the Debtor's Bank account. And it is further,

ORDERED, that the IRS did not violate the §362(a) automatic stay by failing or refusing to affirmatively act and advise the Calumet National Bank postpetition to not comply with the prepetition Notice of Levy. And it is further

ORDERED, that the IRS did not violate the §362(a) automatic stay by failing and refusing to comply with the Trustee's demand letter pursuant to §542(a) that it turn over the proceeds of the Bank account, in that it could require adequate protection from the Trustee for its lien in the Bank proceeds as a condition precedent to turning over the proceeds to the Trustee, and that the Trustee did not offer or provide the USA with any adequate protection for its lien interest therein as required by §363(e). And it is further,

ORDERED, that the IRS may at this time retain the proceeds of the Bank account; provided, however, that in the event that after all estate assets are fully administered and liquidated, and all duly filed claims are allowed or disallowed, and the Trustee determined that the proceeds of the Bank account are reasonably necessary to pay §§507(a)(1)-(a)(7) claims versus the Debtor's estate, and that the lien of the IRS should be subordinated pursuant to §724(b), he may file his Supplemental Complaint in this Adversary Proceeding, so alleging, and if after a trial on the merits, the Court determines that the Bank proceeds are in fact required to pay any such claims, the Court may enter a Final Judgment in favor of the Trustee pursuant to §542(a), without the necessity of the Trustee first providing adequate protection to the USA as to its lien.

¹ The original caption to this Adversary Proceeding as set out in the Trustee's Complaint has been retained for the purposes of this Memorandum Opinion and Order.

² The Trustee served the Complaint and Summons on both the IRS , Cincinnati, (Ohio 45999, and the District Director, Attn: Chief of Special Procedures Branch, Indianapolis, Ind. 46244, the Office of the Attorney General, c/o Dept. of Justice, Tax Director, Civil Trial Section, Washington, D.C., and at the Local Office of the United States Attorney. Thus, it would appear that the Trustee properly served the United States in this Adversary Proceeding pursuant to Fed. R. Bk. P. 7004(b)(4) and (5).

³ It is clear that the IRS is not authorized to sue or be sued in its own right. Matter of Washington, 172 BR. 415, 420 + NN. 4 and 5 (Bankr. S.D. Ga. 1994).

⁴ The Motion for Summary judgment by the USA did not address Affirmative Defenses, Numbers one, two, and three.

⁵ It is noted that §542(a) expressly provides that any entity shall deliver property to the trustee that he may "sell, use of lease under §363", unless the property is of "inconsequential value or benefit to the estate." Thus, the trustee not only has the burden of showing that he will be able to use the property in question, he also has the burden of showing that the funds are not of inconsequential value and will benefit the estate.

⁶ By attaching as Exhibit "A", a Notice of Levy by the Indiana Dept. of Treasury, dated May 1, 1996 , the Trustee has clearly attached the wrong exhibit. However, if such a Notice of Levy was filed, it may (without this Court so holding) be a lien junior to the Notice of Levy issued to Calumet National Bank by the IRS .

⁷ The United States Court of Appeals, Seventh Circuit, has endorsed the exacting obligation of Local Rules, such as Local Bankruptcy Rule B-756, which impose on a party contesting summary judgment to highlight which factual averments are in conflict as well as what record evidence there is to confirm the dispute, and explaining that the Courts are not obliged in our adversary system to scour the record looking for factual disputes, and may adopt local rules reasonably designed to streamline the resolution of summary judgment motions. Waldridge v. American Holchst Corp., 24 F.3d 918, 921-22 (7th Cir. 1994), (Citing, Herman v. City of Chicago, 870 F.2d 400, 404 (7th Cir. 1989); Bell, Boyd & Lloyd v. Tapy, 896 F.2d 1101, 1103-04 (7th Cir. 1990)). The factual statements required by Local Rules are of significantly greater benefit to the Court than the parties, which does not have the advantage of the parties' familiarity with the record and often cannot afford the time combing the record to locate the relevant information. Id. , 24 F.3d at 923-24.

The decision whether to apply a Local Rule, such as set out above, requiring the Movant for Summary Judgment to file a Statement of Material Facts supported by appropriate citations, and requiring the opponent to file any material controverting the Movant's position strictly, or to overlook any transgressions, is one left to the trial court's discretion. Little v. Cox's Supermarkets, 71 F.3d 637, 641 (7th Cir. 1995); Waldrigde v. American Holchst Corp., 24 F.3d at 923, supra, (Court may sua sponte strictly enforce local rule governing nonmovant's response to summary judgment motion, even if movant's did not strictly comply with rule, and despite movant's failure to object to nonmovant's noncompliance with local rule).

⁸ Section 542(a) provides as follows:

(a) Except as provided in subsection (c) or (d) of this section, an entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequencial value or benefit to the estate. (Emphasis supplied).

⁹ It is also observed that §363(c)(2), which is incorporated into §542(a) provides as follows:

(2) The trustee may not use, sell, or lease cash collateral under paragraph (1) of this subsection unless--

(A) each entity that has an interest in such cash collateral consents; or

(B) the court, after notice and a hearing, authorizes such use, sale, or lease in accordance with the provisions of this section.

In addition, §363(c)(4) referred to in §542 states as follows:

(4) Except as provided in paragraph (2) of this subsection, the trustee shall segregate and account for any cash collateral in the trustee's possession, custody, or control.

It is also noted that §362(d) provides as follows:

(d) The trustee may use, sell, or lease property under subsection(b) or (e) of this section only to the extent not inconsistent with any relief granted under section 362(c), 362(d), 362(e), or 362(f) of this title.

Adequate protection that may be required pursuant to §362(d), or §363(e), is set out in §361, which makes specific reference to §§362 and 363.

All of the above provisions are applicable to a case under Chapter 7 pursuant to §103(a).

¹⁰ As a general matter, Congress in enacting the Bankruptcy Code intended a broad range of property to be included in the debtor's estate pursuant to 11 U.S.C. §541, United States v. Whiting Pools, Inc. [83-1 USTC ¶9394], 462 U.S. 198, 103 S. Ct. 2309, 2313, 76 L. Ed. 2d 515 (1983). The question of whether a debtor's interest in property is "property of the estate" is a federal question to be decided by federal law. In re Marrs-Winn Co., Inc., 103 F.3d 584, 591 (7th Cir. 1996); Koch Refining v. Farmers' Union Cent. Exchange, Inc., 831 F.2d 1339, 1343 (7th Cir. 1987). The determination of what property rights the debtor has on the petition date is created and defined by state law, unless some federal interest requires a different result. Butner v. United States , 440 U.S. 48, 54, 99 S. Ct. 914, 918, 49 L. Ed. 2d 136 (1979); Barnhill v. Johnson, 503 U.S. 393, 397-98, 112 S. Ct. 1386, 1389, 118 L. Ed. 2d 39 (1992); UNR Indus. Inc. v. Continental Casualty Co., 942 F.2d 1101, 1103 (7th Cir. 1991), cert. den. 503 U.S. 971, 112 S. Ct. 1586, 118 L. Ed. 2d 305 (1992); Koch Refinery v. Farmer Union Cent. Exchange, 831 F.2d 1339, 1343 (7th Cir. 1987); Matter of Jones, 768 F.2d 923, 927 (7th Cir. 1985).

The scope of "property" under §541 necessarily limited to the property owned by the debtor at the commencement of the case. Matter of Carousel International Corporation, 89 F.3d 359, 361 (7th Cir. 1996) (citing, Matter of Wayco, Inc., 947 F. 2d 1330, 333 (7th Cir. 1991)). However, the bankruptcy estate does not "own" property solely because the estate has a claim of ownership; the estate's property does not include the things to which it lays claim until the matter is adjudicated and resolved by the parties. Id. 89 F.3d at 362.

Section 541(a)(1) of the Code changed the legal landscape by dramatically expanding the definition of property included in the estate. Matter of Geise, 992 F.2d 651, 655 (7th Cir. 1993). Section 541 eliminated the requirement that property must be transferable or subject to process in order to become initially part of the estate. Id. Every conceivable interest of the debtor, future, non-possessory, contingent, speculative, and derivative is within the reach of §541. Matter of Yonikus (Yonikus II), 996 F.2d 866, 869 (7th Cir. 1993). Thus, upon the commencement of a bankruptcy case, all property in which the debtor had a legal or equitable interest becomes property of the bankruptcy estate. Matter of Kazi, M.D., 985 F.2d 318, 320 (7th Cir. 1993). See e.g., Matter of Yonikus (Yonikus I) 974 F.2d 901, 905 (7th Cir. 1992) (Debtor's potential personal injury claim was property of estate).

¹¹ Although footnote 17, Whiting Pools did not decide if §542(a), was applicable to a case under Chapter 7 or Chapter 13, subsequent cases have held that §542 and §363 are applicable to all chapters. See In re Gerwer, 898 F.2d 730, 734 (9th Cir. 1990) (although noting Collier's contrary view, holding Congress intended uniform reach of turnover power, it was included in Chapter 5 of the Bankruptcy Code); In re Dunlap, 143 B.R. 859, 864, 865 (Bankr. M.D. Tenn. 1992) (Section 542 permits Chapter 13 debtor to recover ple.dged collateral--turnover refused as debtor unable to adequately protect secured party).

¹² Assuming arguendo, this did constitute a stay violation, it would be at most a technical violation of the stay, which would not warrant sanctions. The Bankruptcy Noticing Center on behalf of the Clerk served its Notice of the Debtor's Petition on the IRS on May 10, 1997, at its Regional Office in Cincinnati , Ohio . The Notice of Levy was issued by the IRS ' Merrillville , Indiana Office.

Although the record does not reveal the date that the Cincinnati Office received the Notice, assuming it was received on May 11, 1996 (a Saturday), it would not have been acted upon by an IRS employee until May 13, 1996 , or only 10 days before the Bank isssued its check to the IRS on May 23, 1996 . This is only 9 business days after the IRS had an opportunity to act on the Notice of the Debtor's Petition.

Although the Cincinnati Office and the Merrillville Office of the IRS are technically both part of the same USA Agency, there is no evidence in the record that the Cincinnati Office had knowledge of the Notice of Levy by the Merrillville Office, or that the Merrilville Office knew the Debtor had filed its Petition before the Bank issued its check dated May 23, 1996 . Under the circumstances, this is not a basis for the imposition of sanctions versus the IRS for any alleged stay violation.

[96-1 USTC ¶50,103] John and Barbara Camacho, Plaintiffs v. The United States of America , Defendant

U.S. District Court, Dist. Alas., A94-052 Civ, 12/26/95, Affirming in part, reversing in part, and remanding Bankruptcy Court decisions 95-1 USTC ¶50,131 , 95-1 USTC ¶50,315 , 184 BR 807

[Code Secs. 6223 and 6331 ]

Levy and distraint: Nonnotice partners: Bankruptcy: Notice of deficiency: Turnover of permanent fund dividend.--The IRS 's failure to timely enact regulations regarding notice to indirect partners of agency action on top-tier partnerships did not require the IRS to notify a married couple, who invested in a tax shelter partnership that in turn invested in two drilling and equipment partnerships, of the audit of the drilling and equipment partnerships. It was clear from the statute that an indirect partner must rely on the tax matters partner of the pass-through partnership for notice. Furthermore, the lack of regulations did not prevent the taxpayers from communicating their interest in the audit to the IRS . The bankruptcy court did not err in directing the IRS to turn over the taxpayer's permanent fund dividend that was levied upon pre-petition but not received until post-petition. A bona fide dispute existed between the taxpayers and the government regarding the taxes owed. In addition, the levy against the permanent fund dividend was valid.

[Code Sec. 7430 ]

Court costs: Prevailing party: Bankruptcy: Substantial justification.--Since a married couple who indirectly invested in a tax shelter partnership was not the prevailing party concerning the validity of an assessment, their claim for an award of attorney's fees was rendered moot. Moreover, the issue of whether the taxpayers were entitled to actual and punitive damages for a violation of the automatic stay due to the government's failure to turn over the taxpayer's permanent fund dividend was remanded. BACK REFERENCES: 96 FED ¶42,343.68 and 96 FED ¶42,343.80

George R. Lyle, Guess & Rudd, 510 L. St. , Anchorage , Alas. 99501 , for plaintiffs. Robert C. Bundy, United States Attorney, Anchorage, Alas. 99513, Robert J. Branman, Department of Justice, Washington, D.C. 20530, for defendant.

DECISION ON APPEAL

I. Jurisdiction

SINGLE, JR., District Judge:

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). ¹ 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 Sente 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 top-tier 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 S2 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. ² 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. ³ 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. [CCH Dec. 46,862 ], 95 T.C. 243 (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. ⁴ 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 . ⁵ The bankruptcy court agreed in part. ⁶ 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, -- F. Supp. --, Case No. A94-052 CV (JKS), Docket No. 49 (D. Alaska Dec. 22, 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 S