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 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 Equipment, let alone that they unsuccessfully sought to communicate their interest in its audits to the Secretary and were foiled in doing so by the lack of regulations. It will be necessary to reverse the bankruptcy court's ruling on this issue. ⁷

The Government next contends that the bankruptcy court erred in directing it to "turnover" John Camacho's permanent fund dividend for 1992, which it successfully levied pre-petition but did not receive until post-petition. This issue is controlled by 11 U.S.C. §542(a) , which, in substance, requires the person in possession of "property" which the trustee may use, sell, or lease under 11 U.S.C. §363 to turn it over to the trustee. The property of the estate is defined in section 541 to include any property in which the debtor has a legal or equitable interest. Section 542 exempts from this turnover obligation, "[P]roperty [which] is of inconsequential value or benefit to the estate." Seizing on this clause, the Government argues that the permanent fund dividend in this case was of inconsequential value or benefit to the estate because Camacho's retained interest was bare legal title and as a result of the pre-petition levy all equitable interest in the dividend was transferred to the Government. The Government based its argument upon Cross Electric Co. v. United States [81-2 USTC ¶9786 ], 664 F.2d 1218, 1220-21 (4th Cir. 1981). It argued that the levy did not resolve any disputes between the Government and the debtor regarding a right to the permanent fund dividend. The levy did, however, result in a transfer of all the debtor's interest in the dividend to the Government, leaving the debtor only two rights: The right to redeem the dividend by paying the entire prior assessment secured by the levy; and the right to any surplus remaining after the property is sold at a foreclosure sale. When the property seized is cash, there is no need for a foreclosure sale to determine its cash value. Thus, it can be compared with the assessment secured by the levy to determine the likelihood of a surplus. In this case, the permanent fund dividend is significantly less than the tax owed. Thus, the Government reasons that the taxpayer would have to pay the assessed tax in order to redeem the dividend, i.e., pay a larger amount of money in order to obtain a lesser amount of money. In sum, the Government concludes that given the limited "property rights" remaining to a debtor where the alleged property is cash and the assessment exceeds it in value, the property should be determined to be "property [which] is of inconsequential value or benefit to the estate."

Judge McDonald rejected this argument. In his view, Cross Electric had been overruled by United States v. Whiting Pools [83-1 USTC ¶9394 ], 462 U.S. 198 (1983). Judge McDonald relied upon In re Challenge Air Int'l, Inc. [92-1 USTC ¶50,090 ], 952 F.2d 384, 386-87 (11th Cir. 1992) in forming this opinion. In Judge McDonald's view, the Government's argument overlooks one significant right that the debtor retains in the permanent fund dividend after levy; the right to reclaim it by showing that the taxes assessed are not owed and that the debt allegedly secured by the levy does not exist. As the Supreme Court noted, the administrative levy is a provisional device which, in contrast to a lien foreclosure, does not determine that the Government's rights to the seized property are superior to other claimants, including the debtor. It does protect the Government, however, against diversion or loss while those claims are being resolved. Whiting Pools [83-1 USTC ¶9394 ], 462 U.S. at 210-13; United States v. Nat'l Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 721 (1985). Where the dispute concerns a debtor's obligations as a taxpayer, and particularly the enforceability of a specific assessment secured by a levy, and when the property levied against is cash equivalent, the real issue presented is the forum in which the dispute over the property should be resolved. The Government would no doubt prefer to litigate in the tax court, or best yet, if the taxpayer can be persuaded to prepay the disputed tax and sue for refund, in the district court, but Congress preferred to have such disputes resolved in the bankruptcy court. See 11 U.S.C. §505 . "Section 542 simply requires the Service to seek protection of its interest 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 ], 462 U.S. at 209.

The Government seeks to avoid this result by arguing that Whiting Pools is distinguishable. Essentially, the Government argues that the Supreme Court, in Whiting Pools, was primarily concerned with reorganizations and the fact that property in use may have a great value in keeping a going business alive where the same property disposed of at a fire sale would bring in little value to the estate. Such concerns do not exist where the property is cash or its equivalent, notes the Government. This argument is undercut by In re Gerwer, a Ninth Circuit opinion, which applied Whiting Pools to liquidations as well as reorganizations and specifically addressed the importance of a bona fide dispute between debtor and creditor in determining whether a specific item of property in the possession of the creditor was of value to the estate. 898 F.2d 730, 733, 734 (9th Cir. 1990). In Gerwer, the court discusses the creditor's right to protection under section 363(e) and the trustee's right under section 363(f)(4), to dispose of the collateral free and clear of the security interest where the debt secured is subject to a bona fide dispute. The Court relates this discussion to the exception to turnover for property "of inconsequential value or benefit to the estate." 11 U.S.C. §542(a) . Gerwer supports Judge McDonald's conclusion that wherever there is a bona fide dispute regarding the taxes owed, and if the dispute is resolved in the taxpayer's favor, i.e., the taxpayer is entitled to recover all, or even part, of the amount levied, the turnover should be honored and the dispute between the debtor and the Internal Revenue Service resolved in the bankruptcy court.

Here, the levy was based upon the adjustments to the returns of Drilling and Equipment. The Camachos' contend that those adjustments cannot be used to increase their tax liability because the Secretary failed to provide them with timely notice of the audits of the top-tier partnerships. This position created a dispute, which the bankruptcy court resolved in favor of the Camachos. It was thus bona fide. The bankruptcy court did not err in directing the Secretary to turn over the permanent fund dividend so that any dispute regarding the Camachos' taxes could be resolved in that court. ⁸

B. The Camachos' Cross-Appeal

In their cross-appeal, the Camachos argue that the bankruptcy court erred in four particulars. First, they contend that they should have received an award of attorney's fees for successfully defeating the Government's claims regarding Club, Drilling, and Equipment. The bankruptcy court held in favor of the Camachos and invalidated the tax, but concluded that the Government's position was substantially justified. See, e.g., 26 U.S.C. §7430 (establishing the circumstances in which a prevailing taxpayer may recover his attorney's fees from the Government). The Camachos argue that the Government's position was not substantially justified. Since the Camachos are no longer the prevailing party on the validity of the assessment, this claim is now moot.

The Camachos next challenge Judge McDonald's finding that the levy against the permanent fund dividend was valid. Essentially, the Camachos argue that the levy sought to attach for taxes owed in years other than 1984, the year mentioned in the notice of intent to levy. The Camachos concede that Judge McDonald found against them on this issue and that his findings of fact must be upheld unless clearly erroneous, but contend that one finding of fact, really a paraphrase of the testimony of Ms. Guisinger, an IRS employee, was erroneous. The Camachos misunderstand Judge McDonald's conclusions. He did not rely on a misunderstanding of Ms. Guisinger's testimony, but rather, on the totality of the evidence. Judge McDonald's finding that the levy was valid is not clearly erroneous.

The Camachos next argue that Judge McDonald erred in not awarding them actual and punitive damages and attorney's fees for successfully defeating the Government's claim to John Camacho's permanent fund dividend which Judge McDonald ordered turned over. In the Camachos' view, the Government's failure to "turn over" the permanent fund dividend when requested by their counsel constitutes a "willful violation" of the automatic stay in 11 U.S.C. §362(h). The levy in question occurred pre-petition on September 23, 1992. The Camachos filed their bankruptcy petition on September 30, 1992. ⁹ The Government's receipt of the permanent fund dividend occurred post-petition in November 1992. Thus, the alleged willful violation is the failure to "turn over" the permanent fund dividend on request of the attorney for the Camachos. Judge McDonald concluded that the Government did not commit a "willful" violation of the stay. Clearly, there was a bona fide dispute between the parties regarding whether the permanent fund dividend was "property of the estate" subject to turnover and therefore covered by the stay. The Ninth Circuit has indicated, however, that such disputes do not prevent a violation from satisfying the "willfulness" requirement. See, e.g., In re Pinkstaff [92-2 USTC ¶50,502 ], 974 F.2d 113, 115 (9th Cir. 1992); In re Bloom, 875 F.2d 224, 227 (9th Cir. 1989). The Ninth Circuit appears to hold that where a creditor disputes the applicability of the stay to property in its possession, it must honor the stay and apply to the bankruptcy court for relief. Id. If it fails to honor the stay, it must pay damages and attorney's fees, even if it ultimately prevails. But see In re Strumpf, 37 F.3d 155, 159 (4th Cir.), rev'd sub nom, Citizens Bank of Maryland v. Strumpf, 116 S. Ct. 286 (1995). On remand, Judge McDonald should reconsider this issue in light of Pinkstaff, and if damages and attorney's fees are denied, make findings of fact and conclusions of law to enable meaningful review. ¹⁰

Finally, the Camachos argue that the bankruptcy court erred in failing to find that they detrimentally relied on certain settlement negotiations, i.e., promises by the Government to abate certain assessments by failing to file their bankruptcy petition at an earlier time, which permitted the Government to file additional tax liens against them. Judge McDonald considered that the Camachos may have proved misleading conduct by Government agents, but held that finding estoppel under these circumstances would injure the public interest, and by implication, give the Camachos a windfall. He therefore declined to impose an estoppel and to abate the assessments. This decision appears correct. See United States v. Hemmen [95-1 USTC ¶50,210 ], 51 F.3d 883, 892 (9th Cir. 1989); Watkins v. United States Army, 875 F.2d 699, 707 (9th Cir. 1989). ¹¹

IT IS THEREFORE ORDERED:

The orders of the bankruptcy court are AFFIRMED IN PART AND REVERSED IN PART. THIS MATTER IS REMANDED TO THE BANKRUPTCY COURT FOR FURTHER PROCEEDINGS CONSISTENT WITH THIS DECISION.

¹ There is an issue of subject matter jurisdiction that has not been addressed by the parties or the bankruptcy court. Title 11, Section 505(a)(2) , of the United States Code, provides that the bankruptcy court shall not determine the amount or legality of any tax that has previously been litigated before, inter alia, the tax court. See, e.g., Delpit v. C.I.R. [94-1 USTC ¶50,127 ], 18 F.3d 768, 773 (9th Cir. 1994); Am. Principals Leasing Corp. v. United States [90-1 USTC ¶50,292 ], 904 F.2d 477 (9th Cir. 1990); see also Peck v. C.I.R. [90-1 USTC ¶50,311 ], 904 F.2d 525 (9th Cir. 1990) (considering the collateral estoppel/res judicata effect of tax court decisions). This section therefore makes the doctrines of res judicata and collateral estoppel applicable in bankruptcy court to the extent that the debtor, or those with whom he is in privity, has previously litigated the issue before the tax court. Club attempted to litigate the issues regarding Drilling and Equipment's losses in the tax court. See Sente Inv. Club Partnership of Utah v. C.I.R. [CCH Dec. 46,862 ], 95 T.C. 243 (1990). Since the Camachos were partners in Club and the tax court litigation involved partnership property, i.e., the disputed losses, it appears that the tax court decision binds the Camachos, but only as to the partnership property, i.e., the losses claimed by Club which were attributable to loses of Drilling and Equipment. See, e.g., Restatement (Second) of Judgments §60(2) (1982) (a partner, i.e., Club, who receives an adverse judgment in an action it brings on a partnership claim concerning partnership property bars another action on the same claim and is conclusive with respect to issues determined therein in a subsequent action involving obligations of the partnership); see also 4A CHARLES A. WRIGHT & ARTHUR R. MILLER, FEDERAL PRACTICE AND PROCEDURE: CIVIL 2D §1105 and 6A WRIGHT & MILLER §1564 (federal law looks to state law to determine whether a partnership has the capacity to sue and be sued in its own name).

In this case, the applicable state law would appear to be Utah since Club was formed there. Utah law permits general partnerships, limited partnerships, and joint ventures to sue and be sued in their common names. See, e.g., Cottonwood Mall Co. v. Sine, 767 P.2d 499, 500-01 (Utah 1988); Gary Energy Corp. v. Metro Oil Products, 114 F.R.D. 69 (D. Utah 1987). Thus, there exists a strong argument that the Camachos are bound by the decision against Club in Sente Inv. Club and cannot re-litigate in the bankruptcy court any issue decided, or which could have been decided, by the tax court against Club. 11 U.S.C. §505(a)(2) . This argument is supported by two observations. First, Camachos' interest in the property is merely derivative. The Camachos' interest arises from its partnership in Club, which was a partner in Equipment and Drilling. Thus, the Camachos' partnership property is actually its portion of Club's distributive share of Drilling and Equipment's losses and credits. Second, the Camachos' derivative interest has already been litigated. Drilling and Equipment's losses and credits was at issue in the tax court. The tax court ruled against Club. Thus, there is a strong argument that the Camachos are bound by the decision against Club in Sente Inv. Club and cannot re-litigate in the bankruptcy court any issue decided, or which could have been decided, in the tax court against Club. 11 U.S.C. §505(a)(2) .

Normally, a party waives reliance on res judicata and collateral estoppel by not raising them as issues in the trial court. The Government did not rely upon these doctrines in the bankruptcy court. Nevertheless, section 505(a)(2) seems to make this an issue of bankruptcy court jurisdiction--see In re Teal [94-1 USTC ¶50,138 ], 16 F.3d 619, 621-22 (5th Cir. 1994) and such issues must be addressed sua sponte since a court may not proceed in the absence of jurisdiction. See, e.g., In re Bonner Mall Partnership, 2 F.3d 899, 903 (9th Cir. 1993). Since this matter must be remanded for other determinations, the bankruptcy court should consider its jurisdiction in light of section 505(a)(2) before proceeding further.

² The Camachos deny receipt of the October mailing and dispute that there was a mailing. The bankruptcy judge held an evidentiary hearing, considered the evidence produced by the parties, and concluded that the Government had proved by a preponderance of the evidence that the required notice had been mailed. Judge McDonald relied primarily upon the documentary evidence and specifically found that the IDRS certified mailing list introduced by the Government was sufficiently similar to the Postal Form 3877 relied upon by the Ninth Circuit in United States v. Zalla [84-1 USTC ¶9175 ], 724 F.2d 808 (9th Cir. 1984) to establish proof of notice. Judge McDonald's finding that notice was mailed in October of 1990 to the Camachos' last known address is not clearly erroneous.

³ The parties agree that the September 1, 1992 letter the Government served on the Camachos did not satisfy the notice requirements of 26 U.S.C. §6331(d) because it did not provide the Camachos with at least 30 days notice prior to the levy on the Permanent Fund Division.

⁴ Procedurally, Club challenged the adjustments made to its tax returns. Sente Inv. Club [CCH Dec. 46,862 ], 95 T.C. 243. Since the adjustments were based, at least in part, on the audits and ensuing adjustments to the Equipment and Drilling tax returns, the Government moved to dismiss, for lack of jurisdiction, those portions of Club's petition which challenged the adjustments of the Equipment and Drilling audits. Id. The tax court granted the Government's motion, reasoning that it had jurisdiction over adjustments to Club's return, but not over adjustments to Club's returns which were based on prior adjustments to the returns of Equipment and Drilling. Id. The court set a trial date for Club's remaining challenges--challenges to the adjustments not linked to Equipment and Drilling--but Club failed to appear at trial. Id. The tax court thereafter dismissed the petition and the Government later made computational adjustments to the Camachos' returns.

⁵ Section 6223, titled "Notice to partners of proceedings," provides as follows:

(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 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.

⁶ The bankruptcy court concluded that the Camachos were entitled to personal notice of the Drilling and Equipment audits and therefore never reached the question whether Drilling, Equipment, and Club had received the required notices. At first glance, it appears that this issue remains for determination on remand. But see Sente Inv. Club [CCH Dec. 46,862 ], 95 T.C. 243 (holding that Club could not litigate the Drilling and Equipment audits which the Camachos wish to challenge, because such challenges had to be brought at the Drilling and Equipment partnership level) and supra note 1. However, since proper notice to Drilling, Equipment, and Club was necessary to the tax court's conclusion, which is a final judgment, and the appellate process has been exhausted, the tax court's decision appears to bind the Camachos under the doctrine of collateral estoppel, or if the claim is considered identical, res judicata. See discussion supra note 1.

⁷ The Camachos join in raising a number of arguments which were considered and rejected in Walthall. This Court will adhere to its decision in that case rejecting those arguments.

⁸ Judge McDonald's decision is also supported by In re Contractors Equipment Supply Co., 861 F.2d 241, 244-45 (9th Cir. 1988), which applied Whiting Pools to an intangible--an account receivable--and held that so long as the creditor's interest is a security interest, the debtor has significant interest to make the account property of the estate. The Government's reliance on Begier v. L.R.S. [90-1 USTC ¶50,294 ], 496 U.S. 53 (1990) is misplaced. There, the court held that property which the debtor held in trust for the Government was not property of his estate since he held mere legal title. In contrast, as Judge McDonald found, the debtor retains an interest in levied property so long as the legality of the tax assessment is at issue.

⁹ The Court is aware that the Government sent a notice of intent to levy on September 1, 1992 , and actually levied on September 23, 1992 , less than thirty days thereafter, See 26 U.S.C. §6331(d) (forbidding levies less than thirty days after a notice of intent to levy is mailed to the taxpayer's last known address). It appears that the Camachos timed their bankruptcy petition to avoid any levy and were frustrated only because Judge McDonald found an earlier notice of intent to levy in October 1990 sufficient to allow the September 23, 1992 levy.

¹⁰ This Court is not deciding that any damages or attorney's fees are necessarily proper. Damages should be proved, not presumed. Section 363(e) requires that any property turned over in which the creditor has a security interest shall assure adequate protection to the creditor. In this case, when the issue was resolved, the permanent fund dividend was deposited in a controlled account so that it was not available to the debtor while these issues were being litigated. Thus, it is not clear that the debtor suffered any actual damages by virtue of the delay by the Government in turning over the permanent fund dividend, other than those traceable to the natural delay attending litigation. Nor is it clear that this is an appropriate case for punitive damages, considering the uncertainty in the law regarding the issues in question. See Bloom, 875 F.2d at 227-28 (requiring reckless or callous disregard of the debtors rights to justify punitive damages). These are matters that should be addressed by the bankruptcy court in the first instance.

The bankruptcy court should also consider the importance, if any, of the recent United States Supreme Court decision in Citizens Bank of Maryland v. Strumpf, 116 S. Ct. 286 (1995) on the issue of recoverable damages where a creditor delays turning over property that is security for its debt until the bankruptcy court has the opportunity to assure the safeguards managed by section 363(e).

¹¹ The bankruptcy court seems to have assumed that the Camachos presented a prima facie case that the Government knew the true facts regarding the assessments. In light of this Court's decision, what the Camachos consider the true facts--that the assessments were invalid--is incorrect. Judge McDonald was also apparently willing to assume that the Camachos did not know the Government's true intent, and in reliance on their misunderstanding, deferred petitioning for bankruptcy. Hemmen [95-1 USTC ¶50,210 ], 51 F.3d at 892. Nevertheless, the Government's conduct, even if it constituted misrepresentations, seems more akin to inaction than affirmative misconduct, and the people's interest in having taxes collected would suffer if an estoppel were applied. There is no evidence that Government agents intended or at least should have expected that the Camachos would defer filing bankruptcy in reliance on the ongoing settlement negotiations. In sum, the Camachos have not presented a compelling case for the extraordinary remedy of an estoppel against the Government.

81-1 USTC ¶9452]In re Alpa Corporation, a Utah corporation, Debtor Alpa Corporation, Debtor-in-Possession, Plaintiff v. Internal Revenue Service, United States of America, Defendant

U. S. Bankruptcy Court, Dist. Utah, Bankruptcy No. 80-02546, Civil Proceeding No. 80-0445, 11 BR 281, 5/15/81

[Code Sec. 6331 and Bankruptcy Code, 11 U. S. C. Sec. 101 et. seq.]

Levy and distraint: Bankruptcy: Pre-bankruptcy levy: Turnover order.--

The debtor-taxpayer was entitled to possession of equipment, inventory and other property levied upon and seized by the Internal Revenue Service and the IRS was ordered to turn the property over to the estate subject to a stipulation by the parties or a finding by the Court that adequate protection of the IRS 's interest in the property was provided. The bankruptcy court had jurisdiction under the new Bankruptcy Code over the property, which was seized in a pre-bankruptcy levy, so as to enable it to issue a turnover order. The property was not of inconsequential value or benefit to the debtor-taxpayer, the rights given to the taxpayer after seizure of his property by the Internal Revenue Code were inconsistent with absolute ownership of the property by the IRS , the debtor still retained an interest in the property after seizure, and the IRS did not acquire absolute ownership but on levy merely acquired rights similar to those of a lienholder, which it perfected by taking possession of the property. The debtor-taxpayer's interest in the property seized was property of the bankrupt estate, was subject to the rights given to a debtor-in-possession or trustee and the other provisions of the new Bankruptcy Code and was subject to a turnover order. Bush Gardens, Inc., DC, 79-2 USTC ¶9736, distinguished. .

Memorandum Opinion

MABEY, Bankruptcy Judge:

Robert Wily of Salt Lake City, Utah appearing for the debtor, Alpa Corporation; Barbara Johnsen of Salt Lake City, Utah appearing on behalf of the Internal Revenue Service and the United States of America.

[Facts]

Alpa Corporation is a small company engaged in the manufacturing of specialized equipment for use in the optical industry. On December 2, 1980 , the Internal Revenue Service ( IRS ) levied upon and seized all equipment, inventory and other property on the business premises of Alpa Corporation and thereby terminated its business operations. On December 8, 1980 , while the property was still in the possession of the IRS , but before if had been sold or otherwise disposed of, Alpa Corporation filed a Chapter 11 bankruptcy. On December 11, 1980 , the debtor filed a complaint in the bankruptcy court to compel turnover of the property held by the IRS . The debtor also filed a motion for summary judgment in the case alleging no material facts to be in issue. The IRS responded with a motion to dismiss alleging that the Court lacked subject matter jurisdiction over the property and the cause of action pled. By stipulation of both parties, upon recognition of the urgency of the matter in that the debtor's operations were completely shut down, these motions were heard on December 12, 1980 . The Court at that time ruled from the bench on the question before it, but reserved the right to supplement its ruling by written decision. This memorandum opinion is therefore issued to further supplement and explain the Court's previous ruling on the important issue of whether, in the case of a pre-bankruptcy levy by the IRS , the bankruptcy court has jurisdiction over the property seized so as to enable it to order turnover of the property under 11 U. S. C. §542.

[Jurisdiction of Bankruptcy Court]

11 U. S. C. §542, which outlines the authority of the Court to order a turnover of property to the trustee or debtor-in-possession, states that:

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 inconsequential value or benefit to the estate.

Under 11 U. S. C. §101(14), an "entity" includes a "governmental unit;" therefore, providing the property involved is "property that the trustee may use, sell, or lease under section 363," the Court may issue a turnover order against the IRS . Section 363(b) and (c) define property that the trustee may use, sell, or lease as being "property of the estate." The question, then, of whether the Court has jurisdiction over property levied upon pre-petition so as to compel turnover rests upon whether it is "property of the estate" under Section 541.

Among other subsections, not applicable here, 11 U. S. C. §541(a) defines property of the estate as "the following property, wherever located: . . . all legal or equitable interests of the debtor in property as of the commencement of the case." The legislative history to this provision emphasizes the pervasive reach of this provision:

The scope of this paragraph is broad. It includes all kinds of property, including tangible or intangible property, causes of action [see Bankruptcy Act §70a(6)], and all other forms of property currently specified in section 70a of the Bankruptcy Act §70a, as well as property recovered by the trustee under section 542 of proposed title 11, if the property recovered was merely out of the possession of the debtor, yet remained "property of the debtor." The debtor's interest, in property also includes "title" to property, which is an interest, just as are a possessory interest, or leasehold interest, for example.

H. R. REP . No. 95-595, 95th Cong., 1st Sess., at 367 (1977); S. REP . No. 95-989, 95th Cong., 2d Sess., at 82 (1978).

Under this definition, it would appear that if the debtor had any interest at all, legal or equitable, left in the property which has been levied on, that property is "property of the estate."

The IRS argues that its levy under 26 U. S. C. §6331 amounts to a "virtual transfer" of the property levied upon to the United States so as to prevent the property from passing to the estate of a subsequently filed bankruptcy and to preclude the bankruptcy court's jurisdiction over the property. It supports this contention with statements from pre-Code cases on the effect of a levy on property under the Internal Revenue Code and with at least one recent case decided under the Bankruptcy Code. See Phelps v. United States [75-1 USTC ¶9467], 421 U. S. 330 (1975); In re Pittsburgh Penguins Partners [79-1 USTC ¶9312], 598 F. 2d 1299 (3d Cir. 1979); United States v. Pittman [71-2 USTC ¶9650], 449 F. 2d 623 (7th Cir. 1971); United States v. Sullivan [64-1 USTC ¶9392], 333 F. 2d 100, (3d Cir. 164); United States v. Eiland [55-1 USTC ¶9487], 223 F. 2d 118 (4th Cir. 1955); Bush Gardens, Inc. v. United States [79-2 USTC ¶9736], 5 B. C. D. 1023 (D. N. J. 1979).

The language relied upon includes this statement in the footnotes of Phelps v. United States, supra at 207 n. 8: "In any event, the prebankruptcy levy displaced any title of [the debtor] and §70a(8) is therefore inapplicable." Similar statements can be found in United States v. Pittman, supra at 625 ("It is clear that a valid and effective levy under Section 6331(a) of the Internal Revenue Code of 1954, 26 U. S. C. §6331(a), is 'an absolute appropriation in the law,' and a seizure of the property levied upon, tanamount to a transfer of ownership." (Citations omitted.)); United States v. Sullivan, supra at 116 ("[S]eizure is . . . tantamount to a transferal of ownership." (Citations omitted.)); United States v. Eiland, supra at 12 ("[T]he service of such notice results in what is virtually a transfer to the government of the indebtedness. . . ."); and In re Pittsburgh Penguin Partners, supra. Relying on these statements, the Bankruptcy Court for the District of New Jersey recently held in Bush Gardens, Inc. v. United States, supra at 1026, that since the "United States has a significantly greater interest" approaching that of ownership in property seized prior to bankruptcy for the collection of taxes, that property is not "property of the estate" under Section 541, and therefore not subject to a turnover order of the bankruptcy court. A careful examination of Phelps and its progeny, however, convinces the Court that the Bush Gardens decision is incorrect and that the debtor does indeed retain an interest sufficient to include the property in question as part of the estate subject to turnover.

The case of Phelps v. United States, supra, involved a taxpayer who transferred all of his assets to an assignee for the benefit of creditors. The assignee proceeded to convert the transferred assets to cash. The IRS then served a notice of levy on the assignee, and subsequently, the taxpayer filed bankruptcy. Upon appeal over the propriety of the issuance of a turnover order by the bankruptcy court, the United States Supreme Court held that the bankruptcy court lacked summary jurisdiction to adjudicate the controversy without the government's consent. In reaching its decision, the Court found that "the levy . . . created a custodial relationship between the assignee and the United States and thereby reduced the $38,000 to the United States' constructive possession." Id. at 205. This made the United States a "bona fide adverse claimant" to the property held by the assignee, which, as it did not consent to adjudication of its claim in bankruptcy court, deprived the court of jurisdiction and entitled the United States to a plenary suit over its rights to the property elsewhere. Id. at 205. The opinion ends with the statement: "Here the assignee held as custodian for the United States, a bona fide adverse claimant." Id. at 207.

Initially, it is clear that the holding of Phelps has been overruled by the new Code. 28 U. S. C. §1471 establishes the broad jurisdiction of the new bankruptcy court and disposes of the plenary-summary distinction which controlled jurisdiction under the old Act. There remains, however, the question as to what extent the Phelps case and related cases have defined the property interest of the IRS after levy under 26 U. S. C. §6331 and what continuing effect any such determinations may have on the question now before the Court.

A close scrutiny of the Phelps case and other cases cited by the IRS reveals that these cases have never placed squarely in issue the precise extent of the IRS 's property interest in levied-upon property. It also becomes apparent that, in spite of the strong language cited by the IRS , no court has ever gone so far as to state that the IRS acquires an absolute ownership interest upon levy. In fact, the provisions of 26 U. S. C. §6331 et seq. governing levy and seizure would suggest just the opposite.

In the Phelps case, the Court there referred to the post-levy claim of the government as that of a "bona fide adverse claimant." Id. at 205, 207. Only the statement made in the footnotes that the "prebankruptcy levy displaced any title of [the debtor]" can be cited to support the contention of the IRS of a claim akin to ownership. In construing the weight and meaning of that statement, it must first be realized that this statement is clearly dictum, unnecessary in the Court's holding and unsupported by textual explanation. Secondly, to set it in its proper context, the statement appears to have been made simply to avoid any problem which might have arisen under §70a(8) of the old Act, 11 U. S. C. §110a(8), which vested the title held by an assignee for the benefit of creditors in the trustee. This problem, as with that addressed in the main body of the opinion, also depended on the summary-plenary distinction: in this context, the footnote is not inconsistent with the Court's characterization of the government as an "adverse claimant," a designation which connotes not an absolute ownership, but rather merely a substantial claim to the property. ¹ Even if, on the otherhand, this statement could be construed to mean that absolute ownership passed to the government upon levy, it would be inconsistent with the Court's characterization of the claim in the body of the opinion ² and, as will be seen, has not been followed by other courts dealing with the issue.

In United States v. Pittman, supra, the IRS levied upon property in the hands of a nominee who, in response to the levy, actually transferred title to the government. The IRS , upon levy and seizure of the real property in question, exerted actual control over the property. The property was never sold for taxes, as required by 26 U. S. C. §6335, but was actually managed by the IRS .

The issue presented in this case was whether the taxpayer was entitled to credit for taxes equal to the value of the property when it was seized since the property had subsequently depreciated in value. In support of its holding in the case, the court stated that a valid effective levy is an "absolute appropriation in the law tantamount to a transfer of ownership." Id. at 625. Thus, since the seizure was "virtually a transfer to the government of the property levied upon," the taxpayer was entitled to credit on the tax equal to the value of the property when seized. Nowhere does it say that the government acquires actual ownership to the property, or that an actual transfer takes place upon levy, but merely that what the government does acquire is a substantial interest in the property which may be analogized, but not absolutely equated, to a transfer of ownership. Furthermore, these statements were made in the factual context of a case where the government did take actual control of the property, received title to the property, and exercised power which equitably should make it accountable as an owner, even though the court never went so far as to call the IRS an owner. The court's statement that "nowhere does the Code indicate any action beyond levy necessary to place title in the government to enable it to convey it," is not inconsistent with a finding that the taxpayer's interest in or title to the property is not cut off until the actual conveyance.

The case of United States v. Sullivan, supra, also supports no finding of ownership in the government after levy. In fact, its holding flatly contradicts a finding of ownership, for it held that the government had no right, as would the owner, to exercise contractual rights in an insurance policy which was levied upon. This holding was made in conjunction with the statement, citing as authority, United States v. Eiland, supra, that "seizure is . . . tantamount to a transferal of ownership." Again, although it is apparent from this case that substantial rights are transferred to the government upon seizure, it is equally apparent that these rights are not to be equated with absolute ownership.

United States v. Eiland, supra, dealt with the question of whether funds levied on by the IRS should be subject to administrative claims of the bankruptcy estate. In essence, this question resolved into whether the IRS had an interest which was perfected as against the claims of a trustee in bankruptcy. The statements made in this opinion, therefore, relate to the status of the government's claim against the trustee. There is no dispute in the case now before the court that, as was held in Eiland, the government's claim is perfected against the trustee. Rather, the Court is concerned with the extent of the debtor's continuing rights in the property. The much-quoted statement in Eiland that a levy is "virtually a transfer to the government of the indebtedness" is made in the context of explaining the difference between a levy under the Internal Revenue Code and a levy under normal state law procedures. The entire statement is as follows:

The effect of the federal taxing statutes to which we have referred is to create a statutory attachment and garnishment in which the service of notice provided by statute takes the place of the court process in the ordinary garnishment proceeding . . . There is no necessity for adjudicating the amount of the tax under the statutory proceeding and consequently, the service of such notice results in what is virtually a transfer to the government of the indebtedness, or the amount thereof necessary to pay the tax so that payment to the government pursuant to the levy and notice is a complete defense to the debtor against any action brought against him on account of the debt . . . When bankruptcy occurs after the levy and notice have been served upon a debtor of the bankruptcy, the trustee in bankruptcy cannot interfere with the rights of the United States thereby perfected before bankruptcy. (Citations omitted)

Id. at 121-122. Thus, taken in context, the Court in Eiland does not say that a levy is a transfer of ownership, but rather that it establishes a perfected interest in the government by virtue of a simplified and shortened process provided under the Internal Revenue Code.

Finally, the case of In re Pittsburgh Penguins Partners, supra, dicided after the Phelps case, specifically denies the characterization advanced by the IRS . In again dealing with an issue of summary-plenary jurisdiction under Chapter XI of the old Act in the case of a pre-bankruptcy tax levy by the IRS , the Court cites Phelps for the proposition that the levy gives the government not only "constructive possession" but a `substantial adverse claim' of ownership" sufficient to defeat the bankruptcy court's claim to jurisdiction under Section 311. Id. at 1302. It cites the footnote of Phelps, which talks about the displacement of title of the debtor as dictum, and then further goes on to say that "we need not decide, therefore, the further question whether the levy was effective to transfer full title to the assets to the United States," thereby acknowledging the unsettled state of the law in this area. Id. at 1302.

Thus, a look at Phelps and similar cases convinces this Court that a pre-bankruptcy levy has never been interpreted as a complete transfer of ownership to the IRS . In fact, there exist cases which have more directly dealt with the issue of the extent of the government's interest in property levied upon under the tax laws which, since no subsequent case appears directly to overrule their interpretations, are applicable here. These cases reinforce this Court's belief that a levy operates not to transfer title to the government, but rather to give it a perfected lien which, considering the statutory rights afforded the government under the Internal Revenue Code, amounts to a substantial interest in the property levied upon. This substantial interest is nevertheless, not equal to a claim of absolute ownership.

The court in In re Brewster-Raymond, 344 F. 2d 903 (6th Cir. 1965), after determining jurisdiction to be present in the bankruptcy court due to the government's consent, dealt with the question of whether a tax levy passed ownership of the property levied upon to the United States so as to prevent application of Section 57(j) barring the collection of penalties and interest on tax debts from the estate. The Court there held that "The levy of the government against the fund . . . did not operate to pass title, but gave the government only a lien against the fund." Id. at 910. The court stated:

Counsel for the United States has cited no authority, nor have we found any, that holds that the United States has anything more than a lien when it levies upon intangible personal property . . . [T]he levy (in the sense it is used here) is merely one of many means of perfecting a lien. A levy is a seizure of the property of another, but nothing more. It does not in and of itself operate to transfer title to the government.

Id. at 910. Since the levy did not operate to pass title of ownership to the United States, Section 57(j) was held to apply and to bar collection of penalties and interest. Among the cases cited by the government and considered by the Court of Appeals for the Sixth Circuit in rendering its decision was United States v. Eiland, supra.

Bennett v. Hunter, 76 U. S. 672 (1870), a case decided under a much earlier tax law, the reasoning of which, however, has continued applicability today, directly addressed the issue of whether a tax levy on property operated to transfer ownership of property levied upon to the government before an actual sale of that property. In holding that title did not pass until actual sale of the property, the United States Supreme Court said:

What preceded the sale [the levy] was merely preliminary, and independently of the sale, worked no devestiture [sic] of title. The title, indeed, was forfeited by non-payment of the tax; in other words, it became subject to be vested in the United States and, upon public sale, became actually vested in the United States or in any other purchaser; but not before such public sale. It follows that in the case before us the title remained in the tenant for life with remainder to the defendant in error, at least until sale; though forfeited, in the sense just stated, to the United States.

Id. at 676. In noting that the statute allowed the taxpayer to prove payment of the taxes prior to the IRS sale and to receive a release of the property from sale, it concluded that this fact would be inconsistent with a finding that the levy completely divested the owner of title in favor of the United States. A look at the tax statutes now in question, found in 26 U. S. C. §6331 et seq., reveal the same sort of inconsistency between the rights given the taxpayer upon levy with the position taken by the government that such levy operates as a complete transfer of title to the government.

Upon levy and seizure of property for taxes, the taxpayer is given certain specified rights under the Internal Revenue Code. Under 26 U. S. C. §6335, the taxpayer is given the right to receive notice of the seizure and sale. 26 U. S. C. §6337(a) allows the taxpayer to pay the tax before the sale and have the property restored to him. Section 6337(b) allows redemption of the seized property after sale within 120 days of the sale. 26 U. S. C. §6342 requires that the taxpayer receive any surplus generated from the sale of the property over and above the taxes due. All of these rights given to the taxpayer are consistent with the rights normally given to an owner of property upon seizure and sale of his property by a lienholder on the property. They are, however, inconsistent with the contention that the United States becomes the owner of the property upon seizure. In fact, as evidenced by the Pittman and Sullivan cases, the government is not given the right to exercise the control, power and rights of an owner over property which has been levied upon and seized. Rather, as noted in In re Brewster Raymond, supra, the levy and seizure is merely a way of perfecting the government's interest in the property which insures, by the temporary taking of possession, that the property will be safeguarded and available for sale in satisfaction of the tax. 26 U. S. C. §6335 specifically requires that a sale of the seized property be noticed "as soon as practicable after seizure" and that the sale occur within 10 to 40 days after giving public notice. No authority is given for retention of the property, for the use of the property, or for the exercise of other rights normally associated with ownership. That the government needs no further authority to transfer title to the purchaser upon sale does not mean, as addressed in Bennett v. Hunter, supra, that the title or ownership of the taxpayer is divested at any time before that sale. In actuality, further proceedings are clearly necessary subsequent to the levy before title passes as noted in 26 U. S. C. §6337(a). Furthermore, 26 U. S. C. §§ 6335, 6336, and 6337 all refer to the taxpayer as the "owner". These observations support the Court's conclusion today that although the government is given substantial rights under the Code to protect its tax lien and to derive payment of that tax from the sale of the levied upon property, its interest is nonetheless a lien: something less than absolute ownership.

[Property of Bankrupt's Estate]

Since the government obtained rights in the property not amounting to absolute ownership, and since the taxpayer-debtor has continuing rights to the property under the tax statutes, the next question is whether the debtor's interest is "property of the estate" which can be subject to turnover under Section 542.

Bush Gardens, Inc. v. United States, supra, although acknowledging the government's rights in the levied-upon property to be something less than ownership, held that as the "United States has a significantly greater interest" in the property seized prior to bankruptcy than does the debtor, that property is not property of the estate. In reaching this conclusion, the court based its decision on Phelps and other cases decided under the more restricted bankruptcy jurisdiction defined in former law. The court acknowledged rights of the debtor in the property, but then proceeded to apply a balancing test somewhat akin to the old plenary-summary adverse interest balancing tests which were the hallmark of jurisdiction under prior law.

The reasoning of this case, in light of the expanded jurisdiction of the bankruptcy court, appears incorrect. As noted in Cross Electric Company, Inc. v. United States of America, supra at 1349:

The underlying theory of 11 U. S. C. §541(a)(1) is to bring into the estate all interests of the debtor in property as of the date the case is commenced. There is no balancing test involved. Those creditors who hold a significantly greater interest in a particular item cannot automatically have the item excluded from the estate if the debtor still retains some interest in it. (Citations omitted.)

Accord, In re Barsky, 6 B. R. 624 (E. D. Pa. 1980); In re Troy Industrial Catering Service, 2 B. R. 521 (E. D. Mich. 1980); In re Aurora Cord and Cable Company, Inc., 2 B. R. 342 (N. D. Ill. 1980).

Thus, whether the United States has a greater interest in levied upon property at the filing of bankruptcy is immaterial, for as long as the debtor has an interest, that interest will fit into the pervasive definition of Section 541 to constitute "property of the estate." The "legal or equitable interests" remaining in the debtor in the property at hand include title to the property, or legal ownership until sale, the right to notice, the right to pay the tax before sale and have the property released, the right to redeem after the sale, and the right to receive any surplus generated from the sale. These interests are clearly property of the estate under Section 541. Indeed, the legislative history states that even mere title in the debtor is in itself enough to invoke the jurisdiction of the bankruptcy court under Section 541. See H. R. REP . No. 95-595, supra at 367; S. REP . No. 95-989, supra at 82. The conclusion that the property concerned comes within the definition of Section 541 and is "property of the estate," subject to the jurisdiction of the bankruptcy court, leaves the question of whether the Court should order turnover under Section 542 of the Code.

[Turnover Order Under 11 U. S. C. Sec. 542]

In re Avery Health Center, Inc. [81-1 USTC ¶9229], CCH BANKR. L. REP . ¶67,815 (W. D. N. Y. 1981), In re Winfrey Structural Concrete Co., 5 B. R. 389 (D. Col. 1980), and In re Parker GMC Truck Sales, Inc. [80-2 USTC ¶9778], 6 B. C. D. 899 (S. D. Ind. 1980), after acknowledging that the debtor had a continuing interest in the property subsequent to a tax levy by the IRS , declined to order turnover based upon the reasoning that the interest acquired by the bankruptcy estate did not amount to a right to use, sale, lease, or possess the property so as to subject that property to turnover. These courts held that as the debtor would not normally be entitled to possession of the property without first paying the tax, the bankruptcy court cannot compel a turnover under Section 542 without fulfillment of that same condition. However, examination of the rights of the debtor and of the powers given the debtor-in-possession pursuant to the interaction of Section 542, 363 and 361 of the Code convinces this Court that the Code grants the bankruptcy court the flexibility to balance fairly competing rights in the property and to order a turnover upon the debtor's provision for adequate protection of the government's interest in the property.

All of the cases cited above took as their starting point statements made in the legislative history concerning the extent of the debtor's interest under Section 541. Both the House and Senate Reports state:

Though this paragraph will include choses in action and claims by the debtor against others, it is not intended to expand the debtor's rights against others more than they exist at the commencement of the case . . . He [the trustee] could take no greater rights than the debtor himself had.

H. R. REP . No. 95-595, supra at 367-368; S. REP . No. 95-989, supra at 82.

The further statement was then made in the House Debates that

[O]nly the debtor's interest in such property becomes property of the estate. If the debtor holds bare legal title or holds property in trust for another, only those rights which the debtor would have otherwise had emanating from such interest pass to the estate under section 541.

H. R. Debate, 124 Cong. Rec. H11047-117, at H11096 (daily ed. Sept. 28, 1978 ).

From these statements, it was reasoned that the debtor's rights in bankruptcy over property, including its use, sale and lease under Section 363, must be defined by reference to applicable non-bankruptcy law, in this case, the Internal Revenue Code. Thus, only the rights given the debtor under the Internal Revenue Code would constitute the rights given the debtor-in-possession or trustee upon the filing of bankruptcy. Since these rights do not include a right to possession or use of the property prior to the payment of the tax owed, these courts concluded that the trustee would be similarly limited in its allowed control over or use of the property.

In reaching this conclusion, the decisions in In re Avery Health Center, Inc., supra, In re Winfrey Structural Concrete Co., supra, and In re Parker GMC Truck Sales, Inc., supra, failed to focus their attention on the rights given the debtor-in-possession or trustee under the Bankruptcy Code and instead focused only on the rights given the debtor outside of bankruptcy in the Internal Revenue Code. The rights given upon the filing of bankruptcy under the Code, however, make it clear that although the debtor's interest in property brought into the estate cannot be expanded, its rights concerning the use, sale, lease and possession of that property may be altered, upon compliance with certain conditions, by express allowance in the Code.

It is initially true that despite the pervasive reach of Section 541, it was not "intended to expand the debtor's rights against others," or in other words, it brings "only the debtor's interest in such property" into the estate. Thus, as is the case here, where the debtor has only a limited interest in the property in question upon the commencement of the case, only that limited equitable or legal interest comes into the estate. The mere fact that bankruptcy was filed does not work to expand the interest of the debtor in property or concomitantly reduce or impair the rights of another entity holding an interest in that property. On the other hand, an interest in property which falls within the definition of "property of the estate" and thus, within the jurisdiction of the bankruptcy court, subjects that property, in its entirety, to other provisions of the Bankruptcy Code and specifically to rights given to the debtor-in-possession or trustee under the Code. It is clear, for instance, that property and an entity claiming an interest in it become subject to the automatic stay of section 362 ³ and to the strong-arm and preference powers of the trustee or debtor-in-possession found in Sections 544, 545, 547, and 548. Likewise, no matter how limited the pre-bankruptcy rights and interests of the debtor in certain property, that property, once determined to be property of the estate, is subject to the rights given the debtor-in-possession or trustee in bankruptcy as found in Sections 542, 543, 363, and 365 of the Code. ⁴ These rights are independent of any rights existing in the debtor previous to the filing of bankruptcy. They are designed to be exercised consistent with fair balancing and protection of the rights of all entities claiming an interest in the property.

Section 542(a) allows for turnover of "property that the trustee may use, sell, or lease under section 363 of this title." The only relevant limitation on this authority to compel turnover arises when the property in question "is of inconsequential value or benefit to the estate." ⁵ Under Section 363, the trustee or debtor-in-possession may use, sell, or lease "property of the estate" after notice and a hearing if done other than in the ordinary course of business or without notice and a hearing if done in the ordinary course of business. This authority to use, sell, or lease property of the estate is limited by subsections 363(d) and (e). Subsection 363(d) requires this authority to be exercised consistent with any relief from the stay given under Section 362(c), (d), (e), or (f). The implications of this limitation are obvious. Subsection 363(e) further limits the use, sale and lease of property by interposing the requirement of adequate protection as further elucidated in Section 361. Section 363 establishes, except in the case of cash collateral, the burden on an entity having an interest in the property being used, sold or leased or proposed to be used, sold or leased, to request the Court to prohibit or otherwise condition the exercise of the Section 363 authority by the trustee or debtor-in-possession so as to insure adequate protection of its interest. Once this request is made, the burden then shifts, by terms of Section 363(d), to the trustee or debtor-in-possession to prove that the entity is adequately protected before further authority over the property can be exercised.

A debtor's right to possession under §542, then, is dependent upon a weighing of equities in bankruptcy and not simply upon non-bankruptcy definitions of property interest. To say that a debtor is not entitled to a Section 542 turnover order because the debtor would not be entitled to possession absent bankruptcy is to read Section 542 out of the law. The bankruptcy court is, instead, charged with balancing the respective interests in the property against the bankruptcy standards of adequate protection and other cause. The fact that the creditor may have a "significantly greater interest" in the property than the debtor provides no bar to the right of the debtor-in-possession to compel a turnover. Rather, the extent of the creditor's interest in the property is relevant only in the context of determining adequate protection or entitlement to relief from the stay, if requested. Thus, where a greater interest is held by the creditor, a greater burden may ultimately be placed on the debtor-in-possession, once the creditor raises the issues of adequate protection and relief from the stay, to convince the court that in light of the extensive interest of that entity, the use or disposal of the collateral as proposed, or in this case, the turnover of possession under the conditions proposed, meets the standard of adequate protection. ⁶

In the present case, because the debtor had a cognizable interest in the property levied upon pre-bankruptcy so as to bring that interest into the estate under Section 541, that property is then subject to the debtor-in-possession's right to use, sale or lease the property under Section 363 which therefore allows invocation of the right to compel turnover under Section 542 unless limitations set on these rights in the Bankruptcy Code apply. The Court looks not to the status of the rights of possession prior to the filing of the bankruptcy as given in the Internal Revenue Code, but rather to the rights given in bankruptcy to compel a turnover of possession. Thus, upon a balancing of the rights of the debtor and the IRS here, subject to the requirement of providing adequate protection to the IRS 's interest, a turnover is appropriate.

As previously noted, this right to turnover is limited by the requirement in Section 542 that the property be of more than inconsequential value or benefit to the estate. Here, although the market value of the interest still held by the debtor in the property levied upon may be small, it is clear that the benefit to the estate, considering that what is involved is all of the property necessary to run the business, is much greater than inconsequential. As stated in 4 Collier On Bankruptcy §542.02, at 542-7 n. 5 (15th ed. 1980):

This language should be interpreted to excuse turnover only if the property is of both inconsequential value and inconsequential benefit to the estate. Thus, property of little value but of great benefit to the estate should be turned over.

Therefore, this limitation found in Section 542 has no application here.

The Court's conclusion today is not only consistent with the plain statutory provisions of the Code, but also with its spirit as well. Chapter 11 was designed to rearrange and balance the relative rights of debtor and creditor so as to enable the debtor to get back on his feet and thereby benefit all of his creditors instead of just one as would otherwise be the case here. As recognized in Cross Electric Company, Inc. v. United States of America, supra, at 1349:

The purpose of Chapter 11 proceedings is to provide an arrangement in which a company has the opportunity to rehabilitate its business operations and to become a profit making company despite its past financial difficulties. There is a strong public policy which favors rehabilitation of failing concerns to make them viable contributors to society once again, rather than liquidating the companies quickly to turn over a reduced sum to all creditors. Under the rehabilitative plan which is approved by the court, the debtor can, hopefully, pay off all of its creditors in full and continue to be an asset to the community. (Citations omitted.)

The turnover power given the debtor-in-possession in Section 542 provides it with the opportunity to attempt to fulfill the purpose of Chapter 11. As has been recognized in similar circumstances by other courts:

The turnover order in the instant case is particularly appropriate in light of the equitable power of this court . . . and the spirit behind corporate reorganization. If the IRS is permitted to retain the debtor's assets, it is undisputed that the debtor will be forced into liquidation. The essence of Chapter 11, however, is to prevent the unnecessary dismemberment of viable corporations and to provide a maximum distribution to creditors who would be likely to receive nothing in the event of liquidation.

Allowing the property levied upon by Internal Revenue Service to be retained by them effectively decides that the debtor is barred from proposing a plan of reorganization and in satisfaction of creditors. It is clear from the legislative history of the Bankruptcy Reform Act that Congress was aware of situations where giving a secured or lien credit an absolute right to its possessory interests might be seriously detrimental to the rehabilitation of the debtor. Therefore section 361 was enacted to provide the means by which conflicting rights in the debtor's property may be protected.

In re Aurora Cord and Cable Company, Inc., supra at 346. In re Barsky, supra at 627.

In the case at hand, this reasoning and the application of Section 361 through Section 363(e) are particularly appropriate in light of the circumstances presented. As the Court has previously analyzed, the IRS is not the owner of the property levied upon, but is merely a lienholder endowed with extraordinary statutory powers. Nonetheless, as a lienholder, and by terms of the Internal Revenue Code, the IRS is only entitled to possession of the property in question so as to safeguard it until sold for the payment of the taxes due. The IRS has no right to use the property. See 26 U. S. C. §6335. See also, United States v. Pittman, supra. Nor can it exercise other rights normally given an owner. See United States v. Sullivan, supra. If then, the debtor can, by providing "adequate protection", insure payment of the debt with as much certainty as would have followed from the retention of the property by the IRS , the IRS has in essence lost nothing, and suffered no dilution of impairment of its rights, while the debtor has obtained a substantial benefit in being able to continue its business and hopefully provide a greater dividend to all creditors involved.

Order

Pursuant to this memorandum decision, plainiff's motion for summary judgment is granted and turnover is ordered under 11 U. S. C. §542 subject to either a stipulation of the parties or a finding by this Court that adequate protection of the Internal Revenue Service's interest has been provided.

¹ Section 70a(8) specifies that it deals with property "deemed to be held by the assignee as an agent of the bankrupt" which is then subject to the summary jurisdiction of the court. When, however, as was held in Phelps, the assignee is holding the property as a custodian for a "bona fide adverse claimant", Section 70a(8) would not even come into play as the actual facts negate any assumption made under the Act. Furthermore, even Section 70a(8) must relate back to the jurisdiction of the Court as defined in Section 2a, 11 U. S. C. §11a, which again invokes the summary-plenary distinction. See 4A COLLIER ON BANKRUPTCY ¶70.38[1], at 462-3 (14th ed. 1978); 2 COLLIER ON BANKRUPTCY ¶23.06[3], at 506.2-6.3 (14th ed. 1976).

² The court in Cross Electric Company, Inc. v. U. S. A. [80-2 USTC ¶9836], 6 B. C. D. 1348, 1350 (W. D. Va. 1980), in criticism of the IRS 's construction of the Phelps dicta, unequivocally stated: "It is inconsistent for a party to hold full legal rights yet only be classified as an adverse claimant."

³ Even the Court in In re Avery Health Center, Inc., supra at 78, 565, recognized the probable applicability of Section 362 to the IRS despite its failure to allow turnover.

⁴ This application of the rights and powers given in bankruptcy over others holding interests in the property concerned was recognized in In re Barsky, supra at 627, where the Court noted:

By the levy, the [taxing authority] has acquired the right to sell the debtors' property to satisfy its tax lien. That right is, however, subordinate to the rights granted the trustee by Section 542 and 547 of the Bankruptcy Code.

⁵ Other limitations on the turnover power as outlined in subsections (b), (c), and (d), of Section 542 are clearly inapplicable to the case on hand.

⁶ It may be that the statute, as written, requires turnover without reference to the interest of an entity in possession of the property unless that entity timely requests under Section 363(e) the finding of adequate protection or relief from the stay under Section 362(d). 4 Collier on Bankruptcy §542.02, at 542-6 (15th ed. 1980) says: "The better view is that turnover must be tendered immediately after commencement of the case but that adequate protection is a condition precedent to turnover if demanded by the creditor." (Emphasis added.)

81-2 USTC ¶9639]In The Matter Of: Bristol Convalescent Home, Inc., Debtor, Bristol Convalescent Home, Inc., Plaintiff v. Internal Revenue Service, Edward W. Maher, Commissioner, Department of Income Maintenance, State of Connecticut, Defendants

U. S. Bankruptcy Court, Dist. Conn., Nos. 2-81-00624, 2-81-0331, 12 BR 448, 7/7/81

[Code Sec. 6331]

Levy and distraint: Bankruptcy: Pre-petition levy: Effect of: No constructive possession.--

The Bankruptcy Court had the power to compel the turnover of monies owed by a state to a bankrupt where the IRS had placed a levy upon the funds prior to the filing of a bankruptcy petition. The pre-petition levy did not have the effect of placing the debt owed to the bankrupt in the constructive possession of the IRS . Therefore, the property levied upon became the property of the debtor's estate upon the filing of the petition.

Jerome E. Caplan, 111 Pearl Street, Hartford, Conn. 06103, for plaintiff. Arnold I. Menchel, Assistant Attorney General, Hartford, Conn. 06114, Jonathan B. Forman, Department of Justice, Washington, D. C. 20530, for defendants.

Memorandum and Partial Judgment

KRECHEVSKY, Bankruptcy Judge:

This proceeding requires the court to resolve an issue of first impression in the District of Connecticut--whether the bankruptcy court has the power to compel the turnover of property of the debtor levied upon by the Internal Revenue Service prior to the filing of a petition. On May 26, 1981 , the U. S. Internal Revenue Service ( IRS ), pursuant to 26 U. S. C. §6331 et seq., levied upon the State of Connecticut with respect to monies owed by the State to Bristol Convalescent Home, Inc. (BCH), and payable on June 15, 1981 . The levy was made to satisfy over $100,000 in unpaid withholding and FICA taxes for the first quarter of 1981. Thereafter, and as a direct result of the IRS levy, BCH filed its petition pursuant to Chapter 11 of the Bankruptcy Code on June 10, 1981 , and has since operated its business as debtor-in-possession.

On June 15, 1981 , BCH filed its complaint initiating this proceeding, naming as defendants IRS and the Commissioner of the Department of Income Maintenance of the State of Connecticut (State). The complaint alleges that because of the IRS levy, the State refuses to pay BCH approximately $100,000 due it and that it needs these funds as liquid capital to operate the convalescent home and to rehabilitate itself successfully. BCH asks that the defendants be ordered to turn over monies due it from the State and that it be permitted to use these monies in the ordinary course of its business "upon such terms and conditions as will give the defendant IRS adequate protection by way of additional liens or replacement liens on existing and/or future property of the debtor".

The IRS , in its answer and counterclaim, states that the property levied upon is not property of the debtor's estate because its levy had the effect of placing the debt owed to BCH in the constructive possession of the United States. The IRS also denies that BCH is able to give it adequate protection and requests that the court dismiss the complaint and determine in the alternative that (1) the automatic stay of 11 U. S. C. §362 is inapplicable to the IRS with respect to its pre-petition levy or (2) if the stay is applicable, that the court give it relief therefrom and require the State to turn over to the IRS $102,169.92 from the funds owed by the State to BCH. The State's answer admits that it owes BCH the money and states that it will turn it over to whomever the court designates.

At a pre-trial conference on June 29, 1981 , IRS and BCH agreed that a threshold issue to be resolved was whether or not the pre-petition levy of the IRS had the effect of removing the levied-upon property from the debtor's estate and thus rendering it not subject to a turnover order of this court. The parties further agreed that the court would resolve this issue by July 7, 1981 upon the pleadings before it and briefs to be submitted by BCH and IRS .

Although the issue is new in this district, it has been recently considered by a number of bankruptcy and district courts. In re Bush Gardens, Inc., 5 BCD 1023 (BC D. N. J. 11/21/79 ); Matter of Troy Industrial Catering Service, 5 BCD 1243 (BC E. D. Mich. 1/18/80 ); Matter of Aurora Cord and Cable Co., Inc., 5 BCD 1310 (BC N. D. Ill. 1/23/80 ); In re Winfrey Structural Concrete Co., 6 BCD 695 (BC D. Colo. 7/31/80 ); In re Parker GMC Truck Sales, Inc., 6 BCD 899 (BC S. D. Ind. 8/25/80 ); Cross Electric Company, Inc. v. U. S., 6 BCD 1348 (W. D. Va. 10/3/80 ); In re Barsky, 6 BCD 1216 (BC E. D. Pa. 10/20/80 ); In re Paukner, unreported decision, (BC N. D. Ohio, 1/9/81 ); In re Avery Health Center, Inc., 7 BCD 210 (W. D. N. Y. 1/28/81 ); In re Whiting Pools, Inc., 7 BCD 658 (BC W. D. N. Y. 4/28/81 ); In re Alpa Corporation, 7 BCD 791 (BC D. Utah 5/15/81 ). These decisions have split almost evenly in result, four bankruptcy courts and one district court supporting the claim of IRS (Avery, Bush Gardens, Winfrey, Parker GMC, and Paukner), and five bankruptcy courts and one district court supporting the position of BCH (Cross Electric, Troy, Aurora, Barsky, Whiting Pools, and Alpa).

Generally speaking, the cases finding that a pre-petition levy by the IRS places the property levied upon beyond the reach of a bankruptcy trustee or debtor-in-possession rely upon the opinion in Phelps v. U. S. [75-1 USTC ¶9467], 421 U. S. 330 (1975). That case is said to hold that a tax levy gives the IRS "full legal right" to the levied-upon property as against a bankruptcy receiver. IRS claims that, under Phelps, the collection powers provided for by 26 U. S. C. §6331(a) and (b) ¹ are so broad that the taxpayer is left with insufficient interest in the levied-upon property to have such property fall within the terms of 11 U. S. C. §541 and §542. ² That is to say, since a levy pursuant to §6331 permits the IRS to sell the property and provides the taxpayer only with a right to a surplus (26 U. S. C. §6342) or a right to redeem (26 U. S. C. §6337), such levy prevents the levied-upon property from becoming property of the estate which can be used, sold or leased. The cases supporting the position of BCH find that Phelps is inapplicable inasmuch as that case involved an issue of summary versus plenary jurisdiction under the former bankruptcy act, a distinction abolished by the new Bankruptcy Code. Further, it is said that the IRS levy, no matter how extraordinary under the Internal Revenue Code, remains a lien, prior to actual sale of the property, and does not prevent the property levied upon from becoming property of the estate upon the filing of the bankruptcy petition, thereafter subject to the provisions of §542 requiring turnover of said property, subject to the lien, to the trustee or debtor-in-possession.

I believe that the cases supporting the position of the debtor-in-possession are the better reasoned, and I generally subscribe to the arguments set forth therein without further elaborating upon them here. Only the following need be added. The court adopts a construction which is most likely to accommodate the intent of both the Bankruptcy Code ³ and the Internal Revenue Code. ⁴ The position taken by the IRS results in the determination as to when a business entity may remain in operation being made solely by the IRS . Under its theory, whenever IRS believes it appropriate and thereupon levies, no discretion would remain in the bankruptcy court to consider whether the IRS debt can be adequately protected, and whether to allow the business to operate not only for the benefit of the debtor and its creditors, but also for the benefit of the community at large. I wish to point out, in view of some of the fears expressed by the IRS during the pre-trial conference, that when the Supreme Court decided Phelps, it stated what the concerns were in wishing to avoid the jurisdiction of the bankruptcy court:

There is a significant difference in the result of a summary adjudication of the tax claim in the bankruptcy court and the result of its adjudication in a plenary suit:

"The difference between a summary and plenary proceeding in this context is not merely a matter of the relative formality of the respective procedures. The consequence of a summary turnover order is to subject the property in question to administration as part of the bankrupt estate. Where the government has a tax lien on the property, the consequence of the turnover is to subordinate that lien to the expenses of administration and priority wage claims. See Section 67c(3) of the Bankruptcy Act, 11 U. S. C. §107(c)(3). In contrast, if the property is not subject to summary turnover, it may be brought into the bankrupt estate only if the receiver is able to defeat the government's underlying tax claim in a plenary proceeding, i. e., a suit for refund. Thus, in a case where the underlying tax claim is sound, for the government the difference between a summary and a plenary proceeding is the difference between holding the property subject to prior payment of administrative and priority wage claims and holding it outright". Brief for United States 19, Id. at 333 n. 1.

Such is no longer the law. Section 363(c) and (e) of the Bankruptcy Code provides that this court shall prohibit or condition the use of cash collateral "as is necessary to provide adequate protection" of the interest of an entity therein. Methods of adequate protection are provided for by 11 U. S. C. §361, which mandates that whenever the security of a secured claimant is to be used, sold or leased by a debtor-in-possession, the secured party must ultimately be granted the "indubitable equivalent" of his security. Section 507(b) of the Code also provides for a so-called "super priority" whereby any deficiency of the adequate protection is to be made up before any administration expenses can be paid. ⁵ See Collier on Bankruptcy, (15th ed.) ¶507.05 at 507-46-47 (1980).

I thus conclude that the money due from the State of Connecticut to Bristol Convalescent Home, Inc. is property of the estate and subject to a turnover proceeding under §542. The hearing on the remaining issues raised by the complaint and the counterclaim will proceed as scheduled.

¹ 26 U. S. C. §6331.

(a) Authority of Secretary or Delegate. If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary or his delegate to collect such tax . . . by levy upon all property and rights to property . . . belonging to such person or on which there is a lien provided in this chapter for the payment of such tax . . ..

(b) Seizure and Sale of Property. The term "levy" as used in this title includes the power of distraint and seizure by any means . . .. In any case in which the Secretary or his delegate may levy upon property or rights to property, he may seize and sell such property or rights to property (whether real or personal, tangible or intangible).

² 11 U. S. C. §541 provides in pertinent part:

(a) The commencement of a case under . . . this title creates an estate. Such estate is comprised of all the following property, wherever located: (1) . . . all legal or equitable interests of the debtor in property as of the commencement of the case.

11 U. S. C. §542 provides in pertinent part:

(a) . . . 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. . . . shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.

³ The purpose of a business reorganization case, unlike a liquidation case, is to restructure a business's finances so that it may continue to operate, provide its employees with jobs, pay its creditors, and produce a return for its stockholders. The premise of a business reorganization is that assets that are used for production in the industry for which they were designed are more valuable than those same assets sold for scrap. Often, the return on assets that a business can produce is inadequate to compensate those who have invested in the business. Cash flow problems may develop, and require creditors of the business, both trade creditors and long-term lenders, to wait for payment of their claims. If the business can extend or reduce its debts, it often can be returned to a viable state. It is more economically efficient to reorganize than to liquidate, because it preserves jobs and assets.

House Report No. 95-595, 95th Cong., 1st Sess. (1977) 220.

⁴ "Taxes are the life blood of government, and their prompt and certain availability an imperious need". Bull v. U. S. [35-1 USTC ¶9346], 295 U. S. 247, 259 (1935).

⁵ 11 U. S. C. §507. Priorities.

(b) If the trustee, under section 362, 363, or 364 of this title, provides adequate protection of the interest of a holder of a claim secured by a lien on property of the debtor and if, notwithstanding such protection, such creditor has a claim allowable under subsection (a)(1) of this section arising from the stay of action against such property under section 362 of this title, from the use, sale or lease of such property under section 363 of this title, or from the granting of a lien under section 364(d) of this title, then such creditor's claim under such subsection shall have priority over every other claim allowable under such subsection.

[82-2 USTC ¶9545]In Re: Health America of Florida, Inc. d/b/a Union General Hospital Debtor Health America of Florida, Inc. d/b/a Union General Hospital Plaintiff v. Blue Cross-Blue Shield of Florida, Inc. and United States of America, Internal Revenue Service Defendants

U. S. Bankruptcy Court, Mid. Dist. Fla., Jacksonville Div., Case No. 82-544-BK-J-GP, 22 BR 268, 7/29/82

[Code Secs. 6323 and 6331 and the Bankruptcy Code]

Lien for taxes: Levy: Turnover of funds.--

A debtor was entitled to the turnover of funds owed to it and held by an insurance company subject to an IRS levy. The levy for unpaid employment taxes was served prior to debtor's filing for reorganization under the Bankruptcy Code. The court adopted the decision in United States v. Whiting Pools, Inc. [82-1 USTC ¶9269]. The funds were apportioned between debtor and the IRS and the court set up a payment schedule for the unpaid balance owed the IRS .

Lansing J. Roy, Newell Building, P. O. Box 750, Keystone Heights, Florida 32656, for plaintiff. Gerald B. Leedom, Department of Justice, Washington, D. C. 20530, Jane Dickinson, Internal Revenue Service, Jacksonville, Florida 32202, for defendants.

Final Judgment

PROCTOR, District Judge:

This case came before the Court on the debtor's request for a preliminary injunction and turnover against Blue Cross-Blue Shield, of Florida, Inc. ("Blue Closs") and the United States of America and the Internal Revenue Service. The debtor seeks an order restraining the defendants from honoring a notice of levy served on "Blue Cross" on June 25, 1982. 26 U. S. C. §6331. The debtor also requests the Court to order "Blue Cross" to surrender and turn over to the debtor all funds which are otherwise subject to the levy. 11 U. S. C. §542. The debtor's petition seeking reorganization under Chapter 11 Title 11 of the Bankruptcy Code was filed on July 26, 1982.

An evidentiary hearing was held on July 29, 1982. The Court has considered the memoranda and arguments of counsel, the testimony given on behalf of the debtor and the Government parties, and the exhibits introduced at the hearing, and hereby finds and concludes as follows:

1. As of the date of the June 25, 1982 notice of levy (Government Exhibit #1) the debtor had unpaid employment taxes for the fourth quarter of 1981 in the amount of $26,993.28.

2. The proceeds of subsequent levies, honored prior to the date on which the petition was filed reduced the unpaid balance to $18,816.46.

3. The levy served on "Blue Cross" on June 25, 1982 (Government Exhibit 1) directed "Blue Cross" to surrender to the Internal Revenue Service all sums owed to the debtor, the so-called PIP funds.

4. On July 26, 1982, prior to "Blue Cross" honor of the levy, the debtor filed its petition for reorganization under Chapter 11 and, on the same date sought and obtained an ex parte temporary restraining order, barring any turnover to the debtor or the Internal Revenue Service pending a hearing.

Conclusions of Law

The Court adopts the decision in the case of United States v. Whiting Pools, Inc. [82-1 USTC #e9269], 674 F. 2d 144 (2d Cir. 1982). Further the Court rejects the distinction proffered by the United States, as between tangible and intangible property upon which levy has been made. The Court also rejects the argument set forth by the United States, that Phelps v. United States [75-1 USTC ¶9467], 421 U. S. 330 (1975), has continuing viability under the Bankruptcy Code. Accordingly, the Court finds that the full amount of the accounts receivable covered by the "Blue Cross" levy is subject to turnover under 11 U. S. C. §542. Therefore, we must determine, as a condition to any turnover under §542, whether "Adequate Protection" can be offered, 11 U. S. C. §§ 363, 361, and if so, what such adequate protection shall consist of.

The Court finds that the PIP funds being held by "Blue Cross" subject to the Internal Revenue Service §6331 levy should be turned over by "Blue Cross" to the Internal Revenue Service, in part, and to Health America of Florida, Inc. d/b/a Union General Hospital, in part, as follows:

1. The Court hereby modifies the §362 stay to allow the Internal Revenue Service to file a notice of tax lien in the amount of $8,816.46, covering 941 taxes for the fourth quarter tax period 1981.

2. Of the PIP funds presently being held by "Blue Cross" in the approximate amount of $27,000.00, "Blue Cross" is hereby directed to turn over to the United States of America, Internal Revenue Service the sum of $10,000.00 less the $1,795.74 check issued July 26, 1982 , i.e., a net sum of $8,204.26. Thereafter the balance of the PIP funds being held by "Blue Cross" shall be turned over to Health America of Florida, Inc. d/b/a Union General Hospital forthwith which turnovers are to be completed on or before 5:00 P.M. on July 29, 1982.

3. The United States of America, Internal Revenue Service shall be allowed to retain and cash the check dated July 26, 1982, payable to Internal Revenue Service from "Blue Cross" in the amount of $1,795.74.

4. Health America of Florida, Inc., d/b/a Union General Hospital is directed to pay off the unpaid balance owing Internal Revenue Service of $8,816.46 in four equal installments. The first installment will be due on August 30, 1982. The second, third and fourth installments shall be due respectively, on September 29, 1982, October 29, 1982 and November 29, 1982. Interest on the unpaid balances shall accrue at the rate of 20 percent per annum, from the date of this order, which interest shall be paid, in lump sum, on November 29, 1982.

[83-1 USTC ¶9394]United States, Petitioner v. Whiting Pools, Inc.

Supreme Court of the United States, No. 82-215, 103 SCt 2309, 462 US 198, 6/8/83 , Affirming CA-2, 82-1 USTC ¶9269

On writ of certiorari to the United States Court of Appeals for the Second Circuit.

[Bankruptcy Code §542(a)]

Bankruptcy and receivership: Authority of bankruptcy court: Pre-petition seizure of operating assets: Return of assets to reorganization estate trustee.--Although the IRS , as a secured cerditor by virtue of its tax liens, had seized the operating assets of the debtor just prior to the filing of a reorganization petition, Bankruptcy Code §542(a) authorizes the bankruptcy court to order the IRS to return the property to the trustee of the reorganization estate, even though the debtor no longer had a possessory interest in the property. The seizure did not extinguish the debtor's ownership interest, and nothing in the legislative history of the Bankruptcy Code suggests that Congress intended to permit the IRS to frustrate the reorganization provisions by depriving the estate of assets and property essential to the rehabilitation effort. The Bankruptcy Code provides adequate protection for the rights of the IRS , both as a secured creditor and as a tax collector.

Rex E. Lee, Solicitor General, Glenn L. Archer, Jr., Assistant Attorney General, Stuart A. Smith, Assistant to Solicitor General, Wynette J. Hewett, George L. Hastings, Jr., Department of Justice, Washington, D. C. 20530, for petitioner. Lloyd H. Relin, Richard J. Trautwein, 1100 First Federal Plaza, Rochester, N. Y. 14614, for respondent.

Syllabus

Section 542(a) of the Bankruptcy Reform Act of 1978 (Act) requires an entity, other than a custodian, in possession of property of the debtor that the trustee in bankruptcy can use, sell, or lease under §363 to deliver that property to the trustee. Section 543(b)(1) requires a custodian in possession or control of any property of the debtor to deliver the property to the trustee. Promptly after the Internal Revenue Service ( IRS ) seized respondent swimming pool firm's tangible personal property to satisfy a tax lien, respondent filed a petition for reorganization under the Act. The Bankruptcy Court, pursuant to §543(b)(1), ordered the IRS to turn the property over to respondent on the condition that respondent provide the IRS with specified protection for its interests. The District Court reversed, holding that a turnover order against the IRS was not authorized by either §542(a) or §543(b)(1). The Court of Appeals in turn reversed the District Court, holding that a turnover order could issue against the IRS under §542(a).

Held:

1. The reorganization estate includes property of the debtor that has been seized by a creditor prior to the filing of a petition for reorganization. Pp. 4-11.

(a) Both the congressional goal of encouraging reorganization of troubled enterprises and Congress' choice of protecting secured creditors by imposing limits or conditions on the trustee's power to sell, use, or lease property subject to a secured interest, rather than by excluding such property from the reorganization estate, indicate that Congress intended a broad range of property, including property in which a creditor has a secured interest, to be included in the estate. Pp. 5-6.

(b) The statutory language reflects this view of the scope of the estate. Section 541(a)(1) of the Act, which provides that the estate shall include "all legal or equitable interests of the debtor and property as of the commencement of the case," is intended to include any property made available to the estate by other provisions of the Act such as §542(a). In effect, §542(a) grants to the estate a possessory interest in certain property of the debtor that was not held by the debtor at the commencement of reorganization proceedings. Pp. 6-9.

(c) Ths interpretation of §542(a) is supported by its legislative history and is consistent with judicial precedent predating the Act. Any other interpretation would deprive the reorganization estate of the assets and property essential to its rehabilitation effort and thereby would frustrate the congressional purpose behind the reorganization provisions. Pp. 9-10.

2. Section 542(a) authorizes the Bankruptcy Court to order the IRS to turn over the seized property in question. Pp. 11-13.

(a) The IRS is bound by §542(a) to the same extent as any secured creditor. Nothing in the Act or its legislative history indicates that Congress intended a special exception for tax collectors. P. 11.

(b) While §542(a) would not apply if a tax levy or seizure transferred to the IRS ownership of the property seized, the Internal Revenue Code does not transfer ownership of such property until the property is sold to a bona fide purchaser at a tax sale. Pp. 11-13.

[81-2 USTC ¶9269] 674 F. 2d 144, affirmed.

BLACKMUN, J., delivered the opinion for a unanimous Court.

JUSTICE BLACKMUN delivered the opinion of the Court:

Promptly after the Internal Revenue Service ( IRS or Service) seized respondent's property to satisfy a tax lien, respondent filed a petition for reorganization under the Bankruptcy Reform Act of 1978, hereinafter referred to as the "Bankruptcy Code." The issue before us is whether §542(a) of that Code authorized the Bankruptcy Court to subject the IRS to a turnover order with respect to the seized property.

I

A

[Factual Background]

Respondent Whiting Pools, Inc., a corporation, sells, installs, and services swimming pools and related equipment and supplies. As of January 1981, Whiting owed approximately $92,000 in Federal Insurance Contribution Act taxes and federal taxes withheld from its employees, but had failed to respond to assessments and demands for payment by the IRS . As a consequence, a tax lien in that amount attached to all of Whiting's property. ¹

On January 14, 1981, the Service seized Whiting's tangible personal property--equipment, vehicles, inventory, and office supplies--pursuant to the levy and distraint provision of the Internal Revenue Code of 1954. ² According to uncontroverted findings, the estimated liquidation value of the property seized was, at most, $35,000 but its estimated going-concern value in Whiting's hands was $162,876. The very next day, January 15, Whiting filed a petition for reorganization, under the Bankruptcy Code's Chapter 11, 11 U. S. C. §§ 1101 et seq. (1976 ed., Supp. V), in the United States Bankruptcy Court for the Western District of New York. Whiting was continued as debtor-in-possession. ³

The United States, intending to proceed with a tax sale of the property, ⁴ moved in the Bankruptcy Court for a declaration that the automatic stay provision of the Bankruptcy Code, §362(a), is inapplicable to the IRS or, in the alternative, for relief from the stay. Whiting counterclaimed for an order requiring the Service to turn the seized property over to the bankruptcy estate pursuant to §542(a) of the Bankruptcy Code. ⁵ Whiting intended to use the property in its reorganized business.

B

[Conflict Between Circuits]

The Bankruptcy Court determined that the IRS was bound by the automatic stay provision. In re Whiting Pools, Inc. [81-2 USTC ¶9553], 10 B. R. 755 (1981). Because it found that the seized property was essential to Whiting's reorganization effort, it refused to lift the stay. Acting under §543(b)(1) of the Bankruptcy Code, ⁶ rather than under §542(a), the court directed the IRS to turn the property over to Whiting on the condition that Whiting provide the Service with specified protection for its interests. 10 B. R., at 760-761. ⁷

The United States District Court reversed, holding that a turnover order against the Service was not authorized by either §542(a) or §543(b)(1). App. to Pet. for Cert. 46a. The United States Court of Appeals for the Second Circuit, in turn, reversed the District Court. [82-1 USTC ¶9269] 674 F. 2d 144 (1982). It held that a turnover order could issue against the Service under §542(a), and it remanded the case for reconsideration of the adequacy of the Bankruptcy Court's protection conditions. The Court of Appeals acknowledged that its ruling was contrary to that reached by the United States Court of Appeals for the Fourth Circuit in Cross Electric Co. v. United States [81-2 USTC ¶9786], 664 F. 2d 1218 (1981), and noted confusion on the issue among bankruptcy and district courts. 674 F. 2d, at 145 and n. 1. We granted certiorari to resolve this conflict in an important area of the law under the new Bankruptcy Code. 459 U. S. -- (1982).

II

[Analysis]

By virtue of its tax lien, the Service holds a secured interest in Whiting's property. We first examine whether §542(a) of the Bankruptcy Code generally authorizes the turnover of a debtor's property seized by a secured creditor prior to the commencement of reorganization proceedings. Section 542(a) requires an entity in possession of "property that the trustee may use, sell, or lease under §363" to deliver that property to the trustee. Subsections (b) and (c) of §363 authorize the trustee to use, sell, or lease any "property of the estate," subject to certain conditions for the protection of creditors with an interest in the property. Section 541(a)(1) defines the "estate" as "comprised of all the following property wherever located: (1) . . . all legal or equitable interests of the debtor in property as of the commencement of the case." Although these statutes could be read to limit the estate to those "interests of the debtor in property" at the time of the filing of the petition, we view them as a definition of what is included in the estate, rather than as a limitation.

A

[Protection of Secured Creditors]

In proceedings under the reorganization provisions of the Bankruptcy Code, a troubled enterprise may be restructured to enable it to operate successfully in the future. Until the business can be reorganized pursuant to a plan under 11 U. S. C. §§ 1121-1129 (1976 ed., Supp. V), the trustee or debtor-in-possession is authorized to manage the property of the estate and to continue the operation of the business. See §1108. By permitting reorganization, Congress anticipated that the business would continue to provide jobs, to satisfy creditors' claims, and to produce a return for its owners. H. R. Rep. No. 95-595, p. 220 (1977). Congress presumed that the assets of the debtor would be more valuable if used in a rehabilitated business than if "sold for scrap." Ibid. The reorganization effort would have small chance of success, however, if property essential to running the business were excluded from the estate. See 6 J. Moore & L. King, Collier on Bankruptcy ¶3.05, p. 431 (14th ed. 1978). Thus, to facilitate the rehabilitation of the debtor's business, all the debtor's property must be included in the reorganization estate.

This authorization extends even to property of the estate in which a creditor has a secured interest. §363(b) and (c); see H. R. Rep. No. 95-595, p. 182 (1977). 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.

Both the congressional goal of encouraging reorganizations and Congress' choice of methods to protect secured creditors suggest that Congress intended a broad range of property to be included in the estate.

B

[Scope of Estate]

The statutory language reflects this view of the scope of estate. As noted above, §541(a) provides that the "estate is comprised of all the following property, wherever located: . . . all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U. S. C. §541(a)(1). ⁸ The House and Senate Reports on the Bankruptcy Code indicate that §541(a)(1)'s scope is broad. ⁹ Most important, in the context of this case, §541(a)(1) is intended to include in the estate any property made available to the estate by other provisions of the Bankruptcy Code. See H. R. Rep. No. 95-595, p. 367 (1977). Several of these provisions bring into the estate property in which the debtor did not have a possessory interest at the time the bankruptcy proceedings commenced." ¹⁰

Section 542(a) is such a provision. It requires an entity (other than a custodian) holding any property of the debtor that the trustee can use under §363 to turn that property over to the trustee. ¹¹ Given the broad scope of the reorganization estate, property of the debtor repossessed by a secured creditor falls within this rule, and therefore may be drawn into the estate. While there are explicit limitations on the reach of §542(a), ¹² none requires that the debtor hold a possessory interest in the property at the commencement of the reorganization proceedings. ¹³

As does all bankruptcy law, §542(a) modifies the procedural rights available to creditors to protect and satisfy their liens. ¹⁴ See Wright v. Union Central Life Ins. Co., 311 U. S. 273, 278-279 (1940). See generally Nowak, Turnover Following Prepetition Levy of Distraint Under Bankruptcy Code §542, 55 Am. Bankr. L. J. 313, 332-333 (1981). In effect, §542(a) grants to the estate a possessory interest in certain property of the debtor that was not held by the debtor at the commencement of reorganization proceedings. ¹⁵ The Bankruptcy Code provides secured creditors various rights, including the right to adequate protection, and these rights replace the protection afforded by possession.

C

[Legislative History]

This interpretation of §542(a) is supported by the section's legislative history. Although the legislative reports are silent on the precise issue before us, the House and Senate hearings from which §542(a) emerged provide guidance. Several witnesses at those hearings noted, without contradiction, the need for a provision authorizing the turnover of property of the debtor in the possession of secured creditions. ¹⁶ Section 542(a) first appeared in the proposed legislation shortly after these hearings. See H. R. 6, §542(a), 95th Cong., 1st Sess., introduced January 4, 1977 . See generally Klee, Legislative History of the New Bankruptcy Code, 54 Am. Bankr. L. J. 275, 279-281 (1980). The section remained unchanged through subsequent versions of the legislation.

Moreover, this interpretation of §542 in the reorganization context is consistent with judicial precedent predating the Bankruptcy Code. Under Chapter X, the reorganization chapter of the Bankruptcy Act of 1878, as amended, §§ 101-276, 52 Stat. 883 (1938) (formerly codified as 11 U. S. C. §§ 501-676 (1976 ed.)), the bankruptcy court could order the turnover of collateral in the hands of a secured creditor. Reconstruction Finance Corp. v. Kaplan, 185 F. 2d 791, 796 (CA1 1950); see In re Third Ave. Transit Corp., 198 F. 2d 703, 706 (CA2 1952); 6A J. Moore & L. King, Collier on Bankruptcy ¶14.03, p. 741-742 (14th ed. 1977); Murphy, Use of Collateral in Business Rehabilitations: A Suggested Redrafting of Section 7-203 of the Bankruptcy Reform Act, 63 Calif. L. Rev. 1483, 1492-1495 (1975). Nothing in the legislative history evinces a congressional intent to depart from that practice. Any other interpretation of §542(a) would deprive the bankruptcy estate of the assets and property essential to its rehabilitation effort and thereby would frustrate the congressional purpose behind the reorganization provisions. ¹⁷

We conclude that the reorganization estate includes property of the debtor that has been seized by a creditor prior to the filing of a petition for reorganization.

III

A

[ IRS as Creditor]

We see no reason why a different result should obtain where the IRS is the creditor. The Service is bound by §542(a) to the same extent as any other secured creditor. The Bankruptcy Code expressly states that the term "entity," used in §542(a), includes a governmental unit. §101(14). See Tr. of Oral Arg. 16. Moreover, Congress carefully considered the effect of the new Bankruptcy Code on tax collection, see generally S. Rep. No. 95-1106 (1978) (report of Senate Finance Committee), and decided to provide protection to tax collectors, such as the IRS , through grants of enhanced priorities for unsecured tax claims, §507(a)(6), and by the nondischarge of tax liabilities, §523(a)(1). S. Rep. No. 95-989, pp. 14-15 (1978). Tax collectors also enjoy the generally applicable right under §363(e) to adequate protection for property subject to their liens. Nothing in the Bankruptcy Code or its legislative history indicates that Congress intended a special exception for the tax collector in the form of an exclusion from the estate of property seized to satisfy a tax lien.

B

[Ownership of Property]

Of course, if a tax levy or seizure transfers to the IRS ownership of the property seized, §542(a) may not apply. The enforcement provisions of the Internal Revenue Code of 1954, 26 U. S. C. §§ 6321-6326 (1976 ed. and Supp. V), do grant to the Service powers to enforce its tax liens that are greater than those possessed by private secured creditors under state law. See United States v. Rodgers [83-1 USTC ¶9374], -- U. S. --, -- (1983) (slip op. 4); id., at --, --, n. 7 (dissenting opinion) (slip op. 1, 6, n. 7); United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 56-57 (1958). But those provisions do not transfer ownership of the property to the IRS . ¹⁸

The Service's interest in seized property is its lien on that property. The Internal Revenue Code's levy and seizure provisions, 26 U. S. C. §§ 6331 and 6332, are special procedural devices available to the IRS to protect and satisfy its liens, United States v. Sullivan [64-1 USTC ¶9392], 333 F. 2d 100, 116 (CA3 1964), and are analogous to the remedies available to private secured creditors. See Uniform Commercial Code §9-503, 3A U. L. A. 211-212 (1981); n. 14, supra. They are provisional remedies that do not determine the Service's rights to the seized property, but merely bring the property into the Service's legal custody. See 4 B. Bittker, Federal Taxation of Income, Estates and Gifts ¶111.5.5, p. 111-108 (1981). See generally Plumb, Federal Tax Collection and Lien Problems, pt. 1, 13 Tax L. Rev. 247, 272 (1958). At no point does the Service's interest in the property exceed the value of the lien. United States v. Rodgers, -- U. S., at --, -- (slip op. 12); id., at -- (dissenting opinion) (slip op. 12); see United States v. Sullivan, 333 F. 2d, at 116 ("the Commissioner acts pursuant to the collection process in the capacity of lienor as distinguished from owner"). The IRS is obligated to return to the debtor any surplus from a sale. 26 U. S. C. §6342(b). Ownership of the property is transferred only when the property is sold to a bona fide purchaser at a tax sale. See Bennett v. Hunter, 9 Wall. 326, 336 (1870); 26 U. S. C. §6339(a)(2); Plumb, 13 Tax L. Rev., at 274-275. In fact, the tax sale provision itself refers to the debtor as the owner of the property after the seizure but prior to the sale. ¹⁹ Until such a sale takes place, the property remains the debtor's and thus is subject to the turnover requirement of §542(a).

IV

When property seized prior to the filing of a petition is drawn into the Chapter 11 reorganization estate, the Service's 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 Service to seek protection of its interest according to the congressionally established bankruptcy procedures, rather than by withholding the seized property from the debtor's efforts to reorganize.

The judgment of the Court of Appeals is affirmed.

It is so ordered.

¹ Section 6321 of the Internal Revenue Code of 1954, 26 U. S. C. §6321, provides:

'If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person."

² Section 6331 of that Code, 26 U. S. C. §6331 provides:

"(a) Authority of Secretary

"If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax (and such further sum as shall be sufficient to cover the expenses of the levy) by levy upon all property and rights to property . . . belonging to such person or on which there is a lien provided in this chapter for the payment of such tax. . . .

"(b) Seizure and sale of property

"The term 'levy' as used in this title includes the power of distraint and seizure by any means. . . . In any case in which the Secretary may levy upon property or rights to property, he may seize and sell such property or rights to property (whether real or personal, tangible or intangible)."

³ With certain exceptions not relevant here, a debtor-in-possession, such as Whiting, performs the same functions as a trustee in a reorganization. 11 U. S. C. §1107(a) (1976 ed., Supp. V).

⁴ Section 6335, as amended, of the 1954 Code, 26 U. S. C. §6335, provides for the sale of seized property after notice. The taxpayer is entitled to any surplus of the proceeds of the sale. §6342(b).

⁵ Section 542(a) provides in relevant part:

"[A]n 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 inconsequential value or benefit to the estate." 11 U. S. C. §542(a) (1976 ed., Supp. V).

⁶ Section 543(b)(1) requires a custodian to "deliver to the trustee any property of the debtor transferred to such custodian, or proceeds of such property, that is in such custodian's possession, custody, or control on the date that such custodian acquires knowledge of the commencement of the case."

The Bankruptcy Court declined to base the turnover order on §542(a) because it felt bound by In re Avery Health Center, Inc. [81-1 USTC ¶9229], 8 B. R. 1016 (WDNY 1981) (§542(a) does not draw into debtor's estate property seized by IRS prior to filing of petition).

⁷ Section 363(e) of the Bankruptcy Code provides:

"Notwithstanding any other provision of this section, at any time, on request of an entity that has an interest in property used, sold, or leased, or proposed to be used, sold, or leased by the trustee, the court shall prohibit or condition such use, sale, or lease as is necessary to provide adequate protection of such interest. In any hearing under this section, the trustee has the burden of proof on the issue of adequate protection." 11 U. S. C. §363(e) (1976 ed., Supp. V).

Pursuant to this section, the Bankruptcy Court set the following conditions to protect the tax lien: Whiting was to pay the Service $20,000 before the turnover occurred; Whiting also was to pay $1,000 a month until the taxes were satisfied; the IRS was to retain its lien during this period; and if Whiting failed to make the payments, the stay was to be lifted. 10 B. R., at 761.

⁸ Section 541(a)(1) speaks in terms of the debtor's "interests . . . in property," rather than property in which the debtor has an interest, but this choice of language was not meant to limit the expansive scope of the section. The legislative history indicates that Congress intended to exclude from the estate property of others in which the debtor had some minor interest such as a lien or bare legal title. See 124 Cong. Rec. 32399, 32417 (1978) (remarks of Rep. Edwards); id., at 33999, 34016-34017 (remarks of Sen. DeConcini); cf. §541(d) (property in which debtor holds legal but not equitable title, such as a mortgage in which debtor retained legal title to service or to supervise servicing of mortgage, becomes part of estate only to extent of legal title); 124 Cong. Rec. 33999 (1978) (remarks of Sen. DeConcini) (§541(d) "reiterates the general principle that where the debtor holds bare legal title without any equitable interest, . . . the estate acquires bare legal title without any equitable interest in the property"). Similar statements to the effect that §541(a)(1) does not expand the rights of the debtor in the hands of the estate were made in the context of describing the principle that the estate succeeds to no more or greater causes of action against third parties than those held by the debtor. See H. R. Rep. No. 95-595, pp. 367-368 (1977). These statements do not limit the ability of a trustee to regain possession of property in which the debtor had equitable as well as legal title.

⁹ "The scope of this paragraph [§541(a)(1)] is broad. It includes all kinds of property, including tangible or intangible property, causes of action (see Bankruptcy Act §70a(6)), and all other forms of property currently specified in section 70a of the Bankruptcy Act." H. R. Rep. No. 95-595, p. 367 (1977); S. Rep. No. 95-989, p. 82 (1978).

¹⁰ See, e.g., §§ 543, 547, and 548. These sections permit the trustee to demand the turnover of property that is in the possession of others if that possession is due to a custodial arrangement, §543, to a preferential transfer, §547, or to a fraudulent transfer, §548.

We do not now decide the outer boundaries of the bankruptcy estate. We note only that Congress plainly excluded property of others held by the debtor in trust at the time of the filing of the petition. See §541(b); H. R. Rep. No. 95-595, p. 368 (1977); S. Rep. No. 95-989, p. 82 (1978). Although it may well be that funds that the IRS can demonstrate were withheld for its benefit pursuant to 26 U. S. C. §7501 (employee withholding taxes) are excludable from the estate, see 124 Cong. Rec. 32417 (1978) (remarks of Rep. Edwards) (Service may exclude funds it can trace), the IRS did not attempt to trace the withheld taxes in this case. See Tr. of Oral Arg. 18, 28-29.

¹¹ The House Report expressly includes property of the debtor recovered under §542(a) in the estate: the estate includes "property recovered by the trustee under section 542 . . ., if the property recovered was merely out of the possession of the debtor, yet remained 'property of the debtor.'" H. R. Rep. No. 95-595, p. 367 (1977); see 4 L. King, Collier on Bankruptcy ¶541.16, p. 541-72.10 (15th ed. 1982).

¹² Section 542 provides that the property be usable under §363, and that turnover is not required in three situations: when the property is of inconsequential value or benefit to the estate, §542(a), when the holder of the property has transferred it in good faith without knowledge of the petition, §542(c), or when the transfer of the property is automatic to pay a life insurance premium, §542(d).

¹³ Under the old Bankruptcy Act, a bankruptcy court's summary jurisdiction over a debtor's property was limited to property in the debtor's possession when the liquidation petition was filed. Phelps v. United States [75-1 USTC ¶9467], 421 U. S. 330, 335-336 (1975); Taubel-Scott-Kitzmiller Co. v. Fox, 264 U. S. 426, 432-434 (1924). Phelps, which involved a liquidation under the prior Bankruptcy Act, held that a bankruptcy court lacked jurisdiction to direct the Service to turn over property which had been levied on and which, at the time of the commencement of bankruptcy proceedings, was in possession of an assignee of the debtor's creditors.

Phelps does not control this case. First, the new Bankruptcy Code abolished the distinction between summary and plenary jurisdiction, thus expanding the jurisdiction of bankruptcy courts beyond the possession limitation. H. R. Rep. No. 95-595, pp. 48-49 (1977); see Northern Pipeline Construction Co. v. Marathon Pipe Line Co., -- U. S. --, -- (1982) (plurality opinion) (slip op. 3). Moreover, Phelps was a liquidation situation, and is inapplicable to reorganization proceedings such as we consider here.

¹⁴ One of the procedural rights the law of secured transactions grants a secured creditor to enforce its lien is the right to take possession of the secured property upon the debtor's default. Uniform Commercial Code §9-503, 3A U. L. A. 211 (1981). A creditor's possessory interest resulting from the exercise of this right is subject to certain restrictions on the creditor's use of the property. See §9-504, 3A U. L. A. 256-257. Here, we address the abrogation of the Service's possessory interest obtained pursuant to its tax lien, a secured interest. We do not decide whether any property of the debtor in which a third party holds a possessory interest independent of a creditor's remedies is subject to turnover under §542(a). For example, if property is pledged to the secured creditor so that the creditor has possession prior to any default, 542(a) may not require turnover. See 4 L. King, Collier on Bankruptcy ¶541.08[9], p. 541-53 (15th ed. 1982).

¹⁵ Indeed, if this were not the effect, §542(a) would be largely superfluous in light of §541(a)(1). Interests in the seized property that could have been exercised by the debtor--in this case, the rights to notice and the surplus from a tax sale, see n. 4, supra--are already part of the estate by virtue of §541(a)(1). No coercive power is needed for this inclusion. The fact that §542(a) grants the trustee greater rights than those held by the debtor prior to the filing of the petition is consistent with other provisions of the Bankruptcy Code that address the scope of the estate. See, e.g., §544 (trustee has rights of lien creditor); §545 (trustee has power to avoid statutory liens); §549 (trustee has power to avoid certain postpetition transactions).

¹⁶ See Hearings on H. R. 31 and H. R. 32 Before the Subcommittee on Civil and Constitutional Rights of the House Committee on the Judiciary, 94th Cong., 2d Sess., 439 (1975) (statement of Patrick A Murphy); id., at 1023 (statement of Walter W. Vaughn); id., at 1757 (statement of Robert J. Grimming); id., at 1823-1839 (remarks and statement of Leon S. Forman, National Bankruptcy Conference); Hearings on S. 235 and S. 236 Before the Subcommittee on Improvements in Judicial Machinery of the Senate Committee on the Judiciary, 94th Cong., 1st Sess., 125 (1975) (statement of William W. Vaughn); id., at 464 (statement of Robert J. Grimmig). In general, we find Judge Friendly's careful analysis of this history for the Court of Appeals, 674 F. 2d, at 152-156, to be unassailable.

¹⁷ Section 542(a) also governs turnovers in liquidation and individual adjustment of debt proceedings under Chapters 7 and 13 of the Bankruptcy Code, 11 U. S. C. §§ 701-766, 1301-1330 (1976 ed., Supp. V). See §103(a). Our analysis in this case depends in part on the reorganization context in which the turnover order is sought. We express no view on the issue whether §542(a) has the same broad effect in liquidation or adjustment of debt proceedings.

¹⁸ It could be argued that dictum in Phelps v. United States [75-1 USTC ¶9467], 421 U. S. 330 (1975), suggests the contrary. In that case, the IRS had levied on a fund held by an assignee of the debtor for the benefit of the debtor's creditors. In a liquidation proceeding under the old Bankruptcy Act, the trustee sought an order directing the assignee to turn the funds over to the estate. The Court determined that the levy transferred constructive possession of the fund to the Service, thus ousting the bankruptcy court of jurisdiction. 421 U. S. at 335-336. In rebutting the trustee's argument that actual possession by the IRS was necessary to avoid jurisdiction, the Court stated: "The levy . . . gave the United States full legal right to the $38,000 levied upon as against the claim of the petitioner receiver." Id., at 337. This sentence, however, is merely a restatement of the proposition that the levy gave the Service sufficient possessory interest to avoid the bankruptcy court's summary jurisdiction. The proposition is now irrelevant because of the expanded jurisdiction of bankruptcy courts under the Bankruptcy Code. See n. 13, supra.

The Court in Phelps made a similar statement in discussing the trustee's claim that §70a(8) of the Bankruptcy Act, 11 U. S. C. §110(a)(8) (1976 ed.) (trustee is vested "with the title of the debtor as of the date of the filing of the petition . . . to . . . property held by an assignee for the benefit of creditors"), continued constructive possession of the property in the estate, notwithstanding the pre-petition levy. 421 U. S. , at 337, n. 8. The Court rejected this claim. It first cited the trustee's concession that the debtor had surrendered title upon conveying the property to the assignee, ibid., and held that, because the debtor did not hold title to the property as of the date of filing, the property was not covered by §70a(8). The Court went on, however, to state that "the pre-bankruptcy levy displaced any title of [the debtor] and §70a(8) is therefore inapplicable." Ibid. Because the initial conveyance of the property to the assignee was said to have extinguished the debtor's claim, this latter statement perhaps was unnecessary to our decision.