Phelps v. United States, 421 U.S. 330 (1975)

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

Syllabus

After the Internal Revenue Service (IRS) had made federal tax assessments against a company and the company failed to pay the taxes after formal demand, the company transferred its assets to an assignee for the benefit of creditors, who converted the assets into cash. The IRS then filed a notice of tax lien respecting the assessments and served a levy notice on the assignee, who did not, however, comply with the IRS’s payment demand. The company was thereafter adjudicated bankrupt, and petitioner receiver in bankruptcy made application to the bankruptcy Referee for an order requiring the assignee to turn over the cash proceeds. The IRS opposed the application on the ground that the bankruptcy court lacked jurisdiction over the subject matter of the application because the United States was entitled to possession of the cash proceeds held by the bankrupt’s assignee. The Referee rejected the IRS’s contention, holding that the assignment passed inalienable title to the assets of the company to the assignee, and the District Court upheld the Referee. The Court of Appeals reversed.

Held: The United States, by serving the bankrupt taxpayer’s assignee with a valid notice of levy, took constructive custody of the cash proceeds in the assignee’s possession, and neither the bankrupt nor petitioner as receiver could assert a claim to those proceeds. The receiver’s recourse is limited to a plenary suit under § 23 of the Bankruptcy Act. Pp. 333-337.

495 F.2d 1283, affirmed.

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