The opinion of the court was delivered by: HIGGINBOTHAM
The several issues raised by this bankruptcy matter relate to a single question:
Is a notice of levy valid when served by the District Director of Internal Revenue on a Chapter XI
receiver without the prior permission of the bankruptcy court? I have concluded that the instant levy was improper under the circumstances.
This Court is asked to review a portion of the final Order of Distribution entered by a Referee in a bankruptcy proceeding. The reviewant, the Trustee in Bankruptcy of Electricon-Suburban, Inc., challenges the Referee's award to the District Director of Internal Revenue in the amount of $15,334.03 in taxes plus $4,500 in interest, part of debt originally due Electricon as a creditor of the bankrupt estate of Quakertown Shopping Center, Inc. The total claim allowed against the Quakertown estate was $130,000
plus a $34,913.15 dividend. The District Director's claim was satisfied out of the dividend.
On July 27, 1960, the United States served a notice of levy dated July 7, 1960, on the Quakertown receiver for $15,334.03 taxes due. No application was made by the United States to the bankruptcy court before or after the levy for permission to attach the Quakertown receiver.
Electricon asked the Referee to restrain the District Director from proceeding with the levy and to show cause why he should not prove his tax claim in the Electricon bankruptcy proceedings
in New Jersey, where the District Director had already filed proof of claim.
The Referee entered an order awarding the full amount of the tax claim to the District Director. Besides the $15,334.03 in taxes, the Referee allowed the District Director $4,500 in interest, an amount which Electricon contests here as nonallowable post-bankruptcy interest. The Referee ordered the remaining part of the $34,913.15 dividend from the Quakertown estate to go to the Electricon estate for administration and distribution by the Electricon bankruptcy court in New Jersey.
Effect of the Notice of Levy
Both parties in the instant matter recognize that the notice of levy served by the District Director on the Quakertown receiver is valid only if it does not offend the Bankruptcy Act. The District Director argues that there has been compliance with the Act pursuant to the Treasury Department Regulation under section § 6331 of the Internal Revenue Code of 1954,
On the finding that "income tax regulations have the force and effect of law when not in conflict with an express statutory provision," the Referee accepted the government's view that an initially unsanctioned levy on funds in custodia legis pursuant to a tax regulation was permissible under the Bankruptcy Act.
Electricon challenges the levy as "a nullity because it was served on the Receiver in Chapter XI without the prior consent of the Bankruptcy Court."
Electricon argues that only a "consent first" rule is consistent with the Bankruptcy Court's exclusive jurisdiction in bankruptcy cases and that to the extent that a Treasury Department regulation impinges upon that exclusive jurisdiction, the regulation is invalid.
A. The Effect of Treasury Regulation 301.6331-1(a)(3).
The Government relies heavily on Reg. ...