FLOWERS, Bankruptcy Judge
Actual possession is not necessary to remove the Government's tax lien from the subordinate priority accorded under Section 67(c)(3) of the Bankruptcy Act. Therefore, the creditor-bank was required to remit funds in its dealer reserve account to the Internal Revenue Service in the full amount of its levies including accrued interest and penalties even though the creditor held the full balance of the account before the first and after the second levy. See Sec. 67(c)(3) at ¶ 2646 and Sec. 724(b) at ¶ 10,108.
[Digest of Opinion]
In this case, the trustee sought an accounting by the creditor of a dealer reserve account held by it at the time of bankruptcy. Prior to bankruptcy the Internal Revenue Service had filed notices of liens against the bankrupt and had served a notice of levy on the creditor. After bankruptcy ensued the trustee apparently concluded that the reserve fund would not yield any excess over the I.R.S. levy and abandoned any interest in it. The I.R.S. then made a second levy against the account. The bankruptcy court subsequently permitted the trustee to rescind his earlier abandonment and the trustee sought the balance in the reserve account. Since the bankrupt was not entitled to release of funds in the reserve account until the creditor collected on contracts for which the account stood as security, no disbursement was made to I.R.S. prior to the bankruptcy filing. Further, due to the accrual of interest on the several tax accounts, it was difficult to reconcile them with recorded notices of liens and the levies.
The trustee challenged, at the outset, the validity of the I.R.S. claim to the fund, encouraged by discrepancies between the recorded notices of lien and the notice of levy served on the creditor. Notwithstanding any lack of success in prevailing over the liens of others, a valid lien for taxes may be postponed to the payment of bankruptcy administration expenses and wage claims of the Bankruptcy Act, where the tax lien is unaccompanied by possession.
Hence, the initial issue for determination involved the perfection of the I.R.S. lien. The court noted that the claim of the I.R.S. did not assert lien status for any other taxes other than those for which a notice was recorded in the Office of the County Clerk prior to bankruptcy. In part, Section 67(b) of the Bankruptcy Act provides that "statutory liens . . . may be valid against the trustee, even though arising or perfected while the debtor is insolvent and within four months prior to the filing of the petition initiating a proceeding under this Act by or against him." Thus, unless excepted, liens recorded prior to the date of bankruptcy are valid against the trustee. However, pursuant to Section 67(c)(3) "the key is whether the lien is accompained by possession." In this case, the creditor held the full balance of the account before the first levy and still held the full balance after a second levy. In Phelps v. United States, 421 U.S. 330 (1975) the court considered the precise point facing the present court and determined that actual possession is not necessary to remove the Government's tax liens from the subordinate priority accorded them under Section 67(c)(3). Consequently, the court held that while Phelps cannot be stretched to oust the Court from its responsibility over the excess in the reserve account which the trustee is obliged to administer, it does protect the portion of the reserve account claimed by the I.R.S. from deduction for administration expenses or wage claims.