Source: https://www.legalcrystal.com/case/95112/county-spokane-vs-united-states
Timestamp: 2019-04-19 04:54:18+00:00

Document:
1. Congress has power to provide that taxes due to the United States by an insolvent debtor shall have priority in payment over taxes due by him to a state. Pp. 279 U. S. 86 -93.
2. Under Rev.Stats. § 3466, a debt owed to the United States in the form of income taxes and penalties assessed for former years after the taxpayer has become insolvent and his personal property has been taken by a receiver in a state court for the payment of his debts is entitled to payment out of the fund derived by the receiver from his sale of such property, with priority (1) over county taxes assessed on those funds after the federal assessments were made and (2) over county taxes assessed on personal property of the taxpayer before the appointment of the receiver but not shown to be supported by a specific lien under the state law. P. 279 U. S. 93 .
Certiorari, 278 U.S. 585, to review a Judgment of the Supreme Court of Washington which, reversing a state court of first instance, upheld a claim of the United States for payment of income taxes and penalties from funds in the hands of a receiver, in priority over claims for county taxes.
This case presents the question of the priority of payment of debts due to the United States over those due to a state or its agencies against the same found for state taxes, under § 3466 of the Revised Statutes of the United States.
not paid and the proceeds of the subsequent sale of assets by the receiver were deposited in court. On September 23, 1924, Spokane County assessed the money in the hands of the receiver for the years 1923 and 1924, and levied taxes thereupon in the total amount of $1,390.10. On December 20, 1926, Spokane County made a further assessment and levy on the moneys in the hands of the receiver for the years 1925 and 1926 in the total amount of $1,229.52.
The United States Commissioner of Internal Revenue, on February 28, 1923, and May 2, 1923, assessed federal income taxes and penalties for the years 1917, 1918, 1919, and 1920 in the total amount of $70,268.58. But none of these taxes or penalties were paid.
The funds in the hands of the receiver are insufficient to pay in full the claims of the United States and Spokane and Whitman Counties. By proper pleadings, issues were made presenting the question of the comparative priorities in distribution of the fund in his hands. The superior court held that the two counties were entitled to priority not only as to the county taxes levied against the corporation, but for the county taxes for 1923-1926 assessed on the money in the receiver's hands. On an appeal to the Supreme Court of Washington, the judgment was reversed and priority awarded to the United States. 147 Wash. 176.
"whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executors or administrators, is insufficient to pay all the debts due from the deceased, the debts due to the United States shall be first satisfied."
the Constitution declares that the Constitution and the laws made in pursuance thereof shall be the supreme law of the land.
The constitutional validity of the priority of claims of the United States against insolvent debtors, declared in § 3466, was established by this Court very early in the history of the government. United States v. Fisher, 2 Cranch 358. But it was not established, as between debts owing to the states and debts owing to the United States, until after a critical controversy between those who looked to the maintenance of the supremacy of the national government and those who were anxious to sustain undiminished the power of the states.
Section 3466 R.S. was § 5 of an Act entitled "An act to provide more effectually for the settlement of accounts between the United States, and receivers of public money," enacted in 1797, c. 20, 1 Stat. 515. It was amended by an Act of 1799, § 65, c. 22, 1 Stat. 676.
"If the act has attempted to give the United States a preference in the case before the court, it remains to inquire whether the Constitution obstructs its operation. . . ."
and to take those precautions which will render the transaction safe."
"This claim of priority on the part of the United States will, it has been said, interfere with the right of the state sovereignties respecting the dignity of debts, and will defeat the measures they have a right to adopt to secure themselves against delinquencies on the part of their own revenue officers."
"But this is an objection to the Constitution itself. The mischief suggested, so far as it can really happen, is the necessary consequence of the supremacy of the laws of the United States on all subjects to which the legislative power of Congress extends."
the general government to priority of payment, and the rights of individual states, are contemplated as subsisting at the same time, and as perfectly compatible with each other. This only can be effected by giving preference to each existing lien, according to its due priority in point of time. I know of no other mode whereby the several conflicting claims can with justice be protected and secured."
The colleagues of Judge Yeates concurred with him, but one of them expressed regret that the opinion in the Fisher case, supra, delivered previously, had not been furnished for comparison. The decisions in the Fisher and the Nicholls cases created much popular excitement, and, united with other issues of a similar character as between the supporters of the federal government and the state governments, led to much concern over the open defiance of the decision of this Court, until the issues were disposed of in the case of United States v. Judge Peters, 5 Cranch 115. See the account of the litigation in Charles Warren's Supreme Court in United States History, vol. 1, 372, 538 et seq. Four years after the decision in the Nicholls case, a review of that case was sought in this Court on a writ of error. When it came to be heard after nine years more of inaction, it was dismissed for lack of jurisdiction, on the ground that the record did not disclose the insolvency of the debtor, so as to make § 3466 applicable, and thus was eliminated the federal question. 17 U. S. 4 Wheat. 311.
"The local laws of the state could not, and did not, bind them [the United States] in their rights. T hey could not create a priority in favor of other creditors, in cases of insolvency, which should supersede that of the United States."
The power of the Congress of the United States in giving preference to the debts of the government of the United States over those of the separate states is very clearly brought out in Lane County v. Oregon, 7 Wall. 71, which may well be referred to here because there are some expressions in that opinion which, taken away from their context, have been used to give an erroneous view.
"It is indeed a concurrent power, and in the case of a tax on the same subject by both governments, the claim of the United States, as the supreme authority, must be preferred; but, with this qualification, it is absolute. The extent to which it shall be exercised, the subjects upon which it shall be exercised, and the mode in which it shall be exercised are all equally within the discretion of the legislatures to which the states commit the exercise of the power. That discretion is restrained only by the will of the people expressed in the state constitutions or through elections, and by the condition that it must not be so used as to burden or embarrass the operations of the national government."
can by legislation, interfere with the assessment of federal taxes. . . ."
In United States v. San Juan County, 280 F. 120, and in Stover v. Scotch Hills Coal Co., 4 F.2d 748, § 3466 came directly under consideration, and the priority of the United States against that of the states was fully sustained. It was also sustained by an unreported decision of the district court of the Eastern District of Washington in a proceeding relating to the very taxes here involved, but the judgment was reversed for lack of jurisdiction because the jurisdiction of the state courts had first attached. Merryweather v. United States, 12 F.2d 407.
"when the government agreed by § 3186 to take rank after the mortgagee, it must necessarily follow that it is subordinate in rank to those who are superior to its immediate senior."
The Chancellor observed that his conclusion arose out of the peculiar facts of the case, and that it was unnecessary for him to venture into the broad field of constitutional law. Without concurring in the conclusion of the Chancellor, it is enough to say that, as there is no such third creditor here, the case is not in point. Moreover it is contended by the government that the relative priorities could have been maintained in that case by setting apart sufficient funds to pay the mortgage before paying the federal taxes and then providing for payment of the state tax out of the sum so set apart.
"The priority secured to the United States by § 3466 is priority over all other creditors -- that is, private persons and other public bodies."
"Where the debtor is divested of his property in one of the modes specified in the act, the person who becomes invested with the title is made trustee for the United States and bound first to pay its debt out of the debtor's property. Beaston v. Farmers' Bank of Delaware, 12 Pet. 102, 37 U. S. 133 -135 (9 L.ed. 1017). The priority given the United States cannot be impaired or superseded by state law."
31 U. S. 35 . And, to that end, § 3466 is to be construed liberally. Its purpose is not to be defeated by unnecessarily restricting the application of the word 'debts' within a narrow or technical meaning."
The foregoing citations certainly make it clear that the United States has power, in order to collect its taxes and its revenues and debts due it, to confer priority for them over those of the states.
There remains only to determine what priority it has conferred. It may withhold it or vary it, and it has sometimes done so. When in this case did the priority attach and apply? It was said in United States v. Oklahoma, 261 U. S. 253 , 261 U. S. 260 , that, in a case like this, it applied when the receiver was appointed. The appointment was on August 28, 1922. The taxes and penalties due the United States, amounting to $70,268.58, were assessed on February 28 1923, and May 2, 1923, and therefore the priority of the United States attached on or before those dates. No assessment by the counties upon specific property in the hands of the receiver was made until September 23, 1924. The claim of the United States therefore had priority over such claims.
distraint, or other specific proceedings. It would seem to follow that a lien for these particular taxes could not interfere with the priority of the United States, for there is nothing in this record to show that distraint by the sheriff or any of the necessary procedure mentioned in the statute followed.
quoted in the majority opinion, and hence must be determinable in favor of the United States."
Whatever might have been the effect of more completed procedure in the perfecting of the liens, under the law of the state, upon the priority of the United States herein, the attitude of the state court relieves us of consideration of it.

References: § 3466
 § 3466
 § 3466
 v. 
 § 5
 § 65
 v. 
 § 3466
 v. 
 v. 
 v. 
 § 3466
 v. 
 § 3186
 § 3466
 v. 
 § 3466
 v.