Opinion ID: 751538
Heading Depth: 2
Heading Rank: 4

Heading: Federal Law v. State Law

Text: 39 Lastly, Titan maintains that the district court erred when it determined the priority of the IRS's tax claim under New York Lien Law rather than federal law. 40 Section 70 of the New York Lien Law provides for the creation and enforcement of statutory trusts out of the funds earned by a contractor working on a public improvement of real property. The purpose of the trust fund is to provide for the payment of obligations incurred in performing the contract, including tax obligations. See Flintkote Co. v. United States, 47 F.R.D. 322, 325 (S.D.N.Y.1969), aff'd 435 F.2d 556 (2d Cir.1971). 41 Tax claims arising from the performance of a public improvement contract are expressly granted first priority. N.Y. Lien Law § 77(8)(a); see also Onondaga Commercial Dry Wall Corp. v. 150 Clinton Street, Inc., 25 N.Y.2d 106, 110, 302 N.Y.S.2d 795, 797-98, 250 N.E.2d 211, 212-13 (1969). These tax claims have often included claims for federal taxes as well as state and local taxes. See General Fire-Proof Door Corp. v. Citibank, N.A., 544 F.Supp. 191 (S.D.N.Y.1982); Marv Laxer Associates, Inc. v. Moredall Realty Corp., 533 F.Supp. 8 (S.D.N.Y.1981). 42 Titan makes a novel and unsupported argument that the provision of Article 3-A granting tax claims first priority applies only to state and local taxes, asserting that federal tax claims are governed solely by federal law. Titan misunderstands the law governing the priority of federal tax liens. 43 It is true that, as a general rule, the priority of competing liens against a taxpayer's property, including tax liens, is governed by federal law. See Aquilino v. United States, 363 U.S. 509, 80 S.Ct. 1277, 4 L.Ed.2d 1365 (1960). But in Aquilino, the Supreme Court held that it is state law that determines the nature of the interest each claimant has in disputed proceeds. Id. at 515, 80 S.Ct. at 1281. For example, it is state law that determines whether a claim is recognized as an ordinary lien or accorded trust claim status. Id. 44 It is New York that determines what interest competing claimants have in the proceeds of a public improvement contract. New York has spoken clearly on this issue in Article 3-A, directing that the proceeds of a public improvement contract constitute a trust for certain claimants. New York has determined that the most important of those claimants, and those receiving first priority are those asserting tax claims. There is nothing in Article 3-A or elsewhere that indicates that New York chose to limit that priority to only certain types of tax claims. Absent convincing proof to the contrary, we see no reason to narrow the plain language of Article 3-A to deny the IRS its claim under New York Lien Law. 45 We have considered all of Titan's additional arguments and find them to be without merit. 46 Accordingly, the judgment of the district court is affirmed.