Messrs. Charles W. Greenough and A. O. Colburn, both of Spokane, Wash., for petitioners.
Mr. Chief Justice TAFT delivered the opinion of the Court.
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 section 3466 of the Revised Statutes of the United States (31 USCA 191).
In August, 1922, a receiver for the Culton-Moylan-Reilly Auto Company, an insolvent corporation, was appointed by the superior court of Spokane county, Washington. Under the order of the court the receiver sold the personal property of the corporation and reduced the same to cash, which he held for distribution. On March 1, 1921, and March 1, 1922, Spokane and Whitman counties, of the state of Washington, had assessed against the personal property of the company the total amounts of $6,195.38 and $410. 36 respectively, but the taxes were [279 U.S. 80, 86] 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. Exchange Nat. Bank of Spokane v. U. S., 147 Wash. 176, 265 P. 722.
Section 3466 of the Revised Statutes provides in part that '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 (article 1, 8) provides that Congress shall have power to lay and collect taxes and to make all laws which shall be necessary and proper to carry this and its other powers into execution. Article 6 of [279 U.S. 80, 87] 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 section 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 section 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 (chapter 20, 1 Stat. 515). It was amended by an act of 1799 (section 65, c. 22, 1 Stat. 676).
The language has been varied very little since these original enactments. The whole act of 1797 come up for consideration in United States v. Fisher. There seems to have been a division among the judges. Chief Justice Marshall delivered the opinion of the court, which upheld the priority of the United States as against the claims of the states, and held that the act extended not only to revenue officers and persons accountable for public money, but to debtors generally. The Chief Justice said (page 396):
This case was decided in 1805. Later that year the question arose in a Pennsylvania state court. United States v. Nicholls, 4 Yeates, 251. Nicholls was indebted to the United States, and on June 9, 1798, executed a mortgage to the United States supervisor of the revenue for the use of the United States. There was a levy upon the lands of Nicholls, and they were sold for $14,530. The money was deposited in the hands of the prothonotary of the court, subject to the court's order. Nicholls made an assignment for the benefit of his creditors, and a commission of bankruptcy issued against him. The Attorney General relied on this same fifth section of the act of 1797, and the issue arose whether, in the distribution of that fund, the laws of Pennsylvania giving a preference to that state in the payment should prevail over the federal act of 1797. Mr. Justice Yeates, speaking for the court, said (page 259):
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 section 3466 applicable, and thus was eliminated the federal question. 4 Wheat. 311.
No question of the construction of section 3466 seems to have come before this court again until, in Field v. United States, 9 Pet. 182, it was sought to make certain trustees liable from their own funds, because they had made disbursements out of a bankrupt's estate, as to which the United States was entitled to priority. It was objected that the distribution had been made under order of the parish court in an action in which the United States was [279 U.S. 80, 90] not a party. This court held that the United States was not bound to become a party and said, at page 201:
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.
After discussing the taxing powers of the national and state governments, the court, speaking by Chief Justice Chase, said of the state power of taxation (at page 77):
In United States v. Snyder, 149 U.S. 210 , 13 S. Ct. 846, the question was raised whether the tax system of the United States could be made subject to the recording liens of the states. This court said, at page 214 (13 S. Ct. 848):
In United States v. San Juan County (D. C.) 280 F. 120, and in Stover v. Scotch Hills Coal Co. (D. C.) 4 F.(2d) 748, section 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 (C. C. A.) 12 F.( 2d) 407.
Petitioners rely on Ferris v. Chic-Mint Gum Co., 14 Del. Ch. 232, 124 A. 577, where there were several claimants-a mortgagee, the state, and the United States. Under R. S. 3186 (26 USCA 115), the mortgagee was given priority over the United States. By state law, the state was preferred to the mortgagee. The Chancellor allowed the claims in the order of the state, the mortgagee, and the United States, holding that, 'when the government agreed by section 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.
In United States v. National Surety Co., 254 U.S. 73 , 41 S. Ct. 29, the question was whether, in the distribution of a bank [279 U.S. 80, 92] rupt's estate, the United States had priority over a surety company entitled to subrogation under section 3468 of the Revised Statutes. Upon this point this court said (page 76 (41 S. Ct. 30)):
After these cases came the case of United States v. Oklahoma, 261 U.S. 253 , 43 S. Ct. 295, in which the question was of the application of section 3466 to the liquidation of a state bank under the state law and of priority of debts of the United States in such a case. This court found that the section did not apply, because there did not appear to be insolvency of the bank as used therein. But the court had to consider the meaning and effect of the section, and said (page 260 (43 S. Ct. 298)):
Section 3466 was fully considered in the case of Price v. United States, 269 U.S. 492 , 46 S. Ct. 180, and its history from 1789 clearly traced. See, also, United States v. Butterworth-Judson Corp., 269 U.S. 504 , 46 S. Ct. 179; Bramwell v. U. S. Fidelity Co ., 269 U.S. 483 , 46 S. Ct. 176; Stripe v. United States, 269 U.S. 503 , 46 S. Ct. 182. In these cases the word 'debts' used in the section was held to include taxes. The court said in the Price Case, citing an opinion (U. S. v. State Bank of North Carolina, 6 Pet. 29, 35) of Mr. Justice Story (page 499 of 269 U. S. ( 46 S. Ct. 181)):
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, 260 , 43 S. Ct. 295, 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.
Assessments for Spokane County for $6,195.38, and of Whitman county for $410.36, were made in 1921 and 1922 before the receiver was appointed. What is the effect of those claims against the fund in court? In Wilberg v. Yakima County, 132 Wash. 219, 231 P. 931, 41 A. L. R. 184, it is held that the amount of the tax is the personal obligation of the person who owned the property at the time of the assessment and that the tax is to be collected, if the property still continues in the hands of the person against whom it was assessed, from the property; if that specific property does not exist in such hands, the amount of the tax may be collected as a lien upon all the real and personal property of the person assessed, and may be collected from the other personal or real property of such person by seizure, [279 U.S. 80, 94] 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.
From the judgment of the majority of the Supreme Court of Washington in this case, we must infer that the liens of the two counties for the taxes levied before the receiver was appointed and not collected were not specific. This is really a state question. It is explained by the concurring opinion of Judge Parker, as follows:
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.