Exchange Nat. Bank of Spokane v. U.S., 20857.

• Decision Date: 20 March 1928
• Docket Number: 20857.
• Citation: 265 P. 722,147 Wash. 176
• Parties: EXCHANGE NAT. BANK OF SPOKANE et al. v. UNITED STATES.
• Court: Washington Supreme Court

265 P. 722

147 Wash. 176

EXCHANGE NAT. BANK OF SPOKANE et al. v. UNITED STATES.

No. 20857.

Supreme Court of Washington, En Banc.

March 20, 1928

Appeal from Superior Court, Spokane County; Lindsley, Judge.

Action by the Exchange National Bank of Spokane against the Culton-Moylan-Reilly Auto Company, in which a receiver was appointed. The claim of the United States for income taxes being subordinated to the state's claim for personal property tax, the United States appeals. Reversed, with instructions.

Tolman and Holcomb, JJ., dissenting.

Danson Lowe & Danson, Chas. W. Greenough, A. O. Colburn, and Fred J Schaaf, all of Spokane, for respondents.

ASKREN J.

The Culton-Moylan-Reilly Auto Company, an insolvent corporation was placed in the hands of a receiver appointed by the state court in an action brought against it by the Exchange National Bank of Spokane. The United States has a claim against the corporation for income taxes for the years 1917 1918, [147 Wash. 177] and 1919, which were assessed on February 28, 1923, and, for the year 1920, assessed on May 2, 1923. Spokane county has a claim for personal property taxes for the years 1921 and 1922, assessed March 1, of those years, and for 1923 and 1924, assessed September 3 of each year. Whitman county claims a like tax against the corporation for the years 1921 and 1922 assessed March 1 each year. The receiver converted the assets into cash for distribution to the creditors.

A dispute arose as to whether the state or federal tax was paramount; there being insufficient funds in the hands of the receiver to pay both claimants in full. Upon a hearing, the trial court ruled that the state tax was entitled to be satisfied first, and the United States has appealed.

The precise question, so far as we know, has never been presented either to this court or to the United States Supreme Court before, although it has been before three federal District Courts. Under the statutes of the United States, the estate of an insolvent debtor is liable first for the debts due the United States. Section 3466 of the Revised Statutes (31 USCA § 191) reads as follows:

'Sec. 3466. 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; and the priority hereby established shall extend as well to cases in which a debtor, not having sufficient property to pay all his debts, makes a voluntary assignment thereof, or in which the estate and effects of an absconding, concealed, or absent debtor are attached by process of law, as to cases in which an act of bankruptcy is committed.'

Section 3467 (31 USCA § 192) makes every executor, administrator, or assignee of an estate personally liable to the United States, if he pays any other debt before paying the debt of the United States.

Section 3186, Revised Statutes (26 USCA § 115; U.S. Comp. St. § 5908), so far as pertinent to this controversy, is as follows:

'Section 3186. That if any person liable to pay any tax neglects or refuses to pay the same after demand, the amount shall be a lien in favor of the United States from the time when the assessment list was received by the collector, except when otherwise provided, until paid, with the interest, penalties, and costs that may accrue in addition thereto upon all property and rights to property belonging to such person: provided, however, that such lien shall not be valid as against any mortgagee, purchaser, or judgment creditor until notice of such lien shall be filed by the collector in the office of the clerk of the district court of the district within which the property subject to such lien is situated. * * *'

The first quoted section (No. 3466) has been construed by the federal courts, and the words 'debts due the United States' have been held to include taxes due it. Price v. United States, 269 U.S. 492, 46 S.Ct. 180, 70 L.Ed. 373; Stripe v. United States, 269 U.S. 503, 46 S.Ct. 182, 70 L.Ed. 379.

We have thus before us for consideration a federal statute that specifically by its terms declares that, where the funds of an insolvent are insufficient to pay all the debts due from it, 'the debts (taxes) due the United States shall be first satisfied'--words clear and definite enough to support the claim of the United States in this proceeding, unless we are to hold that the federal government has no power to make its claims for taxes prior to those of the states, or because the state, a sovereign power, is not specifically named in that section or in section 3186.

Before proceeding to the arguments advanced in support of these propositions, it may be well to refer to four cases in which the question here at issue has been presented.

The first case involving this question seems to be United States v. Eggleston (C. C. Or. 1877) F. Cas. No. 15,027. In that case the federal District Court held that state taxes were not a 'debt due from the deceased,' but were a charge laid by the state upon the property of the deceased. The point is not argued at length nor is any authority cited in support thereof. The case appears not to have been followed by any other United States court, and is contrary to later decisions by them. The argument that 'debts due from the deceased' does not include the taxes due the state seems erroneous, in view of the holdings in Price v. United States, supra, and Stripe v. United States, supra, that the words 'debts due the United States' include taxes due the United States. There is nothing in the context of the sentence to indicate that the word 'debts' means one thing when applied to the deceased and another when applied to the government.

In United States v. San Juan County, Washington (D. C.) 280 F. 120, the defendant county claimed that its tax was a prior lien to that of the United States. The decision written by the district judge holds that the debt due the United States must be first paid, saying:

'The power of taxation is an indispensable incident to sovereignty, and by the provisions of the Constitution and laws a grant in favor of the United States is paramount in the event of the insolvency of the debtor.'

The decision quotes Chief Justice Marshall in the case of United States v. Fisher, 2 Cranch (6 U. S.) 358, 2 L.Ed. 304, as follows:

'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 United States District Court of Pennsylvania arrived at the same conclusion in Stover et al. v. Scotch Hill Coal Co., 4 F. (2d) 748. In that action the state tax was sought to be made prior to the lien of the United States. The court held that the lien of the United States was paramount, even though, 'under the state laws, the state tax became a lien before the federal tax accrued.' Said the court:

'The commonwealth of Pennsylvania's claim to priority here rests upon the exercise of its own sovereign power by its own act of assembly, and that of the United States also rests on the sovereign powers of the federal government by act of Congress. The two claims here conflict, and in such a case priority must be awarded, both under the Constitution of the United States and that of Pennsylvania, to the United States. The most recent case which establishes this principle is that of United States v. San Juan County (D. C.) 280 F. 120, which fully supports the views we have here expressed.'

The other decision apparently involving this question was presented to the court of chancery of Delaware in Ferris v. Chic-Mint Co., 14 Del. Ch. 232, 124 A. 577. In that case there were many claimants, including a mortgagee, state, county, and city taxes and United States taxes. The chancellor found that the mortgagee's rights were superior to the federal government's tax under section 3186, supra, which excepts under certain provisions mortgagees, purchasers, or judgment creditors. In referring to the priorities under the United States statute which make the mortgagee's rights superior to the federal tax, the court said:

'Inasmuch as the local tax and sewer liens must be paid in full before the mortgagee can receive anything, it is apparent that if federal taxes are paid ahead of the local tax and sewer liens, the outcome will be that the mortgage will bear a burden of abatement. In substance this means that the mortgage is pro tanto subordinate to the federal claim, a result which for the reasons before given is not tenable. * * * The first (the state, county and city) admittedly outranks the second (the mortgagee) and we have seen that the second outranks the third (the United States). Yet it is contended that the third is to be preferred to the first and thus displace the second from a position of preference over the third. If this contention be accepted then indeed will the last be declared to be first. 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

'This conclusion is applicable to the peculiar facts of this case. Because of the fact that the proceeds from the sale of the real estate are insufficient to take care

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